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Bankruptcy Orientation for New Attorneys: Who Should File, How Should They File, and When?

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Bankruptcy Orientation for New Attorneys: Who Should File, How Should They File, and When?

This course will introduce practitioners to the basic considerations for guiding a bankruptcy case: Who needs to file bankruptcy, what kinds of bankruptcy are available, and how does bankruptcy work. The course places bankruptcy practice into the context of the role it plays in our economy and society. We’ll cover the use of bankruptcy to prevent home foreclosures and evictions, and we’ll touch on student loan debt and taxes in bankruptcy.

Transcript

- Bankruptcy Orientation for new Attorneys: Who should file, how should they file, and when? When we think of a debtor who can't pay their debts, what comes to mind? Common notions of people who file bankruptcy tend to be negative, irresponsible, dead beats, living larger than one's resources. Sometimes these things are true, but most bankruptcies do not result from irresponsible spending. The common immediate causes of financial distress that leads to bankruptcy are well known and have been documented since the 1990s. Medical crises are cited in over 71% of bankruptcy filings, a number that has not decreased significantly since the passage of the Affordable Care Act in 2010. The medical crises can lead to loss of income from a breadwinner as a result of injury or illness, or the medical debts from the illness, or loss of work time from a caregiver of someone who has suffered from an injury or illness, then there are non-medical job losses such as layoffs and foreclosure, I'm sorry, layoffs and firings, and finally, divorce and family separation are often a major factor in the financial distress that leads to bankruptcy, as when a family that has had to pay for one household now has to pay for two. Bankruptcy is a solution to the problem of debts a client cannot repay. Often the debts form part of the reason they can't repay, disqualifying them from the job they need, or the auto loan they need to get to the job. Bankruptcy is an answer to the question, what do I do when I can't pay my debts? The code is intended to ensure fairness to creditors as well as a fresh start for debtors. It's a code based area of law, meaning that there's a bit of a learning curve up front, but once you have a handle on the basics, you'll be able to handle cases with some familiarity and competence. It is rewarding for clients and it's rewarding for their advocates as well. This course will introduce practitioners to the basic considerations for guiding a bankruptcy case. Who needs to file bankruptcy? What kinds of bankruptcy are available? And how does bankruptcy work? The course places bankruptcy practice into the context of the role it plays in our economy and society. We'll cover the use of bankruptcy to prevent home foreclosures and evictions, and we'll touch on student loan, and taxes, and bankruptcy as well. A little bit about me, my name is William Kransdorf, and I'm the Director of the Legal Services NYC Bankruptcy Assistance Project, where I've been for the past 16 years. I'm also Adjunct Professor of Law at St. John's School of Law in Queens, New York, where I've been for the past 12 years. I have a total of 30 years of practice in Indigent Legal Services, Bankruptcy Law, and Labor Law. And I have a JD from Harvard Law School from 1992, and a BA in History from the University of Chicago in 1989. People often think of bankruptcy as a negative, a marker of financial failure, and those needing bankruptcy often see it that way as well, but bankruptcy filers quickly come to realize that bankruptcy is something else, it is financial empowerment, enabling families to buy the car they need to get to work, to rent the apartment they need to apply for that better job. Debtors who go through bankruptcy often discover that bankruptcy is a financial fresh start, it brings relief from crushing debt that falls disproportionately on women and families of color, because of structural and historical conditions that have made financial security harder to achieve for some of us than others. Who should consider bankruptcy? Well, obviously, clients who can't pay their debt, who have debts they cannot pay, credit cards, medical debts, utility arrearages, these are common debts that are discharged in bankruptcy, but so are taxes, especially income taxes that are at least three years old, three years due, government benefits overpayments, such as unemployment or social security overpayments, and rental arrearages can be discharged in bankruptcy, although there's complications to that. Auto loans, including where the car has been repossessed, leaving the debtor with a deficiency balance, these are dischargeable debts in bankruptcy, and home mortgages can be dealt with, if not discharged in bankruptcy, at least managed and sometimes modified. Bankruptcy should not be a debtor's last resort. In fact, many of the steps that people take to avoid bankruptcy can be harmful to their long term financial health. In particular, debtors who use their retirement savings to pay debts or make ends meet are buying short term financial solutions with unnecessary long term financial costs. Debtors may try to avoid bankruptcy out of a mistaken belief that it would be too onerous, when in fact, bankruptcy doesn't end one's financial life, it restarts it. Some of the alternatives that might be unwise include selling off assets to pay debts, such as taking money out of one's retirement for the short term goal of catching up credit cards, when the retirement savings are gonna be much more important for getting one through their retirement. Similarly, delaying on filing bankruptcy until after property or wages have been lost is an unfortunate mistake that people often make, and there can be pitfalls to using non-bankruptcy alternatives such as debt rehabilitation. People are often surprised to learn that bankruptcy improves their credit rating, if not immediately, then over time, people with particularly bad credit as a result of defaulted debts may find that bankruptcy immediately improves their credit rating. People are also worried that filing bankruptcy will be known to family, friends, and coworkers when that's rarely the case. The people and parties that are gonna know about a bankruptcy filing are the creditors with whom the debtor had accounts, the creditors with whom they apply for credit in the future, and other parties who would be directly affected by the bankruptcy. Bankruptcy can do a lot to protect somebody who can't pay their debts, such as protecting a debtor's wages from garnishment, protecting their bank accounts from seizure, protecting secured debts such as home and automobile loans so that the secured property isn't sold off to satisfy the debt. Bankruptcy stops creditor harassment, including those calls that creditors make at all hours of the day and night, calls to family, and friends, and neighbors, et cetera. It helps, as I mentioned, bankruptcy helps, enables people to rebuild their credit rating, and bankruptcy is able to wipe out debts even where a judgment has been entered in the case. The bankruptcy process is built on a very simple framework, the moment the debtor files, two things happen. The first is the creation of what's called the automatic stay, the stay is a court order that bars creditors from taking any collection action unless they first get permission from the bankruptcy court. The stay remains in effect throughout the bankruptcy case, and protects the debtor from any collection action. The idea of the creditor coming into court to get relief from this stay is actually very remote. Also, occurring the moment the bankruptcy case is filed is the creation of what we call the bankruptcy estate. Everything the debtor owns or has an interest in at the time the case is filed becomes property of the bankruptcy estate. The bankruptcy trustee oversees this estate, and at least in theory, the trustee is able to sell the property and the estate in order to satisfy the debts of the debtor. The reality, however, is that exemptions protect all of the debtor's property in most cases. The bankruptcy trustee who oversees the case will meet with the debtor in a meeting of creditors that takes place about a month after the case has been filed, contrary to its name, there are almost never any creditors at the meeting of creditors. And if this is a Chapter 7 case, then the creditors have two months following the meeting of creditors to file objections, which they almost never do, and once those two months are up, the bankruptcy court automatically issues an order of discharge. Like the stay, the discharge is automatic, no judge has to sign it, it just goes into effect once two months have passed from the meeting of creditors. The Chapter 7 case takes about three months from the filing to run its course to discharge. As I said, Chapter 7 is liquidation, it's the idea that the trustee is gonna liquidate assets to pay off creditors, but the reality is that over 90% of those cases are no assets cases, meaning that there's nothing for a trustee to liquidate. Chapter 13 on the other hand, involves a repayment plan that lasts three to five years. The debtor will, through this repayment plan, will pay what they can on their debts from future earnings. In both Chapter 7 and Chapter 13, the proceedings are mostly ministerial in nature. There are no litigations, there are no plaintiffs or defendants, there are no depositions, or discovery, or trials, the debtor is not waiting to find out if their bankruptcy will be granted, rather, they're waiting only to see if anybody objects, and when nobody does, the discharge occurs like the stay, automatically. There are some downsides to bankruptcy, the effects of bankruptcy, well, bankruptcy will affect the debtor's credit for at least 10 years from the filing of the case. So bankruptcy can be particularly hard for people with very good credit who may experience an immediate loss of credit worthiness. But most people, when they file bankruptcy already have bad credit, some of the filers have credit that's so bad, that filing bankruptcy actually improves their credit rating, this is because the filing of the bankruptcy stops all credit from being reported on a credit report from prior to the bankruptcy. So if there is good credit history prior to the bankruptcy, the good credit history is wiped out, if there is bad credit history, the bad credit history is wiped out. A bankruptcy filing in and of itself is bad credit history, but it can wipe out worse credit history that existed before the bankruptcy, and perhaps more significantly that bankruptcy filing recedes an importance over time. The filing of a bankruptcy can be particularly harmful to people who are seeking a new apartment, or a rental situation with a landlord, as most landlords now will want to check credit or bankruptcy history before renting to a tenant, they will see the bankruptcy, and that will often have a negative effect on their willingness to rent to a debtor. On the other hand, bear in mind that if a debtor has negative credit history already, the bankruptcy may look no worse than that negative credit history, and in some cases, especially after time has passed, it may look significantly better. Bankruptcy can also hinder debtors from getting some jobs, as, for example, where they're required to get a security clearance, although again, this may be, the harm from bankruptcy may be less than the harm from negative credit on their record. Of course, people who are thinking of filing for elected office should think very carefully about filing bankruptcy as this is likely to be fodder for their opponents for years to come. It's also important to note that some bankruptcy cases will jeopardize the debtor's ability to keep very valuable property such as a second home, a second car, artwork, or other valuables. The important thing to understand, however, is that a decent bankruptcy practitioner will always be able to identify the property that's at risk from a bankruptcy filing, and either avoid filing or give the client adequate guidance to avoid the loss of property. I mentioned earlier about the bankruptcy discharge that it is issued automatically after three months, the thing to know about that bankruptcy discharge is it does not specify which debts were discharged or were not discharged, it says merely, all debts that are dischargeable have been discharged, so to know what that means, you have to identify what debts are not gonna be dischargeable in bankruptcy. Child support and alimony are at the top of this list, they are not dischargeable under any circumstances. Criminal fines and restitution, which includes parking tickets, and traffic tickets, and toll violation penalties, if somebody has toll violations, typically, the bill will have the toll itself, a penalty for late or non-payment, and then interest on the toll and violation. Only the toll itself is dischargeable, and that's typically something like 10% of the total amount owed, so tolls are dischargeable in bankruptcy, but the fines and penalties that come with them are not dischargeable. Most student loan debt is gonna be either non-dischargeable or difficult to discharge, but we're gonna talk more about that in a minute. Similarly, certain tax debts may be nondischargeable, that's gonna be income taxes if they're from the past, within the past three years, or other non-income taxes such as sales taxes. Securing creditors will retain the right to take back their collateral even though the underlying, the debt that is owed for the secured property can itself be discharged, so the creditor may lose the right to collect the money that's owed to them, but they don't lose the right to collect the car or the house, so if a debtor wants to keep that car or that house, they need to keep making payments on that property. Landlords, when debtors try to discharge rent in bankruptcy, landlords retain the right to the collateral, I'm sorry, to the possession of the apartment, so a debtor who needs to keep the place they're renting will need to catch up the rent in whatever way they can, regardless of the fact that the rent has been discharged in bankruptcy. Any time a creditor can show that there was bad faith in borrowing or fraud in a loan, they can challenge the dischargeability of that debt through an adversary proceeding. An example of bad faith borrowing is where a debtor runs up a large amount of debt, say $50,000, in the weeks prior to filing a bankruptcy petition, and then the creditor might allege with some success that at the time the debtor borrowed the money, they were not intending to repay it. The fraud allegation might look like a loan application that shows the debtor's income is significantly higher than it actually was at the time of the loan application, and that might be a basis for nondischargeability as well. Nondischargeability actions by creditors are very rare, require strong facts, and as I mentioned, require this litigation matter called an adversary proceeding. An adversary proceeding is a lawsuit in the bankruptcy court that has a summons in complaint, and there's discovery, and there's a motions for summary judgment, and there can even be a trial, so they can be very expensive to prosecute and generally are not undertaken lightly. Student loan debts in bankruptcy are an important topic for people looking to practice consumer bankruptcy law, they've become much more important in the past 10 years as student loan debt has ballooned. The conventional wisdom about student loan debts is that they are not dischargeable in bankruptcy, but the reality is different. Some educational related debts are not qualified student loans for purposes of bankruptcy discharge, and some debtors will be able to discharge their student loans in bankruptcy even if they are qualified student loans. Debts that are not qualified student loans might include, for example, unpaid tuition, that's a debt directly with the learning institution that did not involve a promissory note. Similarly, private loans that a debtor took out for ostensibly as student loans, but that were not actually used for higher education. So for example, where the cost of education at a particular college was covered by grants and federal student loans, and then the debtor took out some additional student loan from a private lender that was used for other things, perhaps a car, that student loan may be dischargeable in bankruptcy without need to bring the litigation for undue hardship, that I'm about to talk about. So loans that are qualified student loans can be discharged if paying them would be an undue hardship. Showing an undue hardship is what requires an adversary proceeding, so the debtor would need to sue the creditors, usually the Department of Education is, almost always the Department of Education is gonna be one of the defendants in that lawsuit. And it's a bit more involved, a litigation, than filing a garden variety bankruptcy petition, but it's well worthwhile. Many more student loan debts could be discharged in bankruptcy than are attempted, and I think the primary reason for this is because it takes somewhat more work than the average bankruptcy filing, but they're worth doing. To discharge student loans through an adversary proceeding, the debtor must bring this lawsuit, it has its own case number, it has to be associated with an underlying bankruptcy, so you can't just skip the filing of a bankruptcy and go straight to filing an adversary proceeding, you have to first file a bankruptcy, and then the adversary proceeding has to be appended or associated with that bankruptcy, although it has its own case number, it has its own docket, and it is in effect its own case. Debtors must show unique and compelling circumstances that would make paying the debts, in this case, an undue hardship, under bankruptcy code section 523a8, the majority of states follow what's called the Brunner test for determining undue hardship. This follows from the case of Brunner versus New York State Department of Higher Education from 1987, the Brunner test has three prongs that the debtor must, or the plaintiff must establish. Number one, that they can't currently afford to make any payments on their student loan debts, number two, that they're likely never be able to make any payments on their student loan debts for a significant portion of the repayment period. One of the cases in the Brunner case history used the language, a certainty of hopelessness in articulating this second prong, which is one of the reasons why people have been reluctant to bring student loan actions, although they probably shouldn't be, because that language is becoming less persuasive than it was in the past. The third prong is the one that separates the Brunner test from other states, it is a good faith test and requires a debtor to show that they have done all that they could have to repay the student loan debts prior to this bankruptcy, typically, this means that they have made some payments, and in most cases, they need to have made significant payments on their student loan debts to show good faith. The minority test, the totality of the circumstances test, little bit easier to pass, primarily because it does not require that third prong showing of good faith efforts that is required in the Brunner test. The totality of the circumstances test is not attributed to a particular case, but recent cases that have illustrated this totality of the circumstances include, Smith v. Department of Education from 2018, and Erkson versus Department of Education from 2018 as well. Taxes are also dischargeable in bankruptcy under certain circumstances, first of all, income taxes can be dischargeable if they meet certain timelines. To be dischargeable in bankruptcy, an income tax must have been due for at least three years, and that means running from the date the tax return was due, so if we're talking about 2018 taxes, those first became due on April 15th, 2019, and three years due means April 15th, 2020, 21, 22, so as of this past April, 2018 taxes were dischargeable in a bankruptcy. It's a little bit different if the debtor had asked for an extension on their taxes, then the operable date is October 15th, 2019, so you would have to wait until three years from October 15th, 2019 before those 2018 taxes would be dischargeable. Other taxes that are even older would meet this test, but more recent taxes, such as 2019, would need to wait until next year. Note however, that the operable, the date you would expect 2019 taxes to become dischargeable, April 15th, 2020 would be incorrect, in that year, because of Covid-19, the IRS delayed the deadline for filing taxes to July 15th, so you would need, if you were trying to discharge 2019 taxes, you would need to wait until April 16th, 2023 to file that bankruptcy petition to meet that three year test. In addition to the three year test, there's a two year test that requires that tax returns have been filed at least two years before the filing of the bankruptcy petition. And there's also a no reassessment test, meaning that the taxing authority has not reassessed the amount due on these taxes within eight months of the filing of the bankruptcy petition. If those three timelines are met, there are a couple of other tests as well, or things that could cause a tax debt from being discharged, an income tax debt, if the taxing authority claims tax fraud, they would need to come into bankruptcy court to show that, but tax fraud can be a basis for nondischargeability as well. And tax liens may preserve the right of the taxing authority to collect on a debt that was otherwise discharged in bankruptcy, so people who have tax liens filed against them may need to address seeing if those tax liens can be set aside after bankruptcy. Other tax debts that are not income taxes might not be dischargeable, in particular, trust fund taxes are not dischargeable, trust fund taxes means that the debtor was collecting a tax for somebody else. So when a debtor runs a bodega that sells chewing gum, and somebody buys a pack of gum at that bodega, the customer pays the debtor the sales tax on that chewing gum, and the debtor holds that sales tax in trust for the taxing authority until they send it to the taxing authority, if instead they spend that money, they have now created a non-dischargeable trust fund tax debt. So other examples of trust fund taxes could include debtors who had employees and withheld taxes for the employee, withheld unemployment benefits, insurance payments, or other disability insurance or things like that, those are all money that was collected from somebody else for taxes, and the debtor is required to pay that to the taxing authority, or it's a nondischargeable debt. As the discussion with respect to taxes suggests, there's often a question of bankruptcy timing, when is the right time to file taxes? And there are a number of situations where bankruptcy timing comes into play, so for example, a debtor may need to delay filing bankruptcy if they have a large tax debt, as we discussed, that then that tax debt will become dischargeable with time. Similarly, debtors may have a financial crisis that is ongoing and will continue to generate unpayable debts into the future, the debtor may wish to wait to file bankruptcy until that financial crisis is resolved. And a common example here is a medical crisis where the debtor's continuing to churn medical debts while the medical crisis runs its course, that person may want to wait until the medical crisis is resolved before filing bankruptcy so that all of the debts resulting from that crisis are part of the bankruptcy. Imagine if instead the debtor has a medical crisis and files bankruptcy in the middle of that medical crisis, any medical debts that are generated after the bankruptcy has been filed are gonna be outside of the bankruptcy and will not be discharged in bankruptcy, so the debtor could come out of that medical crisis with post bankruptcy debts that are not discharged and not receive the full fresh start that bankruptcy is supposed to give to people. Other financial problems might continue to churn unpayable debts as well, such as, where a debtor has a house that's in foreclosure that they will not be able to save in bankruptcy, they know that they don't have the income to make the monthly mortgage payments, so they're letting the house go, if they file bankruptcy before the foreclosure process completes, there can be debts as a result of that foreclosure that aren't incurred until after the bankruptcy is filed, are not discharged in the bankruptcy, so it might be worthwhile to wait for that foreclosure to run its course before the bankruptcy is filed. A different reason that people might need to wait to file bankruptcy is where there are credit card transactions or contracts that they need to complete, which would be impeded by a bankruptcy filing. So for example, the person who needs to buy a car and needs to get a car loan before they file bankruptcy, or they need to sign an apartment lease before they file bankruptcy, because the bankruptcy would interfere with their ability to get the apartment lease. Note that I talked about bad faith borrowing where borrowing money just before filing bankruptcy could create a nondischargeable debt, and it might sound like borrowing or getting a car loan just before filing bankruptcy would look like bad faith borrowing, but it won't in this case, because the debtor is not going to stop making payments on this car debt, they're gonna borrow money to buy a car and they want to keep the car, so they're gonna continue to make payments on that car loan and the bankruptcy is not going to impede them from making those payments. So that doesn't look like bad faith borrowing, because they're gonna continue to make payments. When debtors who are consumers are looking at filing bankruptcy, they're typically looking at two Chapters, Chapter 7 and Chapter 13, many news articles about bankruptcy talk about Chapter 11 bankruptcy, but our clients are rarely looking at Chapter 11 bankruptcy. Chapter 11 is for businesses and people with very large amounts of debt or assets. Most consumers instead are looking at Chapter 7 and 13, and I've already described these a little bit, but just to recap, Chapter 7 is the simple bankruptcy, sometimes called straight bankruptcy or liquidation, it lasts three to five months, the debtor makes no payments, and it's about two-thirds of all bankruptcy cases that are filed. Chapter 13, on the other hand, lasts three to five years, it involves a monthly payment to a trustee, and it's only available to debtors who have sufficient income to be able to make those monthly payments, so somebody may need a Chapter 13 bankruptcy because they need it to save their house or whatever, but not be allowed to do a Chapter 13, because they don't have sufficient income to show that the payment plan would be feasible. Chapter 13 should be used when people, it's primarily a tool for saving somebody's home, it can be used to catch up a mortgage over the life of a Chapter 13 plan, it can be used to strip off junior unsecured mortgages from a house, it can be used to reform some mortgages to modify them through a process called loss mitigation, but Chapter 13 can play a similar role for rental arrearages, allowing debtors to catch up rental arrearages over the life of a plan. And it can be used to save a debtor's home or other secured debt when they have too much equity in valuable property, and it would be sold in a Chapter 7. Debtors whose past income is above what's the median income for the state they live in may run a file of what's called the means test. The means test is a test for people whose income is above the median that determines after calculating uncertain allowances for living expenses whether the debtor can afford to make Chapter 13 plan payments. The idea here is to create a limit on the ability of people with significant income to file Chapter 7 and not pay anything on their debts. So people who flunk that means test because their income is above the median income for the state they live in, may find that they need to file Chapter 13 bankruptcy. And finally, people may be filing Chapter 13, because they want to pay something to their creditors, and in this situation, Chapter 13 plays a role very similar to the private non-bankruptcy debt rehabilitation programs that I'm gonna talk about in a little bit. The centerpiece or the core of a Chapter 13 bankruptcy is the Chapter 13 plan. The plan is proposed by the debtor and has to be approved by the trustee in the case, and it lays out how much is gonna be paid to secured creditors, how much is gonna be paid to priority creditors, and it has to show that the plan is feasible, that is, that there would be enough income, the debtor has enough income to make the monthly plan payments, and this is particularly difficult in cases where the debtor hasn't been making mortgage payments, they're gonna need to resume making their monthly mortgage payments, and on top of that, start making payments on this Chapter 13 plan. A trustee in the bankruptcy case is gonna get about five to 10% of the amount paid through the plan as administrative costs, and for this reason, the Chapter 13 plan has to allow about 10% for these administrative costs. In addition, the attorney for the debtor will generally run most of their attorney fee through the plan, so if the attorney is charging $4,000 to do a Chapter 13 bankruptcy, the debtor might pay $500 of that upfront and the other 3,500 can be paid as out of the Chapter 13 plan payments. Secured creditors will need to be paid in full with interest, although there's no interest on arrearage payments, those are paid off in full without interest, and secured priority claims need to be paid in full, although there's no interest on those. Everyone else, the credit cards, the medical debts, the government benefits arrearages, they all get paid from whatever's left based on the debtor's ability to pay. So these unsecured creditors might get 100 cents on the dollar, but with no interest, or they might get 50% on the dollar and no interest, or they might get 10 cents on the dollar with no interest. So this is when it's a 10%, 10 cents on the dollar Chapter 13 plan, and there's a cramdown of a car loan that can be very significant, and I'll talk more about that. So there are several ways in which secured property can be saved in Chapter 13. There are several ways that secured property can be saved in a Chapter 13 bankruptcy. Mortgage arrearages, of course, can be caught up through a Chapter 13 plan. So one of the things that happens when a debtor files a Chapter 13 bankruptcy, or Chapter 7 bankruptcy, is that if the debtor has not been making their mortgage payments, they will now need to resume making mortgage payments, very commonly, when people fall behind on their mortgage, the bank will stop accepting the mortgage payment if the debtor sends one in late, so if my mortgage payment is $3,000 a month and I miss four months of mortgage payments and then I try to send in a $3,000 check, the bank may kick it back and say, "No, at this point we're not gonna accept partial payment, you need to pay the entire arrearage before we'll accept a check," so that issue of the bank no longer accepting partial payment of the arrearage goes away with the filing of a bankruptcy, the debtor will now again be able to pay the monthly mortgage payment, it's called reinstatement of the loan, it's one of the things that the debtor gets when they file the bankruptcy. So that's important because the debtor needs to resume making their monthly mortgage payments on top of making their monthly plan payments in the Chapter 13 plan. So they're gonna pay these mortgage arrearages through the plan and they're also gonna resume making monthly mortgage payments. Another way that debtors are able to cure arrearage problems in bankruptcy is with a mortgage modification negotiated through the bankruptcy court's loss mitigation process. Not all bankruptcy courts have a loss mitigation process, but when they do, what it's about is getting the bank and the debtor to sit down together to negotiate a modification of the mortgage terms that would be mutually beneficial to both the lender and the debtor. The bankruptcy court can order the parties to sit down and talk, but they can't order a modification, they can't order the bank or the debtor to accept a particular modification, they can only try to get the parties to sit down and talk. Nevertheless, that power can be very significant as debtors often find that when it would be beneficial to both parties to modify the mortgage, they can't get the bank to sit down with them. So using the loss mitigation process, a modification might include reducing the interest on a mortgage or re-capitalizing the amount, you know, for a new 30 or 40 year term, sometimes putting a balloon payment on the end of the mortgage and all of these things being aimed at bringing down the monthly mortgage payment amount to something the debtor can afford, so that's mortgage modification through loss mitigation. And a significant factor in Chapter 13 plans is that in order to get paid from a Chapter 13 plan, creditors need to submit a claim where they specify how much is owed to them and what the basis for that number is, those claims are often an opportunity for the debtor to object to unfair terms as where creditors try to tack on excessive attorney fees and inspection fees, or not give credit for payments that have been made and things like that, so this can be an opportunity for the debtor to push down the amount that's due if it's been inflated or exaggerated. Auto financing, people with automobile loans can often benefit from a Chapter 13 plan in a couple of important ways. First of all, if a debtor has, let's say a five year auto loan on which they've been in repayment for three years and now they've got two years left on that auto loan, they can refinance that auto loan as part of the Chapter 13 bankruptcy so that the remaining two years of loan payments could be spread out over the five years of the Chapter 13 plan. In addition, in many cases, the debtor is able to cramdown the auto loan, meaning to bifurcate the auto loan into its secured and unsecured portions. So if a debtor has an auto loan for $15,000, but the fair market value of the car is only $7,000, the auto loan could be bifurcated through a cramdown motion into its $7,000 secured portion and $8,000 unsecured portion. The unsecured portion being paid the same as of the other credit cards with 0% interest and sometimes less than 100 cents on the dollar of the amount owed, that can be beneficial. Cars that were purchased within two and a half years of the filing of the bankruptcy cannot be crammed down, so there's another timing issue there that you may need to wait until the car loan is eligible for a cramdown. You won't be able to cramdown a home mortgage, home mortgages cannot be bifurcated in this way into their secured and unsecured portions, so if you have a home mortgage for $400,000 on a house worth $350,000, you still have to pay the $400,000 on the home mortgage, you can't separate off the $50,000 that's unsecured and treated as credit card debt. What you can do, and it's not with the first mortgage on a house, but with a second or a third mortgage, is something called a strip-off. Unlike a strip-off, I mean, unlike a cramdown, a strip-off requires that this second or third mortgage is completely unsecured, so in our prior example where the houses were $350,000 and the debtor owes $400,000 to the first mortgage, there's no equity in that house for the second mortgage to attach to, it is in effect an unsecured debt. If the house were sold, the first mortgage would get $350,000 from the sale proceeds, and the second mortgage would get nothing, so when you have that kind of a fully unsecured second mortgage, you can bring a motion in the bankruptcy court to strip it off, to have it be treated as an unsecured debt, but you can't cramdown a second mortgage or a first mortgage, cramdowns just aren't there for second mortgage, now, they are there for other, actually you can strip-off a second mortgage or a third mortgage, no, you can't. There are some mortgage loans that can be crammed down as, for example, when a debtor has rental properties, but for the debtor's principle residence, the first mortgage cannot be crammed down or stripped off, and the second mortgage cannot be crammed down, only stripped off. In some cases when the debtor falls behind on their monthly mortgage payments, the lender may come into bankruptcy court seeking relief from the bankruptcy stay, they will say in this relief from stay motion that the debtor having fallen behind on their monthly mortgage payments is harming the creditors collateral, diminishing its value, and that they need adequate protection from this diminution of their interest in the collateral, and this is the basis for their relief from stay motion. When that happens, the debtor will generally be scrambling to show how they're either going to catch up the post bankruptcy mortgage arrearages or how they're going to modify the bankruptcy plan to pay off those arrearages along with the rest of the arrearages, or some other remedy that satisfies the bank or the lender, and when that's not possible, the lender will be able to get relief from the bankruptcy stay. When a debtor has income that they could use to pay their debts, but it's not enough to pay their creditors in full, they will sometimes use Chapter 13 instead of debt rehabilitation. As I've indicated earlier, there are many private and non-profit programs that offer debt rehabilitation. These programs offer to negotiate with creditors for reduced payments, where the debtor would write one check every month to that program and the program distributes the money to the creditors. It's very similar to a Chapter 13 case where the debtor pays what they can to their creditors, the difference being that these private, non-bankruptcy programs can offer no protection from creditors who decide to collect a debt outside of the plan or otherwise not abide by the plan, so the Chapter 13 stay provides unique protection from creditors as long as the debtor is in the bankruptcy case and making their plan payments on time. That's an important distinction. I mentioned earlier that debtors facing eviction can slow down the eviction process by filing bankruptcy, but generally, even though an unpaid or rental arrearage needs to be discharged in bankruptcy, will be discharged in bankruptcy, the landlord will retain the right to evict the tenant for this nonpayment of rent, and so the tenant is usually put in the position of having to pay the back rent even though it was discharged in bankruptcy, and sometimes they won't be able to pay the rent in time to stop eviction, so there's a couple of things that the debtor can do here. Well, first of all, if the debtor files bankruptcy to stop eviction, it's only gonna be temporary relief, the landlord might come into bankruptcy court seeking to lift the stay, or they might simply wait out the Chapter 7 bankruptcy, which is only gonna take three months to run its course, and once the bankruptcy is over, the landlord can pick up where they left off with an eviction action in court. If a judgment in eviction was entered before the bankruptcy petition was filed, the debtor, additionally, will need to post a month's rent with the filing of the bankruptcy petition, and pay subsequent month's rent as they come due, so this can be very burdensome for folks. However, there are a couple of remedies here, one of course is just the three months of extra time to let a debtor come up with the rent, but in addition, a debtor might be able to discharge rental arrearages for where the landlord is the state public housing authority, those tenants in many jurisdictions are able to discharge the rent without facing eviction. This is based on an interpretation of law that varies from circuit to circuit, in New York where I practice, public housing tenants are able to discharge rental arrears and stay. Note that discharging rental arrearages does not apply to section eight tenants, section eight tenants are people whose landlords receive a rental payment from the public housing authority, but they still have a private landlord, and those landlords can evict for non-payment of rent, even though some of the rent comes from the public housing authority, the landlord would have to be the public housing authority for a tenant to be able to discharge the rent and stay. And of course, as I mentioned, in most cases, a tenant can use Chapter 13 bankruptcy to catch up back rent, although there are some limitations on that in some jurisdictions, some states have held that a rental arrearage cannot be spread over three to five years, but must be paid in a lesser amount of time, such as 18 months, still that can be beneficial to a debtor, but that situation is gonna vary from jurisdiction to jurisdiction. In summary, bankruptcy is not for everybody, but it is beneficial for more people than is commonly understood. People who are struggling with debts will commonly benefit from one or the other consumer bankruptcy Chapters. It's gonna be the practitioner's job to decide which one applies, but I caution people who are looking at doing this work to avoid bringing value judgments into these decisions. The decision of whether a debtor should pay something to their creditors or not should not be based on whether the practitioner thinks the debtor ought to pay something to their creditors, but rather on whether it's necessary to pay something to their creditors, if it's necessary, then they should be in a Chapter 13 plan, and if it's not necessary, they should be in a Chapter 7 plan. Bankruptcy should not be thought of as a last resort. In fact, if we think about bankruptcy for consumers the way we think about bankruptcy for businesses and corporations, we don't really think of those situations as last resorts, businesses often reach for bankruptcy as a financial management tool that carries no onus of shame or irresponsibility with it, and we should think about bankruptcy for our clients the same way, if the shoe fits, it should be applied, and if it doesn't, then something else should be done. Again, student loan debts can be challenging to discharge in bankruptcy, but don't turn away from the challenge, student loan debts have ballooned in the past 10 years, so many people now have student loan debts in excess of six figures that are going to keep them from ever getting their lives off the ground unless they're able to get student loan discharge. Many, many people have been passed over for student loan discharges that they could have gotten because of the seeming difficulty of bringing these student loan discharge actions, but that shouldn't be the case. Tax debts similarly are dischargeable in bankruptcy, or may be dischargeable in bankruptcy rather, depending on what kind of tax they are, and whether they are old enough, and people should apply the analysis described above to see if a debtor can benefit from tax discharge. Similarly, government benefits arrearages are dischargeable, often a surprise to people who are convinced that, there's a common perception, and I've heard this among lawyers, that if you owe money to the government that can't be discharged in bankruptcy, there's no basis for that opinion. Government benefits and other debts of the government, such as taxes are quite dischargeable in bankruptcy depending on the facts. Again, Chapter 7 is what's gonna be applicable for most Americans, it accounts for over two thirds of the bankruptcy cases filed. Chapter 13 is gonna make sense in almost all of the other cases, it's primarily for home mortgage owners and debt is with excess income or assets that they would lose in bankruptcy. So that's all for now, and I hope that this presentation has been helpful, and I hope that you'll take this information not as the last word in bankruptcy, but as a starting place to lead you to look more into bankruptcy and learn how to help clients with this very important work. Thank you very much for listening and be well.

Presenter(s)

Bill Kransdorf
Director
NYC Bankruptcy Assistance Project

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