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Recent Blog Posts
"Property of the Estate" May Include Life Insurance Proceeds
The 180-day rule applies to life insurance proceeds in a Chapter 7 case. But life insurance proceeds are often exempt, or protected.
Last time, we explained the 180-day rule about inheritances. If within 180 days after you file bankruptcy you "acquire or become entitled to acquire" an inheritance, then the property being inherited is "property of your bankruptcy estate." It’s counted as if it was your property at the time you filed, even though it wasn’t. (See Section 541(a)(5)(A) of the Bankruptcy Code.)
That means to whatever extent the inherited property isn’t covered by a property exemption, or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.
That 180-day rule also applies to life insurance proceeds, our topic today. (See Section 541(a)(5)(C) of the Bankruptcy Code.)
Introducing Fraudulent Transfers
"Fraudulent transfers" have similarities to "preferences." They are both worth understanding because they can cause unnecessary hassles.
Asset Timing in Bankruptcy
Your Chapter 7 trustee usually mostly focuses attention on determining whether any of your assets are not "exempt." You get to keep all exempt assets. If there are any assets that are not exempt, the trustee has the right to take them, liquidate them, and pay the proceeds to your creditors. However, in most consumer Chapter 7 cases all the assets are exempt so the trustee takes nothing. The debtor gets to keep everything.
In this process, the trustee is only interested in what you own at the moment you file your bankruptcy case. This timing gets quite precise. For example, what counts is the amount of actual cash you have on hand at that moment of bankruptcy filing. Same thing with the balance in your checking account(s) at that moment, and all your other assets. The amount of cash or money in your accounts the day before or the day after usually doesn’t matter. What matters is what you had at the moment of filing, with these and all your other assets.
The Judge's Ruling in a Dischargeability Proceeding: an Example
In our example of the adversary proceeding about whether a debt gets discharged, here is the bankruptcy court’s ruling on the matter.
This is the last of six blog posts in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last five posts about all the steps in the "adversary proceeding" so far, including the trial itself. In the last one, lawyers for the creditor and the debtor gave their closing arguments. Today the judge announces and explains her ruling.
The Judge’s Opening Remarks
At issue in this adversary proceeding is whether the debtor, Marshall, can discharge his debt to the creditor, Heather. The loan was made five years ago for $35,000; its current balance is about $21,000. The purpose of the loan was for Marshall to start a car repair business. Heather is Marshall’s aunt. At Heather’s request, Marshall completed a loan application and signed a promissory note. As she instructed, after completing and signing these documents Marshall delivered them to Heather’s lawyer. The loan was not secured by any collateral.
Unexpired Leases and Other Executory Contracts in Bankruptcy
Unexpired leases and executory contracts can continue on after you file your bankruptcy case. What are they and what makes them special?
Debt Contracts
Most debts arise out of a written contract. You sign a credit card application agreeing to pay according to the stated terms. Go to a new doctor and you sign a form agreeing to pay for all services to be provided. Buy furniture, appliances, or electronics at a retail chain store after agreeing in writing to pay for the goods purchased. Buy a vehicle and sign the lender’s loan document. Buy a home and sign dozens of mortgage documents.
In all these situations the creditor provides you money, goods, or services which you agree to pay for. At that point the creditor has finished performing its obligation. Now you are supposed to perform your side of the bargain—to pay the debt.
Executory Contracts and Unexpired Leases
Statutory Liens
Statutory liens on your home cannot be gotten rid of in bankruptcy like judgment liens often can. So it’s important to know what they are.
Statutory Liens Are Rare, Sort of
There’s a good chance you don’t have any statutory liens on your home. But you may.
- Has the IRS or your state recorded a tax lien against your home for unpaid income taxes?
- Have you had a dispute with a roofer or some other kind of building contractor resulting in a contractor’s or mechanic’s lien?
- Are you late on monthly dues or special assessments to your homeowner association, resulting in a lien against your condo?
These are the most common kinds of statutory liens on your home.
What Is a Statutory Lien?
The U.S. Bankruptcy Code says that “the term ‘statutory lien’ means [a] lien arising solely by force of a statute on specified circumstances or conditions.” (Section 101(53).) A statutory lien is essentially created automatically, by operation of a statute, without further action by a court.
Objecting to a Proof of Claim to Defeat a Creditor
If your liability dispute with your creditor spills into your Chapter 13 case, the bankruptcy court may be a good forum to fight it out.
Our last three blog posts were about objecting to a creditor’s proof of claim in a Chapter 13 case. Today we look at situations when this is the most important part of your case.
Bringing a Liability Dispute to the Bankruptcy Court
It’s not unusual that a dispute with a single creditor forces a person into bankruptcy. Often it’s just one otherwise ordinary creditor which is more aggressive than the others, suing you ahead of the others, and then garnishing your paycheck or bank account.
Sometimes it’s not just any extra-pushy creditor, but rather one that you’ve been fighting for quite a while. The fight you are having with that creditor may be the main reason why you filed bankruptcy.
Maybe you were in a serious vehicle accident, and did not have enough insurance coverage. You are being accused of causing the accident but don’t believe you were its primary cause. Because of major injuries to others you potentially owe hundreds of thousands of dollars.
Objecting to a Creditor's Proof of Claim in Chapter 13
If you object to a creditor’s proof of claim in your Chapter 13 case, and prevail in that dispute, you pay nothing on that debt.
Our last blog post was about what happens to creditors who fail to file a proof of claim on time in a Chapter 13 "adjustment of debts" case. The creditor’s debt receives no payment through your Chapter 13 plan, and the debt is discharged—written off.
There’s another way to achieve this same result. Your bankruptcy lawyer can object to a creditor’s proof of claim if you don’t owe the debt as stated.
If the Creditor Does Not Respond to the Objection
Creditors sometimes file proofs of claim that are clearly not legally valid. Your debt may no longer be collectable because the statute of limitation has expired. An ex-spouse may owe the debt on which you’re not liable. Someone with the same name as you may owe the debt instead of you.
In these and similar situations your lawyer would likely file an objection to the proof of claim. Otherwise the legally invalid debt would be treated as a legitimate one. That illegitimate claim could share in whatever you are paying other similar debts under your Chapter 13 payment plan.
Potentially Pay Nothing to Most Creditors in Chapter 13
In some jurisdictions you can pay nothing to your "general unsecured" creditors, if all your money goes to paying higher priority ones.
We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13. We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.
A Conventional Chapter 13 Plan
The U.S. Bankruptcy Code’s official name for Chapter 13 is "Adjustment of Debts of an Individual with Regular Income." In most cases that "adjustment" means you must pay something to all or most of your creditors.
Here’s the way it usually works. You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining "disposable income." That remaining amount is usually what you pay into your Chapter 13 plan each month.
In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your "general unsecured" debts get what’s left over.
The Financial Effect of Surrendering Collateral in Chapter 13
If you are concerned that in a Chapter 13 case a debt resulting from surrendered collateral will cost you more, often it won’t.
Secured Debts in Chapter 13
In a Chapter 13 “adjustment of debts” case you have the option of keeping or surrendering collateral.
Whether it’s your home, your vehicle, or any other collateral, Chapter 13 gives you powerful tools for keeping that collateral.
But in spite of that, sometimes the best option is still to surrender that collateral. You may have overextended yourself buying a vehicle whose payments and insurance you can no longer afford. Or you’ve learned that it’s a lemon and not worth the constant repair costs. Or you bought a home that you’re so far behind on that it’s not worth the cost and effort to catch up, even if Chapter 13 gives you a lot of time to do so.
Secured Debts Turned into Unsecured Ones
Secured Creditors' Proofs of Claim in Chapter 13
If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan.
Secured Debts
A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.
Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)
Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien. Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.
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