By the time many people contact a bankruptcy attorney, their credit card balances are already high – if not at their limit. Sometimes, when there is room to spare on the balance, it can be tempting to use credit if a bankruptcy filing is down the road. Here’s a bit of advice: don’t.

Let’s start with the practical view: if you know you will be filing bankruptcy in the future, then you know you will not pay back what you borrowed (or perhaps not all of it at the terms you agreed to). While understandably, you might think that the big bad bankers have it coming to them, it still does not change the fact that it is wrong to take money under the pretense of borrowing, when you know you have no intention of paying it back. And there are legal consequences as well.

Section 523 (a)(2) of the Bankruptcy Code precludes discharge of debts that were incurred by fraud. If the charge was incurred during a certain period of time prior to the bankruptcy filing, the debt may be presumed fraudulent. In other words, it’s up to the debtor to prove that it’s dischargeable. If a debt is incurred outside that presumptive period, a creditor may still challenge dischargeability if the facts warrant it. They will have the burden of proof, but the debtor will still need to defend his or her decisions. This is all done through an Adversary Proceeding. And there are consequences with that as well.

Adversary Proceedings are civil lawsuits within the bankruptcy case itself, and it is the procedural mechanism that creditors use to litigate dischargeability issues. They can be complex, long and in some cases, the end result is not all together predictable. It can delay the closure of the bankruptcy. I have seen it cause great consternation and anxiety with debtors. One debtor recently told me that she has not slept well since her Adversary Proceeding started. In addition to all that, the Adversary Proceeding adds to the costs of the case – sometimes substantially. All around, it’s not a good time.

If you see bankruptcy in the future, think twice before using that credit card. Think twice before asking for that personal loan. Think twice before accepting that preapproved offer of credit. Yes, the extra money might bring a temporary fix. However, if you find yourself in bankruptcy court, that decision could be costly. If you find yourself itching to use that credit card, and knowing you cannot pay it back, it’s time to talk to a bankruptcy attorney.

Storm Preparation is a weekly series appearing on Wednesdays and offers tips and information to people who think they may need bankruptcy protection in the future. Questions, comments or suggestions can be addressed to info@mcleodlawoffices.com.

Posted by Bill McLeod at 10:19 AM | Permalink | Comments (0) | TrackBacks (0)

I recently read a bankruptcy court decision concerning a very serious matter: nondischargeability of a debt. While serious, there was also a bit of humor in it. The facts of this case were just too good not to share.

The Plaintiffs were homeowners who wanted to have a swimming pool. They lived in Texas, which I hear can get quite warm. The Plaintiffs presumably considered a number of pools before resting on what we can probably infer was the swimming pool of their dreams: “an in-ground swimming pool (with water fall and cave area), space, spa therapy chair, fire pit, covered patio, and outdoor kitchen.” It sounds sweet! In addition to the “drainage and irrigation work” they also wanted to install a rock façade on their home. In November of 2004, they hired the (soon to be) debtor for an agreed price of $100,000, and gave him a $250 deposit.

Apparently, the Plaintiffs were impressed with the (then soon to be) debtor because he “seemed serious about directly managing the project, with on-site supervision, until all work by the subcontractors was completed.” Work on the project began in January of 2005 and shortly after the excavation work, the plaintiff gave the (then soon to be) debtor a check for $40,000. About a week later, the Plaintiffs paid another $40,000 towards the contract price.

Plaintiffs were starting to get concerned about things and they drove out to the (soon to be) debtor’s shop. There, they were told he was not in the office. They were told he was on the lake “with his new boat.” They were told he purchased the boat within three weeks of receiving the $40,000 check. This news was followed by weeks and months of phone calls not being returned.

The pool man then became a debtor in bankruptcy. Plaintiffs’ brought an adversary proceeding claiming that the debt was nondischargeable and it eventually went to trial.

Continue reading "The Case of The Dream Pool" »

Posted by Bill McLeod at 5:25 PM | Permalink | Comments (0) | TrackBacks (0)

There seem to be debtors everywhere who think they can file bankruptcy without an attorney. Of course, in many, many cases, debtors only end up causing themselves greater problems. A case out of the Eastern District of Pennsylvania proves my point.

The debtor in that case got his case dismissed because he did not received the requisite credit counseling. The case was filed on Valentines Day of this year, and along with his petition, the debtor filed a statement of “Exigent Circumstances” to excuse his failure to comply with the credit counseling requirement. The debtor represented that he was facing a foreclosure sale.

On February 20, the court ordered him to file by the 29th a Supplement to the Certification to enable the court to determine whether the requirements of Section 109(h)(3) had been satisfied. Debtor didn’t. Instead, the debtor filed his Certificate of Credit Counseling on the 28th. The case was dismissed. Debtor filed a motion for reconsideration.

Bankruptcy Code Section 109(h)(3) has at least requirements for establishing that there are Exigent Circumstances justifying a failure to obtain prepetition credit counseling. First, there must be some emergency compelling the filing before the counseling was obtained. Second, the debtor has to have tried to obtain credit counseling before filing the case but was unable to get it within the 5 day period prior to filing. The pro se debtor did not provide any information on this second requirement.

The case got dismissed. Hopefully, when the debtor again files bankruptcy (since he was facing foreclosure, I am assuming he did or will), he will have a lawyer. One of the first things he’ll have to do is seek an extension of the automatic stay because he will then be a repeat filer.

In re Kaufman, No. 08-11087 (Bankr.E.D.Pa.)

You might have missed:

Pro Se Perils: When a Case Gets Dismissed
No Ticket? No Bankruptcy

Posted by Bill McLeod at 7:03 PM | Permalink | Comments (0) | TrackBacks (0)

Since the housing bubble that is deflating or exploding (depending on your perspective), it is becoming more and more common for debtors seeking to reorganize to be seeking bankruptcy protection. To be a chapter 13 debtor your debt cannot exceed a certain amount. As of this posting, a chapter 13 debtor cannot have more than $366,900 in unsecured debt, or have more than $1,010,650 in unsecured debt. If a debtor wants to reorganize and has higher debt, chapter 13 is not an option. With that said there are some facts you need to know about chapter 11.

It’s more expensive: the filing fee for a chapter 11 petition is (as of this writing) $1,079. Legal fees and expenses should be expected to be higher (if not significantly so) and most experienced bankruptcy attorneys will quote you a retainer based on the level of skill required, and the level of complexity anticipated in the case. In addition to those expenses, there are quarterly fees payable to the US Trustee.

In addition to the legal fees and costs, there are the tasks associated with being a chapter 11 debtor. Debtors need to prepare and file monthly operating reports with the US Trustee. If debtors are not already doing so, this means getting into the habit of keeping track of every penny of income, and every penny of expenditures.

It is an urban myth (or depending on where you are, suburban myth) that you can file under chapter 13 if you are over the debt limits. You either have to face chapter 11 with a brave face and a good attorney, or you have to accept the fact that you may not be able to afford the property you are trying to keep.

If you think you might be “in the ball park” of the debt limits, you need to get all of your documents in order. This includes bills, statements, as well as other potential claims, such as pending lawsuits. Let bankruptcy counsel review it and determine whether you can get into a chapter 13, versus a chapter 11. The sooner you can know which chapter or chapters you can proceed under, the sooner you can prepare. The time to do that is now, not on the eve of a foreclosure auction.

Storm Preparation is a weekly series appearing on Wednesdays and offers tips and information to people who think they may need bankruptcy protection in the future. Questions, comments or suggestions can be addressed to info@mcleodlawoffices.com.

Posted by Bill McLeod at 6:19 AM | Permalink | Comments (0) | TrackBacks (0)

I have been asked by clients if they can avoid having to list all of their credit cards on their bankruptcy schedules. The answer is simple: “no.” However, they must list all of their debts. And if you owe the credit card company money, you must list it on your bankruptcy schedules (open lines of credit are not debts, although no debtor should expect that an inactive line of credit will survive a bankruptcy filing). Not doing so is – legally speaking – stupid. And recently, a debtor in Massachusetts learned just how stupid it really was.

The debtor filed a chapter 7 case. In an Adversary Proceeding, a creditor alleged that the debtor made a false oath when she failed to list five separate credit card debtors on her petition. She also did not bother to amend her schedules at any time…even after the Adversary Proceeding was filed. When asked about it, the debtor replied:

I didn’t list [the credit cards] because I didn’t want to totally destroy my credit. That’s basically – I didn’t think I had to, you know, divulge these small little credit cards that didn’t mean anything. They weren’t huge.

Continue reading "Not Huge and Very Stupid: A Discharge is Denied" »

Posted by Bill McLeod at 6:29 PM | Permalink | Comments (2) | TrackBacks (0)

I believe there are folks who believe that I am a huge Negative Nancy when it comes to talking about the economy. So much so, that they do not even want to bring up the subject around me. As I have mentioned: I am not an economist. I did not do well in economics while in college. I found it…quite honestly…a tad dry. It was also at 8:00 am. None of that means that I do not have the wherewithal to see that things all around us are not well.

I judge how well the economy is doing by how much it costs to fill my tank or buy groceries. I judge how well the economy is by how many vacant store fronts I see in downtown Boston, or how many I walk by on the way home. And I judge how well the economy is doing by how there is more and more positive spin (or what some people might call propaganda) on how things really are not as bad as they seem. And there are clients (and if you’re reading this, you know who you are) that are banking that “things will pick up later this year” or “I think we’ve hit bottom.”

At the risk of sounding like a Negative Nancy: Things ain’t looking so hot.

A post yesterday at Calculated Risk highlighted certain remarks made in a UPS Conference Call. Among them: “At this point, we see no immediate signs of economic improvement.” The tone of that remark seems a bit negative.

There were other tidbits in the news. There are stories about Americans hoarding food, and some retailers limiting the quantities that customers may purchase. Foreclosures continue to rise. It's all so very negative. And some people say we’re in a recession while our President assures us that we’re not.

And me? Yesterday, I had to fill my tank. I am thankful I live in town and do not need to fill it as often as I did when I was commuting. But I think I may be in a bit of a shock. No. Actually, I am pretty sure I am in a bit of shock. Though I bet others might argue that I’m just being negative.

Posted by Bill McLeod at 8:35 AM | Permalink | Comments (0) | TrackBacks (0)

I cannot tell you the number of times I have heard prospective clients tell me something like this:

“I have been wanting to file bankruptcy for several months, but I wanted to put my house into my relative’s name first.”

Under Section 544, a trustee can avoid a transfer of property by the debtor. In other words, and using the above example, the trustee could get the house back from the relative.

Perhaps even more problematic for a debtor: tThe discharge can be denied. Section 727 provides for a denial of discharge if “the debtor, with intent to hinder, delay or defraud a creditor or an officer of the estate (such as the trustee) has transferred, removed, destroyed, mutilated, or concealed …property of the debtor, within one year before the date of the filing of the petition; or…after the date of the filing of the petition.”

It’s been my experience that debtors transfer property without first speaking to an attorney. While the motives for transferring propety may be questionable, the decision to transfer is usually fueled by a fear of losing the property in a bankruptcy proceeding. However, no one can really determine whether an asset would not be exempt from the bankruptcy estate unless all of the facts are analyzed by an attorney. Without an opinion from an attorney, it is impossible to determine whether the fear is actually legitimate.

Yet even if the fear is legitimate, the biggest reason – if not the only reason – why consumer debtors seek bankruptcy protection is the discharge. Going into the process, losing property and losing the discharge makes no sense. Also, a debtor who transfers property is likely going to find themselves pulled into an Adversary Proceeding, which only increases the costs and fees associated with filing bankruptcy. If you’re thinking of transferring property: speak to a bankruptcy lawyer first.

You might also want to read:
Unauthorized Post Petition Transfer Leads to Denial of Discharge

Storm Preparation is a weekly series appearing on Wednesdays and offers tips and information to people who think they may need bankruptcy protection in the future. Questions, comments or suggestions can be addressed to info@mcleodlawoffices.com.

Posted by Bill McLeod at 7:48 AM | Permalink | Comments (0) | TrackBacks (0)