One of the most common misconceptions people have about bankruptcy is that you can pick and choose which debts one “files bankruptcy on” (I hate that phrase) or which assets can be included.  Not a week goes by that I don’t get at least 2 or 3 people start out their consultation with me by saying “I only want to include these debts”  or, “I have property in another state (or country) that I don’t want to include”.

There are few questions in the law that have simple answers but, happily for this article,  this one is easy.

When you file a bankruptcy case, you must list (i.e. “include”) all assets wherever on the planet earth or the universe they may be located, and all debts no matter who they are owed to (yes, this includes your mother, your best friend, and any other person or entity to whom you owe a debt).

What About My Spouse?

If you live in a Community Property state, such as California, you must list all debts and assets of your spouse–even if they are not joining in the bankruptcy filing– if they were incurred or obtained during the marriage and are not separate property.   If you’re unsure about this, talk to a bankruptcy and/or family law attorney.

Does that mean I can’t repay my family or friends?

No.  To my knowledge, there has never been a law passed in the history of mankind that prevented someone from repaying a debt to another.   Bankruptcy simply takes away the legal obligation to do so.  If you want to file bankruptcy, discharge your debts, and then pay them all back anyway, you may do so.

This article is part of my bankruptcy alphabet series.  For others writing on the letter “L” see:

Lie, the Big Mortgage Industry    St. Clair Shores MI bankruptcy attorney
Lien    New York Bankruptcy Lawyer, Jay S. Fleischman
Lien Stripping    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Lift the Stay    Marin County Bankruptcy Attorney, Catherine Eranthe
Luxuries    Colorado Springs Bankruptcy Attorney Bob Doig
Long Term Payments,  Chapter 13 Plans    Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
Liquidated    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
Lien Stripping    Honolulu Bankruptcy Attorney Stuart T. Ing
List It Or Lose It    Allen Park, Michigan Bankruptcy Lawyer, Christopher McAvoy
Life Insurance    Cleveland Bankruptcy Lawyer, Bill Balena
Life After Bankruptcy    San Francisco Bankruptcy Attorney, Jeena Cho

Image courtesy of Mr. Mystery

Old fashioned 401k plan

Borrowing against one’s retirement is bad for a number of reasons.

Depleting your retirement will not help your future

You spent a lot of hours earning the money that is in your retirement and took the advantage of a retirement account to do so.  These accounts have many benefits, including that they are not taxed until you withdraw the money.  You also, in many cases, get a tax deduction for contributing to them as it reduces your gross income.  To take out a 401k or retirement loan, you must pay a fee to do so, making it even less attractive from a financial standpoint.

Failure to repay a 401k or other retirement loan will result in tax consequences.

If a retirement loan is not repaid, not only do you lose the fees you have to pay to take out the loan in the first place, but the loan then becomes taxable income to you.   Depending on your other income and financial situation, this can result in a significant tax debt.

Payments on retirement loans do not count towards bankruptcy eligibility

People think that a 401k loan is the same as a loan against their car, or house.  It is not.  You are simply repaying yourself.   As such, most (if not all) bankruptcy courts will not include the amount being repaid when analyzing your budget to see if you have income available to pay your creditors.   Thus, if you have net income of $3,000 per month, and necessary living expenses (such as rent, mortgage, car payment, food, clothing) of $3,000 per month, but $700 of that $3,000 is your retirement loan deduction from your paycheck, you will likely not be eligible for a Chapter 7 case, and would have to do a repayment plan in a Chapter 13 (or Chapter 11) instead.

This is one of the biggest obstacles clients of mine face.  They finally run out of options, and money, and decide they need a fresh start and want to file a bankruptcy but because of the 401k loan (which they think they MUST pay), they don’t have any surplus income, yet also may not qualify for a Chapter 7  (which requires no repayment to creditors).

Know the Risks Before Borrowing

I’m not saying that it never makes sense to borrow against your retirement.  Sometimes using it to save your home can be as important as the future benefit from the retirement funds themselves.   But be sure to understand the problems you are getting yourself into by doing so, and use that when weighing your decision.

This article is part of my bankruptcy alphabet series.  For others writing on the letter “K” see:

1. 401k    Marin County Bankruptcy Attorney, Catherine Eranthe
2. Keep    Northern California Bankruptcy Lawyer, Cathy Moran
3. Keep your retirement accounts    Taylor, Michigan Bankruptcy Attorney, Christopher McAvoy
4. Keeping Secured Loans    Hawaii Bankruptcy Lawyer, Stuart T. Ing
5. Keeping your business     Dorota Trzeciecka Bankruptcy Blog
6. Keys    New York Bankruptcy Lawyer, Jay S. Fleischman
7. Kids    Colorado Springs Bankruptcy Attorney Bob Doig
8. Knowledge    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
9. Knowledge    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
10. Know    Cleveland Area Bankruptcy Lawyer, Bill Balena
11. Keep    San Francisco Bankruptcy Attorney, Jeena Cho    

Image Courtesy of Kenteegardin

and www.SeniorLiving.Org

Justice in America has taken different paths over time.  In the days of  Justice of the Peace Roy Bean (portrayed by the late, great Paul Newman), wild west justice was often harsh, decisive and often at the whim of the sheriff or judge serving it up.

Justice is one of those words that gets different definitions from different people.  One person’s justice, is another person’s crime.

In bankruptcy court, justice takes the form of a balancing of competing interests.   Bankruptcy courts are “courts of equity”, which means that they are not designed to merely determine if someone has followed the law or violated it; their purpose is to issue orders to achieve a desired result.

As with everything, the concept of justice seems to have different meanings to different parties.    Creditors feel justice would be served if they get paid 100%.  Debtors seem to believe justice would be served if they don’t have to pay anything (including to their attorneys it often seems).

In bankruptcy, this purpose is to balance the needs of the debtor (filing the bankruptcy case) to get a fresh start and eliminate the obligation to repay certain debts,  with the rights of the creditors (those owed money) to get paid.   The Bankruptcy Code is designed to achieve this result “simply” by analyzing the ability of the debtor to repay his/her/its debts, and the so-called “means test” introduced in 2005 supplemented this goal.

To further these goals, for example, the  bankruptcy laws allow a bankruptcy trustee to sue creditors who have received payments from the bankrupt debtor within a certain period prior to the bankruptcy case being filed (90 days for regular creditors, and 12 months for relatives and insiders) to recover those funds as being “preferential” and they are then paid back to all creditors pro rata for a more equitable distribution.

There are many other ways in which the bankruptcy laws try to achieve this balance, and bankruptcy judges are called upon to make decisions in interpreting the laws that try to maintain this delicate balance because, on the whole, the bankruptcy laws benefit us all as a society.  They give “honest, but unfortunate” debtors the fresh start they need so they can return to being productive members of society (or businesses the chance to reorganize their debts to return to profitability), but also try to maximize the amount creditors will receive.

Does this meet with your definitions of justice?     The bankruptcy laws are evolving even today, but overall I think justice is served.

Others blogging about the Letter “J” in the bankruptcy alphabet:

Joint Bankruptcy Filing    Downriver, Michigan Bankrutpcy Lawyer, Christopher McAvoy
Joint Debts    Hawaii Bankruptcy Attorney, Stuart T. Ing
Joint Filing    Marin County Bankruptcy Attorney, Catherine Eranthe
Judgment    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Judgment Liens    Colorado Springs Bankruptcy Attorney Bob Doig
Judgment Liens    Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
Judicial Lien    Cleveland Area Bankruptcy Lawyer, Bill Balena
Jurisdiction    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
Justify    Northern California Bankruptcy Lawyer, Cathy Moran
J is for Jay Fleischman    New York Bankruptcy Lawyer, Jay S. Fleischman
Judgment Debtor    San Francisco Bankruptcy Attorney, Jeena Cho

Image courtesy of Marion Doss

This article is part of my bankruptcy alphabet series.  Continuing with the Letter “I” in the Alphabet Series:

You’re sitting around watching the Lakers get beat again or just enjoying a good book when the mail comes, and inside it is a lawsuit from a bankruptcy trustee of your nephew, who recently filed a bankruptcy case, seeking to recover from you the $5,000 your nephew repaid you ten months ago.   You think you’re being treated unfairly, but after you speak to a few bankruptcy attorneys, you will realize that by being a relative of the debtor who filed bankruptcy, you have a problem!

Insiders are treated differently than others in a bankruptcy context, a lesson many learn the hard way.

There are many ways in which insiders are treated differently than others in bankruptcy.   This article will not attempt to list all of them, but will focus on repayments by the debtor (preferential transfers) .

What or Who is an Insider?

Insiders are those with a close enough relationship to the debtor (person who filed the bankruptcy case) so that the laws make certain actions different with respect to these individuals or entities than with others.

Per the statutory definition set forth in 11 U.S.C. 101(31), an insider INCLUDES the following:

(A) if the debtor is an individual–

• (i) a relative¹ of the debtor or of a general partner of the debtor;
• (ii) partnership in which the debtor is a general partner;
• (iii) general partner of the debtor; or
• (iv) corporation of which the debtor is a director, officer, or person in control.

(B) If the debtor is a corporation, insiders include–

• (i) directors of the debtor corporation;
• (ii) officers of the debtor corporation;
• (iii) persons in control of the debtor;
• (iv) partnerships in which the debtor is a general partner;
• (v) general partners of the debtor, or;
• (vi) relatives of a general partner, director, officer, or person in control of the debtor.

(C) Partnership debtors have similar definitions for its insiders.

It is important to note that the above list is not exclusive, meaning that a court can determine others to be insiders even though they do not meet the definitions of the above listed parties.

¹ Relatives include all the way down to great grandchildren of the debtor, or cousins and others within the third degree of affinity or consanguinity, including step or adoptive relationships

The Downside to Being Inside

One of the ways insiders are treated differently is with respect to transfers made by the debtor prior to filing a bankruptcy case.   In particular, with respect to a preferential transfer (essentially repaying a debt that entitles the creditor to receive more than they otherwise would have in a Chapter 7 case), the time period for the transfer is only 90 days for most parties.  Thus, if a debtor repays an “ordinary” creditor within 90 days prior to filing a bankruptcy case and meets the other requirements for a preferential transfer, the Trustee in a Chapter 7 case can sue that creditor to recover the amount transferred.   However, for an INSIDER, the period is ONE YEAR prior to filing the bankruptcy case!

Thus, if you are an individual and repay a relative money within one year prior to filing a bankruptcy case, the relative can be sued to recover that amount.  This can be a big surprise, but one that is quite common since for some reason, many people who file bankruptcy think they are being smart by repaying their family members first before filing bankruptcy.   Unless you want to wait more than one year after repaying them, you are putting them at risk.   There are other types of transfers which can be recovered if they occur several years prior to filing a bankruptcy case.

Another Insider Example

In a Chapter 11 context, Insiders are not allowed to vote for or against the proposed repayment plan, and have other restrictions on rights that other creditors do not have.

Others Playing the Bankruptcy Alphabet Game:

1. Lincoln, Nebraska Attorney–Involuntary Bankruptcies
2. New York Bankruptcy–Jay Fleischman–I is for Income
3. Marin County attorney–I is for Income
4. Northern California attorney–I is for IRS
5. Colorado Springs Bankruptcy attorney–I is for in forma pauperis
6. Hawaii bankruptcy attorney–I is for Independent Contractor
7. Michigan Bankruptcy Attorney-I is for Income tax refunds
8. Philadelphia Bankruptcy attorney-I is for IRA
9. Northern Ohio Bankruptcy Attorney–I is for Involuntary Chapter 7

Image courtesy of RalphBijker

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-Burt Bacharach and Hal David

If there’s anything that is a centerpiece of an individuals’ bankruptcy case, it’s their house and whether they can keep and, if so, how?  I have many clients who call up and think that they automatically lose their home when they file a bankruptcy case.  I have others who believe that they get to keep their house under any circumstance.   The truth lies in between.

There are different options available regarding retaining property depending on which bankruptcy chapter is filed.

Keeping Your House in Chapter 7

In a Chapter 7 liquidation case, whether one gets to keep their house, or any other property for that matter, depends on how much equity is in it, and whether they have sufficient exemptions under applicable law to protect that equity value.    Exemptions are “protections” for value you have in certain assets such that they are “exempt” from collections.  Every state has different exemptions amounts available. Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.

How to Calculate Equity

How is equity calculated?  This is for some reason a big hurdle for many.  Calculating equity is simple.  You take the fair market value of the property (preferably from an appraisal, or at least a broker’s written opinion) and then subtract out the amounts owed to any mortgages or other liens¹ against the property, and that’s the equity.   In most courts, you can also subtract out another 8% of the fair market value for “costs of sale” of the property.

Assuming there is no equity, or you have sufficient exemptions to cover whatever equity exists, then the bankruptcy trustee will not sell (liquidate) the house.  However, there is still the obvious requirement that you must stay current with your contractually due mortgage payments in order to prevent foreclosure.

Keeping Your House in Chapter 13

Chapter 13 is very different.  You will not lose your house in a Chapter 13 regardless of how much equity there is in it.  However, any non-exempt equity will need to be paid to your creditors over the term of your repayment plan (36-60 months).  ²

Lien Stripping in Chapter 13 (and Chapter 11)

Another nifty feature of Chapter 13, not available (at least not yet) in a Chapter 7 bankruptcy case, is the ability to remove certain liens against real estate.   How and to what extent this can be done depends on a number of factors, including whether the house is the principal residence of the debtor.  If it is, then a junior mortgage can be “stripped” (i.e. removed) if the value of the property is less than the amount owed to any senior mortgages (e.g. the 1st mortgage). ³  For non-principal residences (such as a rental property),  even partially secured liens can be stripped down to the value of their lien.

Catch up on payments in Chapter 13 (and Chapter 11)

Another great feature of Chapter 13 is the ability to use your 36-60 month plan payments to catch up on past due amounts on your mortgage(s).  Frequently one files a Chapter 13 to gain the benefit of the automatic stay to stop a foreclosure, and then propose a repayment plan to catch up on the past due arrearages and reinstate the loan over a period of time.

But whether one gets to keep their house or not, they can always make another place their home because as the great songwriting team quoted at the top of this article point out, a house is not a home.

__________

¹ This excludes liens, such as judgment liens, when they are able to be removed in a bankruptcy case.  This will be discussed more in my Letter “L” blog.

² This isn’t precisely accurate.  Technically, in a Chapter 13 the debtor must pay more than the creditors would receive in a Chapter 7 case, so one gets to deduct anticipated Chapter 7 Trustee administration fees from the equation.

³ This may not be available in all bankruptcy courts, but is allowed in the Central District of California.

This article is part of my bankruptcy alphabet series

Others playing the Alphabet Game:

Jay Fleischman believes that H is for Household

Cathy Moran agrees that H is for House

Cate Eranthe finds H to be about HOA  Dues

Stuart Ing explains about Household Size

Cleveland Attorney Bill Balena talks about Honesty

Christopher McAvoy discusses Harassment

Mitchell Goldstein examines Households

Daniel Winter looks at Harrassment

Image courtesy of james.thompson

It's not mine--it was a gift!

Gifts come in many shapes and sizes and, while usually a welcome thing, can have unintended consequences in a bankruptcy case.  There’s basically two types of gifts:  Those you give, and those you receive.

Gifts Must Be Listed As Assets On the Bankruptcy Schedules

When preparing the papers to be submitted in a bankruptcy case, any competent attorney will ask their client to list all of their assets, because that is required by the Bankruptcy Code.   I’ve had many clients over the years give me their list, but omit items that were given to them as a gift.   When I am fortunate enough to avert disaster and discover this before their case is filed,  the reason clients give for omitting it is that they think since they didn’t purchase it, it isn’t an asset.   Huh?   If your rich relatives give you their $10 million dollar house, putting title into your name,  just because you didn’t purchase it, it isn’t yours?  Wrong.   Gifts are just as much of an asset as anything else.   If you own it, it’s an asset.  And if you don’t have sufficient exemptions available under applicable law to protect it, you could lose it (depending on which bankruptcy chapter you file).    Regardless, you must list it or else you could face the loss of your discharge under Section 727 of the Bankruptcy Code, and/or possible criminal sanctions.

Gift Income Counts Towards the Means Test

Another frequent scenario is family assistance.  That is, when a friend or family member gives (rather than loans) money to the debtor to help with living expenses.   Thanks to the new (as of 2005) means test created by Congress,  all income received in the six (6) calendar months prior to filing a consumer bankruptcy case counts towards one’s eligibility to file.   Thus, even if the debtor who wishes to file bankruptcy has no wage or unemployment income at the time they file, they could conceivably be ineligible to file a Chapter 7 case now because of income received as a gift from friends and family within that 6 month period.   Of course, the easy solution to this is to have those gifts be loans, or to wait more than 6 months after receiving them to file a bankruptcy case.

Gifts You Make to Others:  Fraudulent Transfers or Charity?

The other side of this coin is gifts that the person filing bankruptcy (debtor) makes.   The bankruptcy papers require disclosure of any gifts made to any entity in the 12 months prior to filing the bankruptcy case if it exceeds $200 to a family member, or $100 to a charitable organization.   It also requires disclosure of ANY transfers of assets made in the 2 years prior to filing the case, for any purpose outside of the “ordinary financial affairs” of the debtor.  Presumably this would exclude normal and regular gifts (such as the holiday or birthday variety).

The reason for these disclosures is to enable a Trustee or creditors of the debtor to determine if assets were essentially “squandered” which could otherwise have been used to pay the creditors.    If large enough and outside the ordinary financial affairs of the debtor, a Trustee can sue the recipient of the gift to recover the value thereof, and if the transfers are particularly large and obvious, it could be grounds for denial of the debtor’s entire discharge under Section 727 of the Bankruptcy Code.   Charitable organizations are usually safe from such gifts,  as are holiday and birthday gift recipients, especially if they were regular donations.

But, if you’ve been Johnny (or Judy) Generous giving out large gifts,  you better wait at least a year before filing a bankruptcy case (particularly Chapter 7).   In fact, to prevent the Trustee from recovering on a fraudulent transfer theory,  it needs to be at least 2 years, and possibly more depending on the laws of your state.

As always, it is very important to discuss all specifics of your situation with a qualified bankruptcy attorney before filing a case!  (See more on why hiring a bankruptcy attorney is so important).

This article is part of my bankruptcy alphabet series

Others playing the Bankruptcy Alphabet Game:

Jay Fleischman believes G is for Garnishment

Cathy Moran believes G is for Guaranty

Ryan Caldwell talks about G for General Unsecured Creditors

Cate Eranthe examines how G is for Gumshoe

Stuart Ing explains how G if for Garnishment

Bill Balena opines that G is for Good Manners

Christopher Carr thinks G is for Garnishment

Jenna Cho believes G is for Good to Me

Mitchell Goldstein posits G is for Good Faith

Image Courtesy of Howard Dickins

forgive me Father for I have charged too much

Ahh forgiveness.  What a lovely word.   It’s at the foundation of most religions and psychologists tell us it’s good to lower stress.  Bankruptcy has its own forgiveness:  Forgiveness of debts, or at least the obligation to pay on the debts (see my Letter “D” post on Discharge of Debts).

Forgiveness of Debt Can Become Taxable Income

But forgiveness of debt can also be taxable income.   That’s right!  If, for example, your home is foreclosed on and there isn’t enough from the sale to pay all the junior mortgages, then those mortgagees have a couple of options (in California, anyway):  1.  Pursue you for the deficiency amount owed; or 2. Issue a 1099 for forgiveness of debt.

If they choose number 2, you will have to include the amount of their deficiency (loss) as income on your tax return!

Bankruptcy Prevents Forgiven Debt From Becoming Income

But wait, there’s hope.  Internal Revenue Code section 108 explicitly states that debts which are discharged in a bankruptcy case do NOT get included in income on the debtor taxpayer’s tax return.  Thus, by timely filing a bankruptcy case, not only can one get rid of the underlying debt obligation, but they can also prevent it from becoming taxable income to them!    By timely I mean that in most cases the bankruptcy case usually (but not always) needs to be filed before the event takes place that would otherwise give rise to the tax obligation.   This requires a consult with a qualified tax professional to ensure the correct timing.

(Note:  the Internal Revenue Code also states that although the debt “forgiven” in a bankruptcy case is not taxable income, it can be used to decrease any tax attributes the taxpayer has, such as loss carryforwards,  etc.  It is important to discuss your specific situation with both a qualified CPA and bankruptcy attorney)

This article is part of my bankruptcy alphabet series

 What do others have to say about the Letter “F” in Bankruptcy?

Future Flow Agreements: Jay Fleischman explains how banks make money when you file bankruptcy

F is for “First”: Cathy Moran starts at the beginning.

F Is For Fresh Start, says Cate Eranthe

F is for Forms

F is for Family Farmer/Fishermen according to Ryan Caldwell

F is for Financial Fatigue, according to Bill Balena

F is for Failure and Fresh Starts, says Christopher Carr

F is for Foreclosure, opines Stuart Ing

F is for Fraud, says Kim Coleman

F is for Fraudulent Transfers according to Chris McAvoy

F is for Fraudulent Transfers agrees Jenna Cho

Image Courtesy of Sprungli

The meeting is slightly different in each bankruptcy chapter, but in most cases it is a very ministerial and quick examination.  It also varies from district to district, so the questions that are asked may be somewhat different in Rhode Island than, for example, in California.

Myths About the Examination/Meeting

Creditors do not need to be present at this meeting, despite it being referred to often as the “meeting of creditors.”  In fact, creditors almost never attend the meeting because there is rarely any need.   Any questions the creditors might be able to ask of the debtor are very limited in scope.  It is the Trustee who does the questioning.

The Trustee is NOT the judge.   The Trustee’s job is to liquidate and/or disburse assets of the bankruptcy estate to creditors, and ensure certain information is accurate.  The Trustee can and will refer cases that look fraudulent or that haven’t complied with rules and procedures to the U.S. Dept. of Justice for possible prosecution (or to deny discharge, or simply dismiss the case), but the Trustee makes no determination as to whether or not a discharge is entered.

Chapter 7 Meeting of Creditors

In Chapter 7 cases the Trustee’s job is to ensure the debtor(s) is (are) who they say they are, by verifying their driver’s license (photo ID) and social security number.  Additionally, the Trustee wants to make sure everything in the bankruptcy papers is accurate, and will ask whether the debtor read the papers before signing them.  Usually the debtor is asked to recite their address and other personal information from memory.  Other than that, the only other questions the Trustee’s usually have arise from poorly drafted petitions by attorneys.  In other words, if the attorney has done their job, then 99% of questions a Trustee would have (such as about the value of assets, or transfers of property, etc.) will be listed and explained clearly in the bankruptcy papers.

For most of my clients, this meeting takes less than 2 minutes.  But I have seen others get grilled for a while.  The Trustee’s job in a Chapter 7 is to see if there are any assets available to sell or liquidate in order to pay the creditors.  Thus, the focus is going to be on anything that might lead to that goal.

Again, if presented properly by the attorney, and all applicable  exemptions have been taken to protect the assets, there’s usually very little for the trustee to ask.    Proper preparation by an experienced bankruptcy attorney is the key to a smooth and trouble-free debtor’s examination.

 Chapter 13 Meeting of Creditors

In a Chapter 13 case, all the same questions are asked as in Chapter 7 above, but also a few more.  In a Chapter 13, since the Trustee is not concerned about liquidating assets, the questions tend to focus much more on income and expenses, and the overall plan of repayment.  Thus, the meeting can take a bit longer than in Chapter 7, but again if everything is presented properly and all the t’s are crossed and i’s dotted, they usually go very smoothly and quickly.

Proper attorney presentation is the key

The Debtor’s examination in bankruptcy is usually not a big deal.  It is very short.  The questions are easy.  And creditors rarely, if ever, show up.   But as explained above, the key to this being smooth and easy is the quality with which the bankruptcy petition and schedules are prepared and presented to the Trustee, along with other required  documents.   This is where having a quality, experienced bankruptcy attorney can make a HUGE difference in how smoothly the meeting goes, as well as how successful your entire case will be.

Other Examinations of the Debtor

Just to be complete, any creditor or party-in-interest may apply to the bankruptcy court to examine the debtor much more fully, pursuant to Federal Rule of Bankruptcy Procedure 2004.   This is essentially a deposition which can last for a day or more going through any and all information listed in the bankruptcy petition, schedules and statement of financial affairs, and anything pertaining to the debtor’s finances going back several years.   The ability of creditors to engage in this more comprehensive examination is one of the reasons t hey are so limited at the “trustee’s meeting” from questioning the debtor at length.

Not to worry though, in most run-of-the-mill cases,  it is very unusual (absent evidence of fraud or other bad faith in the filing) for a creditor or other party to make such a request under F.R.B.P. 2004.

This article is part of my bankruptcy alphabet series

Other Bloggers writing about the letter “E” in bankruptcy:

Jay Fleischman–Executory Contracts

Cathy Moran–Exemptions

Cate Eranthe says E Is For Equity

Ryan Caldwell–E is for Exemptions

Bob Doig–E is for Emergency Filing

Bill Balena-Euphoria Debt

Kim Coleman-Eligibility

Chris McAvoy-Exemptions

Stuart Ing–Exemptions

Chicago Law Blog–Everything

Jenna Cho–Emergency

Mitchell Goldstein–Exemptions

Dorota T–Equitable Distribution

Photo courtesy of Capture Queen

What is a Discharge?

Most people think that the discharge is the elimination of debts.  Most attorneys advertise this way and I myself, in order to communicate with my clients, will use similar terminology or phrases.   However, in truth, the bankruptcy discharge does not eliminate debts.   It eliminates the obligation to repay the debt or, to be even more accurate, it legally prevents (enjoins) the creditor from taking any action to collect on the debt.

11 U.S.C. §524 imposes a permanent federal injunction against the collection of any debt that is discharged in bankruptcy.   That’s pretty powerful stuff.

The distinction of a debt still existing, but not being enforceable, is not that significant in most cases, but it has ramifications for the creditor’s taxes, and there are other reasons for the legal nuance.

Not All Debts Are Dischargeable

Of course, not all debts are dischargeable.    Here are a few of the most common debts not dischargeable in bankruptcy.  These are all set forth in section 523 of the Bankruptcy Code:

1. domestic support obligations (all in Chapter 7 and 11; most in Chapter 13)
2. certain taxes (see more on tax dischargeability)
3. debts incurred by fraud
4.  student loans
5. criminal restitution
6. fines owed to a governmental unit.

Some of the above debts are only non-dischargeable if the creditor files an objection to discharge within specific time frames during the bankruptcy case (such as debts incurred by fraud).   Others, such as student loans, are not discharged unless the DEBTOR brings an action determining them TO be discharged.  Others still, such as child support or alimony, are simply not dischargeable at all.    Tricky, huh?  That’s why God invented bankruptcy attorneys.

Ultimately, if you receive a discharge of a debt, you no longer have to worry about repaying that obligation. Discuss with your attorney whether your debts were discharged.

Discharge not Dismissal

And just to get rid of a pet peeve of mine:  a Discharge is NOT the same thing as a dismissal.  People are always confusing these terms.  In bankruptcy, dismissal means dismissal of the bankruptcy case.   If your case is dismissed, you did NOT get a discharge of debts.

This has been the letter “D” of the bankruptcy alphabet.

This article is part of my bankruptcy alphabet series

To see others writing about the letter D:

D is for Debtor by Jay Fleischman

D is for Discharge by Cathy Moran

Cate Eranthe claims D Is For Disclose

Ryan Caldwell alleges D is for Deconsolidate

Stuart Ing feels D is for Discharge

Kim Coleman believes D is for Documents

Jenna Cho thinks D is for Do’s and Don’ts

Mitchell Goldstein Debt Relief Agency

Image Courtesy of Eddi vanW

Following the alphabet motif here, I am now on the letter “C”.   One of the relatively new bankruptcy related “C” words is “credit counseling”.  OK, that’s two words, but for cases filed after October 2005,  it is now a prerequisite for any individuals filing a bankruptcy case.   Debtors must take a credit counseling course within 6 months prior to commencing any bankruptcy case under Chapter 7, chapter 11 or chapter 13.

Can I Get The Credit Counseling Done Anywhere?

No. The credit counseling course must be taken from an agency approved by the Office of the United States Trustee

What Happens if I Don’t Take the Course?

Taking the course is a prerequisite for being eligible to be a debtor in the Chapter that is filed.  Failure to file the required certificate of completion showing the course was taken prior to filing your case  is grounds for dismissal of the case.   However, some judges will allow the course to be taken after the case is filed.

Financial Management Course–Another Course?

Yes, Congress in its infinite wisdom decided to require individuals to take a post-filing course in debt (financial) management, and file that certificate as a prerequisite to obtaining a discharge.  If the certificate of completion for this course is not filed within required timeframes (different with each chapter), the case will be closed without discharge being entered.

The above are just a couple of the many intricacies of a successful bankruptcy case in today’s world and highlight the need for experienced representation by a qualified bankruptcy attorney.

This article is part of my bankruptcy alphabet series

Other Articles on the letter “C” in bankruptcy:

Creditors in bankruptcy:  by, Jay Fleischman

C Is For Counseling by, Cathy Moran

and also,

• Cate Eranthe says C Is For Chapter 7
• David Axinn claims that C Is For Credit Union
• Ryan Caldwell thinks C is for Conversion
• Bill Balena thinks C is for Cosigner
• Christopher C. Carr thinks C is for Compassion and Competence
• Stuart Ing thinks C is for Cramdown
• Kim Coleman asserts C is for Creditors Meeting
• Jenna Cho finds C is for Cars
• Mitchell Goldstein sees C is for Cramdown
• Dorota T thinks C is for Costs
• Lewis Roberts believes C is for Chapter Choice
• Christine Wilton explains why C is for Congress

Image courtesy of Alan Cleaver_2000