Tag Archives: Section 524

Should I File Bankruptcy Jointly With My Spouse?

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I will give you my opinion right now and say yes, if possible. If your spouse and you do not own any separate property then please file bankruptcy jointly and receive an order of discharge with both of your names and social security numbers listed. Doing this makes it black and white to your creditors. All debts are discharged as to both spouses. If only one spouse files for bankruptcy and receives a discharge you have entered the gray as to the non-filing spouse. While bankruptcy is governed by Federal Law to determine certain asset issues the Bankruptcy Court has to look to state property marital law to determine separate property and community property.

The Community Discharge

So in a community property state only the community assets are liable for community debts. If there are no separate property assets brought into the marriage by the spouses then there is nothing other than community assets at the time of filing and then post-discharge. 11 U.S.C. § 524(a)(3). “[Section] 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.” In re Karber, 25 B.R. 9, 12 (Bankr. N.D. Tex. 1982). In summary, all actions to collect a “community claim” from section 541(a)(2) property acquired after the petition date is permanently enjoined unless timely objected to. A creditor is still free to seek collection against the non-filing spouse’s separate assets.

So What Is The Problem?

So you the issue is some of the debts are under one spouses name and social security number while some debts were incurred by the other spouse. Who files for bankruptcy then? All of the debts were incurred during their marriage too. If one spouse files for bankruptcy and receives a discharge will that discharge protect the spouse that did not file? Yes and no. This is the gray of only one spouse filing. What can a creditor do or not do to collect their debt against the non-filing spouse’s separate property? What is property of the bankruptcy estate or community assets after the spouse received a discharge? Can a judgment creditor suspend the non-filing spouses driver’s license? Is a driver’s license a community asset?

File Jointly If Possible To Avoid Confusion

As bankruptcy attorneys that have filed and been involved in thousands of b bankruptcy cases, if it is possible, we recommend spouses file jointly so that it is black and white post-discharge. Each spouse receives a discharge of all debts whether in their name and social security number or not. A creditor with a judgment can renew the judgment and then wait to collect. The entire time the judgment is also accruing interest. Also, once the judgment is renewed the total amount of the renewal will accrue interest. This accrual of interest will make the judgment increase significantly plus the cost of collection added in also. What is the judgment creditor waiting for? They are waiting for some separate property assets to be obtained by the non-filing spouse. If the non-filing spouse inherits assets from someone the inherited assets are arguably separate property of that spouse and now there are separate assets to collect from. Or the judgment creditor is waiting for the community to end via divorce or death. Once the community is terminated then the protection of the discharge of the filing spouse is also terminated.

We had a judgment creditor write us a letter once to explain their position and right to collect from the non-filing spouse. The judgment creditor argued that the community discharge pursuant to Section 524 is a “phantom discharge” since it only bars collection from community assets. Again, if there are no separate assets then how is the discharge merely a phantom discharge? If there are no separate assets then all assets are community assets and therefore protected. What procedure is there to make the determination that there are no separate assets? There really is none. If a creditor allegedly violates the order of discharge the only recourse is to seek sanctions from the bankruptcy court that signed the order of discharge. Litigating this issue will most likely cost more than what it cost to file the initial Chapter 7 bankruptcy case. No one really wants to have to deal with this after receiving a discharge and moving on. If you are married and do not file jointly this is a potential issue you will be creating by filing alone.

Prevent Possible Litigation

Again, the theme of this article is if you can file jointly then file jointly and eliminate the possibility of litigating whether a creditor is violating the order of discharge or not. It may not be possible though depending upon the circumstances. Bankruptcy attorneys have to look at all of the assets of clients and make a determination as to the best course of action. There are also circumstances in which a spouse refused to file for bankruptcy protection no matter what. The point of filing for bankruptcy is to discharge eligible debts or reorganize debts without causing additional stress or problems for the bankruptcy filer. Most bankruptcy filers do not have the means to litigate issues that sometimes arise. Like a creditor going after a non-filing spouse post-discharge. If you filed for bankruptcy protection you probably do not have thousands of dollars to litigate anything. In the event a creditor goes after a non-filing spouse and we are successful in obtaining sanctions there is no guarantee that the bankruptcy court will award attorneys’ fees and costs for seeking sanctions. It is usually a tough position to be in after the bankruptcy is long over and then a creditor decides to do some sort of collection activity against the non-filing spouse. So what then? To take this issue off the table completely and just file jointly.

Did A Creditor Violate The Bankruptcy Discharge By Suing The Debtors After Discharge?

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Apparently it depends upon the terminology used in the lawsuit and a demand for attorney fees and costs. A recent Ninth Circuit Bankruptcy Appellate Panel published opinion discusses this issue. Desert Pine Villas Homeowners vs. Gil Kabiling; Linda Kabiling (BAP No. NV-15-1380-BDF) Discrimination happens for all kinds of reasons unfortunately. One reason discrimination is not supposed to happen is when you seek bankruptcy protection and obtain a discharge of eligible debts. There are a number of issues in this case, but the outcome of the case is creditors should not use language in lawsuits or other documents post-discharge that disparage a debtor or do not accurately communicate the legal relationship post-discharge. A creditor cannot try and obtain attorneys’ fees and costs post-discharge for a claim that arose before the bankruptcy petition was filed. In this case it all started when the Kabiling’s defaulted on paying their homeowner association assessments for a property located in Las Vegas, Nevada. The Kabilings’ obtained a discharge of their debts in Chapter 7 after the defaults and therefore their personal liability no longer exists for the defaulted homeowner association dues. Generally in most states a homeowner association can attach a lien for the unpaid homeowner association dues and then enforce that lien post-discharge since the lien is not discharged, just the personal liability for paying the pre-petition unpaid homeowner association dues. A homeowner association can also foreclose on the home under state law for unpaid homeowner association dues. Each state has different laws about homeowner association dues and the legal rights involved with collecting unpaid dues. The is not a huge issue in this case, but you need to know your state law in this area as it relates to Section 523(a)(16) of the Bankruptcy Code. Section 513(a)(16) makes post-discharge unpaid homeowner association dues not dischargeable.

The Desert Pine Villas Lawsuit Against Kabiling

On February 1, 2011, the Kabilings’ bankruptcy attorney filed a voluntary chapter 7 petition on their behalf along with a statement of intention asserting that they would abandon the Property. Notice of the Kabilings discharge was mailed to creditors on June 30, 2011. Desert Pines nonjudicially foreclosed on its homeowner association liens in 2013 and thereby acquired title to the Kabilings property. On December 15, 2014, in the District Court for Clark County Nevada, Desert Pines, through its counsel, Alessi & Koenig, filed a complaint against the Kabilings and three additional named defendants seeking to quiet title to the foreclosed property and confirm that Desert Pines held good title to the Kabiling property based on its nonjudicial foreclosure in 2013. Just to be clear, Desert Pine Villas already foreclosed on the Kabiling property under Nevada state law, so why did they need to file an additional lawsuit to quiet title to the already foreclosed property? There could be facts regarding the other named parties in the lawsuit that are not included in the record of this case.

The Kabilings were served with the lawsuit and then retained counsel to inform Desert Pine Villas they violated the discharge injunction by filing the lawsuit against them. Attorneys for Desert Pine Villas of course denied violating the discharge injunction so the Kabilings attorney reopened their Chapter 7 bankruptcy case and filed a motion for contempt against Desert Pine Villas. The bankruptcy court agreed with the Kabilings and found Desert Pine Villas in contempt of court and held Desert Pine Villas liable for the Kabilings’ compensatory damages in the amount of $8,928.00.

The Law In Desert Pine Villas Appeal

A violation of the discharge injunction is enforced through the court’s civil contempt authority under section 105(a). Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002). The debtor has the burden of proving, by clear and convincing evidence, that the offending creditor knowingly and willfully violated the discharge injunction. The offending creditor acts knowingly and willfully if (1) it knew the discharge injunction was applicable and (2) it intended the actions which violated the injunction. ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th Cir. 2006). Actual knowledge of the discharge injunction does not end the inquiry, however, as the creditor also must be aware that its claim against the debtor was subject to the discharge injunction. Emmert v. Taggart (In re Taggart), 548 B.R. 275, 288 (9th Cir. BAP 2016). The focus is on whether the creditor’s conduct violated the injunction and whether that conduct was intentional; it does not require a specific intent to violate the injunction. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003) (citing Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir.1996); and Havelock v. Taxel (In re Pace), 67 F.3d 187, 191 (9th Cir. 1995)).

A chapter 7 discharge releases the debtor from personal liability for debts arising “before the date of the order for relief under this chapter.” § 727(b). A “debt” means a liability on a claim. § 101(12). Federal law determines whether such claim arose prepetition or postpetition. SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 839 (9th Cir. 2009); ZiLOG, 450 F.3d at 1000. The general rule in the Ninth Circuit is that “a claim arises, for purposes of discharge in bankruptcy, at the time of the events giving rise to the claim, not at the time the plaintiff is first able to file suit on the claim.” O’Loghlin v. Cty. of Orange, 229 F.3d 871, 874 (9th Cir. 2000).

9th Circuit Bankruptcy Appellant Panels Analysis

The Ninth Circuit BAP found the bankruptcy court applied and then held an evidentiary hearing to allow for testimony on the contempt motion properly. the bankruptcy court’s conclusion that The 9th Circuit BAP also found that Desert Pine Villas knew that the discharge order applied to its prepetition claims against the Kabilings is supported by the record and is neither illogical nor implausible. The Ninth Circuit BAP also found that during oral argument at the June 30, 2015 hearing on the motion for contempt, counsel for Desert Pines specifically admitted that Desert Pines filed the Complaint in the Quiet Title Action, that it named the Debtors as defendants, and that it sought recovery of attorneys’ fees and costs. Thus, the record supports the bankruptcy court’s conclusion that Desert Pine Villas intended to file the quiet title action and the only remaining question is whether the filing of the complaint violated the discharge order.

The mere filing of a complaint against a debtor by a prepetition creditor does not necessarily violate the discharge injunction. For example, pursuing a post-discharge lawsuit in which the debtor is named as a putative party to collect from a collateral source, such as an insurance policy or an uninsured employers’ fund, does not violate section 524 provided “the plaintiff makes it clear that it is not naming the debtor as a party for anything other than formal reasons.” Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550 (9th Cir. BAP 2002) (citing Patronite v. Beeney (In re Beeney), 142 B.R. 360, 363 (9th Cir. BAP 1992)).

Ninth Circuit Bankruptcy Appellate Panels Findings

The complaint filed by Desert Pines Villas did not provide anything about how the Kabilings failed to pay pre-petition HOA dues and that this default was discharged in their chapter 7 bankruptcy case. The 9th Circuit BAP also noted the Kabilings were not listed as just putative parties in the lawsuit and that the Kabilings were not being looked to for amounts listed in the complaint, such as attorneys’ fees and costs for bringing the lawsuit to quite title. The Ninth Circuit BAP continues to lambast Desert Pines Villas, “To the contrary, the Complaint alleges that Desert Pines was required to incur attorneys’ fees to file the action and prays for a fee award against each of the named defendants, including the Debtors.”

Desert Pine Villas tried to argue that there is no bar to seeking attorneys’ fees and costs in a post-discharge lawsuit. While potentially true see the above law regarding claims and when a claim arises under 9th Circuit law. The Ninth Cir. BAP clearly held that Desert Pine Villas made no distinction in their complaint between prepetition or post-petition claims they have or had against the Kabilings. The complaint reads like Desert Pine Villas is seeking redress for prepetition events or prepetition claims. The Desert Pine Villas complaint also did not identify any post-petition conduct by the Kabilings, a post-petition default by the Kabilings or any post-petition contract between Desert Villa Pines and the Kabilings in Desert Pine Villas quite title complaint.

Exception to Creditors Right to Post-Petition Attorneys’ Fees and Costs On a Pre-Petition Claim

There are a number of cases on this issue. The argument goes if a debtor starts the fight post-petition and returns to the fray, then a creditor has a right to seek attorneys’ fees and costs defending itself of dealing with the issue even though the issue arose about a pre-petition claim. Boeing N. Am., Inc., v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir. 2005).

Conclusion

Bankruptcy attorneys beware. If a creditor files some sort of post-petition or post-discharge complaint against your client and the facts of the complaint only include facts that are from pre-petition events and claims there could be a violation of Section 524. More time spent in drafting the complaint to quiet title could have solved this problem. It sounds like from the provided correspondence the attorney for the Kabilings did reach out to the Desert Pine Villas attorney about this issue to no avail. Desert Pine Villas could have just amended the complaint and changed the prayer or facts listed in the complaint and did not.