Chapter 13 – Page 7 – Rochester Bankruptcy and Debt Relief

Bankruptcy, Cancellation of Debt and Tax Issues

I am often asked if the debt discharged in bankruptcy is treated as debtor’s income and is subject to taxes. The answer to that question under the Bankruptcy Code, for both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy is unequivocally no. Debt discharged in bankruptcy does not result in taxable income to the debtor.

While I have written previously about the problems with debt settlement, this is one more advantage that bankruptcy has over various debt settlement arrangements. If the debtor has his debt reduced or cancelled, the creditor may issue an IRS Form 1009-C form and the debtor would have to report it on his taxes. As a result, the amount of cancelled debt will be added to the debtor’s income as miscellaneous income, and while not subject to self-employment or social security tax, it will be subject to income taxes. If the amount of the cancelled debt is significant, the debtor may face an unexpected tax liability amounting to thousands of dollars.

One exception to the above is cancellation of mortgage debt. The Mortgage Debt Relief Act of 2007 generally allows debtors to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief as well.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. For a detailed discussion of IRS’ position on these issue, please follow this link.

Occasionally, even the debtor who filed fro bankruptcy may receive 1099-C from one of his creditors. Nonetheless, if the debtor received a discharge as a result of either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, the debtor is able to file IRS Form 982, which will inform the IRS that the debtor went through the bankruptcy and any discharged debt should not be included in his gross income. If you are considering your options between a bankruptcy or debt settlement, one of the issues that you should discuss during a consultation with a bankruptcy lawyer is what impact either approach would have on your tax liability.

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

Emergency Bankruptcy Filing – It Can Be Done

Late at night, most people are sleeping. However, sometimes circumstances arise when someone needs to file either a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy before the stroke of midnight, in the middle of the night, or early in the morning. Therefore, occasionally I file bankruptcy petitions late at night.

Sometimes, there are clients who come to me at the very last minute, when there may just be hours to spare before a scheduled foreclosure sale. In such cases, the bankruptcy petition needs to be filed as soon as possible because the minute the petition is filed, the “automatic bankruptcy stay” goes into effect, effectively preventing the sale from going forward. Lawyer’s ability to file an emergency bankruptcy cases is an important part of effective bankruptcy representation.

The reason I am able file bankruptcy petitions in the middle of the night is because all of the bankruptcy filings are done by electronic case filing (otherwise known as “E.C.F.”). By using E.C.F., the petitions and other bankruptcy documents are filed over the internet electronically, directly into the bankruptcy court’s computers. As a result, I can file a bankruptcy petition at any time.

The local rules do not require that the debtor file all of the supporting schedules at the time the case is initially filed. The case can be commenced by filing just the two-page bankruptcy petition together with a list of creditors and their addresses either in the form of the matrix or by filing the schedules of creditors. The debtor must also pay the filing fee.

The local rules permit the debtor to file the remaining schedules and forms within the next few days. If the remaining schedules and supporting documents are not filed during the applicable time periods, the Bankruptcy Court has the right to automatically dismiss the case. One requirement of a normal bankruptcy filing that cannot be waived in an emergency filing is the consumer credit counseling course. However, with consumer credit counseling courses available over telephone and internet, an emergency course provider can be found and a course can be completed at almost any time of day and night.

I prefer not to file emergency petitions, but sometimes it is necessary, and it is a part of the service I offer. Sometimes, I receive calls from the debtors who believe their house is about to be sold at a foreclosure sale. However, many of them confuse a motion return date in the foreclosure proceeding with the actual sale date. Before preparing an emergency filing, I always verify that there is a need to file bankruptcy as soon as possible.

Student Loans and Chapter 13 Bankruptcy

On March 23, 2010, the U.S. Supreme Court issued its decision in United Student Aid Funds v. Espinosa, No. 08-1134 (2010), which affirmed the 9th Circuit’s holding that a Chapter 13 Bankruptcy debtor can obtain a discharge of a student loan by including it in a Chapter 13 plan. The loan can be discharged if the creditor fails to object after notice and opportunity to do so, and the bankruptcy court enters an order confirming the Chapter 13 plan.

In a typical bankruptcy, whether Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, a student loan is not discharged unless the bankruptcy court makes a determination that the student loan would be an undue hardship on the debtor. Under Bankruptcy Rules, the court is required to make such a determination in an adversary proceeding, which is a lawsuit within the bankruptcy case. In United Student Aid Funds, the debtor did not bring an adversary proceeding. Rather, the debtor put in his plan that only the principal amount of the student loan would be paid through the plan, but that accrued interest would be discharged. The student loan lender did receive a copy of the plan, and even filed a Proof of Claim. However, the lender did not object to confirmation of the Chapter 13 plan.

Subsequently, the bankruptcy court entered an order confirming the plan as proposed. After confirmation, the Chapter 13 trustee sent a notice to the lender, saying that the Proof of Claim amount differed from the amount stated in the Chapter 13 plan, and that if the lender disputes the amount in the plan, it should notify the trustee within 30 days. After the debtor completed his plan payment, several years later, the student loan lender tried to collect the remaining amount due.

The debtor filed a motion seeking enforcement of his bankruptcy discharge. The lender filed a motion seeking to declare the order confirming the Chapter 13 plan void. Ultimately, this was the issue that the Supreme Court resolved. That is, the student loan lender argued that the bankruptcy court order confirming the Chapter 13 plan void because the lender was denied due process regarding the required statutory finding of undue hardship, which did not happen in this case.

The Supreme Court, in looking only at Bankruptcy Rule 60(b)(4), which permits a court to relieve a party for a final order or judgment, found that the lender was not denied due process, since the lender did receive the plan, filed a claim, and received the notice from the chapter 13 trustee. The Court agreed that the confirmation of the plan without an undue hardship determination was legal error, however, the legal error does not void the order. The Court noted that Rule 60(b)(4) strikes a balance between the need for finality of judgments, and the right of parties to have a full and fair opportunity to raise issues and the lender had ample notice and opportunity to contest the debtor’s actions.

What is to be learned from United Student Aid Funds? Bankruptcy lawyers are well aware of the fact that lenders can make errors in dealing with both Chapter 7 Bankruptcies and Chapter 13 Bankruptcies. However, in most chapter 13 bankruptcies, here in Rochester, New York, and elsewhere, the student loans are paid pro rata through the plan. Thus, the bankruptcy lawyers are unlikely to follow the debtor’s approach to the student loans in United Student Aid Funds, since it is likely to be rejected by the bankruptcy court. It appears that the bankruptcy court in that case ignored its obligation to make sure that the debtor followed the Bankruptcy Code in his Chapter 13 Bankruptcy. At the same time , there is little harm in trying to discharge some or all of the student loan debt, since if the above approach is followed, and the bankruptcy court or the bankruptcy trustee object, the plan can be amended to comply with the law, but if the bankruptcy court rubberstamps the plan and the lender fails to object in a timely manner, the debtor may get a discharge.

Top Ten Bankruptcy Myths

There are lot of myths and misinformation regarding debtors’ rights to file bankruptcy. In my practice, I see a lot of debtors who seek to file Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, who have heard a lot of rumors and incorrect information with respect to their rights and obligations when they file for bankruptcy relief. The following is a compilation of the typical questions, and correct answers to the questions I frequently hear from the debtors.

1. I will not be able to buy a house for ten years since I will not be able to obtain a mortgage.

Although Chapter 7 Bankruptcy will appear on your credit report for a period of ten years, you will be able to buy a house again much sooner than that, because the bankruptcy is likely to improve your credit rating. Chapter 13 Bankruptcy is likely to improve your credit sooner and is likely to disappear from your credit report much sooner as well.

2. I won’t be able to buy a car for ten years since I will not be able to obtain a car loan.

Although Chapter 7 Bankruptcy is likely to be on your credit report for a period of ten years, you will be able to borrow money to purchase a car again because because the bankruptcy is likely to improve your credit rating.

3. I won’t get a credit card or a good credit score for ten years.

Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are likely to improve your credit rating. In my experience, although I do not recommend it, the debtors are able to obtain credit cards again within 1 to 2 years.

4. I won’t be able to get a student loan for myself or my children.

Since guaranteed student loans must be repaid, and cannot be discharged in bankruptcy, therefore, there is little concern that student loans will not be paid back. Any private lender may deny a student loan based on the debtor’s credit score, however most student loans are government backed.

5. My employer will fire me because I filed for bankruptcy.

While bankruptcy information is available as a public record, employer, or prospective employer, is not allowed to discriminate against you based on debtor’s decision to file Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. If a prospective employer asks you for a copy of your credit report, questions you about bankruptcy, most employers are prefer to know that the debtor no longer has any financial issues which may affect work performance. Discharging the debt is preferable to an employer as opposed to a situation where the debtor is receiving phone calls at work from collectors or a credit report that shows a pattern of irresponsibility. Further, in Chapter 7 Bankruptcy, employers are not notified of the filing. In Chapter 13 Bankruptcy, the employer is likely to be aware of the filing since here in Rochester, New York, the Bankruptcy Court requires a wage deduction order that is sent to the debtor’s employer and requires a portion of the wages to be remitted directly to the Chapter 13 Trustee.

6. I don’t qualify for chapter 7 bankruptcy because I own a house.

You can file for a Chapter 7 Bankruptcy even if you own a home. Most states, including New York, allow a homeowner a certain amount of equity in their residence. In New York, pursuant to its homestead bankruptcy exemption, a single filer can have $50,000 worth of equity in their residential property, and joint filers (husband and wife) can have $100,000 worth of equity in their property.

7. I will lose my car if I file for bankruptcy.

If the debtor has a financed car, and can afford the payments, the bankruptcy court will not take away the car, unless the amount of equity in the vehicle is considerably greater than New York’s vehicle exemption. Further, the lender is likely to ask the debtor to reaffirm the car loan. Most Chapter 7 Bankruptcy filers who have car loans, tend to reaffirm them.

8. I am not a citizen, and therefore I can’t file for bankruptcy protection.

You can qualify to file bankruptcy even if you are not a United States citizen. If you have the right to reside in the United States, have a social security number, and have filed income tax returns, you can file for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy protection.

9. Bankruptcy can’t help because I have unpaid federal and state taxes.

Under appropriate circumstances, even taxes can be discharged in Chapter 7 Bankruptcy. Chapter 13 Bankruptcy can reduce debtor’s monthly payment to the IRS or New York Department of Taxation and Finance and allow for payments over the life of the plan, as long as five years, without interest.

10. My creditors tell me they will still sue to recover the money owed to them.

Once the bankruptcy is filed, the automatic stay, imposed by the bankruptcy law, protects you from any further attempts to collect a debt or any pending or future lawsuits. While secured creditors may ask for their property back if you do not continue to make payments, they must seek consent of the bankruptcy court before attempting to recover the property.

Chapter 7 and Chapter 13 Bankruptcy, Giving Advice to Clients and Restrictions Under BAPCPA

The U.S. Supreme Court has resolved an issue earlier this week that was of great concern to the bankruptcy lawyers ever since enactment of BAPCPA in 2005. This issue had to do with a provision of BAPCPA, which barred attorneys from advising their clients to take on more debt before filing for bankruptcy protection. The Supreme Court held in Milavetz, Gallop & Milavetz v. United States, 559 U.S. ___ (2010), that giving such advice is permissible in appropriate situations.

The high court, in an opinion written by Justice Sonia Sotomayor, said the provision prohibiting such advice was valid, but should be read narrowly. This provision should be read to prohibit bankruptcy lawyers from advising clients to abuse the bankruptcy system. Justice Sotomayer indicated that it would be permissible for lawyers to advise clients contemplating bankruptcy to take on additional debt in certain situations. She wrote that bankruptcy lawyers could advise clients to refinance a mortgage or purchase a reliable car prior to bankruptcy on the grounds that doing so would reduce the debtor’s interest rates or improve the debtor’s ability to repay. According to the opinion, “[i]t would make scant sense to prevent attorneys and other debt relief agencies form advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors.” Professionals specializing in bankruptcy “remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case,” Sotomayor wrote.

This provision has been problematic in the past in situations where my client would have a vehicle that was likely to need repairs in the near future due to its age or mileage. Under BAPCPA, I could not advise the debtor in Chapter 7 Bankruptcy or Chapter 13 Bankruptcy to obtain a new car lease or car loan, as getting a new car is easier to do before filing for bankruptcy than after. Since BAPCPA contained a provision which prevented attorneys from advising clients to incur debt in contemplation of bankruptcy, I was unable to give debtors such advise since BAPCPA’s enactment. Similarly, this provision prohibited me from advising a debtor to refinance his mortgage immediately prior to filing for bankruptcy in order to benefit from a lower interest rate in the future.

The Supreme Court decision now clarifies the scope of BAPCPA provisions and holds that as long as bankruptcy lawyer’s advice is not meant to abuse the system, it is considered appropriate. Of course, a bankruptcy attorney cannot advise a client to go out and run up debt when the client has no reasonable expectation to repay it. The decision also upheld the BAPCPA’s requirement that attorneys make certain disclosures in their advertisements and ruled that attorneys who provide bankruptcy assistance are debt relief agencies within the meaning of the law. This requirement is the reason that whenever bankruptcy attorneys advertise their service, that sentence is included in the advertisement.

Overall, Milavetz was a positive result for bankruptcy lawyers here in Rochester, New York, and elsewhere across the country. The Congress should not have limited bankruptcy attorneys’ ability to engage in frank and open communications with their clients and give debtors the best possible advice.

Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and Debtor’s Credit Report

I am frequently asked by the debtors how long their bankruptcy filing will remain on their credit report and whether they would be able to obtain credit after the filing. There is a substantial amount of confusion with respect to when a bankruptcy can no longer be reported on the debtor’s credit report and whether credit becomes available to those who file for bankruptcy relief.

The length of time a bankruptcy can be reported on the debtor’s credit report is governed by the Fair Credit Reporting Act (“FCRA”). The FCRA orders credit reporting agencies to remove bankruptcy case information from all consumer reports ten years after “the date of entry of the order for relief.” It does not differentiate between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. The order for relief according to §301 of the Bankruptcy Code is entered on the filing date, so the ten year period is measured from the bankruptcy filing date, not the discharge date.

It is usually a good idea to order your credit report after the bankruptcy to make sure that the bankruptcy discharge also shows on the credit report so that potential new creditors understand that the creditors whose claims were discharged in bankruptcy have no remaining legal claims.

In my opinion, bankruptcy is no more harmful to the debtor’s credit score than the financial circumstances that lead to the bankruptcy filing. In today’s lending environment, credit is available to the recently bankrupt. It may be more expensive than prior to the bankruptcy filing, and available with lower limits, but it is likely to be offered. Similarly, according to the credit industry’s studies, 18-24 months after a bankruptcy discharge, bankruptcy debtors can qualify for a mortgage loan on the same terms as if they had not filed bankruptcy. The anecdotal experience of my clients has been that they were able to obtain mortgages within two years of filing Chapter 7 Bankruptcy. While it takes some effort to rebuild credit after bankruptcy, it is possible to do so.

Chapter 7 Bankruptcy and Stripping of Unsecured Second Mortgage

One question that I am often asked is whether the unsecured second or third mortgage on the property owned by the debtor can be stripped in Chapter 7 Bankruptcy. In Chapter 13 Bankruptcy, the unsecured second mortgage can be stripped by bringing a Ponds motion.

Unfortunately, in Chapter 7 Bankruptcy, the unsecured second or third mortgage cannot be stripped. In a recent decision which also applies to the bankruptcy cases in Rochester, New York, In re Grano, the Buffalo Bankruptcy Judge Bucki held that in Chapter 7 Bankruptcy cases, the debtors cannot avoid wholly unsecured second or third mortgages.

Joseph and Ann Grano owned a residence in the Town of Amherst, New York. After filing a Chapter 7 Bankruptcy petition, they commenced the adversary proceeding against Wells Fargo Bank, N.A., to avoid a second mortgage. In their complaint, they alleged that their real estate has a current fair market value of $445,000 and that it is encumbered by two mortgages: a first lien with an outstanding principal balance of $511,000, and the second mortgage of Wells Fargo with a balance of $95,837.60.

Granos asserted that they can avoid the second mortgage pursuant to the authority of 11 U.S.C. § 506(a) and (d). In lieu of an answer, Wells Fargo moved to dismiss the complaint for failure to state a cause of action. In relevant part, section 506(a)(1) of the Bankruptcy Code states that “[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Asserting that the first mortgage secures a debt greater than the value of the property, the debtors argue that in its status as a second mortgagee, Wells Fargo retains only an unsecured claim. Subject to exceptions not here present, 11 U.S.C. § 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In reliance upon this later subdivision, the debtors commenced their adversary proceeding to avoid the second mortgage of Wells Fargo.

In Dewsnup, the Supreme Court accepted the position of the secured creditor, that “the words ‘allowed secured claim’ in §506(d) need not be read as an indivisible term of art defined by reference to § 506(a).” Instead, the language of section 506(d) “should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured. Because there is no question that the claim at issue here has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d), which voids only liens corresponding to claims that have not been allowed and secured.” 502 U.S.at 415. Effectively, therefore, the Supreme Court refused to recognize section 506(d) as a grant of authority to a debtor in Chapter 7 to “strip-down” or cancel the lien of an undersecured mortgage.

In contrast to Chapter 7, debtors in Chapter 13 may assert rights under special statutory provisions for the treatment of secured claims. Specifically, 11 U.S.C. § 1322(b)(2) provides that a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.” InNobelman v. American Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that the language of section 1322(b)(2) precluded the bifurcation of an undersecured homestead mortgage into secured and unsecured claims. Consequently, to the extent that a homestead has value to collateralize any portion of a mortgage, a chapter 13 plan must treat that lien as fully secured. However, in In re Pond, 252 F.3d 122 (2001), the Second Circuit distinguished those circumstances where the homestead lacks equity to collateralize any portion of an inferior lien. In this special circumstance, because the lien is wholly unsecured, the debtors “are not ‘holders of . . . a claim secured only by a security interest in . . . the debtor’s principal residence,’ 11 U.S.C. § 1322(b)(2), and their rights in the lien are not protected under the antimodification exception of Section 1322(b)(2).” 252 F.3d at 127.

In the present instance, Mr. and Mrs. Grano contended that this court should adopt for Chapter 7 the same exception that the Second Circuit has recognized for cases in Chapter 13, to the effect of permitting the avoidance of secondary liens that are totally undercollateralized. Unfortunately, this argument overlooks the unique statutory predicate of Chapter 13. In allowing a debtor in Chapter 13 to avoid a fully unsecured homestead mortgage, the decision in In re Pond utilized the authority of 11 U.S.C. § 1322(b)(2). No parallel provision applies in Chapter 7. The court concluded that notwithstanding the absence of equity beyond superior liens, the debtors may not avoid the second mortgage of Wells Fargo Bank, N.A.

This decision forces the debtors and their bankruptcy lawyer to engage in a cost benefit analysis in a situation where there is a wholly unsecured second or mortgage. Assuming the debtors can file either Chapter 7 or Chapter 13 Bankruptcy, the benefit of filing Chapter 7 Bankruptcy and discharging all unsecured debt, should be compared to the benefit of a Chapter 13 Bankruptcy plan payments over 5 years, and a likely discharge of the unsecured second or third mortgage. Assuming the debtors wish to retain their residence, the comparison of two figures should point them in the right direction.

Second Vehicles, Motorcycles and Bankruptcy

Periodically, I meet with debtors who own either second vehicles or motorcycles, and would like to keep them, after either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy filing. Filing for either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy doesn’t always mean that you have to give up your second vehicle or motorcycle, as long as the payments are considered a reasonable vehicle expense. The second vehicle, referred to above, is the vehicle that is an extra one for the single debtor, or the third one for joint filers.

How does the debtor know if the second car or motorcycle will be considered a reasonable expense? The answer to this question initially depends on the type of bankruptcy being considered: Chapter 7 or Chapter 13.

Since with Chapter 7 Bankruptcy there is no repayment plan for creditors, the secured debts, like vehicle loans, are either continue to be paid by the debtor or the vehicles are surrendered. The debtor is obligated to list his/her income and expenses in the bankruptcy petition. The purpose of listing income and expenses is to show that after deducting reasonable expenses, the debtor has no money with which to repay his creditors. If there is any significant money left over in the budget (more than about $100), the debtor will not qualify for Chapter 7. Instead, he will be required to file a Chapter 13 Bankruptcy where creditors are repaid some or all of what they are owed.

If the Chapter 7 debtor’s monthly income equals to his/her monthly expenses, the debtor has no money with which to repay his creditors in a Chapter 13. However, those expenses must be reasonable or the trustee will object to the bankruptcy. This is the critical issue in whether the debtor will be able to keep the second vehicle or motorcycle. Usually if teh budget shows that even befor the payment on the second vehicle or motorcycle, the debtor is either at break-even, or is in the negative territory, the bankruptcy court will not require him to give it up. If the debtor wants to spend less on other expenses, the debtor can do that. If the debtor wants to make the payments, he can keep the second vehicle or motorcycle. An additional caveat has to do with any equity in such second vehicle. If there is any equity, the trustee is likely to demand that such equity be paid to the bankruptcy estate since it would not be protected by teh bankruptcy exemptions.

The above also applies for Chapter 13 Bankruptcy. In Chapter 13, any vehicle payments allowed in the repayment plan take money away from what the unsecured creditors receive. So a payment for the second vehicle or motorcycle will reduce the money the trustee has available to repay other claims and is likely to be objected to. Here in Rochester, the bankruptcy trustee will permit the debtor to keep the second vehicle or motorcycle if the plan repays all unsecured debtors at 100%. So, if the joint debtors, for example, are a couple with three vehicle payments, three vehicle payments are not necessary for “the effective reorganization of the debtor” required by the bankruptcy statute. The second vehicle or motorcycle is likely to be toy, and allowing the toy to be paid off in the plan reduces the amount the unsecured creditors receive.

The easiest way to determine whether the second vehicle or a motorcycle will be viewed as an allowable expense in Chapter 7 bankruptcy or Chapter 13 Bankruptcy is to discuss these issues with a bankruptcy lawyer prior to making a decision to file.

Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and Purchase of a Vehicle

I frequently meet with debtors who tell me that they are thinking about filing for bankruptcy, but have concerns since they may need a new car in the near future. I am usually asked if a new car or used car should be purchased prior to filing for bankruptcy protection. As a bankruptcy lawyer, the current status of the law prevents me from counseling debtors from acquiring more debt prior to filing for bankruptcy. However, if I were in the debtor’s position, I would consider the following.

First, if you planning to file Chapter 7 bankruptcy, and you will need a different car, you should buy the car since it is easier to buy a car prior to filing for bankruptcy, assuming that your credit allows it. If the car is financed, the loan will have to be reaffirmed, and assuming that the amount of equity does not exceed you New York exemption for a vehicle, you will be able to keep your vehicle. At the same time, a financed vehicle on your credit report will help you rebuild credit after filing for bankruptcy.

If you are filing for Chapter 13 bankruptcy, and decide to buy the car before filing, you will be able to keep the car and payments on the loan will be a part of your repayment plan. If anything, since in Chapter 13 bankruptcy the bankruptcy court allows only a certain amount of interest to be paid on secured loans, it is possible that your monthly payments may be reduced. The situation becomes more complicated if the debtor suddenly needs a car after filing Chapter 13 bankruptcy. In order to obtain new debt, the debtor would need the bankruptcy’s court’s permission to take on a car loan. This is likely to require a motion to amend the plan that was previously approved by the bankruptcy court. If the court approves the purchase, that may change the monthly payments made by the debtor. A potential benefit to the debtor is that if the payments are made on time, this is likely to improve debtor’s credit.

Bankruptcy, Bad Checks, Discharge and Criminal Liability

A bad check, hot check, NSF check, returned check, rubber check, worthless check, or whatever you want to call it, is a check which the bank will not pay because there is either no such checking account or insufficient funds in the account to pay the check. In Texas, writing a bad check is a misdemeanor or can be a felony depending on the amount of the bad check and the circumstances of the issuance of the check. No matter how nominal you think the check is, you can still get you charged with a crime. If you file for bankruptcy and have hot checks outstanding it might make your bankruptcy case a bit more complicated. For the most part, bad check debt is dischargeable in bankruptcy, but since each case is unique, you should obtain legal advice on your bad checks before filing bankruptcy.

If you live in Houston, Austin, San Antonio, Dallas, or anywhere in the State of Texas and need to file for bankruptcy & have bad checks, contact the Texas Bankruptcy Attorneys at The Law Offices Of R.J.Atkinson for a free initial consultation to determine the best option to deal with your bad checks in bankruptcy.

Keep in mind that every bad check and bankruptcy situation is different, so it is important to obtain legal advice for your particular case. The following are some frequently asked questions about bankruptcy and bad checks.

1. If I file for Bankruptcy, will it stop “Prosecution for my Bad Check?”

No. If the prosecution is by a District Attorney, Attorney General, or any law enforcement authority of the State for a criminal action, then it will not stop prosecution for a bad check. When you file a bankruptcy case, there is a stay against any attempts to collect a debt from you which extends to creditors holding or collecting on Bad Checks, Hot Checks, Dishonored Checks, NSF Checks, Bounced Checks, Worthless Checks, Rubber Checks, or whatever you choose to call them.

When a bankruptcy petition is filed, Bankruptcy Law imposes “the automatic stay” which is an injunction on all collection actions and which prohibit further collection efforts on debts that came about prior to the bankruptcy filing. This “automatic stay” is one of the primary reasons many people file for bankruptcy. Although the “automatic stay” is a very powerful part of Federal Bankruptcy Law, the “automatic stay” does not extend to proceedings by the State or any Federal governmental agency pursuant to its police powers. More specifically, any criminal prosecutions which enforce criminal laws are not subject to the automatic stay of bankruptcy. The Bankruptcy Court treats prosecutions of bad checks as criminal proceedings and not attempts to collect debt as long as the actual purpose of a bad check prosecution is to enforce criminal bad check laws. Since a bad check prosecution isn’t meant to pressure the debtor into paying a debt that could otherwise be discharged in a bankruptcy the automatic stay of bankruptcy will have no effect on bad check prosecutions which enforce criminal law.

2. I have written postdated checks to several payday loan companies over the last year. I have to file for Bankruptcy; can they come after me criminally for the “Bad Checks” or sue me?

No. The payday loan company doesn’t have the authority to charge you with a crime. Only the District attorney, Attorney General, or the State or any Federal governmental agency with police powers can charge you criminally. They can however, make a recommendation to the District attorney, Attorney General, or governmental agency with police powers that criminal charges should be brought against you. Whether or not that happens depends on the particular facts of your case. As for filing suit, they could file a lawsuit against you in the Bankruptcy Court as an “adversary proceeding” if the want to attempt to lift the stay. They would have to file a special motion in the bankruptcy Court to lift the “automatic stay”. In thousands of cases, this law firm has never seen this happen. Whether they file suit this way will depend on the facts of the case, I.E. how much is owed, how they are treated in your bankruptcy, when you wrote the checks, etc…

3. I wrote a postdated check to a payday loan company, if I file bankruptcy can they still deposit the check after I file?

Yes, but if they deposit the check after they receive notice of the bankruptcy filing, it could be construed as a violation of the automatic stay. It’s not uncommon for checks to be processed after a bankruptcy filing. Many auto drafts and other similar ACH debits can still go through if the money is there. You should address your bank accounts accordingly, and if you do file for bankruptcy, it’s important that all of your creditors receive proper notice of the filing. Despite the fact that the automatic stay stops collection actions, your bank account can still be debited and outstanding checks can still go through if creditors aren’t properly noticed. Although you may get the money back at some point if the creditor wrongfully takes the money from you, it will still take some time. Whenever you post date a check you are in essence representing that the check will be good on that date. If you write a post dated check to a payday loan company or anyone for that matter, and then later file for bankruptcy, it will ultimately end up in the bankruptcy court if that debt is included in the bankruptcy.

The bankruptcy court will have to sort through the facts and then consider whether there was an agreement between you and the payday loan company or other party to hold the postdated check. The bankruptcy court will also consider other factors, but primarily, whether or not you ever intended to pay on the postdated check. Obviously if the day or weeks before filing bankruptcy you went on a check writing spree to payday loan companies, knowing that there were no funds in your account and that you would be filing for bankruptcy, then the bankruptcy court could get the impression that you never “intended” to make good on the checks. Generally, it all comes down to intent and representation. If your intent was to make good on a postdated check when you issued it, then it may be difficult for a payday loan company to prove you never intended to pay. This is especially true if you previously had an ongoing relationship, or have gotten caught up in the payday loan cycle for the months or years preceding a bankruptcy filing. The whole payday loan business is predicated on postdated checks, so they have the burden as potential creditors in your bankruptcy case to prove your intent. As for representation, if you misrepresent or fraudulently make statements to induce a party to accept your postdated check, then you could have problems discharging the debt in bankruptcy. Everyone’s situation is unique so it is always good advice to seek competent legal counsel.

4. If I file for Bankruptcy, can I discharge the debts owed for bad checks?

It depends. Every case is different, so the facts of each case will dictate if a bad check will be treated as dischargeable or nondischargeable. Generally, so long as there wasn’t any fraud, false pretenses, or material misrepresentations made or conveyed in the actual writing of the check or checks, then the “debt” component from the bad check(s) is quite often dischargeable. That being stated, going on a bad check writing spree days or weeks before filing for bankruptcy filing could make it difficult to discharge such debt.

The Bankruptcy Code doesn’t allow you discharge and debts incurred or obtained by fraud, misrepresentation, or false pretenses. Where Bad Checks, Hot Checks, Dishonored Checks, NSF Checks, or Bounced Checks are concerned, it depends on the circumstances. Obviously if, for example, you had been doing business with a payday loan company for the 6 months prior to bankruptcy and you didn’t have money in your account for 3 months, then wrote a check for $1000.00, and filed bankruptcy the next week, it would be tough to prove that your actions weren’t fraudulent. Therefore, when an irate creditor comes to bankruptcy court in a chapter 7, 13 or 11 case where the creditor is holding the check issued by the debtor that was dishonored, the expectation may be that the debt is not dischargeable. Unfortunately, debt based on a bad check is not automatically and not even usually held to be non-dischargeable.

To succeed in getting a bankruptcy court to find a bad check debt is non-dischargeable, the creditor has the burden of proof to show fraud or false representation by the debtor.

5. How will the Bankruptcy Court decide if the Bad Checks I include in a Bankruptcy will be discharged?

Since every situation is different, there is no way to determine what the Bankruptcy Court will do to interpret the facts of any issue. However, Bankruptcy Courts have examined various things in prior cases to determine whether a bad check is dischargeable or not. Some of the things the Bankruptcy Courts have examined to determine bad check dischargeability are as follows:

Whether there was an agreement to hold a post-dated check.

The time between delivery of the check and the bankruptcy filing.

Did the person issuing the check obtain legal advice from an attorney about bankruptcy before writing the check.

How many bad checks were written and included in the bankruptcy.

The amount or amounts of the bad checks.

The debtor’s financial condition at delivery of the check.

Whether multiple checks were delivered the same day

Whether the person filing was employed when the bad check was written.

Whether the check was written on a closed account.

The financial sophistication of the debtor.

Whether life necessities or luxury items were purchased.

6. I wrote a hot check for $35.00 to the convenience store. Can they do anything if I file bankruptcy?

Sure they can. They can contact the district attorney and file a criminal complaint against you. However, having handled almost two thousand cases, my clients have rarely had problems with bad checks less than $300. That’s probably due to the length of time and hassle involved with pursuing criminal charges, especially when the person who wrote the bad check just filed bankruptcy. I have seen very angry holders of bad checks occasionally show up at creditors meetings and have received calls from a few district attorneys in other states wanting to work out a payment plans, but not for nominal amounts. Since writing a bad check in any amount is a crime, I advise all on my bankruptcy clients to pay anyone who may be holding a bad check.

7. I have to file Chapter 13 Bankruptcy to stop foreclosure, but I have about $1000.00 in hot checks out. Can I repay the checks in my bankruptcy and avoid criminal charges?

There is no way to know for sure. It may be possible to include repayment for the hot checks in your Chapter 13 Bankruptcy but its up to the district attorney as to whether you will be charged with a crime whether you include it in a Chapter 13 plan or not.

When you file bankruptcy, your creditors, which include any parties holding a bad check, are prevented from taking any attempts to collect from you. The Automatic Stay of bankruptcy automatically stops most legal actions against you, but filing bankruptcy will not stop criminal prosecutions against you. So, if you have written bad checks, the party to whom you wrote a bad check to could request to have you arrested and criminally prosecuted for a bad check. When a person who has written a Bad Check files for bankruptcy under any chapter under the Bankruptcy Code, it will not protect them from criminal prosecution and will not discharge their criminal liability for any restitution, costs and fines associated with the criminal prosecution & restitution.

At The Law Offices Of R.J.Atkinson we generally recommend that if at all possible you should attempt make bad checks good prior to your filing for Bankruptcy in order to avoid criminal prosecution on the checks. It isn’t always possible to take care of a Bad Check prior to filing for Bankruptcy since you may be facing a foreclosure, repossession, or other urgent motivating factor, but when the only option is to file Bankruptcy before taking care of a Bad Check, you should be aware that filing for bankruptcy will not stop criminal prosecution for a Bad Check.

If you have bad checks, hot checks, rubber checks, NSF checks, bounced checks, dishonored checks, or worthless checks and live in Houston, Austin, San Antonio, Dallas, or anywhere in the State of Texas and need to file for bankruptcy, contact the Texas Bankruptcy Attorneys at The Law Offices Of R.J.Atkinson for a free initial consultation. We may be able to help you with the bad checks before you file for bankruptcy and can help you determine how to deal with your bad checks in bankruptcy if the Texas Bankruptcy Means Test provides you are eligible to file.

What happens if prior to filing for bankruptcy, the debtor gives a bad check to someone? A bad check, Not Sufficient Funds check, or a bounced check, is usually a check which the bank will not pay because there is either no such checking account or there are insufficient funds in the account to pay the check. In New York, writing a bad check is a misdemeanor, punishable up to 90 days in jail for the first offense. To be charged criminally for issuing a bad check usually means that the check was issued with knowledge that it would not be paid by the bank. If you file for bankruptcy and have bad checks outstanding it might make your bankruptcy case more complicated. For the most part, bad check debts are dischargeable in bankruptcy, but each case is unique.

Sometimes, while the debt may be listed in the bankruptcy petition, the debtor may be charged criminally. The bankruptcy filing, and the automatic stay associated with it, will not stop a criminal prosecution. The automatic stay prevents any attempts to collect a debt from you which extends to creditors holding or collecting on that check. Although the automatic stay blocks all collection actions by the creditors, it does not extend to proceedings by the State or any Federal governmental agency pursuant to its police powers. More specifically, any criminal prosecutions which enforce criminal laws are not subject to the automatic stay of bankruptcy. The Bankruptcy Court treats prosecutions of bad checks as criminal proceedings and not attempts to collect debt as long as the actual purpose of a bad check prosecution is to enforce criminal bad check laws. Since a bad check prosecution isn’t meant to pressure the debtor into paying a debt that could otherwise be discharged in a bankruptcy the automatic stay of bankruptcy will have no effect on bad check prosecutions which enforce criminal law. If the debtor is found guilty of a crime of passing a bad check, the debtor may be liable for civil restitution, which is not likely to be found dischargeable by the bankruptcy court.

If no criminal charges are filed, the situation becomes clearer. The debt associated with a bad check is likely to be dischargeable, but its dischargeability will depend on whether there was any fraud, false pretenses, or material misrepresentations made in the actual writing of the check. If there was no fraud or misrepresentations involved, then the debt from the bad check is usually dischargeable.