BANKRUPTCY
QUESTION AND ANSWERS
Bankruptcy
is set in place for individuals or businesses to obtain relief
from debts that they can no longer pay. While we don't advocate
filing bankruptcy unless it is a last resort, this page will
answer some questions to possibly help you decide if it is
right for you. You should be aware that Bankruptcy is often
abused.
People
file as a way to escape debts when it may not be necessary.
Always consider all of your options such as Debt
Negotiations & Debt
Management plans. Bankruptcy is final and will
remain on your credit
for 7 to 10 years depending on chapter filed. You can
consider negotiating your
debts which will have less impact on your credit. You
should not attempt debt negotiations if you do not have adequate
funds to pay a settlement or reduced payoff. If you have no
income and you can not qualify for a debt
management program, Bankruptcy may be a good option at
that point.
The
Bankruptcy Process
Federal
courts have exclusive jurisdiction over bankruptcy cases.
Bankruptcy cases cannot be filed in state court. Each of the
94 federal judicial districts handles bankruptcy matters.
The primary purposes of the law of bankruptcy are: (1) to
give an honest debtor a "fresh start" in life by
relieving the debtor of most debts, and (2) to repay creditors
in an orderly manner to the extent that the debtor has property
available for payment. What
is the automatic stay: Code 362 of the Bankruptcy code. It
is an enforcement to disallow creditors at the attempt to
collect certain debts (pre petition or possibly post petition
debts) included in the bankruptcy. Basically it means any
attempt to collect a debt involved in a bankruptcy can be
a violation of the automatic stay or discharge injunction.
The
automatic stay prohibits:
(1)
Creditors can not attempt to collect debts listed in a Bankruptcy
or they risk violating the automatic stay. Even an attempt
to collect post petition debts may be prohibited while the
debtor is in bankruptcy. Judgments that are pre-petition (filed
before BK) are uncollectable. No repossession or selling of
property is allowed until the automatic stay is lifted or
the BK is discharged.
(2)
The starting or continuing of any administrative or Judicial
actions against the debtor that was started before the BK
was petition was filed. All action must cease the second the
petition is filed with the courts.
(3)
Enforcing a pre-petition judgment against the debtor or anything
that is considered property of the estate is prohibited. (11
USC Section 362 (a) (2).
(4)
Any action to obtain possession or to try an exercise control
is prohibited.
(5)
Any act to attempt to perfect a lien or enforce a lien against
the property of the estate. The purpose of the automatic stay
is to give the debtor breathing room to liquidate or protect
his assets under a chapter 7 or to set up a plan under a 13,12,
or 11.
The
automatic stay is in effect at the beginning of filing a Bankruptcy
petition and lasts until discharge is granted, a dismissal
occurs or if a motion for relief is granted. A creditor may
try to obtain relief from the stay if the debtor has no equity
in the property involved and the property is not necessary
for a successful reorganization of the debtors finances or
if there is lack of adequate protection for the creditor.
Lack
of adequate protection can be several things.
No
insurance on a vehicle or inadequate insurance such as comp
and collision, then the creditor may ask for relief because
his security interest is unprotected. No equity in property.
The property you are trying to protect has no equity and the
creditor can seek relief on that basis. Delinquency: this
can be a car or secured loan that is delinquent which is causing
a depreciation plus no payments being made. This can be a
valid reason for asking for relief from the stay. No registration
or drivers license for the vehicle. If a creditor violates
the automatic stay, a judge can award attorneys fees and actual
damages along with punitive damages.
If
a creditor gets a notice of a bankruptcy they can send a reaffirmation
request to your attorney. If the attorney does not acknowledge
the request then the creditor can show up at the 341 hearing
and ask then. Many times creditors will ask a debtor to reaffirm
with them. This is allowed if approved by the courts. Creditors
cannot enforce a reaffirmation that has not been approved
by the courts. That would be considered attempting to collect
a BK debt. If
you take out a debt for the sole purpose of paying taxes,
That debt may be Nondischargeable.
Debts
That may not be dischargeable in a Bankruptcy:
-Child
support or alimony.
-Student
Loans unless court agrees it will cause undue hardship to
the debtor or his family. This is rare see more about This
topic here.
-Taxes
unless they are over 3 years old or more.
-Fraud.
You lied on an application or some type of fraud was involved.
False financial statement etc.
-Debts
not listed may not be dischargeable if the debtor was fully
aware of them and did not list or notify creditor.
-Debts
incurred to pay federal taxes.
-Credit
cards used within 60 days for anything other then absolute
necessities. This is a common mistake consumers make.
-Debts
that were included in a previous bankruptcy that was dismissed
within the preceding 180 days.
-Unexplained
or disappearance of assets.
-Abuse
of the bankruptcy process.
-Other
creditors can try to have your bankruptcy dismissed if they
find you showed preference to other creditors over them.
Debts
that are nondischargeable generally fall into the following
categories:
-Individual
income taxes that are assessed within three years of the filing
but remain unpaid.
-Debts
that have been incurred by the use of false financial statements
or by the use of other false pretenses.
-Unscheduled
debts in other words, debts that the debtor failed to schedule
as required at the start of the bankruptcy case.
Debts
that arise from fraud or embezzlement, or from the misuse
of funds when the debtor was acting as a fiduciary. For example,
embezzling money from a relative's trust fund over which the
debtor had control.
-Alimony
maintenance and child support.
-Any
debt incurred from willful or malicious injury are generally
Nondischargeable.
-Fines
and penalties are Nondischargeable.
-Most
educational loans cannot be discharged although a hardship
exception allows a debtor to avoid certain educational loans.
-Debts
for luxury goods or services over $1,000 incurred within 60
days of the court's order of relief.
-Debts
for cash advances in excess of $1,000 on Credit cards incurred
within 60 days of the court's order of relief.
-Debts
arising from a judgment incurred from drunk driving.
The
three R's:
The
three R's are actions you take in regards to a particular
debt.
- Redeem:
you pay balance in one lump sum to creditor
- Rescind:
you give back the property to the creditor
- Reaffirm:
make a new court approved contract and repay
You
can make a voluntary repayment plan with a creditor without
the courts approval as long as it is not considered preference.
This may be beneficial to you because unlike the reaffirmation,
you can stop paying at any time and the creditor cannot attempt
to collect. That is because it was solely voluntary
and not a reaffirmation. If you plan on reaffirming, make
sure you want This! Once the court approves it, it is considered
a new debt! Creditors risk a lot by doing reaffirmation
not approved by the courts. Sears was sued for 400 million
over a 300.00 debt! all because they did not get court approved
reaffirmation and then proceeded to collect when the debtor
stopped paying. Although most Debts can be discharged
in a bankruptcy, certain debts are not dischargeable by individuals
in a Chapter 7 liquidation. Other debts that are normally
dischargeable may be denied a discharge, generally because
of the actions of the debtor.
Cross
Collateral Clauses
Many
banks and Credit unions have enacted the CCC- Cross Collateral
Clause. If you are subject to one it must be in your contract
or terms and disclosures and be obviously displayed. A CCC
is a clause that allows the creditor to secure your unsecured
debts with other secured loans that the creditor may hold
for you. A common use of this is if you have an auto loan
and a line of credit or visa. While it does not stand up well
against visa's because of regulation Z, it does stand up against
most unsecured debts. That means if you file bankruptcy and
think you are going to reaffirm the car, the creditor can
also demand that you reaffirm the visa or they can literally
hold your title hostage. This method however, can not be used
with mortgages or the creditor will lose all future rights
to offset the mortgage, should they attempt to offset payments
by enforcing the CC clause.
What
if I filed Bankruptcy and it was dismissed. What is the statute
of limitations, the date last paid before the BK or the date
of the BK petition to promise repayment? Here is an excellent
article that answers just that.
BANKRUPTCY,
DISMISSAL AND STATUTES OF LIMITATION: A LANDMINE FOR THE UNWARY
A
recent opinion issued by the North Carolina Court of Appeals
should serve to remind all creditors of the necessity of vigilance
when a debtor is in bankruptcy. In Person Earth Movers, Inc.
v. Buckland, N.C. App. , 525 S.E.2d 230 (2000), the Court
reviewed a matter in which a contractor performed work which
was billed in a lump sum in August, 1989. The bill was not
paid and in March, 1992, the contractor filed a petition for
bankruptcy seeking protection under Chapter 13 of the United
States Bankruptcy Code. In his petition, the debtor, who disputed
the amount owed, did not list Person Earth Movers as a creditor.
Aware of the bankruptcy, Person Earth Movers went ahead and
filed a Proof of Claim which was allowed by the Trustee.
Over
the course of the bankruptcy, the Trustee made payments totaling
approximately 10% of the debt. The debtor’s bankruptcy
was dismissed in March, 1994 and Person Earth Movers filed
a state court action to collect the debt in December, 1994.
The trial court denied the debtor’s motion to dismiss
the matter. The motion was based on the affirmative defense
that the statute of limitations within which the action could
be brought had run. After an award for Person Earth Movers,
the debtor appealed, based upon the trial court’s denial
of the motion to dismiss. The Court of Appeals agreed with
the debtor and ordered that this matter be dismissed, i.e.
no award for Person Earth Mover.
So,
what does this mean for creditors? It means that a creditor
has three years in which to bring an action on a contract,
unless the contract is signed under seal. The clock starts
ticking the date the contract is breached. If a debtor files
for protection from the bankruptcy court, then the clock essentially
stops ticking, a sort of suspended animation. The key is that
if the debtor does not complete the bankruptcy and is dismissed,
as opposed to having the debt discharged, then the clock instantly
begins ticking again, at the precise point in time where it
stopped. Using Person Earth Movers as an example, the breach
occurred the day the bill was due and went unpaid (August,
1989). The clock ticked up to the date the bankruptcy was
filed - the Court computed this as being two years and 267
days. Simple math tells us that 98 days remained on the clock
at the time the bankruptcy was filed.
When
the debtor’s bankruptcy was dismissed on March 4, 1994,
the clock began to tick again. In mid-June, the statute of
limitations, the time in which the creditor could bring the
lawsuit expired. As noted earlier, the creditor did not bring
the action until December 1, 1994. The primary argument the
creditor raised in attempting to overcome the statute of limitations
problem was that the payments made by the Trustee served to
reaffirm the debt and start the statute of limitation clock
again. The Court rejected this argument.
Reaffirmation
requires a voluntary action by the debtor which essentially
serves as an admission that the money is owed. The Court determined
that the debtor has no control over what debts the Trustee
decides to pay and therefore, the debtor cannot be said to
have reaffirmed the debt. The Trustee is not an agent of the
debtor. Therefore, there is no reaffirmation by the debtor
and the statute of limitations is not re-started. The moral
of this story is, “always monitor bankruptcies carefully
and be very aware of the statutes of limitations”. It
is not all that unusual for a Chapter 11 or Chapter 13 bankruptcy
to be dismissed, so to preserve a claim, creditors must be
vigilant in watching for notices of dismissal and know the
difference between a “dismissal” and a “discharge”.
Contributed
by James R. Vann VANN
& SHERIDAN, LLP Attorneys at Law 1720 Hillsborough
Street, Suite 200 (27605) Post Office Box 2445 Raleigh, NC
27602-2445 Telephone (919) 510-8585 Facsimile (919) 510-8570©
2003
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