Debtor and Ability to Reopen Bankruptcy

Generally, chapter 7 debtors have the right to reopen their cases for various purposes after their case is closed. Usually, the court will allow the debtor to do so to remove judicial liens for otherwise discharged debt via 11 U.S.C. §522(f) motion, or to add an overlooked creditor, or to file a financial management course certificate, or perhaps for another purpose.  In In re May E. Jones, Case No. 03-21929, debtor moved to reopen the case 13 years after it was closed, to amend the schedule of real property,  disclosing (for the first time) her interest in a parcel of real property and seeking to have the property abandoned to her under 11 U.S.C. §554. If the court were to reopen the case, a substantial real estate asset would likely revert to the debtor.

After reviewing the parties’ submissions and conducting an evidentiary hearing, Judge Warren found that the debtor was aware of her interest in the real property at the time the bankruptcy was filed but did not disclose that interest in her petition.  The court further found that reopening of the case would not be to the benefit to the creditors, and the debtor could not establish that she had acted in good faith at the time her Chapter 7 bankruptcy case was filed.

Concluding his decision, Judge Warren wrote:

The Court will not accept Jones’s invitation to turn a blind eye to the signals pointing toward bad faith, so that she can have the undisclosed assets abandoned back to her. That seems a bit like a parent rewarding a child who was caught hiding her failing report card with a hot fudge sundae.

What is the takeaway from this case?  The cardinal rule of bankruptcy is full and complete disclosure. Here, the debtor did not fully disclose all of her assets and did not act in good faith. Thus, the court denied her motion and debtor could not benefit from her actions. The above situation is unusual both in the length of time from the time of discharge and the relief sought.  However, I believe that it illustrates a simple principal that in bankruptcy a debtor cannot benefit from his wrongful conduct.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

 

Student Loans and Possibility of Discharge

I have previously written about dischargeability of student loans in bankruptcy. For most people filing bankruptcy does not result in a discharge of a student loan under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) amendments. The code, as amended, does not provide for the discharge of a student loan in a bankruptcy. In order for the student loan to be discharged, the debtor must brings a lawsuit, known as adversarial proceeding, and ask bankruptcy judge to make a determination that the continued existence of the student loan will create an “undue hardship” on the debtor. Under the applicable prior decisions, “undue hardship” is the most difficult part, that is the debtor must convince the bankruptcy court judge that in this case under the circumstances applicable to this debtor, the debtor will not be able to make any significant payments on the student loans owed. The high burden of proof makes these lawsuits extremely difficult.

However, under appropriate circumstances, it may be possible to determine what position the Department of Education may take on student loan dischargeability. The Department of Education recently issued a guidance letter on whether a student loan dischargeability lawsuit will be litigated or whether the Department of Education will recommend agreeing to the discharge.

The Department of Education seems to be focusing on a number of factors such as debtor’s efforts in trying to repay the loans, physical or mental disability leading to inability to work, likelihood of significant future income and factors beyond debtor’s control that led to the filing of bankruptcy.

Private student loan lenders have no such policy and it will be up to the individual creditor/lender to determine if their attorney will defend such a lawsuit vigorously or agree to settlement before a trial or go to trial.

It is never easy to obtain discharge of student loans in bankruptcy and all potential alternatives should be explored. Another option may be Income-Based Repayment (“IBR”). This program was designed to make sure that graduates who aren’t earning a significant income after graduation aren’t spending all their income on repaying their student loans and may result in a significant payment reduction and potential loan cancellation.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Making a Choice Between Bankruptcy and Short Sale

Homeowners who are underwater on their home mortgages (underwater mortgage means that the homeowner owes more than his/her house is worth) often attempt to do a short sale. A short sale occurs when the homeowner sells the home to a third party for less than what is owed on the note, and the mortgage lender accepts the proceeds of the sale in full satisfaction of the note. The mortgage lender must approve the short sale before it can go through. A short sale can be a good option for homeowners who do not want to keep their homes, and are willing to move out almost right away.

However, before going through with a short sale, a homeowner should see if Chapter 7 Bankruptcy would be a better option. In a Chapter 7 Bankruptcy, the homeowner’s liability on the note is discharged and the home does not have to be surrendered right away and the homeowner does not have to immediately move out of the house. The homeowner can continue to live in the house without making any payments while the lender goes through the lengthy process of foreclosure. In New York, foreclosures can take years before the mortgage lender can hold a foreclosure sale. Even after the house is sold at foreclosure sale, the new buyer (which is often the mortgage lender itself) has to start eviction proceedings to evict the homeowner from the home. This may give the homeowner time to save up money for a move or a new home. Any shortfall that may result from the sale of the house is eliminated in the bankruptcy, meaning the homeowner owes the mortgage lender nothing when they move.

A final, and highly significant, difference between Chapter 7 Bankruptcy and short sale is tax advantages of a bankruptcy filing. When a mortgage lender accepts a short sale, the homeowner will have to pay taxes on the amount forgiven by the lender. Under the tax code, debt forgiveness is considered income and the mortgage lender will generally send the homeowner IRS Form 1009-C form for it. The homeowner will have to report it as income on his/her tax return. As a result, the amount of forgiven debt will be added to the homeowner’s income as miscellaneous income, and while not subject to self-employment or social security tax, it will be subject to income taxes. If the amount of the forgiven debt is significant, the debtor may face an unexpected tax liability amounting to thousands of dollars. In a Chapter 7 Bankruptcy, there is no tax liability for the debt that is eliminated as a result of the filing.

Deed in lieu of foreclosure is similar to a short sale. The main difference is that unlike short sale where the property is transferred to a third party, in deed in lieu of foreclosure, the property is transferred directly to the lender. It has tax consequences identical to those of a short sale.

Short sales and Chapter 7 Bankruptcies are both good options for homeowners who want to walk away for their homes and their mortgages. When your home is underwater and you are considering a short sale, it is important to talk to an experienced bankruptcy lawyer first. That way you can review your options and make an informed decision.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Can Debtor Keep a Credit Card After Filing Bankruptcy

I am often asked if debtor can keep a credit card after the bankruptcy is filed, especially if the credit card does not have a balance. Generally, debtors are always interested in trying to keep a credit card after the bankruptcy is filed whether as a means of having credit for emergencies or renting a car or hotel room.

My answer to these questions as follows.  Initially, the debtor is required to disclose to the bankruptcy court everyone the debtor owes money to. So, if there is money owed to a credit card issuer, this debt would have to be disclosed and listed in the petition, and, ultimately, discharged.

If the card does not have a balance, it does not need to be listed.  However, that card is still going to be closed by the issuer after the bankruptcy is filed, both for Chapter 7 and Chapter 13 bankruptcy cases. Essentially all credit card issuers subscribe to an automatic monitoring service such as AACER or one of AACER’s competitor. Those services will notify the bank even if a particular credit card is not listed in the petition.

In my experience, in nearly every case, all credit cards will be cancelled within days of the bankruptcy filing. Thus, it makes no difference if the card with zero balance is listed, but I usually list it anyway.

Once the debtor completes his or her Chapter 7 bankruptcy, the debtor is likely to be able to obtain new credit cards within 1 to 2 years after receiving the discharge.  At the same time, my advice to the debtors is not to open new credit cards or if a credit card is necessary, to open one with a low credit limit or a secured credit card. There is always a risk that debtor will become overextended once again, and it is prudent to avoid it.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Unpaid College Tuition Can Be Discharged In Bankruptcy

Generally, pursuant to Section 523(a)(8) of the Bankruptcy Code student loans are not dischargeable in bankruptcy, unless the debtor is facing truly remarkable circumstances. However, unpaid college tuition is not treated the same way and can be discharged in bankruptcy.

In a recent case, D’Youville College v. Girdlestone (AP 14-1018 W.D.N.Y. 2015), Bankruptcy Judge Carl L. Bucki held that unpaid college tuition is treated differently than unpaid  student loans and that the changes in the bankruptcy code in 2005 did not alter the results of the earlier Second Circuit cases. In D’Youville, the debtor attended the college only for a semester and had agreed to pay tuition but did not sign a promissory note.

In Girdlestone, Judge Bucki followed the holding in Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82 (2d Cir. 2000), which held that the mere obligation to pay tuition does not constitute a loan that is non-dischargeable under the Bankruptcy Code.

D’Youville College argued that under the amendments to 11 U.S.C. § 523(a)(8) that Congress adopted in 2005, unpaid tuition should be treated the same was as student loans. In 2005 the Bankruptcy Code provisions related to student loans were changed, and even private student loans, not guaranteed by the government or provided by a school receiving government funding, were no longer dischargeable in bankruptcy. Section 523(a)(8)(B) of the Bankruptcy Code now states that the debtor will not receive a discharge of “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” According to Internal Revenue Code §221(d)(1), a “qualified education loan” means “any indebtedness” that a taxpayer incurs to pay certain qualified higher education expenses.

Judge Bucki held that “under the Bankruptcy Code, nondischargeability extends not to any such “qualified education loan,” but only to “any other educational loan that is a qualified education loan.” Further, according to Cazenovia College, “to constitute a loan there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date.” 222 F.3d at 88. When a student unilaterally does not pay tuition, the student may be indebted to the school, but that indebtedness does not make the transaction a loan. Based on the above, Judge Bucki held that because Cazenovia College would deny this status to the claim of D’Youville College, D’Youville’s claim is not excepted from discharge under 11 U.S.C. § 523(a)(8).

Since it is very difficult to discharge student loans, the above decision represents a rare positive result for the debtor. However, most college graduates do not deal with the same issues because most colleges require payment before students can graduate and a significant number of students take out student loans as opposed to owing money directly to their school.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy Fraud and Revocation of Discharge

Once the discharge is granted, can it be revoked? This  question was addressed by the court had to address in In Re Galan, (W.D.N.Y. 2014).

Section 727(d)(2) provides that a bankruptcy judge should revoke the discharge if, the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.

In Galan, the debtor had failed to report his interest in real property and also had failed to disclose that he was in receipt of insurance proceeds related to the property. Once debtor’s failure to disclose these facts to the bankruptcy court was discovered, both the bankruptcy and the U.S. Trustee moved to revoke his discharge.

The court held that revocation of a debtor’s discharge is permitted pursuant to 11 U.S.C. § 727(d)(2), where a debtor “acquired property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.” The provision is triggered when the debtor is in receipt of or becomes entitled to estate property, either before or after discharge. Since the court found that debtor submitted false testimony with regard to his prior dealings with bankruptcy court, the court disregarded his entire testimony as not credible and disregarded his explanations of his actions. After discussing the facts in detail, the court determined that revocation of discharge was warranted.

Galan demonstrates that it is always a bad idea to mislead the bankruptcy court. Also, debtor’s conduct could subject him to criminal prosecution.

Similarly to the above, a material fraud, which would have resulted in the denial of a debtor’s Chapter 7 discharge had it been known at the time of such discharge, can justify subsequent revocation of that discharge under Bankruptcy Code Section 727(d)(1).

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy and Eviction

If you are behind on the rent and are hoping to buy some time, or wipe out the obligation to the landlord altogether, under appropriate circumstances, Chapter 7 or Chapter 13 bankruptcy may be a solution. Filing for bankruptcy will usually wipe out the balance due for past due rent as of the date on which the case is filed. Rent for any period after the case is filed won’t be discharged. If the filing of the case is done correctly, you may also be able to buy some more time in the place before you have to move out.

The filing of a bankruptcy petition stops all efforts at collection, including an eviction proceeding. This automatic stay remains in effect until a creditor makes a request to the court and that request is granted, or until the case is closed or dismissed, or when your discharge is granted. Once the Chapter 7 or Chapter 13 bankruptcy case is filed, the eviction action has to stop as soon as the bankruptcy case is filed. Stopping the eviction means the debtor will get some extra time before having to move out.

However, there an exception to the above rule. If there a judgment for possession of the property due to failure to pay rent that was issued before the bankruptcy is filed, it is an exception to the automatic stay. This exception to the automatic stay will not apply if the debtor’s attorney did all of the following:

Specially marked the petition indicating a judgment of possession has been obtained on the rental property;

Provided the name and address of the landlord that obtained the judgment;

Filed with the petition and served on the landlord a certification under penalty of perjury that, under the applicable landlord-tenant law, there are circumstances under which debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession;

Along with the petition, deposited with the Clerk of the Bankruptcy Court any rent that would become due during the 30-day period after the filing of the bankruptcy petition; and

Within 30 days of the filing of the petition, filed with the bankruptcy court and served on the landlord a further certification (under penalty of perjury) that the entire monetary default has been cured.

If the tenant is being evicted because of a reason aside from failure to pay the rent – for example, conduct causing a health and/or fire risk; use of illegal drugs on property – then there is also an automatic exception from the automatic stay.

This exception applies only to residential property in which  debtor resides, if debtor is “endangering” the property or using, or allowing to be used, illegal controlled substances on the property. In order for this exception to apply, the landlord must file with the court, and serve on debtor’s attorney, a certification under penalty of perjury that such an eviction action has been filed, or that debtor, during the 30-day period preceding the date of the filing of the certification, have endangered property or illegally used or allowed to be used a controlled substance on the property.

If such a certification is filed then debtor is required to file an objection with the court and serve such objection on the landlord within 15 days of the landlord’s certification. The court will hold a hearing, and debtor will have the burden of proving that the landlord is incorrect.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Debtors and Failure to Turnover Nonexempt Assets

In Chapter 7 bankruptcy cases where debtors have nonexempt assets, debtors have an obligation to transfer those assets to the bankruptcy trustee. It is very common for such assets to be debtors’ tax refunds. In this situation, at the meeting of the creditors, debtors are asked to sign a stipulation which is usually incorporated into a subsequent court order, agreeing to turn nonexempt tax refunds, or a part of them, to the bankruptcy trustee.  If debtors do not do so, they are subject to serious consequences which may include loss of their discharge, contempt of court or monetary penalties. The loss of discharge is the most serious penalty from the debtor’s point of view, since it will leave the debts nondischargeable in this or any subsequent bankruptcy that the debtor may file.

But what if the debtors are unable to turn over such assets due to financial reasons? What if the tax refunds were used for living expenses since debtors simply had no other choice?

This issue was recently addressed in In Re Swan, Case No. 08-11210 (W.D.N.Y. 2014), where Judge Michael J. Kaplan had to decide what the consequences should be for the debtors who had failed to turn over nonexempt portion of their tax refunds to the bankruptcy trustee.  The Chapter 7 trustee sought denial of discharge, as well as a finding of contempt of court and monetary penalties. Judge Kaplan held that in the absence of dishonesty on the part of the debtors, loss of discharge would be too harsh of a remedy and the court should not automatically deny or vacate discharge. Judge Kaplan held that if failure to turn over the assets is not as a result of dishonest conduct on the part of the debtors, the appropriate remedy is a monetary judgment that the trustee would be free to collect. Further, Judge Kaplan also held that if the debtors are unable to turn over such assets to the trustee, they have an obligation to seek immediate relief from the Court.

This case further confirms that debtors always have to try to follow the court’s orders and, if they are unable to comply with them, they have to seek relief from the court. While the debtors in Swan did not lose their discharge, they were held in contempt of court and were subject to monetary penalties. All of this could have been avoided if they kept their bankruptcy attorney involved in the case and notified him of their financial difficulties.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Chapter 13 Discharge and Child Support Arrears

Chapter 13 Bankruptcy cases can take between 3 and 5 years to complete, and, in a current economy, as many as two thirds of all Chapter 13 plans fail.  Thus, any debtor who has completed the plan should be proud of his or her accomplishments.

However, under some circumstances, even if all of the plan payments are made over a five year period, the debtor may not receive his Chapter 13 discharge. Specifically, Bankruptcy Code Section §1328, precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid. Additionally, if the debtor has child support arrears prior to filing of the case, those arrears must be paid in full during the term of the plan.

If domestic support (i.e. child support or alimony) were not paid, and that failure was not excusable, the case will be closed, and the debtor will not receive the discharge. In the case of child support in Chapter 13, the debtor cannot ignore the obligation, even if the custodial parent or child support enforcement is saying and doing nothing. Otherwise, the debtor may end up with a perfect  payment history in Chapter 13, but no order of discharge.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy and Cash Advances

Most of my Chapter 7 bankruptcy clients have a lot of credit card debt that was accumulated over time. That debt may have come from making purchases, incurring services charges and interest, as well as taking cash advances  on credit card. While most of credit card debts are dischargeable in bankruptcy, credit card cash advances may represent a significant problem for potential bankruptcy filer.

According to the Bankruptcy Code, any cash advance, or combination of cash advances from one lender, totaling more than $875, obtained within 70 days of the bankruptcy filing date is presumed to be non-dischargeable. This particular provision is included in Section 523(a)(2)(C)(i)(II). The dollar amount of the cash advance, changes every three years.

This provision was included in the Bankruptcy Code because the Congress was concerned that consumers, who obtained significant cash advances relatively close to time they filed for bankruptcy, knew or should have known that they would be seeking bankruptcy relief, and should not be able to eliminate such debts. Another reason for that provision was to prevent consumers from taking cash advances immediately prior to a bankruptcy filing.

However, in terms of procedural issues associated with cash advances taken out with 70 days prior to the filing, in order to have the court declare that the debt is non-dischargeable, the creditor must file objections in the bankruptcy court. Specifically, the creditor must file an adversary proceeding. Since there are filing fees and other expenses associated with such filings, if the amount of the cash advance is not particularly large, most creditors will not bother filing an adversarial proceeding.

However, since a cash advance may result in an adversary proceeding, I always ask my clients about them and, in appropriate situation, may ask the client to postpone the bankruptcy filing until after the expiration of the 70 day period.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.