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Section 707(b) “Abuse” Motion: Here’s What to Do
When You Receive One
By
Craig Andresen, Attorney at Law
on Sep 26, 2009 in
Chapter 7 Bankruptcy
You have
filed
chapter 7
bankruptcy, and everything was going smoothly, until you received a motion
from the U.S. Trustee’s office under section 707(b). The U.S. Trustee
(UST) says your case is an “abuse” of
chapter 7
and that you can afford to repay part of your debts in a
chapter 13!
However, you know that’s simply not possible on your income, with all
the household expenses you have. Now what do you do?
There’s a
good chance that if you defend the 707(b) motion, you will either win in
court, or the UST will withdraw its motion after your lawyer files a legal
response to the motion. In fact, debtors who defend these motions are
successful most of the time. It might well be worth paying your
bankruptcy lawyer an additional fee to see if you can prevail in your
chapter 7.
The worst that can happen is that you lose, at which time you simply convert
to
chapter 13.
Ask your
lawyer if he or she has defended 707(b) abuse motions before, and if so, ask
about the outcome of those cases. An experienced bankruptcy lawyer
will have defended at least half a dozen 707(b) motions, and possibly will
have had other lawyers refer such cases to him or her for a defense.
Additionally, this might be a good time to get a second opinion, especially
if your lawyer tells you such motions are hard to defend. It usually
is easy to consult with another bankruptcy lawyer about a 707(b) motion, but
remember that it’s best to do so in person.
Even
though it may cost you some money to defend a section 707(b) motion, if
you’re lucky, you’ll win — and your
chapter 7
case will proceed to a
discharge
of your debts.
Since a bankruptcy can be filed by one spouse without the other, this is
one of the most common bankruptcy questions. There are several aspects of
the answer.
A bankruptcy filing by one spouse does not bring the other spouse into
bankruptcy. Neither does the bankruptcy of a spouse give the non filing
spouse the full protection of the
automatic
stay or the bankruptcy
discharge.
Joint debts
If you and your spouse are jointly liable to a
creditor, the
bankruptcy of one spouse does not relieve the other of paying the debt. Upon
a bankruptcy, the creditor may look to the other spouse for payment, unless
the bankruptcy case is under
Chapter 13.
If the debt is a consumer debt to be paid 100% through the Chapter 13 plan,
the co debtor is protected by the codebtor stay in §1301.
Generally, marriage alone doesn't make both spouses
personally liable for a debt. Liability on contracts such as home loans
and credit cards arises by agreement between the creditor and the debtor.
Only persons who signed the loan or credit application are liable for the
debt.
A joint tax return, however, makes both spouses liable for the total of
the tax due.
If you have joint debts, you can expect the bankruptcy to be noted in
some way on the credit record of the non filing spouse. There is uncertainty
in the law at the moment as to whether it is proper to mention the
bankruptcy of one debtor on the credit report of a debtor who is not in
bankruptcy.
Joint property
If you and your spouse own property together, that property may be
included in the
bankruptcy estate and be potentially available to pay creditors. In
community property jurisdictions such as California, both halves of the
community property comes into the estate: all of the community property is
available to pay community creditors and any other creditorsof the spouse
who has filed. So the filing of one spouse could have significant impact on
the other.
Community property discharge
When one spouse files bankruptcy in a community property state, the
marital community enjoys the protection of the filing spouse's bankruptcy
discharge. Section 524 of the Bankruptcy Code provides that any community
property that the filing spouse and the non filer acquire after the
bankrutpcy is protected from creditors of the non filer who held a claim
against the non filing spouse as of the date of the filing.
A creditor with a claim against the non filing spouse can only collect
its debt from the separate property of the non filing spouse. In California,
that separate property is comprised of assets acquired before marriage;
assets acquired by gift during marriage; or assets acquired by inheritance.
Creditors, despite the fact that the community property discharge has
existed since at least the passage of the Bankruptcy Code in 1978, have a
hard time believing that someone in a community property state gets the
benefit of their spouse's bankruptcy discharge, but that's the law.
Credit reports
Each person has (or is supposed to have) a separate credit file for
credit reporting purposes. Your debts, if yours alone, are not supposed to
show in your spouse's credit file. Similarly, your bankruptcy should not
show in your spouse's file if you have no joint debts.
Even so, it pays to
monitor your credit file, since credit reporting, like so much else in
life, does not always follow the law.
Future credit
The bankruptcy of one spouse will have some effect on the credit
worthiness of the non filing spouse if they apply jointly in the
future for a loan. The loan grantor will consider the credit rating of both
applicants in making a lending decision. More on
post bankruptcy
credit.
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Bankruptcy in California
State law gives some twists to bankruptcy issues for Californians
even though bankruptcy is controlled by federal law.
Exemptions
Community property
Single spouse discharge
California gives debtors a choice between the state law exemptions
found in Code of Civil
Procedure §704 and a set of bankruptcy-only exemptions in
CCP
§703.140
that mirror the bankruptcy code exemptions in the federal law when the
California law was adopted.
Usually, homeowners chose the state law exemptions with a generous
homestead exemption for equity in a primary residence.
Renters or those with no equity in their homes chose the CCP
703 exemptions, with its "wild-card" or "grub stake" exemption for
equity in any kind of property.
More on Exemptions
Comparison of California exemptions
California is a community property state where property acquired by a
married couple during marriage is community property belonging equally
to both spouses, unless they agree otherwise. The community
property (though not necessarily the other spouse personally) is liable
for the debts incurred by either spouse during the marriage.
Even if only one spouse files bankruptcy, all of the
community property becomes
property of the estate. Property of the estate, if not claimed
exempt, is available to pay the community debts of both spouses through
the bankruptcy. Can I file
bankruptcy by myself?
The trade off for debtors in community property states for the
inclusion of both halves of the community property in the
bankruptcy estate is that all community property of the marriage
acquired after the bankruptcy is protected by the discharge, even
if only one spouse filed.
That means that the after- acquired community property is not liable
for the debts of the non filing spouse that existed when the bankruptcy
was filed. 11 U.S.C. 524(a)(3). The non filing spouse's separate
property (if any) may be liable, however.
This provides lots of opportunities for planning in cases where there
are reasons why both spouses can't file or where debt and/or property
holdings are lop sided.
Get good legal advice to explore how these principles play out. If
you live outside of the San Francisco Bay Area where the Moran Law Group
practices, the California State Bar certifies
bankruptcy specialists who can be located by county on the bar's
site.
By
Karen Oakes, Southern Oregon Bankruptcy Attorney on Sep 27, 2009
in
Bankruptcy Myths,
Chapter 13 Bankruptcy,
Chapter 7 Bankruptcy,
General Bankruptcy Information,
Marriage and Debt
1. Bankruptcy
doesn’t ruin your credit forever, as explained by
Jay Fleischman, New York consumer attorney. I am
finding that about 20% of my clients’ credit scores suffer due
to a bankruptcy filing, but those clients are in the high 600s
or low 700s already. Most of my clients’ credit
scores are in the 500 range and bankruptcy actually helps boost
their scores as the debt collector balances are zeroed
post-bankruptcy.
2. You don’t have to have a lot of
debt to file bankruptcy, as explained by
Dana Wilkinson, South Carolina bankruptcy attorney.
There is no minimum and no maximum amount of debt for a
chapter 7 bankruptcy filing. (As explained by
Michael Doan, my California colleague, there is a
maximum amount of debt for a chapter 13.) Now,
common sense kicks in at some point. A minimum
wage worker with $5000 in debt and facing a garnishment may be a
candidate for bankruptcy; however, a person earning $100,000 a
year and $5000 in debt is not going to be given bankruptcy
advice (at least by my office).
3. All your friends and family will
most likely never find out about your bankruptcy, as further
explained by
Steve Otto, a Pennsylvannia attorney. 99% of the
time, the only way your friends and family find out that you
filed bankruptcy is if you tell them. A bankruptcy
is public record but in these times, most newspapers do not
publish bankruptcy filings. If your friends and
family are creditors, yes, they will find out as the court sends
them a notice, but otherwise, the only folks who know about your
bankruptcy are the ones involved in your debts or your
bankruptcy.
4. There is no such thing as a
medical-bill-only bankruptcy. as explained by
Wayne Novick, a Ohio bankruptcy attorney. While there
are many bankruptcies that are filed after a significant illness
or as the result of high medical debt, when you file for
bankruptcy, you are required to list all your debts, both
secured and unsecured, both private and personal.
5. YOUR bankruptcy will not ruin your
non-filing spouse’s credit, as explained by my colleague,
Craig Andresen, Minnesota attorney. Long
ago, Congress passed the Equal Credit Opportunity Act.
You don’t have to have joint credit and you don’t have to file a
joint bankruptcy. Your bankruptcy will not appear on your
spouse’s separate debts. Now, your spouse remains
liable on the joint debts and as long as payments are continuing
to be made on those debts, your bankruptcy will not affect the
spouse’s credit. Most of the time, however, when
there are significant joint debts, attorneys recommend
that both spouses file together in order that both can get the
“fresh start” provided by the bankruptcy code.
By
Brett Weiss, Maryland Bankruptcy Attorney on Sep 28, 2009 in
General Bankruptcy Information
Many of my clients come into my office already knowing what chapter
of the Bankruptcy Code they want to file under. Others have no idea how
they want to proceed. So which chapter is “best”?
The answer, of course, depends on the details of the case.
My general rule of thumb is that, unless there is a strong reason to
file for
Chapter 13, I recommend a
Chapter 7. Why is this?
1.
Chapter 7 is less expensive. The attorney’s fees are usually less,
often significantly less.
2. It is a much shorter process. Filing to
discharge typically is about four months, versus up to five years in
a
Chapter 13.
3. There is one hearing, the meeting of creditors. In a
Chapter 13, you also have confirmation hearings.
4. Unless you have assets that can be distributed to creditors, there
is very little Trustee involvement. In a
Chapter 13, the Trustee is far more involved in your case.
So why would you want to file a
Chapter 13?
1. You can catch up on mortgage and car arrearages, back child
support and alimony, and taxes over five years in a
Chapter 13. You have no protections in a
Chapter 7.
2. Co-debtors are usually protected from collections while you are in
the
Chapter 13.
3. You may be able to strip off an unsecured second (or third)
mortgage, judgment or lien in a
Chapter 13.
4. You may be able to cram down your car or other asset in a
Chapter 13.
5. If you fail the
Means Test, you may have no alternative but a
Chapter 13.
6. If you have non-exempt
assets, a
Chapter 13 may be the only way you can keep them.
The determination of which chapter to file is not always an easy one.
Speak with your attorney to discuss the right way to go.
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