Bankruptcy Lawyer Blog

Chapter 7 Bankruptcy is known for its "fresh start" but there are 19 exceptions to bankruptcy discharge that are covered under a specific section of the U.S. Bankruptcy Code, known as §523 Exceptions to Discharge. Although now more than 26 years ago, I did my largest law school paper on this section, and have seen it expand again and again in those 26 years as Congress closes more and more loopholes when abuses are discovered. There are 19 types of debts currently considered non-dischargeable in Chapter 7 Bankruptcy and covered by 11 U.S.C. §523, and we'll cover each one in a separate blog post, but we'll start with: Taxes and Custom Duty.

Taxes or customs duty are not dischargeable if the following conditions are true:

1. If the tax was of the kind and for the periods specified in the list of priority claims found in §507(a)(3) or §507(a)(8), regardless of whether or not a claim for such tax was filed or allowed. A §507(a)(3) tax is an "unsecured claims allowed under §502(f)" of the Bankruptcy Code. §502(f) is in regard to "an involuntary case, a claim arising in the ordinary course of the debtor's business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee and the order for relief shall be determined as of the date such claim arises, and shall be allowed under subsection (a), (b), or (c) of this section or disallowed under subsection (d) or (e) of this section, the same as if such claim had arising before the date of the filing of the petition." A §507(a)(8) tax is "allowed unsecured claims of governmental units, only to the extent that such are for,

(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the petition

(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;

(ii) assessed within 240 days before the date of the filing of the petition, exclusive of -

(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and

(II)any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days.

(iii) other than tax of a kind specified in section 523(a)(1)(B) or 523 (a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case;

(B) a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition;

(C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;

(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (4) of this subsection earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;

(E) an excise tax on--

(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or

(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;

(F) a customs duty arising out of the importation of merchandise--

(i) entered for consumption within one year before the date of the filing of the petition;

(ii) covered by an entry liquidated or reliquidated within one year before the date of the filing of the petition; or

(iii) entered for consumption within four years before the date of the filing of the petition but unliquidated on such date, if the Secretary of the Treasury certifies that failure to liquidate such entry was due to an investigation pending on such date into assessment of antidumping or countervailing duties or fraud, or if information needed for the proper appraisement or classification of such merchandise was not available to the appropriate customs officer before such date; or

(G) a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.

An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days."

Bankruptcy seemed to be the inevitable solution to Capmark's large investment in commercial real estate mortgages. Capmark listed more than $20 Billion in assets and more than $21 Billion in liabilities. While in Bankruptcy, Capmark will finalize its existing deal with Berkshire Hathaway (think: Warren Buffet) to purchase its commercial loan servicing and mortgage business [talk about a significant note purchase!] for $490 Million.

We have a sister-website, www.NationalNoteAssociation.com, that teaches individuals how to buy notes like Buffet. Sign up for a class there today!

Afraid you will never be able to discharge your debt in Chapter 7 Bankruptcy because you have heard rumors that some debts are no longer dischargeable? Let's look at the facts and you will be able to decide what you can and cannot discharge [no longer have to pay] after filing for bankruptcy. We will address each by category:

Medical Expenses: When working with clients as an attorney, the biggest reason for filing was often medical bills. I use to call bankruptcy our nation's answer to national health care coverage. Call me a softie, but I don't understand how a nation as great as ours doesn't provide coverage. I've received emergency medical treatment in Japan (torn ACL) and Switzerland (food poisoning) and I know there is a better way. Until a better way is found, YES you can discharge your medical bills.

Credit Cards: I have to answer this "Yes" and "No" depending on your creditor's actions. Credit card providers may bring an adversary proceeding to prove your debt should not be discharged for two reasons: 1) that you submitted a fraudulent application to obtain the credit card, or 2) the card was used without an intent to repay. The latter item is more likely and appears more frequently in both Chapter 7 and Chapter 13 cases. Here are a few actions which may solicit an adversary complaint:

1. You requested a newly issued card and then quickly filed bankruptcy after running up a bill;

2. You increased your credit card usage shortly before filing;

3. You got large cash advances in months before filing (over $1,075 cash advance is within 60 days of filing is presumed to be non dischargeable);

4. Use of card for recent travel or vacations;

5. Pattern of borrowing on one card to make payments on others;

6. Exceeding your credit limit;

7. Using the card when unemployed or without reasonable belief that the debt can be paid;

8. Large balance at filing (this is disputable depending on circumstances);

9. Charges made after seeking bankruptcy assistance - just STOP your charging!

10. Purchase of luxury good within 60 days of the bankruptcy are presumed to be non dischargeable.

Mortgages: In today's market, it may be likely that your home is "upside down", meaning that the amount of your mortgages exceed the value of your home. If that is the case you can ask the court to "strip off" any mortgage except for the first, and make the other mortgages or liens, unsecure. Thus a second mortgage, may become an unsecure debt because there is no value in the home to support the second mortgage lien on the home. It then becomes unsecured if you request the liens be stripped. Because it then becomes unsecured debt, rather than secured debt, it will be treated like the rest of your unsecure debt, and likely discharged.

We will cover taxes, student loans and fraudulent actions in our next post.

Your Chapter 7 Bankruptcy petition has been filed, and you've received your notice of your Chapter 7 Bankruptcy 341 hearing and you start to freak out with fear. Let me put your mind at ease: if you prepare for your Chapter 7 Bankruptcy 341 hearing you'll do just fine and you'll be amazed how smoothly it will go. 341 Hearings aren't considered a "court" hearing, but are considered an informal meeting between you (and your spouse if included on the petition) and the Trustee who is in charge of reviewing your petition. Questions will be asked, but as long as you've been truthful in your petitions, you'll be fine at the hearing. But you must prepare! Here is our list of how to prepare for your Chapter 7 Bankruptcy 341 Hearing:

1. Double check your hearing date and place.

2. Put it on your calendar.

3. Go to http://maps.google.com and take the address from the hearing notice and Google it to know EXACTLY where your hearing will be held. In MANY cases you are not going to an actual court room - many bankruptcy hearings are held in office buildings near the courthouse. Figure out your timing to get there and be there no later than 30 minutes before your hearing. Why so early? Because there are cases before your case (unless you are first in the a.m. or after lunch) and you can sit and hear the questions asked of other debtors. Every Trustee (the person who will be asking you questions for the most part) runs their court room differently, so you need to be flexible, but you will be more comfortable if you can see others go through it first. Usually, there is a list of debtor names posted outside the hearing room. Make sure you have the right place, TURN OFF YOUR CELL PHONE, and then go in and listen. Luckily, you may be called last if not represented by an attorney, because in many court rooms, trustees take attorney-represented debtors first. That will just give you more time to get acclimated to what is about to happen.

4. Next gather all your documents you will need and have them ready to go that day:

a. A copy you saved of your petition we prepared and you filed with the court clerk;

b. All the paperwork received from the Bankruptcy Court, including the Chapter 7 Bankruptcy Notice of 341 Hearing which has the address;

c. Your maps.google.com or mapquest.com directions;

d. Money and coins for parking;

e. Your official picture ID - VERY IMPORTANT!;

f. Your social security card or proof of social security number - ALSO VERY IMPORTANT;

g. Have a copy of your latest tax returns available.

h. Bring anything else specifically requested in your Chapter 7 Bankruptcy Notice of 341 Hearing note.

5. So you're at the hearing room and you are called to the table. You'll see to whom you will present your picture ID and social security card. If you fail to bring these documents, your hearing will likely be rescheduled. The Trustee will ask you to raise your right hand and take an oath that you are only going to tell the truth, the whole truth, and nothing but the truth under the penalty of perjury. Failing to tell the truth while under oath is a criminal offense. If asked a question, answer verbally as it needs to be recorded - a head shake will not be sufficient to record your response. The Trustee typically asks the following questions:

a. State your name and your current address;

b. Please provide your picture ID and Social Security number card for review.

c. Did you review and sign the petition, schedules, statements, and other related documents and is that your signature on such documents? Did you read and understand the documents before you signed them?

d. Are all of your assets identified on the schedules?

e. Have you listed all your creditors on the schedules?

f. What is your employer's address?

g. Is the copy of the tax return you provided a true copy of the most recent tax return you filed?

h. Have you filed all required tax returns for the past four years?

i. Do you own or have any interest whatsoever in any real estate? If owned: When did you purchase the property? How much did the property cost? What are the mortgages encumbering it? What do you estimate the present value of the property to be? Is that the whole value or your share? How did you arrive at that value? If renting: Have you ever owned the property in which you live and/or is its owner in any way related to you?

j. Have you made any transfers of any property or given any property away within the last one year period (or such longer period as applicable under state law)? If yes: What did you transfer? To whom was it transferred? What did you receive in exchange? What did you do with the funds?

k. Does anyone hold property belonging to you? If yes: Who holds the property and what is it? What is its value?

l. Do you have a claim against anyone or any business? If there are large medical debts, are the medical bills from injury? Are you the plaintiff in any lawsuit? What is the status of each case and who is representing you?

m. Are you entitled to life insurance proceeds or an inheritance as a result of someone's death? If yes, please explain the details. If you become a beneficiary of any one's estate within six months of the date your bankruptcy petition was filed, the trustee must be advised within ten days through your counsel of the nature and extent of the property you will receive. FRBP 1007(h)

n. Does anyone owe you money? If yes: Is the money collectible? Why haven't you collected it? Who owes the money and where are they?

o. Have you made any large payments, over $600, to anyone in the past year?

p. Were federal income tax returns filed on a timely basis? When was the last return filed? Do you have copies of the federal income tax returns? At the time of the filing of your petition, were you entitled to a tax refund from the federal or state government? If yes: Inquire as to amounts.

q. Do you have a bank account, either checking or savings? If yes: In what banks and what were the balances as of the date you filed your petition?

r. When you filed your petition, did you have:

i. any cash on hand?

ii. any U.S. savings bonds?

iii. any other stocks or bonds?

iv. any certificates of deposit?

v. a safe deposit box in your name or in anyone else's name?

s. Do you own an automobile? If yes: What is the year, make, and value? Do you owe any money on it? Is it insured?

t. Are you the owner of any cash value life insurance policies? If yes: State the name of the company, face amount of the policy, cash surrender value, if any, and the beneficiaries.

u. Do you have any winning lottery tickets?

v. Do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding?

w. Have you been engaged in any business during the last six years? If yes: Where and when? What happened to the assets of the business?

Source: Executive Office of U.S. Trustee, Handbook for Standing Trustees, Effective 03/01/06 App C-2

6. Creditors that are present are allowed to ask questions. Answer truthfully. Sears is a creditor that often shows up because it's credit card sale creates a security interest in the property you purchase. You may wish to tell them you are surrendering the property to them, rather than establish payments for it. Although this varies by jurisdiction, where I practiced I never had Sears, or any other small creditor, actually hire someone to go to pick up the items from the debtors even though they said they would. After all, what is a used product really worth?

7. When the Trustee dismisses you, even if you are not told this, it is very likely that you will get your discharge of your debts - which is what you are seeking.

8. Before leaving, make sure you have your ID and other personal documents and you are done.

In preparing for Chapter 7 Bankruptcy, the first question most consumers ask their bankruptcy attorney is "what am I going to lose?" Frankly, in most cases by the time you are ready to prepare your Chapter 7 Bankruptcy case, most people have little to lose - they've already maxed out equity in their homes (or they are upside down after the recent real estate debacle), they've maxed out their credit cards, and they've sold their personal possessions on Ebay or garage sales to pay for food or a utility bill. Your financial life can get pretty unattractive in the days, weeks and months before filing Chapter 7 Bankruptcy. That's why we URGE you to find out what you can SAVE by filing Chapter 7 Bankruptcy before all your real estate and personal property are all gone.

Surprisingly to most people, the Federal Bankruptcy Law wants you to have some items so you are not totally destitute. Filing Chapter 7 Bankruptcy does not necessarily mean you are going to lose everything. People filing for bankruptcy are allowed by statute what are called, "exemptions" or property you may keep if you file a Chapter 7 bankruptcy. We found a good site to determine bankruptcy exemptions is www.legalconsumer.com/bankruptcy/laws where a clear discussion is provided for each state, as your state's law determines the amount and kind of your exemptions.

Continue reading "Chapter 7 Bankruptcy Exemptions - What You Get To Keep In Bankruptcy" »