Offices: Garden City, Plainview, Melville & Hauppauge
|
|
Residents for Over 25 Years... |
Nassau Office: 516.433.7777 |
 |
 |
 |
 |
You're not the only one...
"After my husband got laid off we fell behind on our credit card bills. Mrs. Blutter was very sensitive to our situation and walked us through the bankruptcy process. She gave my family the second chance we needed."
"Two years of a bad economy made us fall behind on our tax payments and credit line obligations. Arthur’s experience as a CPA and knowledge of bankruptcy and tax laws helped us get the IRS off our back." |
Bankruptcy FAQ’s Questions:
- What disclosures must a collection agency provide to a debtor?
- What actions must a collection agency avoid?
- Are there any alternatives to filing bankruptcy?
- Are student loans discharged in a bankruptcy proceeding?
- What effect does a bankruptcy filing have on the collection of alimony and child support?
- Does a bankruptcy discharge eliminate all debts?
- How much property does the debtor have to give up in a bankruptcy proceeding?
- Will a debtor lose his or her home by filing bankruptcy?
- How long are bankruptcy and other credit information included on the debtor's credit report?
- What happens if the debtor's salary increases after filing a Chapter 13 wage-earner plan?
- The Bankruptcy Code uses such confusing terminology. What is meant by such terms as preference and fraudulent conveyance?
- How can a debtor determine whether a debt is secured?
- Learn More: Bankruptcy Law
- What Happens in a Foreclosure?
- What Is The Fair Debt Collection Practices Act?
- What Options Does a Debtor Have Short of Bankruptcy?
- What are Judicial Creditors' Remedies?
- What are Nonjudicial Creditors' Remedies?
- What Is Debtor-Creditor Law?
- What are the Credit Counseling Requirements in Bankruptcy?
- What are the Alternatives to Chapter 7 Bankruptcy?
- What is Exempt and Non-exempt Property Under Chapter 7?
- What Happens In Discharge Under Chapter 7?
- What Is The Bankruptcy Abuse Prevention and Consumer Protection Act?
- What Happens In A Chapter 7 Bankruptcy Proceeding?
What disclosures must a collection agency provide to a debtor?
Typically, a collection agency begins its efforts with an introductory letter. This letter usually contains the required legal disclosures, which include:
- The amount of the debt,
- The name of the original creditor,
- The period of time in which the debtor may dispute the validity of the debt (thirty days), and
- The obligation of the collection agency to send the debtor verification of the debt if its validity is disputed.
In the original correspondence, the collection agency must also inform the debtor that it is attempting to collect a debt and that any information it gathers from the debtor or other sources will be used for that purpose. If this information is not included in the initial contact letter, the collection agency must provide it within five days.
Most lawyers recommend that debtors request verification of the debt because, in that case, a collection agency may not resume collection efforts until the information is confirmed with the original creditor. The collection agency may not, whether by threatening to destroy the debtor's credit rating or by threatening to sue if payment is not received immediately, make a statement in the initial correspondence that overshadows the debtor's right to dispute the debt for thirty days.
What actions must a collection agency avoid?
Under the Fair Debt Collection Practices Act, a collection agency may not act in the following ways:
Third-party communications. The collection agency cannot contact third parties other than the debtor's attorney or a credit bureau for any reason other than to locate the debtor. Collection agents who contact third parties must state their names, and may only add that they are confirming or correcting information about the debtor. They cannot give the collection agency's name unless asked directly. They cannot state that they are calling about a debt. Collection agents may not contact a third party repeatedly unless they believe an earlier response was wrong or incomplete and that the third party has revised information. Further, collection agents cannot communicate with third parties by postcard or by correspondence that uses words or symbols that betray their collection motive.
Attorney-represented debtor. A collection agency cannot contact the debtor directly if counsel represents him or her unless the debtor gives the collection agency specific permission to do so.
Debtor communications. Collection agents may not contact debtors before 8:00 a.m. or after 9:00 p.m., or at another inconvenient time or place. Collection agents also may not contact a debtor at work if he or she knows that the employer bans receipt of collection calls while on the job.
Harassment or abuse. Agents cannot threaten or use violence against the debtor or another person. They cannot use obscene or profane language. They cannot publish a debtor's name on a blacklist or other public posting. Agents cannot call repeatedly or contact the debtor without identifying themselves as bill collectors.
False or misleading statements. Agents may not lie about the debt, their identity, the amount owed, or the consequences for the debtor. They cannot send documents that resemble legal filings or court papers. Agents cannot offer incentives to disclose information.
Unfair practices. Agents may not engage in unfair or shocking methods to collect, including adding interest or fees to the debt, soliciting post-dated checks by threatening criminal prosecution, calling the debtor collect, or threatening to seize property to which the agency has no right.
Are there any alternatives to filing bankruptcy?
Debtors who have faced obstacles to paying off their debts when due have no doubt received more than their fair share of demanding letters and phone calls, and the thought of getting rid of their debts, and thus the constant demands, through bankruptcy can be quite appealing. Before making a decision to pursue that route, which can have long-term effects on credit rating and the ability to make large purchases, like a home, debtors should consider other, less drastic alternatives.
If the debtor's financial problems are only temporary, he or she may want to ask creditors to accept lower payments or that payments are scheduled over a longer period of time. Creditors may be receptive to these ideas if the debtor has been a prompt payer in the past, or if the specter of bankruptcy is raised, since creditors know that once a bankruptcy proceeding is initiated they will probably collect only a portion of what is owed. In addition, creditors may wish to avoid the difficulties of a court proceeding to collect on the debt, which can be time-consuming and expensive.
Consumer credit counselors can also help creditors work out a repayment plan. Some of these advisors work for non-profit agencies, so they charge no fees. Many credit-counseling services charge a fee for their guidance, however, and it may not appeal to an already over-stressed debtor to add another debt to the stockpile.
If the debtor's financial troubles are long-term or if the creditors will not agree to an alternative payment plan informally, bankruptcy may be the best way for the debtor to get out from under an insurmountable debt load. Although it is not without its adverse consequences, bankruptcy can be the right option to enable debtors to make a fresh start.
Are student loans discharged in a bankruptcy proceeding?
Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 or Chapter 13 bankruptcy. They may be dischargeable; however, if the court finds that paying off the loan will impose an undue hardship on the debtor and his or her dependents.
In order to qualify for a hardship discharge, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility: (1) income-if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents; (2) duration-the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and (3) good faith-the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
What effect does a bankruptcy filing have on the collection of alimony and child support?
A Chapter 7 filing should have no effect on such collections.
Although filing bankruptcy stops, or stays, all efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the property of the estate. In a Chapter 7 proceeding, property of the estate includes all possessions, money, and interests the debtor owns at the time he or she files. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor's current income, the bankruptcy should have little impact.
A debtor under Chapter 13 must pay all domestic support obligations that fall due after the petition is filed. Failure to do so could result in dismissal of the case.
Neither a Chapter 7 nor a Chapter 13 discharge affects future child or spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these on-going obligations remain.
Does a bankruptcy discharge eliminate all debts?
The rules on which debts are discharged, or eliminated, are different depending on which type of bankruptcy is filed. A Chapter 13 discharge affects only those debts provided for by the plan. Additional exceptions to a Chapter 13 discharge include claims for spousal and child support; educational loans; drunk driving liabilities; criminal fines and restitution obligations; and certain long-term obligations, such as home mortgages, that extend beyond the term of the plan.
In a Chapter 7 proceeding, the following debts are not discharged:
- Debts or creditors not listed on the schedules filed at the outset of the case
- Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
- Recent federal, state, and local taxes
- Child support and spousal maintenance (alimony)
- Government-imposed restitution, fines, or penalties
- Court fees
- Debts resulting from driving while intoxicated
- Debts not dischargeable in a previous bankruptcy because of the debtor's fraud
In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:
- Debts from fraud, including certain debts for luxury goods or services incurred within sixty days before filing and certain cash advances taken within sixty days after filing
- Debts from willful and malicious acts
- Debts from embezzlement, larceny, or breach of fiduciary duty
- Debts from a divorce settlement agreement or court decree, if the debtor has the ability to pay and the detriment to the recipient would be greater than the benefit to the debtor
How much property does the debtor have to give up in a bankruptcy proceeding?
Items that the debtor usually has to give up include:
- Expensive musical instruments, unless the debtor is a professional musician
- Collections of stamps, coins, and other valuable items
- Family heirlooms
- Cash, bank accounts, stocks, bonds, and other investments
- A second car or truck
- A second or vacation home
Certain types of property are exempt, however, which means that the debtor can keep them. Exempt property can include:
- Motor vehicles, up to a certain value
- Reasonably necessary clothing
- Reasonably necessary household goods and furnishings
- Household appliances
- Jewelry, up to a certain value
- Pensions
- A portion of the equity in the debtor's home
- Tools of the debtor's trade or profession, up to a certain value
- A portion of unpaid but earned wages
- Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account
- Damages awarded for personal injury
Will a debtor lose his or her home by filing bankruptcy?
One of the debtor's major concerns in a consumer bankruptcy is the thought of losing the family home. Although that is possible in some cases, loss of the debtor's home need not always result from a bankruptcy filing.
If the debtor in a Chapter 7 liquidation bankruptcy is behind on his or her mortgage payments, the home could be lost. The mortgage lender in such cases usually asks the bankruptcy court to lift the automatic stay so that it can institute foreclosure proceedings, in which case the home will be sold and the proceeds used to pay off the debt. Whether a debtor who is not behind on mortgage payments will lose his or her house depends on how much equity the debtor has in the property and the amount of the state homestead exemption. If the amount of debt owed on the home is less than the home's market value, the debtor could lose the house unless the homestead exemption entitles the debtor to most of the equity.
In a Chapter 13 proceeding, however, even if the debtor is behind on mortgage payments, if the wage-earner plan includes paying back any missed mortgage payments and current payments are paid when due as well, the debtor should not lose his or her home. If the debtor is current on his or her house payments, the home will not be lost if the debtor continues to make payments when due.
If the debtor is a renter rather than a homeowner, and if the debtor is current in his or her rent payments, it is unlikely that the lessor would even become aware of the bankruptcy proceeding. If the debtor is behind, however, he or she could be evicted. Even after the automatic stay is triggered by the bankruptcy filing, the landlord is likely to ask the court to lift the stay on its behalf, and the court is likely to grant that request.
How long are bankruptcy and other credit information included on the debtor's credit report?
A consumer credit report may include Chapter 7 and Chapter 13 bankruptcy information for ten years from the time the case is filed. One major consumer credit reporting agency is said to remove Chapter 13 information after only seven years, but it is not legally required to do so.
Most other credit information can be included in a consumer credit report for seven years. Civil suits, civil judgments, and arrest records, however, can be reported for at least seven years, and longer if the information is relevant for a longer time period. For example, if the civil judgment against the debtor is valid for ten years, it can be reported for credit-rating purposes for the same time period.
These time limits on reporting credit information do not apply to reports for credit transactions that involve or are reasonably expected to involve a principal amount of $150,000 or more, the underwriting of life insurance involving or reasonably expected to involve a face amount of $150,000 or more, or the employment of a person at salary that is or is reasonably expected to be at least $75,000 annually.
Because both the Fair Credit Reporting Act, which controls what a credit-reporting agency may include in a consumer's credit report, and the Bankruptcy Code are federal law, the same rules apply in all states. There may be some differences, however, in relation to the more-than-seven-year information, since most of the relevant time periods or statutes of limitations are found in the individual states' laws.
What happens if the debtor's salary increases after filing a Chapter 13 wage-earner plan?
The Bankruptcy Code requires that the debtor contribute his or her projected disposable income toward the plan payments for the duration of the plan. Although the code imposes this requirement only when the trustee or a creditor demands it, in reality the trustee always requires it, at least at the beginning of the plan. Whether changes in salary will change the payment plan depends on a complete consideration of all of the circumstances.
If the debtor's income changes after the case has been filed but before the court has confirmed the plan, making it binding on the creditors (which can take as much as six months), the trustee will closely scrutinize the debtor's disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan. If the debtor's income changes during the duration of the repayment plan, changes in income may not necessitate any changes in payments. However, the trustee may ask that payments be adjusted if the debtor's income increases significantly. The trustee does not closely monitor the debtor's income, and it may actually be outside the scope of a trustee's duties to do so.
The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor's salary that is left after deducting all reasonable living expenses. If the debtor's salary increases but so do his or her expenses, there may be no increase in disposable income and therefore no change in the payment plan. If there is a significant increase in disposable income, the trustee may ask for an increase in payments. In cases in which the plan extends over more than thirty-six months, the increased payments may actually reduce the length of the plan's term, so that the debtor has paid off the debts and receives a discharge sooner.
The Bankruptcy Code uses such confusing terminology. What is meant by such terms as preference and fraudulent conveyance?
Preferences and fraudulent conveyances are two ways in which a debtor facing the prospect of bankruptcy may attempt to show favoritism to a particular creditor or close family member or associate, or even set aside some property for himself or herself to avoid losing it to the bankruptcy estate.
A preference occurs when a debtor treats one creditor more favorably than a debtor treats the others. If a debtor has only $500, for instance, and owes that same amount to both First County Bank and First State Bank, but the debtor pays all $500 to First County Bank, that bank has received a preference. Bankruptcy law disfavors preferences if they are made for the benefit of a particular creditor and for a debt owed prior to filing bankruptcy, if the debtor is insolvent at the time of the payment, and if payment is made within ninety days before filing (or one year, if made to an insider like a family member or an officer of a corporate debtor). Creditors receiving preferences may be required to return the amount paid to the debtor's estate, so that it can be added to all the other assets and appropriately divided among all creditors.
Fraudulent conveyances are another vehicle by which debtors may attempt to defraud creditors. The Uniform Fraudulent Transfer Act (UFTA) was enacted to remove any temptation the debtor may have to hide property before declaring bankruptcy, such as by giving it to a relative. Under the Act, any transfer of the debtor's assets within ninety days before filing bankruptcy (or two years if the transfer is to a family member, insider, or business associate) is carefully reviewed by the bankruptcy court. If the court concludes that the debtor was attempting to defraud creditors by selling property at a below-market price, for instance, the court can order that the property be turned over to the trustee. Anything sold for fair market value before the bankruptcy filing cannot, however, be recovered by the court under the UFTA.
How can a debtor determine whether a debt is secured?
The best and perhaps the easiest way to find out whether a debt is a secured debt is to review the documents signed at the time the debt was incurred. If the debt is secured, the documents will say so and will describe the creditor's security interest, which is usually in the property that is the subject of the financing.
Sometimes, however, the type of debt itself will suggest whether it is secured. The following types of debts are often secured debts, which means that if the debtor does not make payments on the debt when due, the creditor can take back the property that secures the debt, sell it, and apply the proceeds to pay off the debt. (If the sale price is not enough to cover the full amount owed, the debtor may still be liable for the remainder.)
Home mortgages. Companies financing home purchases almost always require a mortgage on the house. If the borrower defaults on the mortgage payments, the lender can force a foreclosure, in which case the house is sold and the proceeds are used to pay of the debt.
Motor-vehicle loans. When a person purchases a car on credit, the lender puts a lien on the car, which allows it to repossess the car if the borrower defaults (i.e., fails to make payments on time).
Store purchases. Although many consumers are unaware of this, when they charge something that they purchase at the local department store, the store may retain a security interest in the item purchased based on the agreement that the consumer signed when he or she first opened the account. As a result, if the purchaser fails to pay according to the credit-card agreement, the store can take back the merchandise.
Finance company loans. When a borrower obtains a loan from a finance company and is asked to list things that he or she owns, it is possible that the finance company will obtain a security interest in the items listed.
Learn More: Bankruptcy Law
Bankruptcy law is primarily federal law and varies little from state to state. The United States Constitution grants to Congress the power to establish uniform bankruptcy laws throughout the United States, which ensures uniformity in how bankruptcy proceedings are conducted, encourages interstate commerce, and promotes national economic security. The individual states do, however, retain jurisdiction over certain debtor-creditor issues that are not addressed by or do not conflict with federal bankruptcy law, such as which property remains exempt from creditors' claims.
Bankruptcy law provides two basic forms of relief: (1) liquidation and (2) rehabilitation, also known as reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. In a Chapter 7 liquidation case, a bankruptcy trustee collects the debtor's nonexempt property and converts it into cash. The trustee distributes the resulting fund among the creditors in a particular order of priority described in the Code. Not all creditors will receive the full amount owed through this process, and some may receive nothing. When liquidation and distribution are complete, the bankruptcy court may discharge any remaining debts of an individual debtor. If the debtor is a corporation, it ceases to exist after liquidation and distribution, and there is therefore no real reason for further discharge because the creditors cannot seek payment from an entity that no longer exists.
In a rehabilitation or reorganization, the option courts often prefer, creditors may be provided with a better opportunity to recoup what they are owed. Chapter 11 or Chapter 13 of the Bankruptcy Code governs this type of bankruptcy. Chapter 11 usually applies to individual debtors with excessive or complex debts, or to large commercial entities like corporations. Chapter 13 usually applies to individual consumers with smaller debts. (Farmers and municipalities may seek reorganization through the Code's special chapters, Chapters 12 and 9, respectively.) Reorganization provides a greater opportunity to retain assets if the debtor agrees to pay off debts according to a plan approved by the bankruptcy court. If the debtor fails to do so, however, the court may order liquidation.
Debtors must meet a means test to determine if they are financially eligible for straight Chapter 7 liquidation. In brief, if a debtor can repay out of his adjusted current monthly income $1000 each month to unsecured creditors, over a span of 60 months, he may not avail himself of Chapter 7 and must go into Chapter 13.
In most instances, the bankruptcy case is filed by the debtor, which is considered a voluntary bankruptcy. Once the debtor files the bankruptcy petition, he or she is immediately entitled to relief from creditors through the bankruptcy procedure known as the automatic stay. The automatic stay freezes all debt-collection activity and forces the creditors to allow the bankruptcy proceeding to determine how payment will be made.
Under Chapters 7 and 11, creditors, too, have the option of filing for relief against the debtor, which is known as an involuntary bankruptcy. Involuntary bankruptcies are allowed only when there are a minimum number of creditors and a minimum amount of debt. The debtor has the right to file a response, after which the court determines whether the creditors are entitled to relief. If the court dismisses the involuntary bankruptcy filing, finding that it has no merit, the creditors may have to pay the debtor's attorneys' fees, damages for any losses the debtor experienced because of the bankruptcy, and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition.
Lawyers who practice bankruptcy law can help both debtors and creditors overcome obstacles to the repayment of debt. Their services often extend beyond bankruptcy to include debt repayment and collection options that can circumvent the need for a bankruptcy filing. The following are just some of the areas in which bankruptcy lawyers can assist their clients.
Collections and repossession are remedies sought by creditors against debtors who have defaulted on their obligations. Collections include any technique to get the debtor to make up the remaining debt, including use of a collection agency or the courts. Creditors may also have outstanding debts legally recognized, and then enforced against a debtor's property involuntarily with garnishments, liens, or levies. Repossession of collateral is another technique used when property is pledged to secure a debt.
Commercial bankruptcy is a remedy available to businesses that are unable to pay their debts. Options include liquidation, in which many of the business's assets are sold and the proceeds are divided among the creditors, and reorganization or restructuring, in which the business continues to operate according to a plan that allows for at least partial payment to creditors.
Consumer bankruptcy is a method through which individuals may be able to get out from under insurmountable debt and make a fresh start, albeit with a negative impact on their credit ratings. As in commercial bankruptcy, there are two options: liquidate assets to pay off creditors, or file a wage-earner plan that allows the debtor to retain more assets while working to pay off his or her debts.
Creditors' rights include a full range of options available to creditors to collect unpaid debts. These rights include collection actions, repossession, foreclosure, garnishment, replevin, attachment, obtaining a court judgment, liens, and forcing the debtor into involuntary bankruptcy.
Discharge is the bankruptcy term for wiping out many of the debtor's remaining debts at the conclusion of the bankruptcy proceeding. A discharge is available to only certain debtors, however, and only certain debts are dischargeable.
Foreclosures are the actions taken when a mortgagor fails to make the required mortgage payments on time and the lender, or mortgagee, forces the sale of the property-often the debtor's home-to pay off the debt. Foreclosures can be either judicial, which requires court involvement, or pursuant to a clause in the mortgage that allows for such sales.
Garnishment is a creditor's remedy aimed not directly at the debtor but rather at a third party who owes money to the debtor or holds some of the debtor's property. The garnishment process notifies the third party that the creditor intends to apply the third party's property to satisfy the debtor's debt. Typical garnishees, as the third parties are called, include the debtor's employer and the bank in which the debtor has his or her accounts.
Reorganizations & restructuring are methods by which a bankrupt business may reorganize itself in order to keep operating and pay off creditors at least part of what it owes. This commercial bankruptcy option has many advantages over liquidation, which requires selling off many assets and after which the business ceases to exist.
Workouts are non-bankruptcy agreements between debtors and creditors in which the creditors agree to take less money than the full amount owed or accept payments over a longer period of time than originally anticipated. Workouts have the advantages of being voluntary, less complicated, and less negatively perceived than bankruptcy.
What Happens in a Foreclosure?
Certain creditors may have special rights when faced with collecting bad debts. One of these rights is the availability of a procedure called foreclosure. Foreclosure is most often exercised in relation to unpaid mortgages on real property. In a foreclosure proceeding, the creditor exercises its option under the mortgage to force a sale on the property that is the subject of the mortgage in order to use the proceeds to pay the debt.
The rights of a mortgagee (usually the lender; commonly a bank or mortgage company), when the mortgagor (borrower or homebuyer) defaults, vary considerably from state to state. There are, however, a number of similarities. Generally, there are only two types of foreclosure sales: a judicial sale and a sale pursuant to a power of sale clause contained in the mortgage documents. Judicial sales are more common. Although the details of judicial sales are mainly a matter of local law, they usually require notice of a hearing, a judicial determination of default, notice of sale, a sale, confirmation of a sale, possible redemption and entry of a judgment for any deficiency (the difference between the sale amount and what is owed on the debt).
In order for a mortgagor to avoid a judicial foreclosure once he or she has defaulted in making scheduled payments, the entire debt must be paid. In about half of the states, the period in which the mortgagee can exercise this option, or redeem the debt, extends even beyond actual foreclosure. In that case, the redemption amount is the sale price plus interest, not the amount of the debt secured by the mortgage.
In a judicial foreclosure, the sale is not enforceable by the buyer until it has been confirmed by the court. Legal rules limit the court's discretion on whether to confirm the sale. Mere inadequacy of price without more is not enough to justify the court's refusal to confirm a foreclosure sale, but adequacy of price is a primary concern. In many states, the property must be appraised before the foreclosure sale, and the sale will not be confirmed unless the sale price is at least a certain percentage of the appraised value.
Because judicial foreclosures are time consuming and procedurally complicated, some mortgagees include in their standard mortgages a power-of-sale provision permitting a sale without any court involvement if the mortgagor defaults on the payments. This approach has only limited recognition in the United States. In the states that do allow it, the sale must be public and preceded by a notice (usually by advertisement) that specifies the amount due, the property description, the date and location of the sale and whatever other matters the statute and the mortgage specify. Because courts tend to be critical of non-judicial sales, they are quick to grant relief against such sales for even slight irregularities. This reluctance to accept non-judicial sales can result in uncertainty of title, which could be the main reason that power-of-sale foreclosures have failed to gain greater acceptance.
Due to the important rights involved, debtors facing the prospect of foreclosure and loss of their homes can benefit from the advice of counsel experienced in this area. Attorneys working in this area can also assist borrowers proactively by reviewing the mortgage documents before the borrowers sign them, in order to protect the borrowers' rights and eliminate provisions that do not serve the borrowers' best interests, such as power-of-sale clauses. On the other hand, lawyers representing creditors can guide them through the sometimes cumbersome foreclosure process and aid them in the recovery of the money that they are rightfully owed.
What Is The Fair Debt Collection Practices Act?
Collecting debts can be a time consuming, complicated operation for many businesses, so to help them work with delinquent debtors in the collection process, creditors often contract with debt collectors or attorneys with knowledge of collection law and procedure. A person who gets a letter or a telephone call from a collection agency or attorney's office about a bill or debt may feel powerless. It may seem as though there is nothing that can be done to protect a person from those who are trying to collect money.
The federal Fair Debt Collection Practices Act (FDCPA), 15 USCA § 1692 et seq., gives some protection. Although the law will not make a debt or an alleged debt void, the FDCPA does give a person certain rights and can prevent abusive actions on the part of debt collectors.
Who is Covered by the Fair Debt Collection Practices Act?
The Fair Debt Collection Practices Act applies to anyone whose regular business is the collection of debts for another. This includes primarily collection agencies, debt collectors and, in most situations, attorneys and their employees.
It is important to remember that the Act does not apply to a business or a person who is collecting debt on his or her own behalf.
FDCPA Protections
The Act says that a debt collector may no longer contact you if you inform him or her in writing that you do not want any more contact. Remember, however, that just because you no longer hear from the collector does not mean that the debt, if valid, has been extinguished. A collector may go ahead and start a lawsuit against you to collect the debt.
The Act also states that a debt collector may not:
- Contact you before 8:00 a.m. or after 9:00 p.m., your local time, without your prior consent.
- Contact you instead of your attorney, if he or she knows you are represented by an attorney.
- Contact you at your place of employment, if he or she knows that you are not allowed to receive such calls at work.
- Contact third parties-neighbors, friends or family members-about the debt you are claimed to owe. The collector may only contact third parties about your location.
- Use obscene or profane language.
- Use or threaten violence.
- Publish a list of people who do not pay their debts.
- Call or make a telephone ring continuously.
- Call on the telephone and not identify himself or herself.
- Threaten criminal prosecution.
- Make any false or misleading statement.
Hearing from bill collectors is not a pleasant thing. You can at least be certain that the collectors stay within legal bounds if and when they do contact you.
In addition to the FDCPA, your state consumer protection laws may provide additional protections for debtors and procedural requirements or restrictions for creditors.
Penalties
Most bill collectors know the law and are careful to obey all legal requirements. Some, however, go outside the law when trying to collect a debt. If a bill collector violates the FDCPA, your first defense is to tell him or her in writing to stop contacting you. You may want to report the matter to the Federal Trade Commission (FTC) and to the Attorney General's office in your state. Remember that your state law may provide additional legal remedies.
The FDCPA allows a debtor to sue a collector in federal or state court within one year of the violation date. Violators are liable for actual damages, which may include expenses, interest and even an amount for mental or emotional distress. The Act also provides for other damages within the court's discretion of up to $1000. In determining these additional damages, the court is to consider the egregiousness of the violation and whether it was intentional. A debtor who successfully sues a collector under the Act can also collect costs and attorneys fees.
Usually an FDCPA lawsuit can be successful without showing that the collector acted negligently or intentionally to violate the Act. However, the collector can successfully defend himself or herself if the violation was unintentional and the result of a bona fide error, so long as there were procedures in place to prevent such an error.
The Act also provides for class action lawsuits where appropriate.
Debtors are protected and creditors are regulated by the FDCPA and similar state laws during the debt collection process. If you are a debtor or creditor with legal questions, contact our firm to schedule an appointment with an attorney who is knowledgeable in the law of debt collection.
What Options Does a Debtor Have Short of Bankruptcy?
Before making the decision to file for bankruptcy, a debtor should thoroughly consider other possible options. After all, bankruptcy can narrow future options by negatively influencing credit ratings and employment opportunities. Sometimes a viable alternative for handling problematic debt can be accomplished through informal negotiation or contractual agreement.
Informal Negotiation
The easiest resolution for a thorny financial obligation may be for the consumer to simply approach the creditor and suggest creative new terms that would enable the consumer to continue payment at some level. For example, the creditor may agree to accept lower payments either temporarily or permanently; extend the term of the repayment period; or temporarily suspend principal payments and accept interest payments only. Such renegotiation may be advantageous to the creditor as well as to the debtor. The business relationship will be preserved and the creditor may actually save money in the long run by avoiding the need to take expensive legal action.
Consumer credit counseling services may be of value to consumers in such situations. Beware, however, of the unscrupulous credit organization that promises more than it can deliver.
Workouts
The term workout is often used to describe a more formal, mutually negotiated modification of the debt agreement that does not involve a bankruptcy filing. Simply stated, a workout is a revised debt agreement worked out between the debtor and his or her creditor or creditors, usually by restructuring the payments in some fashion or even by discharging part or all of the debt. Workouts can require long negotiation, often requiring compromise and flexibility. Both debtors and creditors must agree to good faith disclosure and cooperation.
Workouts are often either in the form of a composition or an extension. A composition is a contract between a debtor and two or more creditors in which the creditors agree to take partial payments in full satisfaction of the debts. An extension is a contract between the debtor and creditor in which the creditor agrees to extend the time for payment of the claim. An agreement may be a composition-extension hybrid; for example, the agreement may be to accept less money over a longer period of time.
Compositions and extensions must meet all the formal requirements of contract formation. There must be an offer to make a contract, the offer must be accepted and there must be consideration, defined as the exchange between the parties of something of value.
While more than one creditor may enter into the workout agreement, there is no requirement that all of the debtor's creditors agree to its terms. Creditors that do not agree to the workout are not affected by it. In other words, they are entitled to pursue other legal remedies to collect the debts owed to them and can attempt to recover the full amounts, but they are forfeiting the present opportunity to benefit from whatever partial payments the workout would have allowed.
An attorney experienced in debtor-creditor law can help a debtor determine which repayment method may be his or her best option and can assist a creditor in determining whether to consent to the terms of an informal debt renegotiation or enter into a workout agreement. Contact an experienced debtor-creditor lawyer today.
What are Judicial Creditors' Remedies?
Although more informal methods of debt collection are often effective, when negotiation and other nonjudicial means of collection are unsuccessful, a creditor may have to resort to assistance from the court system to collect a delinquent debt.
Court Assistance
In simplified terms, a creditor who is owed a debt that is in default can go to court and get a judgment against the debtor. Judgments can be paid or satisfied using assets of the debtor, which can be secured with the court's help either before or after the judgment is procured. The creditor can go to the court before the judgment is entered, or prejudgment, for help securing the debtor's property for eventual satisfaction of a potential judgment. Another option is for the creditor to utilize court assistance in collecting the debtor's assets after the judgment is entered, or postjudgment.
Prejudgment Remedies
In cases involving emergencies or other extraordinary circumstances, the creditor may be able to seize or have preserved the debtor's property even before the court decides the matter. The property is either used to satisfy the judgment or if the debtor wins the lawsuit, the property is returned back to the debtor. Here are some of the more common prejudgment creditors' remedies:
- Attachment. Attachment is a procedure set forth in state statutes with the particular details varying from state to state. In an attachment proceeding there is usually a court hearing, after which the court issues an order authorizing the creditor to take the debtor's property or its title, or otherwise to prevent the debtor from selling, transferring or destroying the property.
- Garnishment. Garnishment is an action parallel to attachment, except that the debtor's property is in the hands of a third party or takes the form of a debt from the third party to the debtor. An employer, for instance, may be required to withhold a certain portion of an employee's wages and turn it over to the creditor in order to pay back to the creditor what the employee lawfully owes it.
- Receivership. To preserve, protect or manage property of the debtor that the creditor is trying to reach to satisfy a debt, the court may appoint a receiver, an impartial and uninterested person.
- Temporary injunction. The court may issue a temporary order to prevent the sale or destruction of a debtor's property in anticipation of the main lawsuit on the underlying debt.
Postjudgment Remedies
The creditor will be entitled to an enforceable judgment if it proves its case or if the debtor fails to contest the claim. The most common creditors' remedies after obtaining a judgment include:
- Execution. In most states, recording a judgment creates a judgment lien on the debtor's property. If the debtor does not pay the judgment voluntarily, the lien can be enforced by the local sheriff, who takes the property and arranges for its sale, the proceeds of which are used to satisfy the judgment.
- Garnishment. Garnishment is a legal proceeding to transfer to the judgment creditor property of the debtor in the hands of a third party or owed to the debtor by a third party in order to satisfy the judgment.
- Receivership. In complex lawsuits, sometimes a receiver will be appointed to help manage and preserve the property after judgment is entered with the goal being to eventually satisfy the judgment. Additional court proceedings may be needed.
Other Remedies
- Replevin. In a replevin action, a creditor sues a debtor for possession of property, most commonly where the creditor has a security interest in the property as collateral pursuant to the original agreement. Ordinarily, the local sheriff must execute the order of replevin, seize the property and deliver it to the creditor.
- Involuntary bankruptcy. If none of these debt-collection tactics is successful, multiple creditors may be able to initiate an involuntary bankruptcy proceeding during which the debtor may be forced to liquidate his or her assets to pay off his or her debts, or the debtor may be able to file a reorganization plan that sets out how the debts will be paid. If the creditors initiate such a proceeding in bad faith, however, they may be subject to severe financial penalties, including punitive damages.
Creditors have various legal rights, both through self-help and court intervention, to collect money lawfully owed to them. If you have questions about collecting on a debt or if you are the subject of collection actions, contact an experienced debtor-creditor law attorney to learn how to protect your rights.
What are Nonjudicial Creditors' Remedies?
An attorney with experience in debtor-creditor law can advise both creditors and debtors about their rights and remedies with respect to overdue debts and help them maintain their financial integrity. When a debtor fails to pay his or her debts in a timely fashion, the person or business to which the debt is owed has several available remedies to help collect the money. Although there are formal creditors' remedies that involve the courts, some methods do not require court involvement and are often referred to as self-help remedies.
Creditor Self-Help
Many creditors' early attempts at debt collection do not involve the courts. First, the creditor may simply contact the debtor directly and demand payment, either using a collection letter or by telephone. At this point, the debtor may make the missed payments to bring the obligation current or the parties may be able to negotiate a revised, but mutually beneficial, payment plan.
If these more informal attempts fail, the creditor may transfer the debtor's account to another business whose focus is debt collection. The federal Fair Debt Collection Practices Act (FDCPA) and some state laws prescribe how, when and where debtors may be contacted and prohibit deceptive practices. The FDCPA applies only to persons who regularly collect debts owed to someone else, called debt collectors, but not to creditors collecting their own debts.
Setoff
When two parties owe each other money through different obligations and one of the parties becomes late in payment,the nondefaulting party may subtract, or set off, the amount overdue to him or her from the amount he or she owes the defaulting party. This is most commonly done by banks when a debtor defaults on a loan and the debtor also holds money in accounts at the same bank.
Guaranty
Some creditors require as a condition of debt that the debtor have a backup party legally responsible for the debt in case of default. This party may be called a third-party guarantor or a surety. Creditors can pursue collection from the guarantor or surety if attempts to collect from the primary debtor fail.
Secured Debt
Some debts grant a security interest to the creditor in particular property owned by the debtor. This type of secured property is known as collateral. A creditor with a security interest generally has the right to seize the property to satisfy the secured debt upon nonpayment.
Repossession of pledged collateral, usually personal property, is a common nonjudicial remedy for nonpayment of the loan taken out to purchase the collateral. A familiar example of repossession is when an automobile dealer takes back a vehicle upon nonpayment of the car loan. In most states, the creditor may repossess property without getting a court order or giving the debtor notice as long as the repossession does not breach the peace.
Foreclosure, like repossession, involves the taking back of property that is secured by a loan, but foreclosures generally involve real estate or other real property. Some foreclosures are allowed by virtue of a power-of-sale clause in the mortgage and do not require court intervention, but others must be approved by the court and are more complicated procedures.
Another type of interest or lien that can be enforced to satisfy a debt arises in building construction, including mechanic's or materialmen's liens on the construction itself or on materials supplied to construction sites.
Remember, creditors' remedies are governed primarily by state law, which can vary greatly from state to state. If you are a creditor undertaking self-help remedies or if you are a debtor facing such a situation, an experienced consumer law attorney can provide you with information about the law in your state.
What Is Debtor-Creditor Law?
Debtor-creditor law involves the legal interactions between those parties that owe money and the parties to which the money is owed. Often an aspect of everyday life with little involvement by courts and lawyers, when debtor-creditor situations become more complicated, the legal entanglements and implications grow.
That is when a competent and experienced debtor-creditor lawyer becomes an essential ally in reclaiming financial security, whether you are a debtor or a creditor. If you have debt-related legal questions, call one today.
Creditors' Legal Remedies to Help Collect Debts
When a debtor fails to pay a debt, the creditor or the person or business to which the debt is owed, has several available remedies to help collect the money. These methods include nonjudicial self-help remedies and remedies that involve the courts. Self-help remedies include simply contacting the debtor directly and demanding payment. If informal attempts fail, the creditor may transfer the debtor's account to a debt-collection business, usually called a collection agency.
Creditors may also repossess or foreclose on goods pledged as collateral for secured debts if debtors default on loan payments. The creditor can take back the property, sell it and apply the proceeds to pay off the debt. If the sale price is not enough to cover the full amount owed, the debtor may still be liable for the remainder. Typical types of secured debts that may be collected via repossession include:
- Motor-vehicle loans. When a person purchases a car on credit, the lender puts a lien on the car, which allows the lender to repossess the car if the borrower fails to make payments on time.
- Store purchases. When consumers charge something that they purchase at a department store, the store may retain a security interest in the item purchased based on the agreement that the consumer signed when he or she first opened the account.
- Finance company loans. When a borrower obtains a loan from a finance company and is asked to list things that he or she owns, it is possible that the finance company will obtain a security interest in the items listed, depending on the contract.
Foreclosure, like repossession, involves the taking back of property that is secured by a loan, but foreclosures generally involve real property, such as a house or cabin. Foreclosures may be either nonjudicial remedies or involve the courts, depending upon the exact agreement between the lender and the borrower and upon the law of the particular state. Three other common creditors' remedies that will probably involve the court are replevin, garnishment and attachment, which like repossession involve taking back property, usually with the help of the court.
If all of these remedies fail, the creditor can sue to collect the debt. The creditor will be entitled to an enforceable judgment if it proves its case or if the debtor fails to contest the claim. If even that tactic is unsuccessful and the debtor owes a substantial amount to several creditors, the creditors may be able together to initiate an involuntary bankruptcy proceeding.
Limits on Creditors' Rights Help Protect Debtors
The practices of debt collectors are regulated in order to avoid abuses. Under the federal Fair Debt Collection Practices Act (FDCPA), for instance, a debt collector may not:
- Unless he or she has permission from the debtor or a court, contact third parties other than the debtor's attorney or a credit bureau for any reason other than to locate the debtor. During such contact the collector must state his or her own name but cannot give the collection agency's name unless asked directly. He or she cannot state that he or she is calling about a debt.
- Contact the debtor directly once he or she knows the debtor is represented by an attorney, unless the debtor, a court or the attorney gives the collection agency specific permission to do so or if the attorney is nonresponsive.
- Contact a debtor at work if it is known that the employer bans collection calls while on the job; contact debtors before 8:00 a.m. or after 9:00 p.m. or at another inconvenient time or place; or make phone contact without identifying himself or herself.
- Threaten or use violence against the debtor or another person or use obscene or profane language.
- Publish a debtor's name on a "blacklist."
- Lie about the debt, their identity, the amount owed or the consequences for the debtor or send documents that resemble court papers.
Creditors have various legal rights, both through self-help and court intervention, to help them collect moneys lawfully owed to them. But debtors, too, are entitled to legal protection and there are clear legal bounds on creditors' conduct. If you have questions about enforcing a valid debt or if you are the subject of debt-collection attempts, contact an experienced debtor-creditor law attorney to learn how to protect your legal rights.
What are the Credit Counseling Requirements in Bankruptcy?
In 2005, Congress passed and the president signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a bankruptcy reform law. One of the new requirements BAPCPA imposes on a new bankruptcy debtor is to receive credit counseling from an approved credit counseling agency before the bankruptcy filing.
Credit Counseling Briefing
Specifically, a debtor must receive an "individual or group briefing" from a nonprofit budget and credit counseling agency within 180 days before filing for bankruptcy. The briefing can be in person, by telephone or via the Internet. The law provides that the briefing must "[outline] the opportunities for available credit counseling and [assist] such individual in performing a related budget analysis." If a debt management plan is developed in the course of the required counseling, it must be filed with the bankruptcy court.
Approved Credit Counseling Agencies
In most states, the US trustee maintains a list of approved credit counseling agencies for use in the court districts in those states. In Alabama and North Carolina, this list is approved by bankruptcy administrators. The list of approved agencies is available on the US courts Web site. An approved agency is first on the list for a six-month probationary period, renewable in one-year increments. Approval can be revoked at any time. Interested persons can ask the court to review the approval of any agency.
To obtain approval, an agency must have qualified, experienced counselors who provide adequate counseling and have no financial interest in the counseling outcome; handle client funds securely; maintain an independent board of directors; charge reasonable and sliding scale fees; make certain disclosures; possess financial security to oversee repayment plans of clients; and maintain "quality, effectiveness, and financial security of the services it provides."
Exceptions to the Credit Counseling Requirement
There are some exceptions to the counseling requirement for certain debtors in particular situations. First, the court may waive the counseling requirement if there are "exigent circumstances" and the debtor made a request for counseling that an agency was unable to provide within five days. Second, a debtor is excused from the requirement if incapacitated by mental illness or deficiency, if physically impaired such that he or she is unable to participate with reasonable effort or if on active military duty in a combat zone. Third, counseling is not required if the trustee or administrator in a particular court district determines there are not enough approved credit counseling agencies available.
Criticisms of the Requirement
The credit counseling requirement has many critics. One argument is that it is too little and too late for a debtor in bad enough financial shape to be on the brink of bankruptcy. Supporters of the requirement feel that it will weed out people who are in financial crisis because of their own voluntary behavior; however, counseling agencies have found that most people counseled have had legitimate problems not caused by their own recklessness. Dismissal of a bankruptcy case for not obtaining required counseling is seen by some as harsh treatment for a debtor facing, for example, foreclosure on a modest home. Finally, depending on the interpretation of the judge, the dismissal could weaken the automatic stay in a subsequent bankruptcy filing.
Conclusion
Consumers considering bankruptcy as a future option should investigate the credit counseling requirement well before the anticipated bankruptcy filing. The experienced consumer and bankruptcy law attorneys at our firm can be just the counselors and zealous advocates such a consumer needs in trying economic times.
What are the Alternatives to Chapter 7 Bankruptcy?
The term "workout" is used to describe a non-bankruptcy negotiated modification of debt. More simply stated, a workout is an out-of-court agreement between a debtor and his or her creditors for repayment of the debts between them, which is negotiated without all the procedural complications — and perhaps the stigma — of the bankruptcy process.
Why Choose a Workout?
There are a variety of reasons why a debtor might prefer a workout to bankruptcy. By entering into a voluntary agreement with creditors, the debtor avoids the stigma that attaches to bankruptcy but achieves the same results — discharge from all or a portion of his or her debts. In fact, a workout discharge can be even broader than a bankruptcy discharge. In addition, a workout discharge does not affect the debtor's rights to file a future bankruptcy, whereas certain types of bankruptcy discharges do. The main advantage of a workout is that both the debtor and the participating creditors voluntarily enter into it. In a workout, unlike bankruptcy, the majority of creditors cannot cram down concessions on dissenting creditors.
Non-Bankruptcy Alternatives
- Compositions and Extensions. A "composition" is a contract between the debtor and two or more creditors in which the creditors agree to take a partial payment in full satisfaction of their claims. An "extension" is a contract between the debtor and two or more creditors in which the creditors agree to extend the time for payment of their claims. An agreement may be both a composition and an extension; in other words, an agreement to accept less money over a longer period of time.
There is no requirement that all of the debtor's creditors agree to a composition or extension, but most of them must voluntarily support it for it to work. Creditors that do not agree to the workout are not affected by it and remain entitled to pursue other remedies to collect the debts owed to them. Although they can theoretically proceed to recover the full amount due, they forfeit the right to benefit automatically from whatever partial payment the composition would have allowed had they taken part. - Assignment for the Benefit of Creditors. An assignment may be a simpler and cheaper alternative to bankruptcy for a small business that wishes to be liquidated. The debtor assigns all nonexempt property to an assignee who acts as a fiduciary for the benefit of creditors. The assignee liquidates the assets and distributes the proceeds pro rata among creditors who have filed claims with the assignee. An assignment is voluntary, but all creditors must accept it.
Bankruptcy Alternatives
- Chapter 11. Filing for bankruptcy under Chapter 11 may be an option for debtors such as corporations, sole proprietorships and partnerships that are engaged in business. These debtors may wish to stay in business and avoid liquidation. Under Chapter 11, the debtor can have debts reduced or have the time for repayment extended.
- Chapter 13. Chapter 13 may be an option for individual debtors with regular income. Chapter 13 allows individual debtors to save their homes from foreclosure by coming up with a payment plan for past due payments. Sole proprietorships may also be eligible to file for Chapter 13.
Non-bankruptcy alternatives such as compositions and extensions have several benefits. However, in some circumstances, a debtor is afforded greater protection by a formal bankruptcy, and attempting a workout may just prolong the financial agony and delay the inevitable. An attorney who has experience in bankruptcy and debtor-creditor law can help both debtors and creditors determine whether a workout is the best option for debt repayment, or whether bankruptcy is the better choice in their particular circumstances.
What is Exempt and Non-exempt Property Under Chapter 7?
In a Chapter 7 liquidation case, the debtor must relinquish certain property to the bankruptcy trustee so that he or she can sell the property and use the proceeds to pay off debts. Property of the bankruptcy estate is broadly defined under Section 541 of the Bankruptcy Code. The estate is technically the legal owner of all of the debtor's property and consists of all legal and equitable interests that the debtor has in property at the initiation of the bankruptcy case. Income that the debtor earns after the date of the petition is not included in the estate. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up.
A debtor must file a schedule of exempt property with the court. Exempt property is property that the debtor can protect from liquidation. The Bankruptcy Code allows each state to adopt its own exemption laws, which the debtor can select instead of the federal exemptions. It is important to consult with an attorney who can explain the exemptions available under your state's laws and how they compare to the available federal exemptions.
Non-exempt Property
Items that the debtor usually must forfeit include:
- Expensive musical instruments, unless the debtor is a professional musician
- Collections of stamps, coins and other valuable items
- Family heirlooms
- Cash, bank accounts, stocks, bonds and other investments
- A second car or truck
- A second home or vacation home
Exempt Property
Certain types of property are exempt, meaning that the debtor can keep that property. Exempt property includes:
- Motor vehicles, up to a certain value
- Reasonably necessary clothing
- Reasonably necessary household goods and furnishings
- Household appliances
- Jewelry, up to a certain value
- Pensions
- A portion of the equity in the debtor's home
- Tools of the debtor's trade or profession, up to a certain value
- A portion of unpaid but earned wages
- Public benefits, including public assistance (welfare), social security and unemployment compensation, accumulated in a bank account
- Damages awarded for personal injury
If you have questions about what property you will be allowed to retain if you file bankruptcy under Chapter 7 of the Bankruptcy Code, it is prudent to seek the counsel of an experienced and knowledgeable bankruptcy attorney who can respond promptly and accurately and put your mind at ease.
What Happens In Discharge Under Chapter 7?
"Discharge" in the bankruptcy sense refers to clearing the debtor's slate of all, or most, past debts. Although many people expect that filing for bankruptcy will wipe out all of their debts, that is not always the case. Bankruptcy only discharges certain debts. The availability of discharge depends on the type of bankruptcy proceeding involved, who the debtor is and what type of debts the debtor has.
A Discharge Does Not Wipe the Slate Completely Clean, but It Does Afford Great Relief
There are a number of prerequisites for obtaining a discharge. In a Chapter 7 liquidation case, if the debtor was in some way dishonest or uncooperative, such as by making fraudulent transfers or failing to keep adequate records prior to filing or by ignoring lawful court orders after filing, the court may deny discharge. In addition, a Chapter 7 debtor cannot have his or her debts discharged more than once every nine years. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides that in order to receive a discharge, an individual debtor must complete a personal financial management class.
When a discharge is granted, it protects the debtor from any further liability on the discharged debts. No legal action may be taken against the debtor to collect on discharged debts, and no collection calls or letters may be sent with regard to such debts. A discharge does not actually cancel or extinguish the debt, however; it merely extinguishes the debtor's personal liability. Also, a discharge does not automatically discharge a co-debtor's or guarantor's liability.
A bankruptcy discharge also has no effect on liens. Take, for example, the situation in which the debtor owes the creditor $5,000 and the debt is secured by the debtor's car, which is worth $3,000. If the debtor files for Chapter 7 relief and receives a discharge, the discharge does not extinguish the creditor's security interest. In other words, the creditor can still repossess the car. However, it cannot go after the debtor for the $2,000 difference between the debt and the value of the security. That is the personal protection afforded to the debtor by the bankruptcy discharge.
A court may revoke a Chapter 7 discharge if the trustee or a creditor requests it, and if the debtor obtained the discharge through fraudulent means; acquired property that is property of the estate and knowingly failed to report the property or give it to the trustee; or made a material misstatement or failed to provide information in connection with an audit of his or her case. 11 USC §727(d).
Debts that Remain After a Chapter 7 Discharge
Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:
- Debts or creditors not listed on the schedules filed at the outset of the case
- Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
- Recent federal, state and local taxes
- Child support and spousal maintenance (alimony)
- Government-imposed restitution, fines and penalties
- Court fees
- Debts resulting from driving while intoxicated
- Debts not dischargeable in a previous bankruptcy because of the debtor's fraud
Student Loans
Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 bankruptcy. They may be dischargeable; however, if the court finds that paying off the loan will impose an undue hardship on the debtor and his or her dependents. In order to qualify for a hardship discharge of a student loan, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts often apply a three-part test to determine eligibility:
- Income — if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents
- Duration — the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period
- Good faith —the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy
Additional Non-Dischargeable Debts
In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:
- Debts from fraud, including certain debts for luxury goods or services incurred within 90 days before filing and certain cash advances taken within 70 days after filing
- Debts from willful and malicious acts
- Debts from embezzlement, larceny or breach of fiduciary duty
- Debts from a divorce settlement agreement or court decree, if the debtor has the ability to pay and the detriment to the recipient would be greater than the benefit to the debtor
If you have questions about which debts will be affected by a bankruptcy discharge, it is essential to seek the advice and counsel of an experienced bankruptcy attorney.
Copyright © 2008 FindLaw, a Thomson Reuters business
What Is The Bankruptcy Abuse Prevention and Consumer Protection Act?
On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which instituted substantial changes to the Bankruptcy Code. Most provisions of BAPCPA became effective in October 2005. BAPCPA's provisions make it more difficult to file for Chapter 7 and impose many additional requirements on debtors in an effort to exclude debtors who can pay their creditors from Chapter 7. Under the amendments to Section 707(b), a bankruptcy case should be dismissed if the debtor is found to be "abusing" Chapter 7 relief. Prior to the BAPCPA, the word "substantially" was included immediately before "abuse" in the test.
Chapter 7 Means Test
One of the most significant aspects of the new bankruptcy laws is the means test for individuals with primarily consumer debts who wish to file for Chapter 7. Under §108(8) of the Bankruptcy Code, a consumer debt is "primarily for a personal, family, or household purpose." If the debtor is above the threshold established by the means test, his or her Chapter 7 petition may be dismissed, or the case could be converted to a filing under Chapters 11 or 13, if the debtor consents.
If the debtor's current monthly income is less than the state median, the debtor automatically qualifies for Chapter 7. If the debtor's current monthly income is more than the state median income, the means test will be applied to determine if filing for Chapter 7 is presumptively abusive. This step is a bit tricky. If the debtor's projected disposable income, which is monthly income minus certain allowable expenses, over the next five years is less than $6,000 ($100/month), you are eligible to file under Chapter 7. However, if the debtor's current monthly income minus the allowable expenses and multiplied by 60 (the number of months for the next five years) is more than the lesser of (1) 25% of the debtor's non-priority unsecured claims in the case or $6,000, whichever is greater; or (2) $10,000, the court will presume that abuse exists. 11 USC §707(b)(2)(A)(i). If this is the case, the debtor will not be allowed to file for Chapter 7 unless he or she can show special circumstances.
Other Requirements for the Debtor
BAPCPA includes a number of additional requirements for a debtor seeking to file under Chapter 7. Individual debtors are now required to obtain an individual or group briefing from an approved nonprofit budget and credit counseling agency within 180 days of filing for bankruptcy. 11 USC §109(h). This briefing must, at a minimum, outline opportunities for available credit counseling and assist the debtor in performing a budget analysis. Another critical requirement is that prior to receiving a discharge, a Chapter 7 debtor must complete a personal financial management course. 11 USC §§ 111, 727(a)(11). Section 521(e) requires that debtors filing under either Chapter 7 or 13 provide a copy of their most recent tax return to the trustee before the meeting of creditors. The debtor must also provide a copy to any creditor that requests one. Finally, Federal Rule of Bankruptcy Procedure 9011 requires that before a debtor submits documents to the court or a trustee, the debtor and his or her attorney must make a "reasonable inquiry to verify that the information contained in such document is (1) well grounded in fact, and (2) warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law."
Duties of the Trustee
There are also new, increased duties for the trustee. Under Sections 704(a)(10) and (c)(10), the trustee must advise a domestic support creditor in writing of the existence of and right to use support enforcement and collection agencies. The trustee must also provide notice of such claims to those agencies. If the debtor was serving as an administrator of an employee benefit plan at the time of filing, the trustee must perform the duties of an administrator. 11 USC §704(a)(11). If a debtor is a health care business, the trustee must use "all reasonable and best efforts" to transfer that business's patients to another such business in the same physical area that provides substantially similar services with a reasonable quality of care. 11 USC §704(a)(12). Finally, a trustee in a Chapter 7 case must ensure that the final reports are uniform.
Although BAPCPA has made it more difficult for individuals with consumer debt to file for Chapter 7 bankruptcy, it is still possible, and the majority of debtors still qualify for Chapter 7 relief. An experienced bankruptcy attorney can determine whether you qualify for Chapter 7 and help you navigate the requirements for filing.
What Happens In A Chapter 7 Bankruptcy Proceeding?
A Chapter 7 case begins with the debtor's filing of the petition with the bankruptcy court, which triggers the automatic stay — bankruptcy terminology for the termination of all debt-collection activity. Filing a petition does not stay certain types of actions, and the stay may only be in place for a limited period of time. As long as the automatic stay is in place, creditors may not initiate or continue lawsuits against the debtor, garnish wages or call the debtor demanding payments.
The debtor must also file a schedule of assets and liabilities; a schedule of current income and expenditures; a statement of financial affairs; and a schedule of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007. There are additional filing requirements for individual debtors with primarily consumer debts. These debtors must file a certificate of credit counseling and a copy of any debt repayment plan; evidence of any payments from employers made 60 days before filing; a statement of monthly net income and any anticipated increases in income or expenses after filing; and a record of any interest the debtor has in state or federal qualified education or tuition accounts. 11 USC §521.
The court appoints a trustee who oversees the Chapter 7 case and liquidates the debtor's assets in order to pay off the debts. In many cases, however, the debtor's assets are exempt or already subject to valid liens, so there will be no assets to liquidate. Most consumer bankruptcies are "no asset" cases in which there is nothing available for the creditors. The trustee can also try to recover money for the estate under the trustee's "avoiding powers." These powers include the power to set aside preferential transfers to creditors within 90 days of filing; undo security interests and pre-petition transfers that were not properly perfected; and pursue fraudulent conveyance and bulk transfer claims under state law. If there are assets, the trustee collects the sale proceeds in a fund from which the debts are paid to the extent possible. Under §726 of the Bankruptcy Code, property is distributed according to six classes of claims; each class must be paid in full before creditors in the next lower class are paid anything.
The trustee holds a meeting of creditors between 20 and 40 days after the debtor files the petition. During this meeting, the trustee and creditors may ask the debtor, who is under oath, questions. The debtor must attend the meeting of creditors and answer questions about his or her property and financial matters. 11 USC §343.
When a debtor wants to keep certain secured property (such as a car) after bankruptcy, he or she may choose to reaffirm the debt. In a reaffirmation agreement, the debtor and creditor agree that the debtor will pay all or part of an otherwise dischargeable debt after bankruptcy. The creditor promises that it will not repossess the property as long as the debtor continues to pay the debt. Reaffirmation agreements must be entered into before discharge is entered and they must be signed by the debtor and filed with the court. 11 USC §524(c).
When all of the proceeds are distributed, most remaining unpaid debts are discharged, meaning that they no longer exist and the debtor has no further obligation to pay them. Some debts, such as student loans, damages resulting from the debtor's willful or malicious acts, debts incurred by giving false financial information, domestic support obligations and some debts incurred just prior to filing for bankruptcy, are non-dischargeable. A court may deny a discharge if the debtor failed to keep or produce financial records; failed to satisfactorily explain any loss of assets; committed perjury; failed to follow an order of the court; fraudulently transferred or hid property; or failed to complete the required financial management course.