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Discharge is often the last thing a bankruptcy client sees or thinks about their case, but it is not the end of the bankruptcy case. This is often a confusing aspect for clients. We’ll explain here and try to simplify the two and explain what the distinctions are.

11 United States Code § 101 is often helpful in defining terms in the bankruptcy context. This section is the “Definitions” section of the Bankruptcy Code. Regretfully, the terms “discharge” and “closure” are not set forth in the definitions section. So what do they mean in the day to day lives of those who choose to file for bankruptcy relief?

On the United States Courts’ website the answer to the question “What is a discharge in bankruptcy? is answered this way:

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Thousands of consumers have been deceived through telemarketing schemes designed to sell phony mortgage assistance and debt relief programs to already cash-strapped citizens. In 2012, the FTC filed complaints against several telemarketing companies alleging that they pitched programs that would supposedly help consumers in financial distress pay, reduce or restructure their mortgage and other debts. Among other things, the reported schemes violated the FTC Act, the Commission’s Telemarketing Sales Rule and the Mortgage Assistance Relief Services Rule (MARS Rule) which prohibits mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they deem acceptable.

According to the FTC, the FTC’s complaints alleged that in addition to misrepresenting the likelihood that consumers would obtain a mortgage modification, the defendants falsely represented that consumers who did not receive a modification would receive full refunds, falsely represented that they were affiliated with the U.S. government, and falsely claimed to provide legal representation to consumers. Also, in violation of the MARS Rule, the telemarketers allegedly told consumers to stop communicating with their lenders, and failed to make Rule-mandated disclosures intended to ensure that consumers understand transactions with mortgage-assistance relief service providers and their rights under the Rule.

If you are experiencing financial difficulty, you may be tempted to use a debt relief company to help take care of your bills. Often times, settling with your creditors is a good alternative to filing bankruptcy. However, before you hire a company to help with your debts, you should first understand the differences in services that debt relief companies claim to offer, as well as the potential risks involved.

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Filing for bankruptcy is a serious decision for anyone, but is often necessary in order to preserve your family and obtain a fresh start. As part of the process you must list all your assets and detailed financial information on the papers you file. Your attorney guides you through the bewildering paperwork that must be filed to make sure you get your discharge. However, you must be very honest with your attorney and tell him (or her) everything. If you do not list everything or try to hide something, it could result in a criminal bankruptcy conviction and jail time. This is just what happened to a Real Housewife of New Jersey.

Teresa Giudice, the star of “The Real Housewives of New Jersey” was sentenced on October 2, 2014 to 15 months in prison and fined $8000.00 for bankruptcy fraud. When she filed with her husband, they concealed on the bankruptcy papers filed the fact that they owned businesses, had income from rental property, and concealed Teresa Guidice’s income from the Housewives show. At her sentencing, the U.S. District Judge berated her stating,

“I’m not sure you respect this court. I’m not sure you respect the law. On the one hand you are a savvy businesswoman who writes successful cookbooks and markets herself so well. On the other hand you say you didn’t know how to cooperate. It defies logic. In the eyes of the law, it doesn’t matter who you are.”

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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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One issue which comes up periodically when contemplating the filing of a bankruptcy is whether to purchase a new car prior to filing the case. Most chapter 7 debtors say that they need to purchase a car before the filing of the bankruptcy because they feel their credit will not allow them to purchase a car after the discharge. Most chapter 13 debtors say that they need a new car now, so they can survive the five year chapter 13. Generally, our experience has been that chapter 11 debtors rarely express these concerns. In each case the debtor intends to pay for the vehicle and retain it.

There is an Arizona statute, A.R.S. § 28-2133 which provides for the procedures relating to the recordation of a lien on a vehicle title. Essentially, what the statute means is that a creditor must perfect its security interest within 30 days of a new buyer taking possession of a vehicle, or the security interest may be set aside. The full text of the statute is as follows:

28-2133. Index and filing of liens, encumbrances or instruments; constructive notice

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Private student loans are currently nearly impossible to discharge in bankruptcy. Legislation proposed by Sen. Tom Harkin (D-Iowa) as part of a larger higher education package would allow private student loans to be discharged in bankruptcy. Reform to the current student loan bankruptcy laws has to be addressed due to the size and scope of the debt amounts current student loan holders have.

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The original motivation for reigning in dischargeability of student loan debt centered around preserving government loans, with proponents of reform painting bleak scenarios about federal educational aid drying up if the discharge status quo carried the day. The first student loan reforms took place in 1976 as an amendment to the Higher Education Act and required that debtors wait five years from the beginning of their repayment period, or demonstrate undue hardship, before their student loans were eligible for discharge in bankruptcy. The five year bar was later extended to seven years and in 1998, the laws were changed so that governmental student loans could never be discharged absent a showing of undue hardship. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made all educational loans, public and private, nondischargeable absent a showing of undue hardship (an impossible standard to meet as interpreted by courts across the country).

With one-in-three students loans considered delinquent and often affecting a student’s ability to make purchases in the future, the bill could offer much-needed reprieve for college students left with mountains of both federal and private student loans. However, the likelihood of the bill moving forward this session is slim, the WSJ reports.

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One issue which comes up when contemplating the filing of a bankruptcy is the homestead exemption. Normally the issue is fairly straight forward. Arizona’s Homestead Exemption, ARS. 33-1101provides: Homestead exemptions; persons entitled to hold homesteads

A. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:

1. The person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.

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As followers of this Blog know, Chapter 7 is the most common type of bankruptcy. This is the bankruptcy that discharges your debts. In exchange for that, a trustee is appointed who liquidates certain assets to pay your debts. However, you get to keep other items, i.e. the trustee cannot take them. These include your home with equity of up to $150,000, your car with equity of up to $6000, most household goods and appliances, a computer, and retirement plans.

A Chapter 13, on the other hand, is a reorganization bankruptcy where you pay your disposable income to the trustee for 3-5 years in order to obtain your discharge. Debts do not necessarily have to be paid in full. Disposable income means the income you have left over after paying your reasonable living expenses such as house payment, food, utilities etc. Paying $1000 per month to play golf would not be a reasonable expense.

When looking at these 2 types of bankruptcies, many clients ask me why someone would ever file a Chapter 13? After all, who would want to make payments for 5 years in a Chapter 13, when there are no payments in a Chapter 7 and you get your discharge in 4-5 months? The answer is that you can accomplish things in a Chapter 13 that you cannot do in a Chapter 7. Here are some of the reasons someone would file a Chapter 13 rather than a Chapter 7.

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During our initial bankruptcy consultation we go out of our way to advise potential clients that they will likely be required to turnover income tax refunds to their bankruptcy trustee. Many potential clients choose to delay the filing of their bankruptcy until they have filed tax returns, and received and spent tax refunds. Clients who retain our firm are again reminded of the requirement to turnover tax refunds to the Trustee.

However, sometimes the case is filed and the client collects and spends the tax refunds without consulting counsel. The usual explanation is “I am bankrupt, I needed the money for… insert a compelling, important reason.” When the requirement is again brought to the client’s attention we sometimes hear “So what? What can the trustee do about it?” This is an important question, and the answer is of critical importance.

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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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