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The Bankruptcy Code

               When it comes to bankruptcy, the primary source of law is the Bankruptcy Code (Title 11 of the United States Code).  Title 11 of the United States Code provides a comprehensive overview of all the substantive laws dealing with bankruptcy.  Title (11) is broken down into 9 Chapters, 28 subchapters and 1,532 sections.

               Chapter 1 deals with “General Provisions,” and is broken down into 12 sections.  The first section, “Definitions,” essentially defines keywords to be found throughout the Bankruptcy Code.  These words include “attorney,” “claim,” “consumer debt,” corporation,” “debtor,” etc.  This particular section is helpful to refer back to frequently when trying to understand the Code.  The remainder of this Chapter sets out to establish “General Provisions,” such as the power of the courts, and who may file for bankruptcy.  

               Chapter 3 is entitled “Case Administration,” and explains how the bankruptcy case is to be administrated.  Chapter 3 contains 4 subchapters.  The first subchapter is “Commencement of a Case,” and its sections explain how a bankruptcy case is to get started.  Subchapters 2 through 4, talk about “Officers,” “Administration,” and “Administrative Powers.”  Within these subchapters there is information regarding: the duties and qualifications of a trustee, attorney interaction with debtors, the Meeting of Creditors, examination of debtors, the bankruptcy estate, dismissal of cases, opening and reopening of cases, adequate protection and most importantly the Automatic Stay.

               Chapter 5 is “Creditors, The Debtor and The Estate.”  This chapter contains 3 subchapters.  The first subchapter deals with “Creditors and Claims.”  Information regarding proofs of claim and liability can be found in this subchapter.  The second subchapter deals with “Debtor’s Duties and Benefits.”  This subchapter enumerates the debtor’s duties, exemptions and information regarding discharge and debt relief agencies.   The third subchapter is entitled “The Estate.”  This subchapter sets out to explain how the bankruptcy estate is formed and works throughout the case.

               Chapters 7, 9, 11, 12, 13 and 15, deal with specific types of bankruptcies.  Chapter 7, “Liquidation,” deals with what some people call a “straight bankruptcy.”  Chapter 7 bankruptcies are the most common type of bankruptcy filed in the United States.  Chapter 9, “Adjustments of Debts of a Municipality,” is available only to municipalities.  A Chapter 9 allows and assists municipalities to reorganize and restructure their debt.  Chapter 11, “Reorganization,” is similar to a Chapter 9, in that it allows for reorganization and restructuring of debts, but it is aimed towards businesses.  Chapter 13, “Adjustments of Debt of an Individual with Regular Income,” is the same reorganization process mentioned above for individuals as supposed to businesses or municipalities.  Chapter 12, “Adjustments of Debt of a Family Farmer or Fisherman with Regular Annual Income,” is only available to farmers and fisherman and is essentially the same as a Chapter 13, but with some additional provisions.  Chapter 15, “Ancillary and Other Cross-Border Cases,” allows for corporations across borders to gain access to United States Bankruptcy Courts. 

              

 

I’ve filed Bankruptcy Before, Can I file Again?

            Yes, you can file bankruptcy multiple times. In fact, there is no limit to the number of times that you can file. However, if you have received a discharge in a previous case, a certain amount of time must pass before you can receive a discharge again. The amount of time that must elapse depends on which chapter you previously filed, and which chapter your plan on filing now.

            If you have previously filed a Chapter 7 bankruptcy, you must wait eight years to file and receive a discharge in a new Chapter 7. If you have filed a Chapter 7 in the last eight years and received a discharge you can still receive the protection of bankruptcy (automatic stay) by filing a Chapter 13.  If more than four years has elapsed since you filed your Chapter 7, you can receive a discharge in your new filing.

            If you previously received a discharge through a Chapter 13, you can receive a discharge in a Chapter 7 if six years has passed since your Chapter 13 filing. Note, that the clock starts as soon as your case is filed, not when you receive your discharge. If six years, has not passed, you can receive a discharge through another Chapter 13 as long as two years has passed since the previous Chapter 13 filing.

            But what if you can’t receive a discharge? Can you still benefit from filing? Absolutely! Student loans and taxes are generally not dischargeable in a Chapter 7. After your Chapter 7 has concluded, student loan creditors can resume garnishing up to 25% of your paycheck. The IRS is even worse. They can take over 90% of your paycheck to pay on back taxes.  Even though you may not be eligible for a discharge, you can still receive the protection of bankruptcy by filing a Chapter 13 and your student loan creditors will not be able to garnish your wages. A small monthly payment may give you up to five years of protection from lawsuits, garnishments, levies and liens.

            Just because you have previously filed a bankruptcy doesn’t mean you can’t file again. Even if you can’t receive a discharge, you can still enjoy the protection that bankruptcy provides. Schedule your appointment today with one of our experienced bankruptcy attorneys. He or she will be able to evaluate your situation and determine what is best for you.

A Brief History of Bankruptcy Legislature and Reform Through 2005

            Most of us have heard of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  This Act was both recent and had a major impact on bankruptcy laws as we knew them.  However, there is quite a bit of important legislature that led us to where we currently are.

                In 1979 the Federal Bankruptcy Code was enacted.  The primary purpose of the Federal Bankruptcy Code was to protect consumers.  Within less than a year the Consumer Credit Industry began to voice their unhappiness with the Federal Bankruptcy Code.  They felt this enactment was unfair to creditors.  

                This led to the Bankruptcy Amendments and Federal Judgeship Act of 1984.  As it turns out, these amendments were not all that helpful to creditors.  In fact, they were more beneficial to consumers, although they did increase the amount of paperwork to be filed by debtors.

                Only a couple of years later, The Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986 was passed.  Under this Act, more Bankruptcy Judges were assigned to the Judicial Districts and a United States Trustee system was put into place.  The United States Trustees are there to oversee and aid the with the administrative duties of both the individual trustees and the Court. 

                Under the 1994 Bankruptcy Reform Act, a National Bankruptcy Review Commission was created to decide whether or not changes to the Bankruptcy Code should be made.  The commission decided to double the amounts of Federal Exemptions, make cost of living adjustments and increase Chapter 13 limits.  Congress also overruled quite a few of the Supreme Court’s decisions regarding mortgages in Chapter 13s.  The 1994 Reform Act was detrimental to consumers in regards to reaffirmation agreements and the increased time and cost necessary to file bankruptcy.

                On April 20, 2005 George W. Bush signed The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA or “the new bankruptcy law”).  This act effected almost all aspects of bankruptcy cases.  It reduced the rights of debtors and created difficulties for bankruptcy attorneys.  The act specifically made it harder for debtors to file a Chapter 7, by creating “means testing.”  The means test is essentially a calculation of a debtor’s current monthly income. Only debtors whose current monthly income falls below their state’s median income can file a Chapter 7 without a presumption of abuse of the Bankruptcy Code.  Current monthly income is defined as a debtor’s average income over the 6 month period prior to the filing of the bankruptcy.  Debtors whose income is above their state’s median must file a Chapter 13. 

                Under BAPCPA Debtors are also now required to take credit counseling courses both before and after the filing of their case.  The act also placed restrictions on applicability of the Automatic Stay for debtors who had previously filed a bankruptcy.  Among other things, the act created additional filing fees, stricter notice requirements and increased attorney liability.  Overall the Bankruptcy Abuse Prevention and Consumer Protection Act was not necessarily favorable for debtors and their attorneys.      

                 

Bankruptcy & the IRS

Filing for bankruptcy might be a solution to your tax problems. There are certain circumstances which allow for full or partial discharge of income taxes. In addition, in a chapter 13 you can pay the potion of the tax debt that cannot be discharged over a period of up to five years.

 

Depending upon whether you file a Chapter 7 or a Chapter 13 petition, you may be able to wipe out some if not all of your back income tax liability.

 

As a general rule, past due taxes related to unfiled or late returns and the related penalties cannot be discharged although there are exceptions.

 

If you are filing a Chapter 7 petition, generally, you can wipe out federal income taxes as long as ALL of the following criteria are met:

 

There is no fraud. If you filed a fraudulent return(s) or tried to avoid paying your income taxes, you will not be able to discharge the obligation.

 

That the tax liability in question is for a tax return filed at least two years prior to the bankruptcy.

That they were income taxes and not payroll or trust fund taxes.

 

That the actual tax return was due in excess of three years ago.

DSC00213

DSC00213 (Photo credit: BankruptcyLawyerStL)

 

That any tax deficiencies (that were assessed on those prior returns) were actually assessed at least 240 days prior to the filing of the petition in bankruptcy.

 

Lastly, that the IRS had not filed a tax lien for these back taxes on your assets. If there is already a lien, the lien survives the bankruptcy and the government can still seize the liened property to collect the tax debts.

 

Income taxes for the last 3 years are not dischargeable. If you file a chapter 13 bankruptcy case, you need to file your tax return or obtain an extension for the prior three years. It is good practice and actually required by local rule in St. Louis, Missouri, that every debtor lists the IRS and MODOR (Missouri Department of Revenue) as creditor on the petition. MODOR will then check if all tax returns within the last three years have been filed, and if not, file a motion to dismiss. You have then time to either file the tax returns or obtain an extension to file. In the East St. Louis area, the trustee might ask for copies of the tax returns for the last two or three years. In either chapter, you must provide a copy of the last filed tax returns to your trustee. If you are not required to file a tax return, you bankruptcy attorney will provide you with an affidavit that you don’t have to file a tax return.

In the event you decide to file a Chapter 13 bankruptcy petition, your back taxes usually have to be repaid under a payment plan. The usual time period is 3 to 5 years. However, if your income is less than your state’s median income, you can choose the length of the plan, if you are above median, your plan has to be 5 years. Generally, even with a payment plan you usually end up paying less than you owe.

 

As you prepare your payment plan proposal, the plan must be considered reasonable. It will be provided to the judge, who will be the person to ultimately approve it. Creditors and the IRS normally do not show up at the hearing. In calculating your payments, take into account the fact that interest and penalties stop accruing upon the filing of your Chapter 13 petition. The exception is for secured taxes (taxes that are secured by a tax lien).

It should be noted here that the automatic stay which comes into play when you file a bankruptcy petition applies to the IRS with respect to debts incurred prior to the petition. The IRS rarely applies to remove this automatic stay.

 

It should also be noted here that if you filed for an Offer in Compromise it will affect your time periods. The 240 day minimum time period, as mentioned above, begins from when the IRS disapproved the offer, plus 30 days.

 

In summary, if you are considering bankruptcy to get out from under a large tax burden, seek the advice of a qualified bankruptcy lawyer in St. Louis before proceeding. Whether or not these taxes can be discharged is a complex question and affected by numerous facts and circumstances. It is important that you do your own due diligence, gather all the information regarding your tax situation, including all tax returns and notices sent by the IRS so that you will have the information available when you seek the advice of a knowledgeable attorney before proceeding.

Never Showing Favor To Creditors

Debt Payment

Even though it is natural for someone that is filing for bankruptcy to want to favor one creditor over another, the unfortunate fact in bankruptcy is that all similar class creditors must be treated fair and equal. It does not matter if this favored creditor is a family member, business partner, or simply your favorite credit card the fact remains that if all of the above are unsecured creditors, they must be treated the same.

When filing for bankruptcy you must report those to whom you have paid a substantial sum of money prior to filing. In most cases a substantial sum is considered to be anything above $600. This is amount is not a fixed amount and it is up to the trustee to decide which amount is worthwhile to pursue. There are trustees who will require that a creditor returns a $300 payment. Each debtor has to list payments within 90 days prior to filing the bankruptcy petition if the aggregated value of all transfers is $600 or more. If a debtor is married and files a chapter 13, debtor has to include also payments made by his/ her spouse to creditors of more than $600. All payments to friends or family members made within the last year before filing have to be listed on the petition. These payments, if paid in a disproportionate amount as to the other similarly classified creditors and to the amount you owe each, could be viewed as favoring one creditor over another.

An example of this would be if you owe the following to unsecured creditors:

1. Creditor 1 – $3,000

2. Creditor 2 – $6,000

3. Creditor 3 – $9,000

Imagine if you had $2,400 cash on-hand that you wanted to pay toward your unsecured debt. In this instance you would have to split the $2,400 and pay it to each creditor in a proportionate amount to the total amount owed.

Read more…

What should I do when I inherit something during or after my chapter 7 bankruptcy case?

Dealing With Family Gifts and Loans

When filing bankruptcy, it is often easy to overlook personal loans and gifts. However, this type of debt or property may have a significant impact on your bankruptcy filing. Not disclosing information regarding real estate that has been gifted to you, an outstanding loan to a family member or co-owned bank accounts can cause some unexpected problems with your bankruptcy filing.

Listing All Assets

Regardless of the size of an asset, when you file for bankruptcy it must be listed. This includes any interests in real estate that you may own with another person, a bank account which is also listed under your name, or a pending income tax refund. Failure to leave these assets off your bankruptcy filing can result in problems with your filing. If you are not controlling the asset, you must still list them and can explain why you are not the true owner of the property. Often older parents put their children on their bank account in the case of an emergency so that the daughter or son can make financial decisions for their parents. Likewise, parents are often listed on the bank account of the minor child. Even though the debtors name is on a bank account and must be listed on the bankruptcy petition, it is not the debtor’s asset a trustee or creditors could take an interest in.

 

 

Debts to Family Members

Oftentimes when we are having difficulties making ends meet, we borrow money from friends and family members. These debts must be included in a bankruptcy filing for numerous reasons. First, they are unsecured, legitimate debts. Second, you are required to list all of your debt. You cannot exclude the creditors which are more favorable to you. While it may be easy to ignore debts to friends and family members, they are unsecured creditors under the law and must be listed as creditors. Often, clients wish to repay friends and family members or a doctor they want to continue to see. You can do this after the bankruptcy is over. Even though you will not have a legal obligation and creditors can’t request money from you, you are free to repay after discharge if you choose to do so.

Repaying Loans to Family

It may be tempting to repay loans to friends and family members prior to filing bankruptcy. However, it is important to discuss this possibility with a bankruptcy attorney before you take this step. You have to list all payments within the last 12 months to insiders on your bankruptcy petition. In most cases, the trustee will ask you this question also at the 341 meeting. In some cases, this may fall under a clause in the bankruptcy code called preference. In effect, you have given preference to a debt owed to a friend or family member over your credit card payments. In these cases, the trustee of the bankruptcy may order these payments reversed and paid to all unsecured creditors equally. This can cause some problems later on when the relative or friend does not have the money anymore you paid him 6 months ago. For example if you re-pay your father in law before filing bankruptcy and it is not disclosed until the 341 meeting, the trustee will ask you father in law to repay it. You might not want to get you father in law involved in your bankruptcy proceeding. After you father in law pays back the money to the trustee, you still might feel an obligation to repay him after the bankruptcy case is over.

There are also situations in which a relative or friend might be relatively safer from request by the trustee. If the money was paid to a relative in a different state whose only income is social security and does not have the money anymore. It is unlikely that the trustee would go after that relative. Pursuing such a claim might not be successful. Even if the trustee obtains a judgment for repayment of the money to the trustee, the relative might be “judgment proof” if the only income is social security.

Full Disclosure

When you are meeting with your bankruptcy attorney it is critical that you make full disclosure of all debts that are owed including those to friends and family members. It is also important that you disclose all payments made during the prior year. Your bankruptcy lawyer can only help you if you are completely open and honest about all debts that you owe and all payments that you have made against these debts.

When you have outstanding loans to friends and family members, they may be discharged in Chapter 7 bankruptcy. However, once your bankruptcy is discharged, you have the right to repay any debts that were discharged including those to friends and family members. Failing to disclose these loans and payments can cause additional legal problems.

Illegal Debt Collection Tactics: Knowledge is Power

Debt Collection AttorneyThe following is a guest post from Sergei Lemberg, whose firm represents consumers in matters relating to fair debt collection, fair credit reporting, and lemon law.

 

As the economy has worsened, many of those in the debt collection industry have ramped up their efforts to squeeze consumers into paying whatever money they can toward overdue bills. Although most people simply aren’t able to pay, debt collectors often attempt to turn up the heat. The result? Debt collectors engage in tactics that are illegal under the Fair Debt Collection Practices Act (FDCPA).

 

Once you have a solid understanding of which debt collection practices cross the line, you’re in a better position to fight back. The FDCPA enables consumers to sue debt collection agencies that violate the law, and to be awarded up to $1,000 in damages along with court costs and attorney fees.

 

Here are three common – and illegal – debt collection tactics that desperate collectors often use:

 

1. Threatening to sue over time-barred debt. One segment of the debt collection industry consists of what are termed debt buyers. Debt buyers typically purchase hundreds or thousands of accounts that have been charged off by the original creditor as uncollectible, and that have often been subject to unsuccessful collection attempts by other debt collection agencies. Often, there is very little documentation for the debt, and much of it is very old. However, the cost of buying the debt is so low (pennies on the dollar), that there is enormous potential for profit. The problem is that each state has a statute of limitations (it varies by state), and a debt collector has no legal recourse to collect debt that is past the statute of limitations. Nonetheless, some debt collectors threaten to sue consumers in court for this time-barred debt. This is a violation of the FDCPA, since the FDCPA says that debt collectors can’t threaten to take an action that they’re not legally allowed to do or have no intention of doing.

 

2. Leaving messages on answering machines and voicemail. One of the provisions of the FDCPA is that debt collectors can’t discuss a debt with third parties, such as family members, friends, and coworkers. A court decision set a precedent whereby a debt collector can’t leave a message that mentions the debt. The rationale is that a third party could overhear the message, and that it would constitute an illegal third-party communication. So, while a debt collection agency can leave a message asking the consumer to call a certain number, it isn’t allowed to say or imply that it’s calling regarding a debt.

 

3. Calling at work. The FDCPA says that a debt collector can’t call a consumer’s place of employment if the consumer has told the debt collector that he or she isn’t allowed to receive calls at work. The consumer doesn’t have to put it in writing, but simply has to verbally tell the debt collector not to call at work. If the debt collector continues to call, it may also be a violation of the FDCPA’s prohibition against calling at inconvenient times or places.

 

If you’ve been the victim of illegal debt collection tactics, it’s worth your time to speak with a lawyer who is familiar with the FDCPA. In addition to the avenues of redress afforded to you by the FDCPA, once you’ve notified a debt collection agency that you have an attorney, the agency is no longer allowed to contact you directly. That’s a good first step in getting the debt collection nightmare to stop.

Bankruptcy and Domestic Support, what is when dischargeable?

The new bankruptcy law enacted in 2005 (Bankruptcy Abuse Prevention and Consumer Protection Act, or short BAPCA) had a direct impact on Family Law. Some debts incurred in the course of a divorce proceeding are dischargeable in a chapter 13 and not in a chapter 7.

Domestic Support obligations or short DSO, are not dischargeable in neither chapter 7 nor chapter 13 proceeding. The Eights Circuit decided in 2011 (In re Phegly) that “Exceptions from discharge for spousal and child support deserves a liberal construction, and the policy underlying 523 favors the enforcement of familial obligations over a fresh start for the debtor, even if the support obligation is owed directly to a third party.” In that case the debtor in a chapter 13 bankruptcy case was obligated to pay spouse’s attorney fees. The 8th Circuit viewed the payment to spouse’s attorney as part of the support obligation. In a different decision the court considered attorney fees not as part of the support obligation because the awards were considered to be “conduct-based” (as in bad conduct by the husband).

Interest on a domestic support obligation was also viewed as part of the non-dischargeable support obligation. A penalty assessment for late payments is however not part of the DSO and therefor dischargeable through the bankruptcy filing (In re Smith, 1st Circuit 2009). The definition in 101 (14A) allows for the voluntary assignment of DSOs to non-governmental entities for the purpose of collection debt. Some have argued that this language could potentially harmful arguing that the DSO claim might not be protected if it can be assigned to someone.

The protection in chapter 7 is even broader, it excludes from discharge all marital or domestic relations debts incurred in connection with divorce, separation, or related action.

How does the $25 billion Mortgage Settlement affect Bankruptcy Debtors?

After extensive investigations and negotiation, 49 state attorney generals, in conjunction with the federal government, have finally reached an agreement with the five chief mortgage loan servicers in the U.S.   J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo and Ally Financial, formerly known as GMAC Mortgage have agreed to a $25 billion mortgage settlement. This is the largest federal and state civil settlement in the United States since the 1998 Tobacco Settlement. Bank of America has the largest monetary responsibility of $11.8 billion.

Under the agreement, the five servicers will provide $20 billion towards a variety of financial relief options for distressed mortgagees. Banks must make a cash payment of $5 billion to federal and state governments of which $1.5 billion will go towards a cash payments to 750,000 homeowners who lost their homes to foreclosure, bankruptcy or sale between January 1, 2008 and December 31, 2011.

According to the complaint filed in the United States District Court for the District of Columbia, the servicers:

  • Issued improper mortgages.
  • Conducted unauthorized and premature foreclosures.
  • Violated service members’ and other homeowners rights and bankruptcy protections.
  • Used false and deceptive affidavits and other documents.
  • Wasted and abused taxpayer funds.

The settlement provides :

  • Reduced loan principals for homeowners who are delinquent, at risk of foreclosure or underwater (owe more than the home’s value).
  • Refinancing for homeowners who are current, but underwater.
  • Cash payments to borrowers who lost their residence to foreclosure.
  • State attorney general oversight. For the first time, servicers must report settlement compliance to an independent agency, monitored by the state’s attorney general. Banks will pay heavy penalties for non-compliance.

Bankruptcy Violations

The United States Trustee Program participated in negotiations because of bankruptcy violations by the major servicers. Bankruptcy affords debtors certain protection such as an automatic stay. According to the complaint, these major loan servicers disregarded the debtors’ legal rights under federal bankruptcy rules.

The mortgage servicers made inaccurate, false or unreasonably based representations to obtain relief from automatic stay protection. Servicers also sought principal, interest, fees, escrow or advance payments they were not entitled to collect. Other violations included collecting attorney, filing and preparation fees for withdrawn or dismissed proof of claims, motions for relief from stay or other documents. Commencing collection actions against debtors under an automatic stay, violating Chapter 13 payment plans and failing to notify debtors of payment increases violated bankruptcy debtors’ rights. As a result, many debtors lost their homes to foreclosure.

To rectify the violations, the settlement requires new servicing standard reforms. Banks must provide a designated point of contact, trained staff and improved communication with the borrower. Banks must also implement effective document execution in foreclosure cases, terminate improper servicing and document fees and end dual-track foreclosures. Dual tracking occurs when the servicer continues the foreclosure process while the borrower seeks a loan modification.

The acceptance of the settlement does not release servicers from future civil liability. If you filed a Chapter 7 or 13 bankruptcy that directly affected your home, you may be entitled to additional financial relief. Contact an experienced attorney to discuss your legal rights.

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