Bankruptcy’s Role If You Have Criminal Debts

Bankruptcy doesn’t discharge criminal debts—criminal fines or restitution. Still, consider bankruptcy if you owe, or will owe, these debts. 

 

The Practical Purpose of Bankruptcy

Bankruptcy isn’t a legal procedure used only for wiping out all of your debts. The main purpose for filing bankruptcy often is to get rid of some debts so you can pay other debts. That’s especially true of the debts you want to pay are extremely important to pay. That’s especially true if what’s at stake are your personal reputation and your freedom. That’s what you’re dealing with when dealing with a criminal charge or conviction.

Many bankruptcy cases do not discharge—write off—all your debts. In a Chapter 7 “straight bankruptcy,” there’s often a debt or two that you either legally can’t discharge—like a recent income tax debt–or you choose to pay—like a mortgage or vehicle loan. In Chapter 13 “adjustment of debts,” your payment plan favors certain special debts while paying less—maybe nothing—on others. Also, a big reason for bankruptcy is to stop paying creditors so you’ll have the money for crucial expenses.

So, bankruptcy can discharge most of your debts so that you have the money to pay criminal expenses and debts. If you’re fighting to avoid a criminal conviction, you have no more important expenses than your criminal defense costs. If you already have a criminal conviction requiring you to pay a criminal fine or restitution, you have no more important debts than these. And if you have ongoing expenses related to your conviction or probation, you absolutely must have the money for them.

After Being Charged with a Crime

Have you been charged with a crime? If so you need to fixate on paying for your defense attorney and related costs. You need to be creative and do everything you can to come up with the necessary funds. That may well include selling assets or not paying your creditors. Sometimes it’s best to get rid of your debts and quickly improve your cash flow by filing Chapter 7 bankruptcy.

After a Criminal Conviction

Have you already been convicted of a crime? Then you have some financial obligations you absolutely must pay to the criminal justice system. You could owe a criminal fine, restitution, probation/supervision fees, community service fees, drug treatment costs, and/or electronic monitoring charges. The fine and restitution could be significant and overwhelming to pay. Any ongoing fees and costs could be very challenging as well. If you don’t pay what your conviction judgment requires, you risk getting incarcerated. Or you risk getting re-incarcerated if you have been paroled or conditionally released. A Chapter 7 or Chapter 13 case could discharge your other debts so that you could pay the criminal obligations.

Paying Required NON-Criminal Debts and Expenses

Sometimes the criminal court will directly or indirectly require you pay other kinds of debts or expenses. These would be related to your criminal conviction but not owed directly to the criminal system.

For example, you may have to be consistently employed or do community service. You may have to meet with your parole or probation officer, and/or attend treatment or classes. These may require you have a vehicle. That means keeping current on your vehicle payments and insurance, and paying repairs and maintenance on that vehicle.

Filing bankruptcy can enable you to pay these kinds of debts or expenses when you could not afford to do so otherwise. Doing so may prevent breaking your conditions of parole or probation.

Summary

Filing bankruptcy can allow you to concentrate your financial energy where it needs to be—your criminal case. That allows you to focus your emotional energy there as well. If you’re being charged with a crime, bankruptcy can be an unexpected but necessary part of your game plan. Same thing if have already been convicted.

These are all very delicate issues which need to be thoroughly explored with an experienced and conscientious bankruptcy lawyer. Either meet with one yourself or make sure your criminal defense lawyer is in close discussions with one

 

Being Honest in Bankruptcy

It’s really not hard to do the most important thing to have a successful bankruptcy case—be honest with your lawyer and throughout your case. 

 

The U.S. Supreme Court described the purpose of consumer bankruptcy way back in 1934 as follows:

… it gives to the honest but unfortunate debtor…  a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This case involved a loan of $300 made near the beginning of the Great Depression. Hunt, the debtor, had signed an assignment of future wages for payment of the debt to the Local Loan Company. The Supreme Court held that this assignment became invalid when the debt was discharged in bankruptcy. The Court rejected state laws to the contrary. It said:

The new opportunity in life and the clear field for future effort… would be of little value to the wage earner if he were obliged to face the necessity of devoting the whole or a considerable portion of his earnings for an indefinite time in the future to the payment of indebtedness incurred prior to his bankruptcy.

292 U.S. 234, 245. So, if you are an “honest but unfortunate debtor,” the very powerful tools of bankruptcy are available to you.

Receiving that “New Opportunity in Life”

In most consumer bankruptcy cases, the person filing the case gets a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.

The U.S. Bankruptcy Code says that in a Chapter 7 “straight bankruptcy” case the bankruptcy “court shall grant the debtor a discharge,” with only certain narrow exceptions. (See 11 U.S.C. Section 727(a).)

It’s very much the same in a Chapter 13 “adjustment of debts” case. The “court shall grant the debtor a discharge of all debts,” again with only certain narrow exceptions. (See Section 1328(a) of the Bankruptcy Code.)

As long as those exceptions don’t apply to your debts, they will get discharged in bankruptcy. As long as you discharge enough debts, you’ll have that new financial opportunity in life.

Exceptions to Getting a Discharge

There are two sets of exceptions to discharging your debts. There are those that determine whether you can discharge:

  1. certain specific debts, and
  2. any of your debts.

1. Non-Dischargeable Debts

You’ve more likely heard about the first set, the specific kinds of debts that can’t be discharged. These include certain taxes, criminal fines, and student loans. These various kinds of debts bankruptcy does not discharge for many reasons. These reasons fall into 3 groups. Bankruptcy does not discharge:

  • one group of debts ever, under any circumstances, such as unpaid child support (Section 523(a)(5) and Section 101(14A));
  • another group under certain conditions, such as income taxes (Section 523(a)(1)); or
  • a final group if a creditor objects AND successfully proves certain facts, such as debts incurred through misrepresentation or fraud by the debtor (Section 523(a)(2)).

2. NO Debts Discharged

The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever. (Section 727(a)(2)-(7))

You cannot be dishonest in the midst of your bankruptcy proceeding itself. If you are you may lose the ability to discharge any of your debts. This goes back to the “honest but unfortunate” phrase in the Supreme Court case quoted above. In order to receive the benefits of bankruptcy, you must be honest in how you proceed through it.

The following kinds of dishonesty could result in not being able to discharge your debts:

  • Hiding or destroying assets during the year before filing bankruptcy
  • Hiding or destroying assets after the bankruptcy case is filed
  • Hiding, destroying, falsifying, or failing to keep records about your financial condition
  • Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
  • Making a false oath

Conclusion

Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.

 

Get a New Financial Start with this New Year

Get a new financial start for 2018. Stop creditor pressures immediately, write off all or most debts, and responsibly deal with the rest.

 

An Overall New Financial Start

Get a new start by discharging (permanently, legally writing off) all or most of your debts. If you have mostly consumer or small business debts you have two main choices about how to make this happen.

A New Start with Chapter 7

With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.

Imagine if you filed a Chapter 7 case this month. Immediately your creditors could no longer chase you or anything of yours. All or most of your debts would forever be gone by April or May. The remaining critical debt or two you’d be able to handle sensibly. That quickly you’d have a new financial start.

A New Start with Chapter 13

With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.

Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts. You often have much more flexibility with secured debts like home mortgages and car loans. Same thing with income taxes and child support arrearages, among others, that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.

You finish your Chapter 13 payment plan in usually 3 to 5 years. Whatever debts you have not paid off get discharged. You are debt-free with limited exceptions like a home mortgage you want to still pay.

Under Chapter 13 you get immediate relief and a new start through a reasonable payment plan based on your budget. Then when that plan is done it’s followed by a full new start with (virtually) no remaining debts.

So, if you filed a Chapter 13 case this month, immediately your creditors could not chase you or any co-signers. You’d enter into a doable payment plan to handle your special debts in ways much better than Chapter 7. And when that plan is paid off you’ll have a full new financial start.

 

Student Loans in Bankruptcy

Student loans can sometime be written off in bankruptcy, but it can be quite hard to meet the necessary conditions to do so.

 

The Discharge of Student Loans

Student loans are NOT among those debts that can NEVER be “discharged”—legally, permanently written off on bankruptcy. Bankruptcy law does totally exclude certain kinds of debts from being discharged–one example is unpaid child support.

Instead student loans are among those debts that are discharged IF they meet certain conditions. They are somewhat like income taxes, which can definitely get discharged. With income taxes there is a list of conditions; with student loans there is only one to meet. Yet, discharging a student loan can be much more difficult than discharging an income tax debt. That’s because the conditions for discharging income taxes are mostly straightforward, compared to the much vaguer condition for student loans.

The Vague Condition of “Undue Hardship”

Bankruptcy law allows a student loan to be discharged if “excepting such debt from discharge… would impose an undue hardship on the debtor and the debtor’s dependents.” Section 523 (a)(8) of the U.S. Bankruptcy Code. So if you can show that your student loans are causing “undue hardship,” you can discharge those loans.

What’s “Undue Hardship”?

The problem is in figuring out what that phrase means.

In practical terms what does the statute consider a “hardship”? And what more does it take for a “hardship” to rise to the required level of an “undue” hardship?

The phrase “undue hardship” did not originate in Congress. It came from a Commission on the Bankruptcy Laws created by Congress way back in the early 1970s to help guide a total overhaul of our bankruptcy laws.

When Congress used that term in the statute on student loan discharge quoted above, it did not define it. Many other important terms used in the Bankruptcy Code are directly defined within the Bankruptcy Code. See Section 101 on “Definitions.” But not this one.

A Practical Standard for “Undue Hardship”

Congress left it to bankruptcy judges and courts of appeals to apply this term to people’s circumstances. They’ve focused on coming up with practical conditions required to have a hardship that is serious enough to be considered to be “undue.”

Over the decades most of the bankruptcy courts in the country have largely settled on three hurdles to jump for undue hardship:

1. To make the required payments on the student loan under your current income and expenses would leave you unable to maintain even a minimal standard of living.

2. This current situation of being unable to maintain a minimal standard of living is expected to continue over all or most of the repayment period of the student loan.

3. You’ve made a real effort at paying the student loan and/or qualifying for programs to address the debt responsibly.

Important Considerations

  • You must ask for a hardship discharge during your bankruptcy case or you’ll continue to owe your student loan(s). This is done through what is essentially a lawsuit in the bankruptcy court. You must convince the bankruptcy judge that you’ve jumped the above three hurdles to get a decision in your favor. 
  • The timing of your request can make all the difference. You may not qualify for undue hardship now, but you may do so in the future. An example would be if you have a worsening chronic medical condition. Talk with your bankruptcy lawyer about reopening your bankruptcy case later when you better qualify for undue hardship.
  • Consider filing a Chapter 13 “adjustment of debt” bankruptcy now if you may not qualify now but will in the next few years. You could likely not make any student loan payments for a few years. Then later in your 3-to-5-year case, or as soon as you’d qualify, you’d ask the court for an undue hardship determination, while your Chapter 13 case is still open.

Conclusion

It’s often not easy to meet all three conditions of the undue hardship standard. It can be a rather lengthy and expensive legal process. But an increasing number of people have large student loans as a major portion of their debts. If that’s you, get legal advice from an experienced and conscientious bankruptcy lawyer. The bigger your student loans, the bigger their impact on your future, and all the more important to understand your rights and options.

 

The Chapter 7 and 13 Trustees, and the U.S. Trustee

The Chapter 7 trustee decides whether to liquidate anything, the Chapter 13 oversees your case, and the U.S. Trustee is the enforcer. 

 

When you hear the term “trustee,” that could refer to various people or roles.

Some are not directly related to the bankruptcy process. For example, in many states the “trustee sale” is the final event of a home foreclosure. A trustee legally conducts the foreclosure instead of your lender.

More broadly, a trustee is a person given certain powers to administer property or to fulfill some other tasks on behalf of others.

In bankruptcy, a trustee gets assigned to your case when you file a Chapter 7 or Chapter 13 case. You and your bankruptcy lawyer will meet with that trustee briefly. Sometimes you’ll have more contact with the trustee, especially in a Chapter 13 case.  Generally speaking these trustees have certain powers over you and your property, and act on behalf of your creditors.

There is also the U.S. Trustee. He or she usually works behind the scene; in most consumer cases you’ll never meet this person.

The Chapter 7 Trustee

Chapter 7 “straight bankruptcy” is a liquidation procedure, although in consumer cases usually no liquidation takes place. (Nothing of yours gets liquidated and sold to pay your creditors if everything you have is “exempt,” or protected.) The Chapter 7 trustee is the person who determines whether or not you have any assets to liquidate. In those cases in which the trustee sells debtor assets, he or she is also responsible to distribute the proceeds to the creditors as required by law.  

The Chapter 7 trustee presides at the so-called “meeting of creditors.” That’s usually the only time you’ll see him or her. This 10 minute or so meeting takes place within about a month after you and your bankruptcy lawyer file your case. At this short meeting the trustee will ask you some (usually quite simple) questions about your bankruptcy documents. Your lawyer will prepare you for them and help at the hearing as needed.  

The trustee is assigned to your case from a “panel” of potential trustees. Generally your lawyer can’t predict or influence who will be your trustee. 

See Section 704 of the U.S. Bankruptcy Code about the duties of a Chapter 7 trustee.

The Chapter 13 Trustee

Chapter 13 “adjustment of debts” is a procedure involving the court approval and the implementation of a payment plan. The Chapter 13 trustee administers and oversees the process.

This trustee has a number of roles. The primary one is to enforce your obligations under Chapter 13 law. For example, the trustee tries to ensure that you pay your creditors what they are entitled to. The trustee

  • reviews your proposed payment plan and other court-filed documents,
  • presides at your so-called “meeting of creditors”
  • can raise objections to your plan with the bankruptcy court as appropriate
  • after court approval of your plan, receives your plan payments and distributes them to the creditors as specified under the terms of the plan
  • files motions with the bankruptcy court if you are not complying with the plan
  • at the end of your case tells the court when you have successfully completed your plan obligations

Unlike the Chapter 7 trustees, there is usually a single “standing Chapter 13 trustee” assigned to all the Chapter 13 cases filed in a particular area. Since most handle a large volume of cases most of them have a staff of assistants. Your lawyer will very likely have a long-standing working relationship with the trustee and staff. You’ll know in advance who will be your Chapter 13 trustee.

See Section 1302 of the Bankruptcy Code about the duties of the Chapter 13 trustee.

The United States Trustee

The U.S. Trustee is the enforcer within the bankruptcy system—the watchdog over the bankruptcy process.” You generally hope to avoid hearing from the U.S. Trustee—it’s often not good news.

As described on its website:

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

The main responsibilities of the local U.S. Trustee in consumer cases is to:

  • appoint and supervise Chapter 7 and Chapter 13 trustees
  • take legal action to prevent fraud and abuse of the bankruptcy system
  • investigate and refer matters to the appropriate enforcement authorities (as mentioned above) for criminal prosecution

See 28 U.S. Code Section 586 for the duties of the U.S. Trustee.

 

The Bankruptcy Clerk and the Bankruptcy Judge

Usually you have little or no interaction with the bankruptcy clerk or the bankruptcy judge, but they are both important in your case. 

 

Last week we told you about the debtor and different kinds of creditors in bankruptcy. Today we get into the bankruptcy court and bankruptcy judge. Again, it’s much easier to be comfortable with the process if you know who the main players are and what each one does.

Bankruptcy Clerk

The clerk is the person who, together with his or her staff, handles the clerical tasks of the bankruptcy court. Some of these tasks are quite important, affecting your interests and that of your creditors. It may seem to be “just paperwork,” but is still crucial for the smooth running of your case.

The clerk:

  • processes the paperwork that your lawyer files electronically at the start of your case and thereafter
  • maintains your bankruptcy file at court securely
  • mails out the official notices providing deadlines and certain hearings for you, creditors, the bankruptcy trustee
  • follows the many bankruptcy laws and official procedures in the processing of your case

Your bankruptcy lawyer interacts with the clerk and his or her staff to make sure that everything proceeds as it should. In most cases you will not have anything directly to do with them. 

Bankruptcy Judge

The bankruptcy judge is the person who ultimately has authority over your case. Every case is assigned to one judge. 

You are not likely to meet your judge in any straightforward Chapter 7 or 13 case. If you do it would usually be for a very specific purpose. For example, in a Chapter 7 case you might need to attend a short “reaffirmation” hearing. In a Chapter 13 case you might need to attend a payment plan “confirmation” hearing. But again, in most cases you’ll never see your judge. The most you usually see of him or her is a signature on official documents.

These judges are officers of the federal court system, but they are not full federal judges. Technically they are “judicial officers of the United States district court.” There are between 1 and 4 federal “districts” in each state, to which bankruptcy judges are assigned. Most federal districts have multiple bankruptcy judges, although some with smaller populations have only 1. Unlike regular federal judges who are appointed for life, bankruptcy judges are appointed to terms of 14 years. See 28 U.S. Code Section 152.

If there is any dispute in your case, the judge resolves such disputes. In Chapter 7 cases he or she decides whether a debt should be discharged (legally written off) or not if that is in dispute. In Chapter 13 cases the judge decides on the terms of your Chapter 13 plan, if you and the Chapter 13 trustee or a creditor disagree. 

The decision of the bankruptcy judge can be appealed, either to a local federal district judge or sometimes to a regional 3-judge Bankruptcy Appellate Panel. That very seldom happens because of the time and expense involved.

 

Who Does What in Your Bankruptcy Case?

The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee. 

 

Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.

Debtor

The debtor is the person or business entity filing the bankruptcy case.

The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.

A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).

The debtor’s most important job is to be honest and responsive. You need to do this first with your bankruptcy lawyer, so that the lawyer can advise and protect you. Then, through the lawyer’s guidance, do the same with the bankruptcy court and the other players in the process.

See these Sections of the U.S. Bankruptcy Code: Section 109 on “Who may be a debtor,” and Section 521 on “Debtor’s duties.”      

Creditors

The creditors are of course the businesses and individuals to which the debtor owes debts.

Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.

Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.” See Section 506 of the Bankruptcy Code on “Determination of secured status.”

Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures. See Section 507 on “Priorities.”

For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, bounced checks, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.

Creditors Getting Involved

Creditors can theoretically be involved in the bankruptcy process in a lot of ways. However, they tend to be less involved than you expect. They often decide that getting involved is not worth their cost or effort. Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”

Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts.  Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.

 

Satisfying the Debtor Education Requirement

You can’t complete a personal bankruptcy and receive a discharge of debts without meeting the so-called debtor education requirement.

 

The “Credit Counseling” and “Debtor Education” Requirements

If you are an “individual” filing a bankruptcy case you can’t file a bankruptcy case without first undergoing “credit counseling.” (An “individual” is a person, not a business entity.) This requires you to get “an individual or group briefing (including… by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in preforming a related budget analysis.” (See Section 109(h) of the U.S. Bankruptcy Code.) It’s easier than this might make it sound. You must do this during the 180 days before filing, and you can’t file without doing so. (See our very last blog post about “credit counseling.”)

Then after filing bankruptcy, you must also meet the “debtor education” requirement. This means completing “an instructional course concerning personal financial management.” If you don’t do this, the case will end without you getting the discharge (legal write-off) of your debts. This applies to both Chapter 7 (Section 727(a)(11))  and Chapter 13 (1328(g)) of the Bankruptcy Code.

Today’s blog post is about this requirement.

What IS “Debtor Education”?

It is a class “designed to assist debtors in understanding personal financial management.” It’s usually done online, but can also happen over the phone, or even in person.

The “nonprofit budget and credit counseling agencies” providing the class must be approved by the United States Trustee, based on certain “applicable standards.” (See Section 111(c)(2) of the Bankruptcy Code.) At the heart of these standards an agency must:

provide adequate counseling with respect to a client’s credit problems that includes an analysis of such client’s current financial condition, factors that caused such financial condition, and how such client can develop a plan to respond to the problems without incurring negative amortization of debt

Make Sure to Do “Debtor Education” on Time

You get a certificate of completion after completing “debtor education,” your proof that you did so. Tell your bankruptcy lawyer so that he or she can file this certificate at court. This must be done before your case is completed. Otherwise, if a certificate of completion isn’t in your file when your bankruptcy case is ready to be closed the judge won’t sign the usual order discharging your debts. Then your bankruptcy case ends without a discharge of your debts.

This is not good. Most likely your main goal in filing bankruptcy is to discharge your debts and get a financial fresh start. You certainly don’t want to go through all that effort and expense without reaching this goal.

There’s a Likely Solution But It’s Expensive and Risky

If you’re reading this after your case has closed without you meeting the “debtor education” requirement, there’s likely a solution.

You could still take the “debtor education” class—after your case is closed. At that point, your lawyer may be able to persuade the judge to reopen your case, accept your certificate of completion, enter the discharge order, and then again close your case. This would get you the discharge of debts and solve the problem.

But it’s much better to avoid this situation. For 3 good reasons:

  • These otherwise unnecessary steps would cost you hundreds of dollars more in “re-opening” filing fees and additional attorney fees.
  • While your case is closed without a discharge, all your creditors could take action to collect on their debts.
  • There’s some risk that a judge would not go along with this attempted solution.

So, take the “debtor education” course on time—preferably soon after filing your case—avoiding these unnecessary costs and risks.

 

Satisfying the Credit Counseling Requirement

The credit counseling requirement is not at all hard to meet. You have to do it before you can file a bankruptcy case, so get it over with.

 

You can’t file an individual bankruptcy case without first taking this one, relatively easy step—the so-called “credit counseling.” It’s probably helpful to consider it nothing more than a bureaucratic formality. It almost never serves as any kind of helpful “counseling.” But you definitely need to take of it and appropriately to avoid problems when you file bankruptcy.  

The Requirement

The part of the U.S. Bankruptcy Code titled “Who may be a debtor,” says you can’t file a bankruptcy unless you

received from an approved nonprofit budget and credit counseling agency… an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in preforming a related budget analysis.

See Section 109(h) of the Bankruptcy Code.

This is easier than it sounds.

What’s Actually Required

Not much.  It’s actually a simple procedure you do on the internet, or by phone if you prefer. You simply provide some information about your debts, income, and expenses, and then are almost always told that your income is not sufficient to pay for your expenses.

The practical benefit of this “counseling” is that you get an emailed certificate saying that you’ve completed “credit counseling.” That certificate lets you file bankruptcy. You can’t without it. Your lawyer attaches it to your initial bankruptcy petition.

180 Days before Filing

The “counseling” session must take place “during the 180-day period” before filing bankruptcy. So be sure that you’re going to be filing bankruptcy within that length of time after you do it. Otherwise, if your bankruptcy filing is delayed you may have to do the counseling again closer to your filing date.

Usually people run into the opposite problem, putting it off too long. Be sure not to get into the position of needing to file bankruptcy quickly but not being able to. Get the credit counseling step out of the way as soon as you know that you’re filing soon.

Reason for this Requirement

The supposed reason for this requirement was to encourage people to consider options other than bankruptcy. Some say that its real purpose was to bureaucratically discourage people needing bankruptcy relief. In the end it does not seem to be an effective disincentive.  

For example, the United States Government Accountability Office has issued a report with the following practical conclusion:

The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options.

Who To Contact to Get this “Counseling,” and How Much Does it Cost?

The providers of this service must first be approved by the U. S. Trustee. (That’s an agency which oversees certain aspects of the bankruptcy system.) You can find a list of the approved agencies for your area on the U.S. Trustee’s website. In the dropdown list click on your state. (Look for your local federal district if you state has more than one).

Frankly, this will lead you to a long and not very helpful list of approved providers. They vary widely in quality, convenience, and cost. So ask your bankruptcy lawyer which one he or she recommends, and for other helpful information about that particular provider.

 

Protecting Your Co-Signer Better through a Chapter 13 Bankruptcy

Chapter 13 protects your co-signer better through the special co-debtor stay. It has its own limits but provides the strongest protection.  

 

Two weeks ago we discussed how to protect yourself from both your co-signer AND the creditor owed the co-signed debt. 

Then last week was about protecting your co-signer in the limited ways that Chapter 7 can. It assumed that protecting your co-signer was a very high priority for you. You are willing to pay the co-signed debt once you discharged (wrote off) all your other debts.

The Limitations of Chapter 7

But as we just said Chapter 7 “straight bankruptcy” helps in only limited ways. Here are situations where it can’t help. If:

  • even after bankruptcy, you can’t afford to pay the co-signed creditor’s monthly payment
  • whether or not you can afford those payments, you’ve fallen behind and don’t have the money to catch up
  • the co-signed creditor has “accelerated” the debt—declared it to be all due at once, which you can’t pay all at once
  • the creditor has sued your co-signer, and already has or will soon have a judgment against him or her

In all these scenarios nothing stops the creditor from pursuing your co-signer.

Chapter 7 Protects You but Not Your Co-Signer

As soon as you and your bankruptcy lawyer file a Chapter 7 case, the creditor could no longer chase you. You’d be protected by the “automatic stay” against virtually all creditor collection actions. (See Section 362 of the U.S. Bankruptcy Code.)  And after your case would be completed a few months later that debt would be forever discharged. The creditor would have no further recourse against you. (See Section 727(b) of the Bankruptcy Code.)

Because of this the creditor would pursue your co-signer instead. The creditor may not even be willing to talk with you or accept your payments because it thinks it’s legally not supposed to.

The Special Chapter 13 Co-Debtor Stay Solution

If you instead file a Chapter 13 “adjustment of debts” case you can usually protect your co-signer from the creditor. This protection is enabled by the “co-debtor stay,” which is available only under Chapter 13.

The co-debtor stay specifically protects your co-signer—“any individual that is liable on [a consumer] debt with the debtor.” The “creditor may not act, or commence or continue any civil action [that is, lawsuit], to collect all or any part of a consumer debt of the debtor.” (See Section 1301 of the Bankruptcy Code.)

So the co-debtor stay stops an attempt by the creditor to collect the debt through the co-signer.

Limits to the Co-Debtor Stay

This may not be quite as good as it sounds right off.

First, the creditor can get around the co-debtor stay simply by filing a motion in the bankruptcy court saying that your Chapter 13 payment plan is not proposing to pay the debt in full. (Section 1301(c)(2).)

One way to prevent this is for your lawyer to structure your payment plan to pay that debt in full.  If your original plan did not do this, amend your plan to pay that debt in full after the creditor’s motion. Bankruptcy judges in most parts of the country will allow you to favor your co-signed debt in this way.

Second, there’s a problem even if a creditor takes no action when you’re not paying the co-signed debt in full. The co-debtor stay expires when your Chapter 13 case is completed. To whatever extent you didn’t pay off the debt by that time, the creditor can then pursue your co-signer. This includes any accumulated interest, late fees, etc.

The only way to prevent this is to make sure that you pay the co-signed debt in full during your Chapter 13 case. You’ll usually have up to 5 years of protected time to do so.

Third, the creditor can pursue your co-debtor if the debt benefitted the co-debtor instead of you. After asking permission from the court the creditor can pursue the co-signer if it “received the consideration” for the debt. (See Section 1301(c)(1).) That is, you can’t protect a co-signer if YOU actually co-signed the debt tor the CO-SIGNER’S benefit.

Exceptions to the Co-Debtor Stay

The co-debtor stay does not apply to and help with:

  • non-consumer (business) debts
  • income tax debts (with spouses or business co-obligors)
  • debts entered into by your co-signer “in the ordinary course of [his or her] business”

Conclusion

Notwithstanding these conditions and exceptions, Chapter 13’s co-debtor stay can be a remarkable and effective tool for protecting your co-signer.