Bankruptcy Still Works - A guide to the new bankruptcy laws

Part VI

Authors:
LEON D. BAYER
Partner: Bayer, Wishman & Leotta
JEFFREY WISHMAN
Partner: Bayer, Wishman & Leotta

o First idea: Stop making car payments and buy something cheap for cash. As soon as the case is filed, the debtor ordinarily has a "free ride" under the automatic stay. This will ordinarily

protect the vehicle from repossession for about two and one-half months, (that is, until 45 days after the first meeting of creditors). The debtor should use that time to save up money towards buying a cheap "transportation car" until able to get into something else. Very cheap cars really are available. With careful shopping, they can be had from private parties, and from organizations. For example, both the Salvation Army and Goodwill sell cheap running cars that have been donated. They have several locations. (A debtor that can’t save enough money to buy themselves a "runner" would never have been able to make the payments on a reaffirmation.)

o Second idea: Upon discharge, most debtors are aggressively solicited by new car dealers, offering "easy terms" to finance or lease a new car. They specifically target people emerging from bankruptcy as sales leads. The debtor can usually get into a new car, even with bad credit, provided they have a sufficient and steady income. This may be a far better alternative than making a bad reaffirmation. The new car loan won’t start out with more money owing than the vehicle is worth, it will represent a better investment than keeping the debtors old car with upside down financing on it, and the new car will probably be more reliable transportation with a new car warranty. Of course, the catch is that the debtor needs to play for time to get their discharge. Here is how to do that: Reaffirm if necessary to keep temporary possession of the vehicle until the debtor receives a discharge, but rescind the reaffirmation within 60 days after discharge. Use that time to get into another vehicle, and be sure to rescind the reaffirmation before it becomes binding.

o Third idea: Maybe a friend, lover or family member will buy or lease something for the debtor to drive. The debtor can be insured and registered as a driver of the vehicle, and the debtor can be the one who makes the payments.

o Fourth idea: There are companies that will rent used cars on a monthly basis. The payment for

these monthly rentals is usually much less than the payments on the debtor’s car loan. After the debtor receives a discharge the debtor can probably purchase and finance a new car.

o Fifth idea: Maybe there is public transportation that the debtor can use on a temporary basis, until discharge, and then buy a new car?

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Nondischargeable debts. Chapter 7 bankruptcy does not discharge every kind of debt. If we look at Section 523 of the Bankruptcy Code, it sets forth a laundry list of different types of obligations that are not dischargeable. The best way to understand the likely difference between the dischargeable debts and the non-dischargeable debts are to think of acts committed by the debtor which amount to intentional wrongs (intentional torts). Generally, intentional acts of wrongdoing, such as fraud, are not dischargeable.

Public policy. Other types of debts which are not going to be dischargeable are debts that have a very important social aspect to them, separate and apart from the monetary debt which the obligation represents.

Examples. What are talking about here? Taxes, student loans, alimony, spouse support, child support-these are all obligations that are evidenced by monetary debt, yet they also have extreme social, importance to society at large, separate and apart from the money that is owed. The public policy of every state is that persons must support their children. They must support the spouses when ordered to do so. They must pay their taxes, they must pay back their student loans and in fact the Bankruptcy Code very clearly provides that most of those kinds of societal obligations are not going to be discharged. In addition, Chapter 7 does not discharge debts arising from a divorce or marital separation agreement, (for example a property division or equalization judgment).

There are some minor exceptions:

Discharging Income Taxes. Taxes owed to the United States or any state, county, or other governmental entity are normally nondischargeable, however, income taxes will discharge if all of the following criteria are met:

1. The taxes are more than three years old at the time the Bankruptcy was filed. (The three-year period begins to run from the time the returns were due, plus any periods of extension); 2. If the return was not filed on time, more than two years has expired since the return was filed; 3. If there was an assessment, more than 240 days have expired from the date of the assessment before the bankruptcy is filed; 4. There has been no fraud.

Caveat: If you intend to discharge taxes with your bankruptcy filing, we recommend that you obtain a complete history of your tax obligations for each specific year in question from the I.R.S. and consult a tax professional before filing the bankruptcy. To get your Federal IRS tax history, call the IRS at 800-829-1040and ask them for a report called MFTRA-X. Tell them you want the MIFTRA-X for each year that you owe them for. They will mail you the reports, and might even fax them if you ask them nicely; Also note that a bankruptcy discharge does not automatically remove any filed or recorded tax lien on any property which you own.

Discharging Student loans. Student loans that were made under the auspices of, or guarantied by, or at least partly funded by a governmental entity or nonprofit institution are normally nondischargeable, as are any student loan that carries payments which are qualified under the IRS Code for income tax deductibility. However, such loans can be discharged but only upon a showing that not discharging the loan would be an undue hardship upon the debtor and any dependents of the debtor. Unfortunately, the process of seeking the undue hardship exception is extremely difficult for most debtors. The process entails filing a lawsuit against the creditor, and the debtor has the burden of proof. Such suits are very complicated and time consuming to pursue, and the assistance of legal counsel can be very necessary but very expensive.

Undue hardship student loan discharge. Court decisions that find undue hardship for the debtor have been extremely rare in the reported case decisions. A review of the reported court decisions in this area will disclose that most undue hardship discharges that have been granted typically go to individuals that suffer from some type of very severe permanent and total disability or some sort of permanent disability that drastically restricts the ability of the

debtor to more than a subsistence level of income. The courts require a finding that the debtor has proven each of the following three elements:

(1) That the debtor cannot maintain, based upon current income and expenses, a "minimal" standard of living for himself and his dependents if compelled to repay the student loans; and

(2) That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

(3) That the debtor has made good faith efforts to repay the student loans.

A big "Stop Sign" to the creditors. The automatic stay is probably the most important feature of Chapter 7 Bankruptcy, separate and apart from actually receiving a discharge of debts. The commencement of a bankruptcy case imposes an immediate automatic restraining order upon all creditors, regardless of the bankruptcy chapter that is filed. The source of this law is contained in Section 362(a) of the Bankruptcy Code, which sets forth a list of the different types of actions against a debtor which are automatically stayed by commencement of the bankruptcy case.

Examples. The automatic stay stops phone calls from bill collectors, the commencement of lawsuits against the debtor for the collection of money, enforcement of judgments, collection letters, and demands for payment are all ordinary examples of the kinds of actions that are stayed by the filing of the bankruptcy case. Perhaps even more powerful is that the automatic stay stops foreclosure and repossession so this is an extremely powerful component of the bankruptcy laws and any debtor who is faced with the imminent repossession of a vehicle or the imminent foreclosure of real property will often resort to Chapter 7 if for no other reason then to gain time to try and resolve the debt problem and come up with a method of curing a default.

Drawbacks of Chapter 7. Chapter 7 provides a fairly wide range of debt relief for a prospective debtor but it does not do all things for all people. There are some debt problems that Chapter 7 just does not help. A Chapter 7

case will temporarily stay a foreclosure but the filing of the case and the imposition of that stay does not give the debtor any mechanism to force a creditor into accepting a payment schedule for the cure of the default. When the Chapter 7 is discharged the automatic stay normally ends. This frees a secured creditor to proceed with lien enforcement and let’s them pick up where they left off when the bankruptcy was filed and finish the foreclosure. (In some California foreclosure cases, the stay will not stop the running of the statutory time that the borrower has under state law to cure a default.) In a case of an automobile loan that is delinquent, the vehicle will eventually be repossessed. Thus, Chapter 7 is an imperfect remedy for individuals who have defaulted on secured obligations and who are desirous of keeping the collateral.

Typical Chapter 13 cases. In the past, the typical Chapter 13 case was usually filed by someone who is trying to stop the foreclosure sale of their home. The balance of Chapter 13 cases are probably filed by individuals who are trying to reorganize tax debts, deal with a default situation on motor vehicles, or retain nonexempt assets that would be liquidated if the case was administered under Chapter 7. Of course, now that the new bankruptcy laws have gone into effect, there will also be some Chapter 13 filings by individuals who have been excluded from a Chapter 7 because of the means test.

Stoping foreclosure. In the case of a real estate foreclosure, the debtor files the Chapter 13 case which imposes an immediate automatic stay and stops the foreclosure. This must be done before the foreclosure auction takes place and notice of the automatic stay needs to be given to the necessary parties.

Plan to cure the default. The debtor now has to do something in the case to cure the default on the loan. The court is not going to simply let the debtor sit there and enjoy the benefits of ownership without the burdens of making payments. So what actually happens is under the Chapter 13 law and the local rules of the bankruptcy court the debtor is required to commence making regular monthly payments again on the mortgage. Payments must commence with the next payment that comes due following the filing of the bankruptcy case. Now in additional to paying regular monthly payments the debtor has to do something to catch up the default.

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Attorneys at Law
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Los Angeles, CA 90017

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