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debtsA bankruptcy court may grant a discharge of remaining debts at the end of a case, allowing a fresh start for the debtor. Certain debts, however, are not eligible for discharge. A bankruptcy judge in California recently considered a creditor’s argument that an alleged debt was nondischargeable on one or more fault-based grounds, since it was incurred as a result of fraud or false pretenses, fraud by a fiduciary, or willful and malicious acts resulting in injury. 11 U.S.C. §§ 523(a)(2)(A), (a)(4), (a)(6). The judge reviewed the standard of proof for each alleged ground and ruled that the creditor failed to provide sufficient evidence to support her claims. In re Ogilvie, No. 13-bk-31179, Adv. Proc. No. 13-ap-03221, mem. dec. (N.D. Cal., Feb. 23, 2015).

A debt involving something of value obtained through “false pretenses, a false representation, or actual fraud” is not dischargeable. 11 U.S.C. § 523(a)(2)(A). The Ninth Circuit, which includes California, uses a five-part test in this sort of claim:  (1) the debtor made statements or representations to the creditor, (2) which they knew at the time were false, (3) with fraudulent intent, (4) and the creditor reasonably relied on these statements or representations in making the transaction and (5) suffered damages as a result. In re Eashai, 87 F.3d 1082, 1086 (9th Cir. 1996). A creditor must establish each element by a preponderance of the evidence.

Debts incurred through fraud while acting in a fiduciary capacity are not dischargeable. 11 U.S.C. § 523(a)(4). A creditor has to prove, by a preponderance of the evidence, the existence of an express trust, the actual act of fraud, and the fiduciary relationship. In re Stanifer, 236 B.R. 709 (B.A.P. 9th Cir. 1999). Proving a trust requires evidence of a trust agreement, including “sufficient words to create a trust.” Ogilvie, mem. dec. at 9.

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mireyaqh [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayPersonal bankruptcy under Chapters 7 and 13 offer ways for people to obtain financial relief when their income is not high enough to continue making required payments on their debts. The federal Bankruptcy Code deals with different types of debt in different ways. The Bankruptcy Code establishes that certain types of debt have priority over others, and these creditors are therefore entitled to payment from the bankruptcy estate first. While many debts may be subject to discharge at the end of a personal or business bankruptcy case, some debts are expressly excepted from discharge, such as debts for recent taxes or child support obligations. However, these priority debts can be paid back via a Chapter 13 over a period of 3 to 5 years. Understanding how bankruptcy law treatss various types of debt is critical to planning and preparing for a bankruptcy filing.

Secured vs. Unsecured Debt

A key distinction in bankruptcy is between secured and unsecured debts. A secured debt has one or more specific items of property attached to it, known as collateral. See 11 U.S.C. § 506. A secured creditor has the right to take possession of the collateral if the debtor defaults on their repayment obligation. A mortgage, for example, is typically secured by the real property purchased with the mortgage loan.

Unsecured debt does not have collateral. The Bankruptcy Code divides unsecured debts into priority and nonpriority debts. 11 U.S.C. § 507. Many priority unsecured debts are also included in the list of debts excepted from discharge. 11 U.S.C. § 523.

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old manSeniors, generally defined as people age 65 or older, comprise a growing percentage of the U.S. population. According to the Administration on Aging, part of the U.S. Department of Health and Human Services, seniors accounted for 14.5 percent of the population in 2014. That percentage is expected to increase to 21.7 percent by 2040. A greater and greater number of people want to retire, or are no longer able to work, and must rely on various types of fixed income. Increased health care costs for the myriad medical issues that seniors face will become an increasingly pressing concern. While specific debts are not necessarily passed on to a person’s heirs, creditors can cause considerable havoc in a person’s estate. Seniors who find themselves in financial distress may find that bankruptcy offers some solutions. Many types of income that seniors receive are exempt from creditors both before and during a bankruptcy case, and many debts commonly associated with seniors are unsecured and therefore subject to discharge in bankruptcy.

Debtors filing for personal bankruptcy usually choose between Chapter 7 and Chapter 13. In a Chapter 7 case, a debtor’s non-exempt assets are liquidated to pay debts, and the court discharges most debts at the end of the case. A Chapter 13 case involves a repayment plan that lasts several years, followed by a discharge. While some debts are not subject to discharge, bankruptcy can result in having most of one’s unsecured debts wiped out.

A California debtor filing for bankruptcy has two options for claiming property as exempt under California law. The first system allows exemptions for seniors that include up to $175,000 of the equity in their residence, up to $2,300 in motor vehicles, and up to $6,075 in “jewelry, heirlooms, and works of art.” See Cal. Code Civ. P. §§ 704.010 et seq., 704.730. The second system does not include a specific homestead exemption but allows multiple other exemptions and a “wildcard” exemption for property valued up to $24,060. Cal. Code Civ. P. § 703.140.

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By Oparvez (http://www.flickr.com/photos/oparvez/390728321/) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA U.S. district judge affirmed a bankruptcy court’s dismissal of a Chapter 13 case, finding that the debtor did not respond to two separate motions to dismiss filed by the trustee and a creditor. In re Quezada, No. 1:13-cv-00638, mem. op. (D.D.C., Dec. 20, 2013). While this failure to respond would allow the court to treat any issues presented by the motions to dismiss as conceded by the debtor, the court went further and addressed several other reasons for dismissing the petition. The court’s opinion provides a useful guide to various Chapter 13 filing deadlines and the consequences of missing them.

The debtor was the owner of a multi-unit apartment building in Washington, D.C. The beneficiary of the deed of trust, the Dyer Trust 2012-1 (“Dyer”) foreclosed on the property when the debtor fell behind on mortgage payments. It scheduled a foreclosure sale on January 10, 2013, but the debtor filed a Chapter 13 petition two days earlier. The automatic stay therefore prevented the sale.

The Chapter 13 petition did not include all of the documents required by federal law. The bankruptcy court instructed the debtor to file the remaining required financial documents and a Chapter 13 plan of reorganization within two weeks, and later extended that deadline by another two weeks. The trustee had to cancel a creditor meeting scheduled on February 11, 2013 because the debtor still had not filed the required documents. On February 12, the trustee filed a motion to dismiss the petition, in part for the lack of financial documents and a reorganization plan. Dyer filed a separate motion on February 21, citing additional grounds for dismissal. The debtor did not respond to either motion. Continue reading →

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student-849825_640As of late 2015, about 40 million people in the United States owed a total of $1.2 trillion in student loan debt, an average of $30,000 in debt per student loan borrower. Reform of the student loan system is likely to be a significant issue in the upcoming presidential election, and student loans have become a topic of much discussion in the media, much of it of questionable accuracy. The arrest of a man in Houston, Texas in February 2016, supposedly due to student loan default, made headlines around the country, but the situation was not as straightforward as initial reporting made it seem. The use of federal marshals to enforce student loan debt at all still seems troubling, but this might at least be one area in which bankruptcy, through the automatic stay, can offer some immediate assistance.

Part of what makes student loan debt so pervasive is its distinctive treatment by the federal Bankruptcy Code. Certain types of debt are not subject to discharge at the end of a bankruptcy case. Most of these types of debt are based on factors like the fault of the debtor, such as cases of fraud or embezzlement, certain tax debts, and domestic support obligations like child support.

Student loan debt, both public and private, is also included on the list of nondischargeable debts, 11 U.S.C. § 523(a)(8), although the rationale for its nondischargeability may not be as clear. The only exception is when repayment would cause “undue hardship” to the debtor or the debtor’s dependents, but courts interpret this very narrowly. See Brunner v. N.Y. State Higher Educ. Svcs. Corp., 831 F.2d 395 (2d Cir. 1987); In re Pena, 155 F.3d 1108 (9th Cir. 1998).

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money bagThe federal government is perhaps the most tenacious creditor of them all, and it goes to great lengths to recover money it believes it is owed. This applies not only to taxes but also to benefits, such as the Social Security Disability Insurance (SSDI) program. A bankruptcy court in California, for example, recently considered the government’s claim for recoupment of about $190,000 in SSDI overpayments from a debtor’s future benefit payments. In re Angwin, No. 15-bk-11120, Adv. Proc. No. 15-ap-01080, mem. dec. (E.D. Cal., Apr. 5, 2016).

The Social Security Administration (SSA) administers the SSDI program and other federal benefits programs. The eligibility requirements for SSDI benefits are complicated, and the application process is often quite cumbersome. Once a person is approved to receive benefits, the burden is largely on that person to report any changed circumstances that might cause a reduction in benefits payments. If the SSA determines that it has been overpaying someone, it will assess an overpayment amount. It can withhold benefits payments in their entirety until that amount is satisfied, 20 C.F.R. § 404.502(a)(1), or pursue other means of enforcement.

The automatic stay prevents efforts to collect on a pre-petition SSDI overpayment while a bankruptcy case is pending. An overpayment is also potentially subject to discharge in bankruptcy, unless the SSA can establish an exception. The Angwin court addressed two possible ways for the SSA to assert its claim. The doctrine of setoff applies when a debtor and a creditor owe each other money prior to the bankruptcy case. 11 U.S.C. § 553. It allows the setoff of an amount owed to one party equal to the amount owed to the other party, and it treats that amount as secured debt. Id. at § 506(a)(1).

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By White House photographer Paul Morse [Public domain], via Wikimedia Commons2015 marks the 10-year anniversary of the comprehensive law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. 109-8, 119 Stat. 23. Supporters of the bill claimed that it would streamline the bankruptcy process and cut costs for everyone involved, but analyses of the law’s impact have suggested that creditors received most (or all) of the benefits. Some studies have suggested that BAPCPA has actually caused debtors’ costs to go up. Now that 10 years have passed, let us take a look at the bill and a handful of the changes it brought.

Passage of the Bill

Much of the support for BAPCPA came, unsurprisingly, from creditors. These are often the parties that bear the greatest loss when a bankruptcy court grants a discharge of debt, so they sought changes to the Bankruptcy Code that would ease this burden.

Opponents of the bill covered a wide spectrum, but a major point of contention was the assumption of widespread bankruptcy fraud. It was not clear to many that fraud was occurring at a rate that merited such a radical overhaul. Regardless of the opposition, however, the bill passed both houses of Congress—74 to 25 in the Senate, and 302 to 126 in the House of Representatives. President George W. Bush signed it into law on April 20, 2005.

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Unsplash [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayChild support, spousal support, and any other “domestic support obligation” (DSO), as defined by the Bankruptcy Code, are treated differently in a bankruptcy case from most other types of debt. DSOs have the highest priority for payment of any unsecured claim. 11 U.S.C. § 507(a)(1). They are excepted from discharge. Id. at § 523(a)(5). Property claimed as exempt under bankruptcy law could still be liable for DSO debts. Id. at § 522(c)(1). The bankruptcy trustee has additional duties when a creditor files a claim for amounts owed under a DSO.

The Bankruptcy Code broadly defines a DSO as any debt “owed to or recoverable by” a debtor’s spouse, ex-spouse, child, child’s parent or guardian, or governmental agency that is “in the nature of alimony, maintenance, or support,” and that is part of a court order or court-approved agreement. 11 U.S.C. § 101(14A). This includes orders for child support and spousal support under California law. See Cal. Fam. Code §§ 4000 et seq., 4330 et seq.

Courts around the country have found that other debts may meet the Bankruptcy Code’s definition of a DRO. These include an award of attorney’s fees in a proceeding for a modification of child support, In re Johnson, 445 B.R. 50 (Bankr. D. Mass. 2011); a duty to make mortgage payments on a former spouse’s residence, In re Westerfield, 403 B.R. 545 (Bankr. E.D. Tenn. 2009); and juvenile detention costs payable by a parent under state law, In re Rivera, 511 B.R. 643 (BAP 9th Cir. 2014). Courts found that each of these debts was excepted from discharge under § 523(a)(5). A monetary award that was part of the property division in a pre-bankruptcy divorce decree, however, was not a DRO, and therefore it was discharged at the end of the ex-husband’s Chapter 13 case. In re Mooney, 532 B.R. 313 (Bankr. D. Id. 2015).

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Sanfranman59 (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)], via Wikimedia CommonsThe bankruptcy system in the U.S. includes multiple levels of courts, including bankruptcy courts, bankruptcy appellate panels (BAPs), and district courts. Some of these courts have overlapping areas of jurisdiction, while others are excluded from hearing certain matters. The Ninth Circuit Court of Appeals recently considered whether its BAP had jurisdiction over a debtor’s petition for a writ of mandamus. In re Ozenne, No. 11-60039, slip op. (9th Cir., Mar. 25, 2016). The court held that the BAP did not have jurisdiction and that the district court was the proper forum.

A writ of mandamus is a court order that directs a lower court or other public official to take some official action, often to remedy an error or abuse of discretion. When a petition for a writ of mandamus is directed at a lower court, it often asks for an order modifying or vacating an order from the lower court. It serves a function similar to an interlocutory appeal. The federal All Writs Act states that any court “established by an Act of Congress” may issue a writ of mandamus. 28 U.S.C. § 1651(a). The question in Ozenne was whether Congress “established” the BAP.

Most of the federal judicial system is the result of Congressional legislation. After Article III of the U.S. Constitution established the Supreme Court, Congress created the system of district courts and circuit courts of appeal in the Judiciary Act of 1789. Federal statutes establish the number of federal judicial districts in each state, such as the four districts in California. 28 U.S.C. § 84. The bankruptcy court in each district “constitute[s] a unit of the district court.” Id. at § 151.

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Medical debt may be the single biggest factor leading to personal bankruptcy in the country. The Affordable Care Act (ACA), which began to take effect in 2014, makes health insurance coverage much more widely available to people. It does not, however, address many of the health care issues that lead to bankruptcy, such as high premiums, high deductibles, out-of-pocket costs, and external costs like missed work. It seems that wider access to insurance has not led to fewer bankruptcies. At least one report indicates that nearly 80 percent of debtors filing for bankruptcy due to medical bills have health insurance. The bankruptcy system offers solutions for people with overwhelming medical bills, and California law also offers some options short of bankruptcy.surgeon-3-1562055

A 2013 study found that as many as 10 million adults with full health insurance coverage would incur more medical debt that year than they could pay. This is only a small part of the 56 million adults who the study predicted would have some amount of difficulty paying their medical bills. A study of one county in Oregon found that medical debt was a factor in almost three-fourths of new bankruptcy cases in 2014. Over half of the total medical debt in that county was owed to hospitals and hospital systems, where costs can quickly skyrocket, and patients are often surprised to find bills for services that are not included in their insurance provider’s network.

Part of the purpose of a bankruptcy filing is to stop debt collection activities with the automatic stay. California offers some ways for debtors to seek relief from certain types of debt collection, short of filing for bankruptcy. The tools that creditors may use to enforce judgments vary from state to state, and California allows one of the worst ones, at least from a debtor’s point of view:  wage garnishment.

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