What's in a Name?

 A bankruptcy case is part lawsuit, part financial accounting. Before filing bankruptcy, the debtor must make a good faith effort to account for and disclose all of his creditors and debts; monthly income and expenses; and describe and value all assets. In addition, the federal law requires the debtor to disclose financial transactions, such as a sold automobile, cashed out stock, or transferred real estate prior to filing bankruptcy. The debtor and his attorney may spend many hours probing the debtor’s finances, including investigating bank accounts; tax returns; mortgage documents; titles and deeds; and retirement accounts.

Considering all the meticulous preparation before filing bankruptcy, it’s remarkable when a debtor (and his attorney) files a case under a false name. Let me explain. Suppose your name is Sally. Your parents, teachers, friends, spouse, co-workers, pastor. . . everyone knows you by Sally. Your credit cards, debit card, and library card all say Sally.

The only problem is, your birth certificate name is Sarah.

The government knows you as Sarah, not Sally. Your driver’s license and your social security card identify you as Sarah, so “Sarah” is the name you must use on the bankruptcy petition. That is also the name you must use when completing the pre-bankruptcy credit counseling course and the post-bankruptcy financial management class.

“But wait,” you say, “everyone other than the government knows me as Sally.” The bankruptcy petition form gives a debtor an opportunity to list nicknames, trade names, names used in doing business, former married name(s), and maiden name immediately after the debtor’s legal name:

All Other Names used by the Debtor in the last 8 years

(include married, maiden, and trade names):

Alias information is indexed into the bankruptcy system and is searchable for creditors. All notices sent by the bankruptcy court contains alias information provided by the debtor.

Other common pseudonym situations that may cause trouble include:

  • Using “Sr.” to identify the father of a “Jr.” when the father has not legally changed his name with the government.
  • Using a married name when the spouse has not legally changed his or her name.
  • Using a maiden name after divorce without legally changing the name with the government (even if the change is authorized or ordered by the divorce court).

Bankruptcy Rule 1005

Rule 1005 of the Federal Rules of Bankruptcy Procedure requires a debtor to include the “name, employer identification number [if any], last four digits of the social-security number, any other individual-taxpayer identification number, and all other names used” within eight years before filing the petition. This information helps creditors to (1) correctly identify the debtor when they receive notices and orders from the court, (2) comply with the automatic stay, (3) file a proof of claim, and (4) exercise other rights given to them by the Bankruptcy Code. A failure to list correct identifying information on a petition fails “to notify creditor about the relevance of the bankruptcy proceeding to some of its claims.” See Ellet v. Stanislaus, 506 F.3d 774 (9th Cir.2007).


It is important to make sure that all creditors know about the bankruptcy proceeding and are allowed to exercise their rights in the case. A debt owed to a creditor who is not given proper notice of the bankruptcy may not be discharged and the liability may continue despite the completion of the bankruptcy case. See 11 U.S.C. § 523(a)(3). While an error on the debtor’s petition is correctable by filing an amendment, the error may cause delay in the case. In one case out of the Ninth Circuit, the time for filing creditor objections was extended when the debtors’ name was misspelled on the petition. See In re Diepholz, 2012 WL 4747238 (9th Cir. B.A.P.).

It is essential to provide the proper legal name and all other names used by the debtor when filing a bankruptcy case. Notice to creditors is an essential part of the bankruptcy process; without it, the debtor’s fresh start may stall at the starting line. 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

BANKRUPTCY TRICK: Filing Stale Claim May Violate FDCPA

The Eleventh Circuit recently held that a third party debt collector is liable for violating the Fair Debt Collection Practices Act (FDCPA) when it files a proof of claim in a bankruptcy case that is barred by a state statute of limitations. This decision marks the first time that a circuit court has extended the protections of the FDCPA to bankruptcy proofs of claim.

In the case of Crawford v. LVNV Funding, LLC, et al. (In re Crawford), Case No. 13-12389, Opinion (11th Cir. July 10, 2014), the Eleventh Circuit Court of Appeals applied a “least-sophisticated consumer” standard and found that filing a time-barred claim was deceptive, misleading, unconscionable and unfair under FDCPA Sections 1692e and 1692f. Relying on the Seventh Circuit Case of Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013), the court in Crawford stated that

the FDCPA outlaws ‘stale suits to collect consumer debts’ as unfair because (1) ‘few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts’ and would therefore ‘unwittingly acquiesce to such lawsuits’;

(2) ‘the passage of time…dulls the consumer’s memory of the circumstances and validity of the debt’; and (3) the delay in suing after the limitations period ‘heightens the probability that [the debtor] will no longer have personal records’ about the debt.

The Eleventh Circuit rejected LVNV’s argument that filing a proof of claim is not a “collection activity,” and held that filing of a proof of claim fell well within the broad prohibitions of Sections 1692e and 1692f as it was a “means” by which to collect a debt.

A violation of the FDCPA includes a statutory fine and an award of attorney fees. Section 1692k of the FDCPA provides that a debt collector may be liable to a person in an amount equal to actual damages; statutory damages of up to $1,000; and the costs of the action, including reasonable attorney’s fees.

It is worth noting that the Eleventh Circuit acknowledged that circuit courts in the Second, Third, Seventh and Ninth Circuits all hold that the Bankruptcy Code preempts the FDCPA in the context of a proof of claim. However, LVNV did not claim that the Bankruptcy Code preempts the FDCPA, so it is unknown whether the case would have been decided differently had this issue been raised.

This case highlights the need for a debtor and his attorney to diligently review all proof of claims that are filed in the bankruptcy case. In Crawford, the debtor filed bankruptcy in 2008 and LVNV filed a timely claim. Only in 2012 did the debtor raise objections that LVNV’s claim was beyond the state statute of limitations - long after LVNV had received distributions during the bankruptcy case.

A statute of limitations defense may be asserted in a bankruptcy case, especially in a Chapter 11 or 13 repayment case. See In re Hess, 404 B.R. 747 (Bankr. S.D.N.Y., 2009). Debts that are outside the statute of limitations may be discovered by the bankruptcy trustee and objected to under Section 1302(b)(3). If not challenged by the trustee, the debtor should motion the bankruptcy court to disallow the debt as time-barred under Section 502(b)(1). Disallowed debts are not paid during the bankruptcy case which may lower the monthly payment to creditors, or could reduce the Chapter 13 debtor’s time in bankruptcy.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

BANKRUPTCY TIP: Fight Back Against Mortgage Servicers

Mortgage servicer PHH Mortgage Corporation is in the news again, this time on the losing end of a $16 million jury verdict. Like many others in Yuba County, California, homeowner Phillip Linza ran into some financial trouble after purchasing his home in 2006. Linza filed bankruptcy in 2009, then worked with PHH for a home loan modification. According to Linza’s attorney, PHH agreed to a loan modification that reduced Linza’s monthly payments from $2,100 to $1,543, which would take effect in January 2011.

Inexplicably, PHH changed the terms. PHH first told Linza his new payment was $2,350 per month, then demanded an extra $7,056. When Linza complained and threatened litigation, he was told, "We're a multi-billion dollar company. Stand in line because we've got a busload of attorneys that are on retainers."

This is not the first time PHH has been in the news. In January, 2014, the Consumer Financial Protection Bureau initiated an administrative proceeding, alleging PHH harmed consumers through a mortgage insurance kickback scheme that started as early as 1995. The CFPB is seeking a civil fine, a permanent injunction to prevent future violations, and victim restitution.

In December, 2013, the New Jersey Attorney General announced a $6.25 million settlement with PHH to resolve allegations that the company misled financially struggling homeowners who sought loan modifications or other help to avoid mortgage delinquency or foreclosure.

In 2011, PHH was hit with a $20 million jury verdict from a Georgia federal court for improperly reporting U.S. Army sergeant David Brash to credit agencies as "seriously delinquent" despite the fact that all his mortgage payments had been automatically deducted from his paycheck. When he tried to resolve the matter, his letters to PHH went unanswered (violating federal law) and his calls were routed to overseas customer services staff who couldn't answer his questions.

When a mortgage servicer will not play fair, there are few options. Litigation is costly and time-consuming, and also carries some risk since not every consumer lawsuit is successful. For many consumers, the power found in the federal bankruptcy laws is a more certain and permanent option. Most jurisdictions allow a bankruptcy debtor to strip away an unsecured junior lien against a home in a Chapter 13 case. A mortgage arrears may be repaid over three to five years under court supervision, and without threat of an unannounced foreclosure.

A Chapter 7 debtor may discharge a personal obligation on a home loan while retaining the right to modify post-discharge under HAMP. That means that the lender has no recourse against the homeowner for nonpayment, and the property is eligible for loan modification.

If you are experiencing the pains of dealing with an incompetent or dishonest servicing company, consider all of your options, including options found in the federal bankruptcy laws. Bankruptcy is not always the best option, but it is often the most powerful option.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati  Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

BANKRUPTCY TRICK: Lien Strip a Previously Discharge Mortgage

 While the Bankruptcy Code prohibits modification of a secured home mortgage, most courts permit an underwater debtor to “lien strip” an entirely unsecured junior mortgage. For instance, suppose Roger “Raj” Thomas owes $100,000 on a first mortgage and $20,000 on a second, but Raj’s home in Watts is only worth $90,000. In most jurisdictions Raj may “strip” the second mortgage lien, which converts its debt into an unsecured obligation. At the end of the Chapter 13 case, the lien is stripped off Raj’s house and whatever is not paid during the case is discharged.

Lien stripping in conjunction with a Chapter 13 discharge is common. What is uncommon is lien stripping when the debtor is ineligible for a discharge. This situation arises in a case colloquially known as a “Chapter 20,” or a Chapter 7 with discharge followed by a Chapter 13 filing (Chapter 7 plus Chapter 13 equals Chapter 20). Bankruptcy courts are split on whether to allow a debtor to lien strip property in a Chapter 13 case when he is ineligible for discharge due to a prior Chapter 7 discharge; however, a growing number of Circuit Courts are allowing the process. See Wells Fargo Bank N.A. v. Scantling (In re Scantling), ___ F.3d ___,  2014 WL 2750349 (11th Cir. June 18, 2014); Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir. 2013); Fisette v. Keller (In re Fisette), 455 B.R. 177 (B.A.P. 8th Cir. 2011).

Recently, the Sixth Circuit Bankruptcy Appellate Panel joined these Circuit Courts in the case of In re Cain, No. 13-8045 (6th Cir. BAP, July 14, 2014). The debtor, Cain, filed Chapter 7 bankruptcy in 2008 and received a discharge, including a discharge of her personal obligation a second home mortgage. The second mortgage was completely underwater, so, Cain filed a Chapter 13 bankruptcy case a few months after her Chapter 7 discharge. Cain was ineligible to receive a discharge in the Chapter 13 case since it was filed within four years of the Chapter 7 case. See 11 U.S.C. § 1328(f)(1). Nevertheless, she proposed to lien strip the home upon completion of her Chapter 13 case, which paid an outstanding auto loan, delinquent tax obligations, and cured a default on her first mortgage. The plan was confirmed, but in 2013, the bankruptcy court denied Cain’s motion to avoid the lien on the second mortgage at the end of her case. The Sixth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court and held that “nothing in the Code prevents a Chapter 20 debtor from stripping a wholly unsecured junior lien on the debtor’s principal residence.”

Chapter 20 is a valuable strategy when the debtor can initially qualify for Chapter 7 bankruptcy (based on a low income or business debt exception) and has one or more unsecured junior liens. By eliminating all dischargeable unsecured debts in the Chapter 7 case, the debtor is not bound by the anti-discrimination rules in Chapter 13. In other words, the debtor may pay student loans or other non-dischargeable, non-priority unsecured debts, and not worry about discriminating against other unsecured creditors (who were discharged in the Chapter 7 case). Through Chapter 20, the debtor has an opportunity to receive many of the benefits found in Chapter 7 and Chapter 13.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Payments held by Chapter 13 trustee

When a debtor’s Chapter 13 bankruptcy case is terminated early, the first question asked is, “What happens to my money that the trustee is holding?” The answer depends on whether the Chapter 13 plan was confirmed prior to a dismissal, or whether the case is converted to a Chapter 7.

Unconfirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was not confirmed prior to dismissal, money held by the trustee is returned to the debtor. After the dismissal of the Chapter 13 case, the trustee makes an accounting, and pays trustee's fees, attorney fees and/or adequate protection payments to creditors. Any remaining money is generally returned to the debtor. See In re Stamm, 222 F.3d 216 (5th Cir. 2000)(holding that when a Chapter 13 case is converted to Chapter 7 before confirmation of a plan, wages paid by the debtor to the trustee under the proposed plan do not become part of the Chapter 7 estate and must be returned to the debtor).

Confirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was confirmed prior to the dismissal of the case, there is a split of opinion on where the money goes. The Third Circuit Court of Appeals directs the trustee to return undistributed money to the debtor. See In re Michael, 699 F.3d 305 (3rd Cir. 2012). Conversely, the Fifth Circuit Court of Appeals states the right of creditors to money paid to the trustee under direction of a confirmed plan is superior to the debtor’s. See Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. July 7, 2014). In the Fifth Circuit, the trustee may pay creditors after he case is converted. These funds are generally not property of the Chapter 7 bankruptcy estate (see below).  

Dismissed Case

If the debtor’s Chapter 13 Plan is dismissed by the bankruptcy court after the case was confirmed, any money held by the Chapter 13 trustee is returned to the debtor. See 11 U.S.C. § 349(b)(3)(dismissal generally revests the property of the estate in the debtor); see also In re Nash, 765 F.2d 1410 (9th Cir. 1985) (holding that any undistributed earnings paid to a Chapter 13 trustee pursuant to a confirmed plan must be returned to the debtor upon dismissal of the Chapter 13 case). 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send and email to fears@fnlawfirm.com.

Cram Down a House

“Cram down” is lawyer-speak for a bankruptcy court reducing a secured interest to the value of the property. For instance, if a bass boat is worth $2,000 and there is a $4,000 balance owed to the bank, the bankruptcy court can cram down the secured interest to $2,000. The remaining $2,000 is now unsecured and paid at the same rate as other unsecured debts.

The Bankruptcy Code allows cram down of many secured debts in a Chapter 13 bankruptcy. One notable exception is a mortgage on the debtor’s primary residence found in Section 1322(b)(2). A Chapter 13 debtor may not reduce the amount of a primary or secondary home mortgage simply because it is underwater. The debtor may strip off a wholly unsecured junior lien (thereby making the debt unsecured), but if any part of the junior debt is secured, lien stripping is not allowed. Cram down is never allowed for a debtor’s home.

The exception in Section 1322(b)(2) only applies to the debtor’s primary residence, not to other property owned by the debtor. This distinction seems simple enough, but reasonable minds can disagree about the details, and often do in the world of bankruptcy. Take for example the case of In re Benafel, 461 B.R. 581 (9th Cir. BAP 2011). In Benafel, the debtor moved out of her home under threat of foreclosure. Benafel rented out her home in March of 2010 and filed Chapter 13 bankruptcy that same month. She proposed to cram down her rental property and the trustee objected.

The issue before the Ninth Circuit Bankruptcy Appellate Panel was when the court should determine the real property as a Chapter 13 debtor's principal residence for purposes 11 U.S.C. §1322(b)(2)'s prohibition. The court said that the date for this determination should be the day the bankruptcy case is commenced – the day the debtor files for bankruptcy. On that day Ms. Benafel no longer lived in her home, so she was allowed to cram it down to value.

Moving out and filing bankruptcy can be tricky business. If this is done solely for the purpose to avoid the Section 1322(b)(2) prohibition, the bankruptcy court may find the debtor has acted in bad faith. Obviously, the risk of a court finding bad faith diminishes the more time between the date the home is rented and the date of the bankruptcy filing.


While lien stripping a home loan only applies to a junior mortgage, cram down of investment property applies to all mortgages. Suppose the debtor has a first mortgage of $100,000, a second mortgage of $100,000, and the real estate has a fair market value of $90,000. In a lien stripping situation, the second mortgage can be entirely stripped off as unsecured, and the first mortgage is fully secured to $100,000. In a cram down situation, the second mortgage is crammed down to zero and the first mortgage is crammed down to $90,000, the value of the real estate. In effect, the second mortgage is now unsecured, and the first mortgage is bifurcated into a $90,000 secured debt and a $10,000 unsecured debt.

The problem with cram down is that most courts require the crammed down mortgage must be paid in full through the Chapter 13 plan. This not only adds trustee fees to the cost of the mortgage, but also places the burden to increase the monthly payments to the creditor or refinance the loan before the close of the bankruptcy case. On the other hand, cram down can be useful if a junior mortgage is undersecured. The debtor may cram down the junior mortgage and pay it off over the bankruptcy term.

For instance, say the amount owed on a first mortgage is $100,000, a second mortgage is $100,000, and the debtor’s rental property has a fair market value of $120,000. The debtor could cram down the property to $120,000 value, continue paying the first mortgage at the contract rate, and pay the remaining $20,000 crammed down second mortgage over five years. The unsecured $80,000 on the second mortgage is paid at the same rate as other unsecured creditors and the remaining balance is discharged at the end of the case.  

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Lien Stripping in Chapter 13 Bankruptcy

 Section 506(a) of the Bankruptcy Code separates the debtor’s obligations into two general categories or “claims”: secured claims and unsecured claims. Secured claims are obligations in which payment is guaranteed (or “backed” or “secured” or “collateralized”) by property. Section 506(a)(1) provides that a secured creditor's claim is “a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.” Consequently, when the value of the property is less than the amount of the secured claim, Section 506(a) allows the obligation to be divided into a secured claim and an unsecured claim.

For instance, suppose the debtor finances a car for $40,000. It’s commonly said that a car depreciates the minute it drives off the lot, so let’s say the car is now worth $35,000 and no payment has been made. In bankruptcy, this car loan would have a secured claim of $35,000 (the value of the collateral) and an unsecured claim of $5,000.

The most notable prohibition against reducing the amount owed on a secured obligation is found in Section 1322(b). This provision, often called the “anti-modification provision,” prohibits a Chapter 13 debtor from modifying the rights of a secured claim when the claim is secured only by the debtor’s principal residence. The U.S. Supreme Court in the case of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), decided that 1322(b) means that a claim against the debtor’s primary residence cannot be bifurcated into secured and unsecured claims. However, most bankruptcy courts have distinguished the ruling in Nobleman to allow a junior mortgage to be stripped away if the value of the senior claims are more than the value of the debtor’s home.

To understand how lien stripping works, consider the following “negative equity” example of a debtor’s home:

Value of home:           $330,000

First mortgage:            $360,000

Second mortgage:       $40,000

Amount of equity       -$70,000

Most courts allow the $40,000 second mortgage to be stripped off and reclassified as an unsecured debt because the amount owed on the first mortgage is more than the value of the home. In other words, the second mortgage is not actually secured by anything because the amount owed on the first mortgage “eats up” all of the home’s equity. There is no equity left to secure the second mortgage. If the second mortgage was partially secured, even by one dollar, the second mortgage could not be lien stripped according to Nobelman.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Assumption of a Lease vs. Reaffirmation

A reaffirmation agreement continues the personal liability of a debtor in secured property after the bankruptcy discharge. A reaffirmation agreement must be approved by the bankruptcy court before it is effective. Essentially, if the debtor purchases a vehicle with financing, and wants to keep it after bankruptcy, he will be asked to execute a reaffirmation agreement by the lender. According to 11 U.S.C. § 521(a)(6), if the debtor fails to reaffirm or redeem the vehicle within 45 days after the first 341 Meeting of Creditors, the automatic stay is terminated and the lender may repossess the vehicle - even if the debtor is current on the payments!  See In re Dumont, 581 F. 3d 1104 (9th Cir. 2009).

Assuming or rejecting leases (and executory contracts) in bankruptcy is detailed in Section 365. This Section and area of the law has been described as “psychedelic.” See In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687 (Bankr. S.D.N.Y. 1992) (quoting Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989)). The part relevant to personal property is found in Section 365(p):

If a lease of personal property is rejected or not timely assumed . . . the leased property is no longer property of the estate and the stay under section 362 (a) is automatically terminated. . . . If the debtor in a case under chapter 7 is an individual, the debtor may notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract. . . .

When read together with the relevant part of § 365(d):

In a case under chapter 7 of this title, if the [debtor inheriting the trustee’s power to assume the lease pursuant to § 365(p)] does not assume or reject an executory contract or unexpired lease of . . . . personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.

Section 365 requires the debtor to assume a lease in personal property, rather than to reaffirm the lease.

All courts agree that the bankruptcy court plays no part in the assumption or rejection of a debtor’s personal property lease, but there is confusion over whether assumption of a lease continues any personal liability after discharge. Collier explains it this way:

If the debtor then assumes the lease, the liability under the lease will be assumed by the debtor and not the estate. However, because there is no reaffirmation of the lease debt, it is not entirely clear what this means. Personal liability on the lease will ordinarily be discharged if the chapter 7 discharge is entered, presumably even if the lease is assumed.

See 1-15 Collier Consumer Bankruptcy Practice Guide ¶ 15.04[8].

Courts are split in the interpretation of Section 365 in regard to personal liability. The majority of courts find that assumption of a lease is not the same as reaffirmation, and, therefore, the debtor’s personal obligation under the lease is extinguished by the discharge. See, e.g., In re Eader, 426 B.R. 164 (Bankr.D.Md. 2010); and In re Creighton, 427 B.R. 24 (Bankr.D.Mass. 2007). These courts point to the necessity of a reaffirmation agreement under Section 524(c) and Federal Rule of Bankruptcy Procedure 4008 to continue the debtor’s personal obligation, and that the bankruptcy discharges “personal liability of the debtor, whether or not discharge of such debt is waived." See 11 U.S.C. § 524(a)(2).

A minority of courts find that assumption of a lease binds the debtor to the original lease terms and the discharge has no effect on the debtor's assumed obligation. The court in In Re Mortensen, 444 B.R. 225 (Bankr. E.D.N.Y. 2011), found:

Once a lease is assumed, it is assumed cum onere and the Debtor is bound to accept the obligations and the benefits. See NLRB v. Bildisco and Bildisco, 465 U.S. 513, 531-32, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); and In re Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir.1999) (citation omitted). In exchange for the right to retain the lessor's property for her use, the Debtor cannot assert that the Debtor has been discharged of her obligations under the Lease the discharge injunction simply does not apply.

Most courts will find that assuming a lease creates a kind of non-recourse situation. The debtor is entitled to keep and use the leased property, but has no personal liability for default. Lenders, especially auto finance companies, have different perspectives on leased vehicles in bankruptcy. Some lenders require short lease assumption documents, while others compel the debtor to file a reaffirmation of the lease obligation with the bankruptcy court.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Where are Bankruptcy Rules Found?

Bankruptcy law is complex and confusing to bankruptcy outsiders (and often to bankruptcy in-siders). To gain a general understanding of the process, the Administrative Office of the U.S. Courts publishes a basic overview of the federal bankruptcy process entitled Bankruptcy Basics. This guide is available on the US Courts website: http://www.U.S.C.ourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx

Article I, Section 8, of the United States Constitution authorizes Congress to enact federal bankruptcy laws, which are codified in Title 11 of the United States Code. This section of federal law is commonly called the Bankruptcy Code and is divided into nine chapters. Chapters 1, 3, and 5 apply to all cases. An individual bankruptcy case is filed under either Chapter 7, 11, or 13. A complete copy of the Bankruptcy Code is maintained on-line at: http://www.law.cornell.edu/U.S.C.ode/text/11

The dollar amounts found in the Bankruptcy Code change from time to time. Changes are published in the Federal Register: https://www.federalregister.gov

The federal bankruptcy process is governed by the Federal Rules of Bankruptcy Procedure, which may be read on-line at: http://www.law.cornell.edu/rules/frbp

Approved agencies for consumer credit counseling and the financial management course are found on the United States Trustee’s website, along with information required for completing the bankruptcy Means Test: http://www.justice.gov/ust/

Finally, take a look at the bankruptcy court’s “local rules,” which supplement the bankruptcy procedures. Every court has a copy of its local rules posted on its website.

Bankruptcy rules are only one aspect of understanding the bankruptcy process. The court interpret these laws and rules, including the bankruptcy court, district court, bankruptcy appellate panels, circuit courts and the United States Supreme Court. Phew! That’s a lot of reading! Fortunately, an experienced bankruptcy attorney has spent years reading these laws and cases, and is able to help you navigate the bankruptcy system.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com


Bankruptcy Discharge Order

At the conclusion of nearly all consumer bankruptcy cases the court will issue a permanent injunction prohibiting creditors from collecting on pre-bankruptcy debts. This permanent injunction known as the “bankruptcy discharge” replaces the “automatic stay,” a temporary injunction. Specifically, the discharge order prohibits discharged creditors from taking any kind of collection action against the debtor personally. The discharge injunction generally forbids a discharged creditor from sending bills, making collection phone calls, or filing a lawsuit to collect on a debt. This protection is final and permanent. Violation of the discharge injunction has serious consequences, and may result in a federal contempt of court charge.

A discharged debt is not erased. See In Re Mahoney, 368 B.R. 579 (Bankr. W.D. Tex. 2007)(“Bankruptcy does not erase debt; the discharge is only an injunction against attempts to collect the debt as a personal liability of the debtor. See 11 U.S.C. § 524(a)” see also In re Vogt, 257 B.R. 65, 70 (Bankr. D. Colo. 2000)). The debt still exists, but payment cannot be collected from the debtor because of the bankruptcy court's injunction. However, a creditor may still have opportunities to collect.

Although a debtor is no longer personally liable for a discharged debt, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) during the bankruptcy case will remain after the debt is discharged. This is because enforcing the lien is an action against the property, not against the person. In this way the bankruptcy laws balance the interests of the debtor and the creditor. For instance, the bankruptcy discharge may prohibit an auto lender from garnishing a discharged debtor’s wages to satisfy an unpaid and defaulted loan, but the law allows the lender to repossess the vehicle. Bankruptcy attorneys are fond describing it this way: “secured property must be paid for or returned.”

The bankruptcy discharge does not protect non-filing co-debtors. The discharge injunction only applies to the debtor. A creditor may still enforce its collection rights against a co-debtor. Typically co-debtors are "jointly and severally liable," which means that the non-discharged co-debtor is likely on the hook for 100% of the debt.

What happens when a creditor contacts the debtor after discharge?  The answer depends on the situation and first involves answering three questions: (1) “Was the debt discharged in bankruptcy?” (2) “Is the collection directed at the discharged debtor?” and (3) “Was the creditor notified of the bankruptcy case or discharge?”

As stated previously, a discharged debt is no longer legally enforceable against the debtor. Some debts are not discharged, so it is important to understand which debts are included in the discharge and which are not. For instance, taxes, student loans, and family support obligations may not be subject to the discharge.  In other cases a debt may be excepted from discharge by the court. 

The discharge only protects the debtor from collection efforts. It does not protect a co-debtor who did not file bankruptcy, and, as a general rule, it does not protect property that is subject to a lien. For instance, a discharged creditor may not garnish the debtor’s wages to collect on a discharged debt, but may repossess collateral when a lien survives the bankruptcy discharge. Therefore, it is important to understand how property is affected by the bankruptcy discharge and whether a creditor can seize, repossess, or foreclose on the property after a bankruptcy.

As a practical matter, if a collector does not know about the bankruptcy discharge, the bankruptcy court is not likely to impose sanctions against it. Often a collection attempt can be resolved by informing the collector of the discharge and either providing a copy of the discharge or referring the collector to the debtor attorney. Buying and selling debt is big business, and debts often get passed from collector to collector – even uncollectable debts like those discharged in bankruptcy!

The bankruptcy discharge injunction applies to the original creditor, collection agencies, attorneys, and any other subsequent collector. A creditor may be liable for selling a discharged debt when the subsequent purchaser attempted collection action. See Laboy v. FirstBank P.R. (In re Laboy), 2010 Bankr. Lexis 345 (Bankr. D.P.R. 2010) (concluding that the original creditor had knowledge of the bankruptcy discharge and selling the debt some 15 years later to a debt collector violated the discharge injunction. Creditors “are obligated to maintain procedures to ensure that they do not violate [the discharge injunction], and may be held liable for damages and attorney’s fees if they do not”).


If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com