The letter N, in my Bankruptcy Alphabet, stands for Nondischargeable.  These are the debts that simply don’t go away, even when you get a bankruptcy discharge.

Family support heads the list of nondischargeable debts, at least figuratively.  Whether it’s called child support, alimony, maintenance, or a domestic support obligation, the debtor’s obligation to pay on court ordered support survives bankruptcy.  That’s the case in every chapter of the Bankruptcy Code.

There’s a different rule about other financial obligations that are created in a divorce.  These debts might be equalizing payments for a division of property or an obligation to indemnify your ex from debts to others you are expected to pay.  Those obligations are nondischargeable in Chapter 7, but dischargeable in Chapter 13.

Famously, student loans are nondischargeable in bankruptcy, unless you bring an adversary proceeding in the bankruptcy and prove that repayment of the student loan imposes an “undue hardship” on you and your dependents.

Some taxes are nondischargeable: recent income taxes and the trust fund portion of payroll taxes.

Then, there is a group of debts that may survive bankruptcy if the creditor files a non dischargeability action in the bankruptcy and proves that the debt is the result of some listed kinds of “bad behavior” on the debtor’s part:

• fraud,
• misrepresentation,
• conversion, embezzlement,
• breach of fiduciary duty, and
• intentionally inflicted harm

If the creditor can prove that the debt was created by any of these kinds of conduct on the debtor’s part, the debt will survive a discharge in any chapter.

Credit card usage provokes the most nondischargeability litigation. The lender typically claims that the debtor used the card without the intention to repay the charges. Courts vary on how much real evidence the creditor has to offer to prove his contention. That’s why I ask each client about their recent credit card usage; I want to assess whether the credit card company is likely to challenge the discharge of the debt.

The rest of the non dischargeable debts are found in Section 523.

So there you have nondischargeable, brought to you by the letter N.

My friend and bankruptcy attorney Jay Fleischman thinks N is for Naked.  He certainly looks at bankruptcy differently.

Image courtesy of takomabibelot.

 

 

 

M is for Modify in my Bankruptcy Alphabet. The Bankruptcy Code provides that a borrower can modify the terms of some secured debts, like car loans, judgment liens, and some mortgages. And in the midst of the mortgage mess, the automatic stay can prevent foreclosure while a homeowner seeks a mortgage modification on their principal residence.

Generally creditors with liens on a person’s assets fare better in bankruptcy than creditors who have simple unsecured claims like credit card debts. Absent some specific court order, liens pass through bankruptcy unchanged.

Here are some of the ways that a lien can be modified in bankruptcy.

• In Chapter 13, the interest rate on a car loan can be changed to today’s interest rate.
• Some car loans can be reduced to the value of the car today.
• Judgment liens that interfere with exemptions can be reduced or eliminated alltogether.
• Tax liens can be voided or paid to the extent the lien attaches to actual value in some asset of the debtor.

That adds up to a whole lot of modification.

But the modification that is usually at the forefront of thinking after the housing collapse is the modification of home mortgages. A provision of bankruptcy law prevents the modification of home loans on the debtor’s home, so long as there is any equity in the property for the lien to attach to.

With the plunge in property values, many junior liens are now, in fact, totally unsecured. An unsecured lien, even on a home, can be stripped in Chapter 13. Welcome to the world of bankruptcy, where change is everywhere.

Today’s post has been brought to you by the letter M.

M also stands for Means Test, in bankruptcy lawyer Jay Fleischman’s world.

Image courtesy of takomabibelot.

In my bankruptcy alphabet, H is for house.

Can I keep my house if I file bankruptcy, anxious homeowners ask.

With the precipitous fall of home values, my answer is almost always, “yes”.

Should you keep the house is another question.

Houses are vulnerable in bankruptcy only if there is

• significant equity
• above the total of the mortgage payoffs and delinquent property taxes, and
• above the homestead exemption allowable to the debtor, and
• above the expenses of sale like real estate commissions

If the trustee can’t sell the property for enough money to pay  costs of sale, property taxes, mortgages and their arrears, and the debtor’s homestead, the house will be abandoned by the trustee back to the debtor.

It’s black letter law that liens pass through bankruptcy unaltered, unless there is a bankruptcy court order to the contrary.   The liens of the mortgage lenders and any back property taxes remain valid charges on the property.

Even though the bankruptcy discharge prevents the lender from suing the borrower, the lender can still foreclose on the property if state law allows.

The more difficult question, then, is whether the homeowner, now free of the old unsecured debt, can work it out with the lender.  The bankruptcy case neither compels nor frustrates the attempt to modify a mortgage loan.

My questions are can the homeowner

• Make the regular payments
• Catch up on any missed payments
• Modify the loan to better terms

My hope for my clients is that they can look at homeownership with a clear head, and make a sound, economic decision about whether to keep an troubled piece of property.  In the end, home is where the heart is not where your name is on the title.

This post was brought to you by the letter H. Others taking the bankruptcy alphabet challenge think H is for Household.

I think our image is courtesy of Rootytootoot.

 

G is for guaranty in my Bankruptcy Alphabet.

A guaranty is just as much a debt as the bills one incurs directly, yet guaranties are often forgotten when the list of creditors is assembled to file bankruptcy.

Any time you sign for a debt, yours or someone else’s, you create a legal relationship. The lender or card issuer has obtained the right to sue you on your guaranty for the debt involved.

Usually, the creditor doesn’t even have to sue the other borrower first. So guaranties come with some real financial exposure.

If you think of your creditors as just those people who send you a bill monthly, you’re likely to miss a number of creditors. It is an absolute rule that when you file bankruptcy, you include all of your creditors.

Whether or not a debt is now due, whether it may only be payable when someone else can’t pay, or even it you dispute that you owe the debt, the debt should be listed in your bankruptcy papers.

Lots of my clients tell me that they are only “secondarily liable” for a loan, or they are “just a co signor” for a debt. They miss the fact that any kind of liability at all makes the other party a creditor.

I ask clients to tell me about any situation where they are a guarantor, a co signor, a co borrower, or a second party. We also want to find debts where the client disputes that there is any debt at all. Bankruptcy can discharge debts that have never been decided by a judge.

I can only guaranty my clients the bankruptcy outcome they want if they list everyone to whom they owe money or might owe money.

This post has been brought to you by the letter “G”.

In Jay Fleischman’s bankruptcy world, G is for Garnishment. Gad zooks!

Special rules for guarantee of SBA loans

Image courtesy of takomabilelot

E stands for exemptions in my Bankruptcy Alphabet. Exemptions describe the possessions you get to keep when you file bankruptcy.

E could also stand for Exception, since exemptions are the only place in bankruptcy law where the law is explicitly different from state to state.

The Bankruptcy Code gave the states the right to prohibit their citizens from using the federal exemptions and to limit them to the exemptions provided by state law. Most of them took the feds up on the offer.

California had it both ways: it denied residents the right to claim the federal exemptions, then enacted California bankruptcy exemptions that mirrored the federal exemptions. Go figure.

The right to keep some assets away from your creditors is grounded in the idea that a debtor needs something with which to start over.

When a debtor designates some piece of property as exempt, it leaves the bankruptcy estate, that mythical pile of possessions that the debtor entered bankruptcy with. Neither the creditors nor the bankruptcy trustee can take exempt property from the debtor.

Exemptions protect the equity in an assets. So, the debtor may end up keeping a house worth lots more than the dollar amount of the exemption because a large part of the value of the asset has been pledged to secure a mortgage loan. The debtor doesn’t have to exempt that part of an asset charged with securing a debt.

There are also unwritten exemptions, or functional exemptions. The laws of economics say that the trustee will not gather up and sell assets with so little value that the costs of sale leave little for creditors. For that reason, debtors often keep more than the exemption system provides because it’s simply too expensive to sell things worth relatively little.

Sadly, it is the choice of exemptions where many people who attempt to file bankruptcy without a lawyer get in trouble. It isn’t trouble with the system, it’s trouble in that they short change themselves and leave unprotected something they could have kept despite the bankruptcy, if they had done the exemptions right.

This discourse on Exemptions has been brought to you by the letter “E”.

Consumer protection lawyer Jay Fleischman, who started this letter madness, thinks “e” is for Executory Contract.

Image courtesy of takomabibelot.