Monthly Archives: July 2013

What Happens if Someone Tries to Collect on a Debt Discharged in Bankruptcy?

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This question comes up all the time. What happens if someone tries to collect a debt that has been discharged in a bankruptcy case? There are many scenarios in which someone may try and collect a debt that has been discharged in bankruptcy. Maybe the creditor received notice and then mistakenly did not update the account records? Maybe the debt was transferred or assigned to a collection agency that does not know that a bankruptcy case was filed? What can be done about it was addressed in Barrientos v. Wells Fargo Bank (In re Barrientos), 663 F. 3d 1186 (9th Cir. February, 2011).

In Barrientos the bankruptcy filer noticed that a credit reporting agency was reporting a debt for Wells Fargo was still owed. Barrientos disputed the debt and Wells Fargo verified the debt in violation of the order of discharge and Section 524 of the Bankruptcy Code.

So what can be done here? In this case the bankruptcy attorney filed an adversary proceeding to sue Wells Fargo for an injunction, declaratory relief and contempt for violation of the order of discharge seeking damages including attorney’s fees and costs. The 9th Circuit in Barrientos held that the proper remedy is to seek an order of contempt from the bankruptcy court and not file an adversary proceeding. Section 524 of the Bankruptcy Code does not provide a private right of action for damages. The normal remedy for the violation of a court order is to hold the violator in contempt of court. The discharge order is no different. The discharge order signed by the court permanently enjoins a creditor from every collecting on the debt again.

Federal Rule of Bankruptcy Procedure 9020 provides that FRBP 9014 governs motions for contempt by trustee or a party in interest. So your bankruptcy lawyer needs to reopen the bankruptcy case and file a motion for contempt if a creditor violates the order of discharge and attempts to collect a discharged debt. Whether you actually seek contempt depends upon if there are damages and how severe the damages are. To reopen a bankruptcy case the court filing fee is $260.00. To stop the collection activity you may only have to send the creditor the order of discharge for their records. If a creditor sues you, repossesses a vehicle or continues with a foreclosure sale of your home in violation of the automatic stay or order of discharge your damages could be very significant.

City of Detroit Chapter 9 Bankruptcy

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The City of Detroit filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code on July 18, 2013, Bankruptcy Case No. 13-53846. Detroit lists its major creditors as General Retirement System of the City of Detroit is owed a little over $2 billion, Police and Fire Retirement System $1.4 billion, U.S. Bank N.A. $801 million in pension related certificates of participation, U.S. Bank N.A. certificate of participation $516 million, U.S. Bank N.A. certificate of participation $153 million, U.S. Bank N.A. $78 million in tax general obligation bonds, U.S. Bank N.A. $60 million in general obligation capital improvement bonds, U.S. Bank N.A. tax general obligation bonds of $183 million and more.

As you can see the vast majority of Detroit’s debts are pension related unfunded benefits for retirees. Detroit’s bankruptcy attorneys will have to seek reduction of retirees’ future benefits to pull Detroit out of the whole. It is estimated that Detroit has at least 20,000 retirees as of the date of the bankruptcy filing.

One of the issues in every municipal bankruptcy case is eligibility. Unlike other chapters under the bankruptcy code a municipality must prove it is eligible to be a debtor pursuant to Section 109(c) of the Bankruptcy Code. Detroit must prove that it is a municipality, specifically authorized to be a debtor under Michigan state law, is insolvent, desires to affect a plan to adjust its debts and has negotiated in good faith with creditors holding a majority in amount of claims. This will be the first major battle in the case. Creditors such as the Public Finance Guarantee Corporation will argue that Detroit is not eligible under section 109(c)to be a debtor. Public Finance Guarantee Corporation is involved in almost each and every municipal bankruptcy case. They have insured the bond cities issue to pay for capital improvements and recently budget and retirement benefit shortfalls. If Detroit is allowed to reduce the amount of their bond debt the guarantor Public Finance Guarantee Corporation will have to pay the difference. Given that Public Finance Guarantee Corporation is very active in municipal bankruptcy cases.

The insolvency prong is what is screaming out right now. The City of Detroit is facing a $115.5 million cash flow shortfall for fiscal 2012. In the past Detroit issued long term and short term debt. In 2008 Detroit issued $75 million, 2010 $250 million and then again in 2012 $129.5 million. Detroit has been getting along by wage cuts, layoffs, employee furloughs, cash pooling and borrowing from city funds. Detroit also deferred payments for pension contributions for 2012 and 2013 totaling $216 million. Detroit’s bankruptcy lawyer filings project the cash shortfall for fiscal year 2014 will be $198.5 million without restructuring. More than half of Detroit’s budget goes to service its debts and not to provide services to the public. The amount of the budget that must be used to pay debts will only increase in Detroit’s future if they do not successfully reorganize under Chapter 9.

What Should I Expect At My Chapter 13 Meeting of the Creditors?

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It is called the 341 hearing or meeting of the creditors. Section 341 of the Bankruptcy Code provides what is to take place at the meeting of the creditors, but Section 343 of the Bankruptcy Code is actually the section that is entitled “Examination of the Debtor” and provides the bankruptcy filer must appear for examination and provide testimony under oath.

At least a week before the meeting of the creditors your bankruptcy lawyer should provide the trustee’s office with at least your federal tax return. Some trustees require additional information depending upon the circumstances. Most trustees will also inform your bankruptcy attorney of the issues that need to be resolved before the trustee and recommend approval/confirmation of your Chapter 13 plan.

The meeting of the creditors is administered by the Chapter 13 trustee’s office. Either the actual Chapter 13 Trustee or his/her attorney will conduct the meeting. You will need valid identification and proof of your social security number for the meeting. The trustee must verify you are the person listed in the bankruptcy petition. For identification a valid driver’s license or passport will work and your social security card, an original W-2 or government document with your social security number on it will work to prove your social security number.

Once your identity is verified you will be sworn in and placed under penalty of perjury. Most of the time the standard questions are as follows: Do you review and sign the petition before it was filed? Did you list all of your assets? Did you list all of your debts? Did you list all of your income? Has there been any changes to your income since the case was filed? Is this your only source of income? How many consecutive years have you lived in California? Do you own any vehicles? If so, are your vehicles insured? Do you own any real property? If so, are the mortgage payments current or have you made your mortgage payments since the bankruptcy case was filed? Are the property taxes current? Is the real property insured? Have you stopped using all of your credit cards? Have you made a payment of $1,000 or more to any single entity in the last six months outside the normal course of business? Are there any changes to the petition that need to be made that you are aware of?

There are usually a few questions directly related to your circumstances too. By the time the meeting of the creditors you will have had to make at least one Chapter 13 Plan payment. They will then verify you either made the payment or not and let you know when the next payment is due. If everything is in order the trustee can let you know if they are recommending confirmation/approval of your Chapter 13 Plan. If there are any creditor objections to confirmation filed there may be a brief discussion about what needs to take place to resolve the objections. If there are no creditors that wish to be heard in the matter the meeting will be concluded. Creditors have the right to attend the meeting and ask you questions about the bankruptcy petition, your income, assets or ability to pay your debts. It is usually not worth the time and money for a creditor to pay an attorney to show up at the meeting of creditors and ask questions.

Who Files for Bankruptcy and Why?

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The “who” files bankruptcy is easy. Anyone from every different walk of life files for bankruptcy protection. You just never really understand until you find yourself thinking about what can help your financial situation? You never thought it would be true, but bankruptcy became a viable option for you. You never know what the future holds and bad things happen every single day. A lost job, depression, decrease in property value, failed marriage or an illness that does not allow you to work can happen to anyone. Whether these bad things results in filing bankruptcy is the question and usually depends upon how much debt a person has when the bad thing happens.

The “why” is a little more difficult to answer. In the last five or six years the mortgage meltdown was driving the increase in bankruptcy filings. Interest only mortgages and adjustable rate mortgages along with decreasing home prices was a recipe for disaster. A bankruptcy attorney could expect a mortgage issues or housing problem to part of the potential clients financial problems.

Credit Card Interest Rates Are the Number One Problem

In my opinion the real number one reason why the vast majority of people seek bankruptcy protection is because of out of control credit card debts. It is not medical debts. It is not car loans. It is not unaffordable mortgages and decreased housing values. These things do not help, but by far credit cards and their high interest rates are the problem. It is high interest rates that make paying back even reasonable amounts of credit card debt take years if ever. Most people have some credit card debt and are able to make the payments. The problem is when the bad thing happens it is not possible to make the minimum payments any longer and something has to give. Each state has or had usury laws to protect us consumers. The Supreme Court of the United States found a way around that for credit card companies. They held that a credit card issuer could charge the amount of interest allowed by state law in the state the credit card issuer resides, not the interest rate your state law allows. So what happened? A couple of states rescinded their usury laws and credit card companies set up shop in those states and the 28% interest rate became legally possible on a credit card. The rest is history. If credit card companies actually made a good faith effort to negotiate reductions in accrued interest and interest rates the number of people that could pay back the original amount they charged would be huge. Bankruptcy lawyers everywhere would see a decrease in bankruptcy filings.

Tax Debts are Becoming More of a Problem

Another major cause of bankruptcy filings is tax debt. Unfortunately taxes are only increasing and it appears will have to continue to increase as our federal, state and local governments struggle to keep up with employee benefits and retirement for retirees with generous retirement and pay packages. I believe we will see more and more potential clients with dischargeable taxes choosing to file for bankruptcy to discharge their taxes or pay a portion of the taxes back in a Chapter 13 bankruptcy.