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Constant Wauters [Public domain], via Wikimedia CommonsBankruptcy offers relief to people and businesses in financial distress, allowing them to pay down debts over a period of time, or pay them down quickly by liquidating assets. A court may then grant a discharge of some unpaid debts. The bankruptcy process is not, however, supposed to give people a way out of debts incurred because of dishonest or unlawful acts. Congress has placed provisions in the Bankruptcy Code that except certain types of debt from discharge. A California district court recently considered the appeal of creditors who alleged that their claim against a debtor was excepted from discharge because it involved false pretenses. In re De Long, No. 2:14-cv-02947, order (E.D. Cal., Jan. 7, 2016).

The Bankruptcy Code bars a wide range of debts from discharge. 11 U.S.C. § 523(a). In some cases, such as child support obligations and student loans, an entire class of debt is excepted from discharge. Other exceptions are based on the manner in which the debtor incurred the debt, including debts for something of value “to the extent obtained by…false pretenses, a false representation, or actual fraud…” Id. at § 523(a)(2)(A). Creditors may ask a bankruptcy court to find that a debt is not subject to discharge under this section, after providing notice to all parties and conducting a hearing. Id. at § 523(c)(1).

The debtor in the De Long case owned and operated a construction company in Sacramento, California. The creditors, a married couple, hired the company to work on their home. The original contract between the parties, signed in June 2010, included a total project cost of $246,000 and a payment schedule. The creditors eventually paid the construction company a total of $189,400, but they hired another contractor in late 2011 to complete the job.

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By Frank T. Merrill (1848-1923), L.S. Ipsen, John Harley (Gutenberg.org) [Public domain], via Wikimedia CommonsContrary to many popular misconceptions about bankruptcy, declaring bankruptcy does not necessarily mean that a person is “broke.” It means that, even if the person has cash or other assets on hand, they cannot continue to make payments on their debts and other obligations with their available income and assets. Sometimes, though, a person is in such financial distress that they must ask the bankruptcy court to waive the filing fee and other court costs. This is known as a request to proceed in forma pauperis. A California district court recently considered such a request from a Chapter 7 debtor. Following the magistrate’s finding that the debtor did not make the request in good faith, the judge denied it. In re Gjerde, No. 2:15-mc-0013, findings and recommendations (E.D. Cal., Oct. 26, 2015), order (Nov. 13, 2015).

As with any legal proceeding, bankruptcy courts require a payment of fees for new cases. In the Central District of California, which includes Los Angeles, the filing fee for a Chapter 7 bankruptcy petition is $335, and $310 for a Chapter 13 petition. Most other new bankruptcy filings have a much higher fee of $1,717. Reopening a case also requires the payment of a fee—$260 for a Chapter 7 case and $235 for Chapter 13. The court charges fees to amend bankruptcy schedules, to file certain motions, and to issue certain documents like abstracts of judgment. Converting a Chapter 7 case to Chapter 13 is free of charge, but a conversion in the opposite direction costs $25.

Numerous federal statutes and rules address in forma pauperis requests for a wide range of fees, including the cost of obtaining a transcript, 28 U.S.C. § 753(f), and most or all fees associated with an appeal. Fed. R. App. P. 24. U.S. district courts have discretion to permit a waiver of fees if the requesting party submits an affidavit stating that they are unable to pay, or provide security for, the required fees. The court may not grant the request if it “certifies in writing that [the request] is not taken in good faith.” 28 U.S.C. § 1915(a)(3). While the same general standards as in other federal proceedings govern in forma pauperis requests in Chapter 13 cases, additional requirements apply to Chapter 7 cases. See Guide to Judiciary Policy, Vol. 4, § 820 et seq.

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By Jacob Davies [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsIn a personal bankruptcy case filed under Chapter 7 or Chapter 13 of the federal Bankruptcy Code, all of a debtor’s non-exempt property becomes the property of a new entity known as the bankruptcy estate. The court will appoint a person to serve as the trustee of the bankruptcy estate. The trustee’s duties depend on the type of case the debtor selects. In some situations, a trustee may find it necessary to keep a debtor “out of the loop” regarding all or part of a bankruptcy proceeding. This occurred in a Chapter 7 case that recently went before a California federal judge, In re Zinnel, No. 2:12-cv-00249, mem. order (E.D. Cal., Nov. 17, 2015). The court found that the trustee was entitled to a “protective order” preventing the debtor from formally requesting information about estate activities. However, this does not occur often. In most cases, the fact that a Debtor’s property is considered ‘property of the estate’, is actually a good thing since this fact will also allow the debtor to enjoy certain benefits and protection from creditors while the bankruptcy case is pending.

Protective orders—which protect information in the context of a bankruptcy case—are available in a variety of situations. The Bankruptcy Code authorizes courts to issue orders sealing case materials, which would ordinarily be public record, if they involve trade secrets, “scandalous or defamatory” information, or information that could be used in identity theft. 11 U.S.C. § 107. Procedural rules allow protective orders for information that might not become part of the public court file, if a court finds that the request for information will cause “annoyance, embarrassment, oppression, or undue burden or expense.” Fed. R. Bankr. P. 7026, Fed. R. Civ. P. 26(c). This type of order states that a party is not obligated to respond to discovery requests, or is only obligated to respond to a limited extent.

The debtor in Zinnel originally filed a Chapter 7 bankruptcy petition in July 2005. The case was closed at some point prior to June 2011, which was when the Office of the U.S. Trustee applied to the court to reopen the case on the grounds that the debtor might not have included certain assets in his schedules. Prosecutors had recently indicted the debtor for several bankruptcy-related offenses.

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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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