Articles Posted in Chapter 7 Bankruptcy

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A Chapter 7 bankruptcy allows consumers overburdened by credit card and medical debt to discharge the debt and get a fresh start in life. In exchange for wiping out the debt the court appoints a trustee who takes certain assets you own and sells them to pay your creditors. However, the trustee cannot take certain property you need for living, e.g. a house you live in with $150,000 equity, a car with $6,000 equity, household goods, computer, retirement benefits and items that do not exceed a certain value, such as wedding rings, watches, bicycles, milk cows, poultry, and life insurance, to mention a few. However, many debtors try to use cut rate attorneys to file bankruptcy, thinking that all lawyers are the same, hoping to save a few dollars in attorney’s fees. Unfortunately, there are lawyers out there who claim to be bankruptcy lawyers who do not know what they are doing and just charge a small fee and then abandon their clients. Here are some disasters I have witnessed in my 36 years of practicing law caused by clients’ lawyers whose cheap fee seemed too good to be true:

1. The client had a car accident lawsuit pending when he filed bankruptcy. His attorney told him it was exempt from the trustee. It was not. The trustee took it over and settled it for $240,000, none of which went to the client.

2. Client lost his house with $110,000 equity. While this would have been exempt under Arizona law, because the client had not lived in Arizona for 2 years, the trustee was allowed to use North Carolina law which only allowed a $20,000 exemption. His attorney did not know this.

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Just because you are eligible to file a chapter 7 bankruptcy doesn’t mean you are entitled to a discharge of debt. The following is a list of the major parts of Bankruptcy Code Section 727(a) which describes the requirements and limits on receiving a discharge.

1. You must be an individual

2. You can’t with an intent to hinder, delay or defraud a creditor or officer of the bankruptcy estate transfer, remove, destroy, mutilate or conceal, or allow someone else to do so any property that you own within one year before the bankruptcy filing date or after the date of filing.

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Any human, who resides, is domiciled, has property or a place of business in the United States, may file a Chapter 7 bankruptcy in the U.S. Bankruptcy Court as long as:

1. he or she was not a debtor in a bankruptcy case that was dismissed within 180 days prior to the filing date for “willful failure” to abide by orders of the court or to appear before the court in proper prosecution of the case. (didn’t cooperate)

2. he or she did not request and obtain a voluntary dismissal of a bankruptcy case following the filing of a request for relief from the automatic stay.

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These are the types of debts that are discharged in a chapter 13 bankruptcy that are NOT dischargeable in a chapter 7 bankruptcy:

1. Debts that weren’t or couldn’t be discharged in a previous case.

2. Court Fees

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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

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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?
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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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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.

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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.

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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.