Articles Posted in Bankruptcy Cases

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When a debtor petitions for bankruptcy protection, the Court automatically issues a protective order sometimes referred to as an “automatic stay.” The automatic stay prohibits creditors from continuing collection activities such as calling debtors, mailing debtors or proceeding with lawsuits against debtors. In fact, creditors are required to stop all forms of contact with debtors after a bankruptcy petition has been filed.

At the conclusion of a bankruptcy proceeding and after a debtor has received a discharge of his or her debts, the Court orders a discharge injunction. This means that creditors that were listed and noticed in the bankruptcy proceeding are forever barred from collecting the discharged debt. If a creditor violates the discharge injunction, the bankruptcy court has jurisdiction to hear the matter and issue sanctions against the offending creditor if warranted.

Wells Fargo Bank N.A. was ordered to pay $69,500 to a debtor for repeated violations of the discharge injunction in April, 2015. Sometime after the debtor received a discharge in his Chapter 7 bankruptcy, Wells Fargo began calling the debtor regarding a debt that was included in the debtor’s bankruptcy. Wells Fargo made 139 attempts to collect the discharged debt. The debtor’s attorney contacted Wells Fargo regarding the debtor’s bankruptcy and discharge and followed up with a letter outlining Wells Fargo’s collection efforts over a period of two years. Wells Fargo acknowledged the attorney’s letter through a letter sent directly to the debtor stating that “as you were the only person who signed the Note, Wells Fargo holds you financially responsible for repayment of the loan.”

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The Ninth Circuit Bankruptcy Appellate Panel recently made a ruling that will protect business owners in bankruptcy from what has long been an injustice. The Court ruled in Sachan v. Huh, 2014 WL 936803 that debts that are the result of an agent or employee’s fraud can be discharged unless the debtor participated in the fraud. Here is why this ruling is important.

I filed a bankruptcy case some years ago for a client who owned 3 convenience stores in Kingman, Arizona. Unfortunately, the bad economy forced him to file bankruptcy due to the large business debts regarding the stores. Normally in a Chapter 7 bankruptcy he would have received a discharge of all of his debts, which would have allowed the client and his family a fresh start. But in this case there was a problem.

In bankruptcy, fraud debts cannot be discharged. This makes sense, as bankruptcy is set up for the poor but unfortunate debtor who incurs debts that he honestly cannot pay. If the debtor has debts obtained through fraud (Ponzi schemes, lying on loan applications, stealing money from his employer), he should not be able to escape these debts in bankruptcy. This is what happened to my debtor in his case. He had a manager who ran one of the stores. Unbeknownst to my client, the manager was ripping off the gasoline company. The manager would order gas for the pumps, divert the gas after delivery to his own personal tanks so he could sell it himself, and then the manager failed to pay the gas company. The manager then skipped town, leaving my client with an unpaid $100,000 bill to the gasoline company.

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When a chapter 13 case is filed, a “plan” must be proposed that tells the court and creditors how each debt is going to be treated i.e. paid or not, how much and when.

How each type of debt is treated, depends on the bankruptcy code and case law. Generally, a chapter 13 filer must have enough income to pay the following in full:

1. Living Expenses
The law assumes that you need a certain amount of money to pay for your “reasonable” living expenses. What is considered to be reasonable is litigated around the country each week. In Arizona, your reasonable living expenses typically includes: mortgage, food, utilities, insurances, out of pocket medical care costs, upkeep on home, hoa dues, property tax, child care, spousal maintenance, daycare, costs related to maintaining your small business, or related to your employment, gas and upkeep on car, laundry, mandatory withholdings at work, car lease and a few other items. These items are paid outside the plan of course.

2. Car Loan
Car payments are paid through the chapter 13 plan as part of the plan payment. The plan will often change the treatment of the car loan creditor. The law often allows for the debtor to pay less in principal and or interest and the length of the loan payout is either shortened or lengthened.

3. “Priority” Debt
Certain taxes, child support, spousal maintenance are the most common debts that must be paid in full through the plan.

4. Tax Lien
If a taxing entity has properly recorded a tax lien and the debtor has assets with value, the tax lien will have to be paid through the plan with interest.

5. Mortgage Arrears
If behind on a home loan, the amount that is owed will be paid as part of the plan payment and any foreclosure will be stopped while the payments are made.

6. Value of Non Exempt Assets
If the debtor has a asset that is not considered “protected” under state law, in order to create a viable chapter 13 plan, unsecured creditors must be paid it’s value during the plan. If the debtor has an antique jukebox worth 10000.00, these creditors will need to be paid 10000.00 during the plan or give the jukebox up to the chapter 13 trustee for sale and distribution as in a chapter 7 bankruptcy.
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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.
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