Will all my debts be discharged in bankruptcy?

The bankruptcy discharge is the ultimate goal of most bankruptcy cases. It is a court order that releases the debtor from the obligation to repay certain debts. Bankruptcy law divides debts into four categories: secured debt, priority debt, student loans, and general unsecured debt. Each of these categories is treated differently in bankruptcy.

Secured debt usually includes mortgages and car loans. In a Chapter 7 bankruptcy case, you have the option to either keep the secured property and continue paying the debt or surrender the property and have the debt discharged.

Priority debt includes government fines and penalties, recent taxes, and domestic support arrears. This type of debt is not dischargeable in a bankruptcy case.

Student loans are generally not dischargeable in bankruptcy, but there are some limited exceptions. In certain circumstances, you may be able to have your student loans discharged if you can prove undue hardship, and there are some recent promising developments in this area.

General unsecured debt is the fourth category and includes credit card debt, medical bills, deficiencies on repossessed vehicles, and other similar debts. In a Chapter 7 bankruptcy case, general unsecured debt is fully dischargeable, which is why many people choose to file for Chapter 7.

It’s important to note that even if a debt falls into a category that is generally dischargeable in bankruptcy, there may be exceptions or conditions that apply. For example, debts resulting from fraudulent activity may not be dischargeable, even if they are considered general unsecured debt.

It’s advisable to consult with a qualified bankruptcy attorney to determine which of your debts may be eligible for discharge in bankruptcy and what the potential outcomes of your case may be. The bankruptcy discharge can provide a fresh start for those who are struggling with overwhelming debt, but it’s important to understand the limitations and requirements of the bankruptcy process.

If you have any questions about this post or if you’d like to speak with an experienced bankruptcy lawyer about your situation, contact Boeing Law Office for a free confidential consultation at (510) 761-6230.

How does bankruptcy affect my credit?

It is true that filing for bankruptcy can have a significant impact on your credit score and credit history. However, it’s important to note that for many people who file for Chapter 7 bankruptcy, their credit score actually improves within a year after their case is completed.

This may seem counterintuitive, but it’s because Chapter 7 bankruptcy allows filers to discharge most unsecured debts, which can help them get a fresh start financially. By eliminating these debts, filers can often improve their debt-to-income ratio, which is an important factor in calculating credit scores.

In addition, most Chapter 7 filers are able to keep their property through exemptions provided by law, which can help them maintain a stable financial foundation after bankruptcy. With careful budgeting and responsible use of credit, many people who file for Chapter 7 are able to rebuild their credit over time.

Of course, the impact of bankruptcy on credit scores can vary depending on individual circumstances, and it’s important to work with a qualified bankruptcy attorney and financial advisor to develop a plan to manage your finances effectively after bankruptcy. But it’s worth noting that for many people, filing for Chapter 7 can actually be a step toward a stronger financial future.

Can I keep my property if I file for bankruptcy?

Whether you can keep your property if you file for bankruptcy depends on a number of factors, including the type of bankruptcy you file, the exemptions available to you, and the value of your property.

In Chapter 7 bankruptcy, which is also known as liquidation bankruptcy, your non-exempt assets may be sold to pay off your creditors. However, most people who file for Chapter 7 are able to keep most or all of their property through exemptions provided by law. These exemptions can vary depending on the state you live in, but they generally allow you to protect certain types of property, such as your home, car, and personal belongings.

In Chapter 13 bankruptcy, which is also known as reorganization bankruptcy, you can typically keep your property while repaying your debts over a three to five-year period under a court-approved payment plan. However, your plan payments must be sufficient to pay off any secured debts (such as a mortgage or car loan) and a certain percentage of your unsecured debts.

It’s important to note that the exemptions and rules regarding property can be complex, and the outcome can vary depending on the specifics of your case. Therefore, it is advisable to consult with a qualified bankruptcy attorney to determine how bankruptcy may affect your property and what options are available to you.

If you have any questions about this post or if you’d like to speak with an experienced bankruptcy lawyer about your situation, contact us for a free confidential consultation at (510) 761-6230.

What are the different types of bankruptcy?

There are several types of bankruptcy, each with its own requirements and procedures. The most common types of bankruptcy for individuals and small businesses are:

Chapter 7: Also known as “liquidation” bankruptcy, Chapter 7 is designed to discharge most unsecured debts (such as credit card debts, medical bills, and personal loans) by selling non-exempt assets to pay off creditors. Most people who file for Chapter 7 are able to keep most or all of their property through exemptions provided by law.
Chapter 13: Also known as “reorganization” bankruptcy, Chapter 13 allows debtors to keep their property and repay some or all of their debts over a three to five-year period under a court-approved payment plan. Chapter 13 is often used by people who have regular income and can afford to make monthly payments to creditors.
Chapter 11: Chapter 11 is a type of bankruptcy that is typically used by businesses and large corporations to reorganize their debts and operations. Under Chapter 11, a debtor typically continues to operate its business while repaying creditors over time.
Chapter 12: Chapter 12 is a type of bankruptcy that is available only to family farmers and fishermen. It is similar to Chapter 13 but provides additional benefits and flexibility for these types of debtors.

It’s important to note that the eligibility and requirements for each type of bankruptcy can vary depending on individual circumstances. It is advisable to consult with a qualified bankruptcy attorney to determine the most appropriate type of bankruptcy for your situation.

If you have any questions about this post or if you’d like to speak with an experienced bankruptcy lawyer about your situation, contact us for a free confidential consultation at (510) 761-6230.

Chapter 13 Debt Limits: April 2022 §109(e) Increases

Section 109(e) of the Bankruptcy Code provides what are known as the “debt limits” for Chapter 13 bankruptcy cases. It provides that only a person whose debts are less than a certain amount may file a Chapter 13 case.

As of April 1, 2022, those limits are changing. For cases filed April 1, 2022 and later, the limits will be $1,395,875 for secured debt (up from $1,257,850) and $465,275 for unsecured debt (up from $419,275).

Usually, secured debts are mortgages and car loans, which are “secured” by the house or car. Unsecured debts are basically everything else. If your total debts in either category exceed those limits, you are ineligible to file a Chapter 13 Case.

The 109(e) debt limits can play more of a role here in the San Francisco Bay Area than they do in other parts of the country, due to the comparably high housing values and mortgages. This increase in the limit should prevent a significant number of people from being forced into a different chapter.

If you are considering filing a bankruptcy case, but have debts that are still higher than the new limits, you should speak with a qualified attorney about your alternatives.

“Such Lien is Void” – Stripping Liens from Co-Owned Property in Chapter 13 (Lopez v. SLS)

” Lien Stripping” is something we’ve discussed here in previous blog posts. The idea is simple: In a Chapter 13 case, if there is more than one lien on your property, and if the value of the property is less than the amount owed on the first lien, the security interest is “stripped” from all junior liens, and the amounts owed under those junior liens becomes unsecured debt (i.e. subject to discharge).

One issue that often comes up with lien stripping is: What if the property is co-owned with someone else? Of course, spouses usually co-own the family home, so the problem is easily resolved by having both spouses file a joint case. However, if you co-own property with someone who is not your spouse, you can’t file a joint case with that person. There is the option of both co-owners filing separate cases in which both parties strip the lien as it attaches to their half of the property, but in my practice I’ve found that co-owners rarely want to do this, and understandably so.

In October 2019, in the case of Lopez v. Specialized Loan Servicing LLC, Judge Huennekens of the Bankruptcy Court for the Eastern District of Virginia (Case 19-03046) looked at the plan language of the statute to cut through a decade of assumptions and found that separate cases are not needed.

Blas Lopez and his brother co-owned a house in Henrico, Virginia. The house was worth $154,000, there was a first mortgage held by U.S. Bank with an amount owed of $158,000, and a second mortgage held by SLS with an amount owed of $36,000. Lopez initiated an adversary proceeding to determine this very question, of whether a Chapter 13 debtor may strip an unsecured lien where the property is titled jointly and where the joint tenant is not a debtor.

SLS asked the Court to follow the Middle District of Pennsylvania which, under similar facts in In re Harris, 494 B.R. 215 (Bankr. M.D. Pa. 2013), relied on the Third Circuit’s decision in Miller v. Sul (299 F.3d 183 (3d Cir. 2002) to hold that the stripped amount is limited to the debtor’s one-half interest in the property.

Judge Huennekens opined differently, finding that Harris’s reliance on Miller was misapplied. § 506 is the section of the Bankruptcy Code that governs the stripping of unsecured liens in Chapter 13 case. Miller was a case about § 522(f), which covers the stripping of judgment liens where there is equity in the property. The Miller Court wanted to avoid a result that would be a windfall for the co-owners: One could file a case, wipe out the judgment lien in its entirety, then both could enjoy the remaining equity.

In § 506 actions, there is by definition no equity in the property, and therefore there is no such concern about the debtor or her co-owner receiving a windfall. As such, there is no reason to deviate from the plain language of § 506, which says that a claim is secured only to the extent of the value of the property, that the remainder is unsecured, and that to the extent a lien is not an allowed secured claim, such lien is void.

There is no mention in the statute that only the portion secured by the debtor’s one-half interest is void. The LIEN is void.

This all is in keeping with something I heard Judge Carlson say from the bench in San Francisco years ago when presented with a similar situation, namely: “The lien is the lien!” Surprising that so many of us Chapter 13 Debtors’ attorneys have taken it as gospel that two cases are required. Long-held assumptions need to be questioned from time to time.

In re Crocker: Fifth Circuit Holds Private “Bar Study” Loans Dischargeable

On October 21, 2019, the Fifth Circuit Court of Appeals entered an opinion in In Re Crocker. In 2015, Evan Crocker filed a Chapter 7 Bankruptcy case and received a discharge. In his Schedules, he had listed a $15,000 claim held by Navient that was originally incurred in 2009 as a “bar study loan.” (Bar study loans are loans incurred by law school graduates/would-be attorneys after graduation to cover the costs of taking bar preparation courses and living expenses while awaiting exam results.) After the conclusion of the case, Navient continued to try to collect from Crocker, so he filed an adversary proceeding in the Southern District of Texas, asking for a finding that the loan had been discharged and a contempt finding against Navient.

Crocker then added as a co-plaintiff Michael Shahbazi (who had filed Chapter 7 in Virginia in 2011 with a loan related to his attendance at a technical school in 2002), and sought certification as a national class action. Navient moved for summary judgment, claiming the District Court lacked jurisdiction to enforce a discharge entered in another District.

The District Court certified both the dischargability and jurisdiction question to the Circuit Court. The Fifth Circuit, in a major holding outside the scope of this blog post, held that only the Court that issued a discharge order has the power to hear an action for violation of that order.

As to the dischargeability question, the Circuit Court held that the § 523(a)(8) student loan exception to dischargeability did not apply to the bar study loan, and that it was indeed dischargeable. This is a position that this office has long held, and successfully represented clients with respect to.

§ 523(a)(8) says that absent “undue hardship,” the bankruptcy discharge does not apply to: “qualified educational loans” (§ 523(a)(8)(B)), education debts made, insured, or guaranteed by the government (§ 523(a)(8)(A)(i)), and obligations “to repay funds received as an educational benefit, scholarship, or stipend” (§ 523(a)(8)(A)(ii)).

With respect to bar study loans, such borrowers have already graduated from law school at the time of borrowing, and bar prep classes are not Title IV institutions, so such loans can’t be qualified educational loans under § 523(a)(8)(B). Moreover, since bar prep schools are not qualified to participate in Title IV programs, therefore all such loans are private (i.e. not governmental). That takes care of § 523(a)(8)(A)(i). Nor are the funds received as a scholarship or stipend. So that leaves you, as will all bar study loan cases, with the definition of “educational benefit.”

After looking at the legislative history and doing linguistic analysis, the Court concluded: “[E]ducational benefit” is limited to conditional payments with similarities to scholarships and stipends. The loans at issue here, though obtained in order to pay expenses of education, do not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because their repayment was unconditional.”

This is a good decision that does not fall into the trap that has snared other courts of confusing an “educational benefit” with “the benefit of an education.” Debtor’s lawyers should take note.

Practical Considerations on Discharging Taxes in Bankruptcy

Consideration #1: The Basic Rules for Taxes in Bankruptcy

It’s easy to rattle off the rules regarding the dischargeability of taxes in a bankruptcy case:

The tax must have come due at least 3 years before the filing of the case. (§507(a)(8)(A)(i))
An actual return must have been filed at least two years before the case is filed. (§523(a)(1)(b)(ii))
The tax must have been assessed by the IRS, if at all, at least 240 days before the filing of the case. (§507(a)(8)(A)(ii))
You can’t have committed fraud or willful evasion. (§523(a)(1)(C))
Only income tax can be subject to discharge.

Sounds great, right? Let’s say it’s February 2018. You had a tax liability for 2013, which came due on April 15, 2014. That’s more than 3 years ago. You filed a return on time, and you and the IRS agree to the amount owed (and hence, as a practical matter, it’s assessed). It’s income tax, and you’re not a member of a tax deniers group. You can file a bankruptcy case and it’s all gone, right? Not so fast.

Consideration #2: Is There a Lien?

When you file a bankruptcy case, the law puts your tax debt into three categories: Priority, Secured, and Unsecured. Any tax that does not meet the 3 year/2 year/240 day rules above is subject to “priority,” and that’s the reason why it’s not going to get discharged.

But then you take a look at all that remaining non-priority tax. If the IRS has not recorded a lien, then great! All of the remaining tax goes into the “unsecured” and is subject to discharge.

However, if the IRS has recorded a lien, then you take a look at your assets. You add up the value of all your assets: equity in your home, in your vehicle, money in the bank, personal belongings, everything. (Everything, that is, except funds in ERISA-qualified retirement accounts such as 401(k)s.) Whatever the value of all that is, an equal amount of the non-priority tax becomes “secured.” And so, that amount doesn’t get discharged either, but for a totally different reason.

Thus the question of whether there is a lien becomes very important. If there is, the only amount that will be subject to discharge will be the amount that’s left after a) you subtract the priority amount, and b) you subtract the secured amount.

Consideration #3: Your Assets and Income

Let’s say you’ve gotten this far and it’s looking good. All your tax is old and you filed your returns on time, and there’s no lien. Next you have to look at your assets and income. This is more a question of basic bankruptcy law than tax law.

If you file a Chapter 7 case, the law puts your assets into different categories, and then puts caps (“exemptions”) on those categories. If you have assets over those caps, a Chapter 7 trustee has the authority to liquidate those assets and divvy up the proceeds amongst your creditors.

So even if all of your tax debt falls into the “unsecured” category, if you have significant assets (such as a house with lots of equity), the IRS is still going to get at least partially paid: they will get a portion of the proceeds from the trustee’s distribution.

If you file a Chapter 13 case, the Trustee does not have the authority to liquidate your assets. However, the Court cannot confirm your Chapter 13 Plan unless your creditors get paid at least as much as they would receive in a hypothetical Chapter 7 case. So whatever the IRS would get if you filed Chapter 7, your Chapter 13 Plan must propose to pay them at least that much over 5 years.

There’s also a consideration of income. Even if all your tax debt is non-priority and unsecured, and even if your assets are below the exemption caps, there is a thing called the Means Test. This is a calculation that tries to come up with an amount that you can supposedly afford to pay to your unsecured creditors through your Chapter 13 Plan. Again, the Court cannot confirm your Chapter 13 Plan unless it pays your creditors what the Means Test says you can afford. And so again, the IRS would at least get something.

It’s Complicated, But There Is Help (and Hope!)

Dealing with taxes in bankruptcy is more complicated than just knowing the dischargeability rules. But perhaps I’ve depicted it as overly complicated here. It’s not really; these are concepts that any experienced bankruptcy lawyer is going to be readily familiar with. What’s more, I have represented a large number of clients in getting rid of a large amount of tax debt. It’s the rare case in which the Bankruptcy Court doesn’t have any kind of assistance to offer.

I post this because I know that there is a great deal of misunderstanding out there about what happens to taxes in bankruptcy, both on the part of individuals and on the part of professionals helping them. It may be more complicated than you think, but there is also more that the Bankruptcy Court can accomplish for you than you think, and only an experienced bankruptcy lawyer can sort it out for you.

HOAs’ Secured Claims Are Limited to Amounts Stated in Lien

If a person files a Chapter 13 bankruptcy case (or a Chapter 7 case where there is a distribution to creditors), creditors must file claims with the court in order to receive any money from the trustee. Such claims are categorized as secured, unsecured, or some of each. Claims such as mortgages, car loans, and tax liens are secured and will have to be paid in full. Credit cards and medical bills are unsecured and can be paid less than 100%. (In many cases, unsecured creditors get nothing.)

It is not uncommon for people to file bankruptcy cases where there are unpaid HOA dues/assessments, and where the HOA has recorded a lien. Homeownership issues and foreclosure prevention are, after all, primary reasons why people file bankruptcy cases. In such cases, the HOA will typically file a claim asserting that the secured portions of such claims consist of not just the amount listed on the recorded lien that they recorded, but of the entire amount that the homeowner owes to the HOA. Such claims are based on the notion that their liens secure future amounts that come due. This notion is simply not correct under California law.

The District Court for the Southern District of California weighed in on this question back in 1993 (In re Henderson, 155 B.R. 10, 12 (Bankr. S.D.Cal. 1993)), and now so too has the Northern District in In re Warren (N.D. Cal., 2016), bankruptcy case no. 14-31236.

The facts the Warren case are these: Angela Warren the homeowner failed to make seven HOA payments from December 2007 through June 2008. The HOA then recorded an assessment lien against the property for those unpaid dues, specifying an amount of $5,865. The lien also contained language claiming to include other fees, costs, and interest “as may become due to with respect to the Property subsequent to the typed dates set forth above”. Ms Warren filed a Chapter 13 case in August 2014, then converted it to Chapter 7 in September 2014. The HOA filed a claim in a total amount of $88,796, with a secured portion of $31,406. The Bankruptcy Court disagreed and limited the HOA to a secured portion of the $5,865 listed in the lien.

On appeal, the District Court affirmed the Bankruptcy Court’s Decision. The reasoning is simple: §5650(a) of the California Civil Code requires an HOA to give at least 30 days’ notice before filing a lien to collect “a past due assessment” and that the notice must include, among other things, a statement of the charges owed. Further, the HOA can only impose liens after a vote by the directors. The Court noted that the Code’s HOA provisions “reflect the legislature’s intent to impose and rigorously enforce its procedural requirements to protect the interest of the homeowner.” Therefore, the language purporting to secure future assessments was not permissible under the Code, and therefore the secured portion of the claim was limited to the amount originally listed. The Court pointed out that the HOA could have continued recording additional liens when new amounts came due, but they didn’t do that.

This is a much-misunderstood area of bankruptcy law, a state of affairs that isn’t helped much by the HOA industry’s continued insistence that their claims are fully secured. I myself wouldn’t have been aware of these developments if I hadn’t recently heard Oakland’s Judge Novack discussing them from the bench recently. I hope this information will become more widely known among the debtors’ bar, and you can bet I will be on the lookout for this in future cases with HOA issues.

10 Steps to Filing a Bankruptcy Case

Filing a case with the Bankruptcy Court can seem complicated and daunting, but it doesn’t need to be that way. Here are 10 steps to filing a bankruptcy case to help you know what to expect. I’m providing this list in the hope that if you know what’s in store for you, it’ll be less confusing and stressful. Of course, this list is no substitute for being represented by a lawyer. (I would never, ever recommend that you consider that you try filing bankruptcy without a lawyer, and so that is #1 below.) As you review this list, you’ll see that there are one or two “heavy lifting” items that your lawyer has to do, but that most of it is comprised of information that you have to provide. Fortunately, providing the information is not too difficult: pulling a few documents from your bank or employer, plus a few online searches, should do it.

Also, be aware that this is just a list of PRE-filing items. Once the case is filed, there will be a few more things for you to do. Fortunately, in a consumer bankruptcy case, most of the “big picture” decisions are made before the case is filed.

Here are the basic pre-filing steps:

Get a Lawyer: This is absolutely the first step. Please don’t try to file a bankruptcy case without a lawyer. There are many documents to be filed with the Court, and if you fail to do so, your case will be dismissed. If your case is dismissed, a subsequent case becomes much more difficult. Moreover, the documents you file with the Court should present a coherent picture to the judge and the trustee. What are you trying to accomplish with your case? Are your assets protected from liquidation? How much are your creditors entitled to receive? These are all basic questions that should be very clear from a well-drafted bankruptcy petition.
Determine Your Income: How much money do you make? From what sources? (e.g. employment, business, social security, retirement, rental, etc.) How much money did you make in each of the past 6 months? Is there going to be a change in the immediate future? The answers to these questions are used in the Means Test, which determines whether you are eligible to file a Chapter 7 case, or how much creditors must receive in a Chapter 13 case.
Break Down Where Your Money Goes: You have the same ordinary & typical expenses that everybody has: housing, groceries, cell phone, gas, car insurance, things like that. But you also have expenses that are unique to you. Are you making payments on student loans? A payment plan to the IRS? Domestic support? Medical expenses? Care and support of a family member? The answers to these questions are also taken into consideration in the Means Test.
List your assets: Do you own any real estate? A business? Vehicles? Retirement accounts? These are the big items a person usually thinks of as assets, but there are other, easily overlooked items: Does anyone owe you money? Are you the beneficiary of any trust? Do you have life insurance with a cash value? A security deposit with your landlord? An anticipated tax refund?
List and categorize your debts: Who are all the people in the world who say you owe them money? I think of them as falling into 4 categories: 1) General unsecured debt: credit cards, personal loans, medical bills, deficiencies on repossessed vehicles, etc. 2) Secured debt: generally, mortgages and car loans. 3) “Priority” debt: Debts owed to the government, such as recent taxes, domestic support arrears, fines and penalties. 4) Student loans.
Be aware of potential pitfalls: Are you a married person filing without your spouse? Do you own a business? Have you incurred any new debt recently? Is anyone suing you, alleging fraud? Have you transferred any property to, or have you paid off, any family members or business partners? Have you filed previous cases in the past? These are examples of the kind of thing that can very quickly make a bankruptcy case very complicated.
Figure out what kind of case is right for you: This is a very big decision, and one you probably can’t make without the help of a lawyer. This is probably the first thing any lawyer you speak with is trying to figure out, and it should probably be #2 in this list, except that no lawyer will be able to give you an answer until the answers to numbers 2-6 have been fleshed out. Just be aware that for most people, there are two kinds of cases, Chapter 7 and Chapter 13. If you have modest income and modest assets and entirely unsecured debt, Chapter 7 is almost certainly better for you. If you are trying to stop a foreclosure, Chapter 13 is almost certainly better for you. However, most people are in between, and there are pros and cons to each kind of case, and you need a lawyer to help you figure it out.
Take your pre-filing class: Everyone who files a bankruptcy case has to take 2 classes, one before you file, one after. People typically take them online. They take about 2 hours each. If you don’t take the pre-filing class, your case gets dismissed. If you don’t take the post-filing class, you don’t get a discharge. The certificate showing you took the pre-filing class must be attached to the petition when you file your case.
Prepare the petition, schedules, and other documents: A typical consumer bankruptcy filing consists of around 40 to 60 pages. Much of the information contained therein is comprised of the income, assets, expense, and debt information discussed above. You have to swear under penalty of perjury that it is all true and accurate. As mentioned above, it is especially important that the documents present a coherent picture.
Pay the filing fee and file the case: As of today, filing fees for a Chapter 7 case are $335, and $310 for Chapter 13. Most bankruptcy lawyers will file your case electronically, although it is possible to go to the clerk and file paper documents. In my practice, I do not file “skeleton petitions” (just a couple basic documents, with the rest needing to be filed later) unless it is absolutely necessary. And if you have done all the preparatory work listed above, it generally will not be necessary.

That’s it. Filing a bankruptcy case shouldn’t be confusing or scary. The hardest parts will probably be meeting with, paying, and getting documents to your lawyer. Don’t worry; most bankruptcy lawyers do this kind of work because they want to help people. They won’t bite. Perhaps more importantly, as lawyers, they have ethical obligations to you that other people don’t (such as debt consolidators and “foreclosure prevention” realtors). In my practice, initial consultations are free. If you need help, call or email me today.