Arizona Bankruptcy Lawyer Blog

Some debts will be discharged in a chapter 7 bankruptcy case UNLESS the creditor files a complaint and obtains a court order that the debtor will remain responsible for the debt after the case is over.

The debts that are not dischargable if the creditor successfully challenges discharge are typically:

1. Debts that arise as a result of a fraudulent action. This includes:

a. Debts that are the result of an intentionally fraudulent act in which the creditor relied on the deceit in it's extension of credit. Examples:

- Debtor obtained the loan and promised to pay back when had no intention to do so (this is common i.e. borrowing money against a line of credit or credit card when the debtor knows they are insolvent and unable to pay and/or is going to file for bankruptcy)
- Debtor borrowed an item and used it as collateral for a loan
- Debtor wrote a check for an item, stopped payment on the check and kept the item
- Debtor wrote a check when funds in the account were insufficient then promised the seller
the check was good

b. Recent credit card charges that were used to buy luxury items.

- The law presumes...that a debt is fraudulent if it was more than 550.00 from any particular creditor for a luxury good or service within 90 days prior to filing the bankruptcy

c. Debts incurred based on a false written document about financial condition. Requirements:

- The statement must be in writing obviously.
- It must have been "material" i.e. a very important factor in the creditors decision to extend
credit. (overstatement of income is a common material false statement)
- The false statement must relate to financial condition
- There must have been an intent to deceive the creditor
- The creditor must have reasonably relied on the statement

Continue reading "Debts not discharged in a chapter 7 bankruptcy if the creditor objects" »

In a chapter 7 bankruptcy the debtor is able to "discharge" or cancel the obligation to pay certain debts. These debts typically include:

credit card
medical bill
personal loan
deficiency balances car repossessed
deficiency balances other personal property repossessed
deficiency balances on home foreclosure
certain tax debt
student loans for which the debtor can prove a "hardship"

The real question is, what debt is going to survive the debtor's attempt to discharge in the chapter 7 bankruptcy?

Continue reading "Arizona Chapter 7 Bankruptcy - Which Debts are "discharged"?" »

The Ninth Circuit Court of Appeals, has decided the issue of whether a reaffirmation agreement is necessary in bankruptcy in relation to personal property.

Prior to the 2005 changes to the bankruptcy code that resulted in what is now known as "bapcpa", a debtor could "retain and pay" or "ride through" on it's car loan as long as he stayed current on the car payment.

The creditor with the security interest in the car was left without any legal obligation to sue on, should the car be surrendered or repossessed and a deficiency balance existed.

No reaffirmation agreement was typically necessary. (read more about what a reaffirmation agreement is here)

Not signing a reaffirmation agreement was good for the debtor because he obtained the best of both worlds as a result. i.e. Keep the car and make the payment, but not be liable on any deficiency balance should he not be able to afford the car down the road and after surrender.

Many attorneys felt as a result, that advising a client to sign a reaffirmation agreement with the creditor on the car loan inside of the bankruptcy case was malpractice. Especially if the car was upside down, i.e. it was worth much less then what was owed on it.

If the reaffirmation was signed unnecessarily and the debtor lost the car down the road he would then owe what sometimes amounted to a large deficiency balance nullifying some of the "fresh start" benefit gained in the bankruptcy case.

Continue reading "Ride Thru, Reaffirmation Agreements and the Ninth Circuit Court of Appeals" »

If you file for bankruptcy, all collection activity by creditors must stop with a few exceptions. The part of the law governs this is called the "automatic stay".

So if a creditor is trying to collect from your or sue you based on a credit card, medical, breach of contract or other debt, they must stop all activity against you once you file.

They can't file a lawsuit, continue in a lawsuit, record a lien, report the debt to the credit reporting agency or seize property without permission from the court.

What happens if the creditor does continue with collection activity after notice of the bankruptcy has been received? They have likely violated the automatic stay rule and can be sued by the debtor. They may also have to pay damages and attorney fees.

I always suggest that if a creditor who is barred from collection by virtue of the bankruptcy filing continues to contact one of my clients, that the client or our office provide the creditor one more "notice" of the bankruptcy prior to suing. This notice usually goes out by phone and/or via a certified letter.

Most creditors "get the picture" and discontinue the contact.

Unfortunately, some continue. A lawsuit is then appropriate and often even necessary.

There are exceptions to the list of creditors who are completely barred from collection activity which will be discussed in further posts.

If you are in a bankruptcy and a creditor continues to contact you even after you are sure they know about the bankruptcy, you will want to speak to your attorney about whether a lawsuit is a good idea.

Statistics from the U.S. Bankruptcy Court of Arizona show that there was a substantial jump in filings between 07 and 08. Statewide total filings were 10,570 in 2007 and 19,147 in 2008.

It is widely believed that filing numbers will continue to increase at least for the next few years.

While many of these filings are the result of consumer overspending, a number are also the result of failed businesses, lost jobs, tax debts, rental properties that have lost value and unexpected medical expenses.

Small business is the backbone of our economy. There are literally millions of small businesses in the United States and at any given time, a large percentage of them are failing.

Many Arizonans with small businesses have contacted me when faced with serious business related debt to ask whether a creditor(s) can sue them personally for debts incurred to create and maintain the business.

A small business owner's personal liability usually is determined by whether the debt has been personally guaranteed. I.E. did the business owner borrow the money in his or her own name, or did they personally promise to pay if the business couldn't. If so, a lawsuit and collection can follow.

The related question is whether the "structure" of the business provides any protection for the small business owner?

Sole Proprietorship - The most common business structure

If you are what is commonly known as a "sole proprietor", the business is you and you are the business. You have probably personally signed off on every loan, credit card debt, lease etc. If so, you can be sued personally and your personal assets are up for grabs.

General Partnership - provides no protection

Partners in this type of structure are personally liable for the debts of the partnership, all of it. Worse yet, ANY one partner can tie the entire partnership to a loan. If you are a partner in a general partnership in Arizona and the whole project goes "south", you may be in trouble and not even know how much.

Corporate entities and Limited Liability Companies

These types of entities protect your personal assets and income from the business creditors not personal creditors as described above. By statute, the shareholder or member of the LLC has limited personal liability.

I find that most small business owners who have organized the business as an LLC or Corporate entity, have also provided the various creditors, landlords etc. a personal guarantee in order to borrow the money or obtain the lease. If you have done this, then the business creditor can go after those assets and your income after suing you and obtaining a judgement.

So, if you are a sole proprietor, a general partner or have otherwise personally guaranteed debt or lost the protection of your corporate/llc umbrella, what do can you do to deal with the debt?

1. Debt Negotiation

Most creditors will consider reducing the amount they are paid and forgiving the rest. Even business creditors. I find that negotiating serious business debt doesn't work well unless the "debtor" has some present asset or cash with which to negotiate. There are other negatives as well. You can read about the pros and cons of negotiating debt in more detail by reading this entry, debt negotiation - pros and cons.

2. Bankruptcy

Any individual that owes debt as a result of a personal guarantee, general partnership debt, etc can file bankruptcy (Chapter 7, 13 and even 11 if necessary) in order to protect their exempt assets and future income.

The business as a separate entity may or may not need to file a bankruptcy. Corporation, LLCs and partnerships are legal entities and can only file a chapter 7 to liquidate and close shop or chapter 11 to "reorganize". No chapter 13 bankruptcy is available, and no "discharge" of the debt is available to the corporate entity.

Reorganizing under chapter 11 will only make sense if the business may become viable as a result. Chapter 7 liquidation may only be necessary for the corporate entity if a creditor is about to take a business asset that could be used to pay a personal priority debt, bankruptcy trustee involvement makes sense to help in winding down the business within the protective arms of the bankruptcy code, or if the bankruptcy filing would cause creditors to "close the file" and leave officers and shareholders alone.

If personal bankruptcy is the option, then typically the choice will be between a chapter 7 and a chapter 13.

In a chapter 7 bankruptcy the non exempt assets, or assets not protected by state law from collection by creditors are taken by the bankruptcy trustee, liquidated and paid out to creditors in varying priorities. Most debt is then wiped away.

In a chapter 13 bankruptcy, a payment plan is proposed. That plan calls for you to pay part or all, (usually a small part) to your creditors in monthly installments for a three to five year period. Typically, most non exempt assets are protected for liquidation as a result. Most other debt is then wiped away.

If the majority of your debt as a result of the failed business is "priority" debt, then the benefit of bankruptcy may be significantly reduced.

If you have credit card, medical bill debt, or other unsecured personal loans that are so large you can't pay them off in a reasonable amount of time, you will likely end up using one of the following options to deal with it.

1. Borrow your way out

In the recent past, most with serious unsecured debts would turn to their home in the form of a home equity line or second mortgage. This was a quick fix that usually provided a lower monthly payment to service the same amount of debt. The obvious problem now? Loans are more difficult to come by.

The other problem? The new lender will require that the home be pledged as security for the loan. Once that happens, the debt is here to stay. The borrower will eventually pay in full or lose the home. These loans are almost always of the higher rate and higher cost variety as well.

2. Non Bankruptcy Payment Plan - Consumer Credit Counseling

Many credit providers will work out a payment plan with you either directly or through a "credit counselor". These counselors or agencies gather your income and budget information, help you get organized, and propose a new payment arrangement to each creditor. The proposal typically consists of a reduction in the interest rate and a lower monthly payment. Problems do exist, especially where the debt is so high that no "payment plan" will ever catch you up.

For those with serious debt, the debt usually never goes away, the credit report continues to reflect late payments, and at some point a collector gets involved again.

If you are going to engage a credit counselor, make sure that 1. They are reputable 2. They are not doing something for you that you couldn't do yourself and 3. That the proposed plan is "doable" and will pay off the debt in full in a reasonable amount of time.

3. "Negotiate" your debt

Many unsecured credit card lenders will reduce the principal balance and accept a sum smaller then they are owed to "settle" the account. "A bird in the hand" as they say.

Once you have fallen behind on the debt, the creditor or collector has a "formula" that tells them how much they will accept to settle the account at any given time. If you are a bankruptcy candidate or if they believe that for some other reason they may end up getting less than they would like, they may adjust the amount downward.

The willingness on the part of these credit card companies has led to the growth of a horde of so called "professional" debt negotiators. You hear the ads on TV, Radio and if you listen to enough cable news, you start to hear them in your head.

Most of these companies include in their "pitches" things that aren't necessarily true. Things that lead you to believe that these credit card companies must allow you to settle your debt or that they have some secret that allows them to settle your debt for less than anyone else.

The truth however is a little different as follows:

A. You can probably do on your own what most "debt negotiation professionals" are able to do for you.

In order to have a shot at convincing the lender to settle for less than the standard, I find that you need to be a good candidate for bankruptcy and the creditor must believe that to be true, and you need to have the cash in your hand when you make the settlement offer.

If these two things aren't true, you are simply relying on the "good graces" of the creditor to determine the amount of settlement. That is all a "debt negotiation professional" does i.e. rely on good graces and a slick marketing campaign.

B. If you begin to make payments monthly to the "debt settlement professional" you will likely continue to get collection calls and you may even be sued before you come up with the funds to settle all the debts.

Monthly payments to the "debt negotation professional" does not stop the clock from ticking, nor does it stop the creditors litigation timeline. There is no secret word that the "professional" uses to magically stop the collection. Many people with serious debt learn this the hard way.

C. "Debt Settlement Professionals" are very expensive and you are vastly overpaying for what you get.

In essence, you are paying the company to set up an accounting system to collect and track your money. When they are paid the estimated amount for their fee and the estimated amount needed to settle, they make some phone calls. If you are sued in the meantime, they "earned their fee" for magically keeping the debt collector from suing you until then.

I have reviewed dozens of the contracts they use, and know that most people taken in by these operators pay a "set up" fee, a monthly fee and a percentage of either the total debt or the amount saved. For a debtor with $100,000 in credit card debt who settles the debt for 50%, or $50,000, the overall fee is usually $12,000 to $20,000.

Before you consider paying these types of fees, contact your local bankruptcy attorney. Ask him or her to put together a bankruptcy case if you are a good candidate for bankruptcy. Then ask them to use it and your funds as leverage to negotiate with your creditors on an hourly basis.

You will pay far less and likely get a much better result. One governed by Arizona State Ethics Rules for Attorneys.

D. Forgiven debt is taxable

Unless you fall under the "insolvency" exception, you will have to treat the forgiven portion of the debt as income on your tax return. Bankruptcy is the other exception.

E. While you are waiting to save the money to settle your credit score is being destroyed

Most creditors don't seem to be interested in settling unless you are late on your payments. Most people who engage the "professional debt negotiator" stop making payments and never start again. The plan falls apart, they still have the debt and the 10 months of late pays on the report. Thanks.

4. File for Bankruptcy

Filing for bankruptcy is usually the most comprehensive and effective method for dealing with serious debt. Bankruptcy can do the following:

A. Stops Debt Collection by virtue of the federally mandated "automatic stay"
B. Provides a means to save a home from foreclosure
C. Provides a means to save your car from repossession
D. Provides a potential means to reduce secured debt amounts
E. Discharges or wipes away most if not all of your consumer debt

Chapter 13 bankruptcy, allows you to pay what you can "afford" over a set amount of time to your creditors.

In almost every instance the amount paid in the chapter 13 is far less then a debt settlement negotiation will require you to pay.

There are downsides. Bankruptcy carries a stigma. It has become a bit more difficult to qualify to file, the workload to file has increased, it is a matter of public record and stays on the credit report for 10 years.

My clients go through a rigorous analysis process to determine which of the options described above is the best.