- Creditors will sometimes agree through direct negotiations to discount their claims.
- Some states have procedures called assignments for the benefit of creditors, where assets are assigned to a neutral third party who sells them for the benefit of creditors.
- Formal workouts involve meeting with creditors as a group and entering into a payback agreement over time.
However, these alternatives are dependent on the willingness of your creditors to go along with them. If you are in financial trouble you may find that your creditors are quite unreasonable and bankruptcy is probably your best choice.
Another alternative is to simply do nothing. If you have no assets and plan on living on a very low income for the foreseeable future, you may be judgment proof. Of course, if you feel you could have a brighter future if only you could erase your debts, then bankruptcy is probably your best bet.
A word of caution: you have undoubtedly heard ads for various organizations that promise to work things out with your creditors and repair your credit. Many of these outfits are scams pure and simple, and as a result, they are now facing criminal actions by the Attorneys General in a number of states. These scam artists take your fees and leave you saddled with your debts. Avoid them. You’re better off doing nothing than being taken in by them.
The better question is: “Can you afford not to?” Filing for bankruptcy can be less expensive than drowning in debt and can give you a fresh financial start. The Law Offices of Nicholas Gebelt will quote you a flat fee for the entire case based on your individual situation.
Our offices can establish an affordable payment plan with interest-free payments to fit your budget and will file your case as soon as the filing and legal fees are paid.
The question is, how much interest and fees will you have to pay? And, can you afford your monthly payments? You certainly don’t want to begin a new cycle of painful financial problems.
A. What The Bible Teaches About Bankruptcy
It may help to learn that the Bible actually provides for a type of bankruptcy once every seven years. In the Old Testament book of Deuteronomy we read:
At the end of every seven years, thou shalt make a release. And this is the manner of the release: Every creditor that lendeth aught unto his neighbor shall release it; he shall not exact it of his neighbor, or of his brother; because it is called the Lord’s release. (Deuteronomy 15:1-2 (King James Version)).
Thus, creditors in ancient Israel were required by law to forgive their debtors every seven years. And, of course, the New Testament is replete with commands to forgive. For example, in the Sermon on the Mount, Jesus commanded the inclusion in the prayer of the statement: “And forgive us our debts, as we forgive our debtors.” (Matthew 6:12 (King James Version)).
B. The Foundation Of United States Bankruptcy Law
When the United States Constitution was drafted, its framers apparently felt that this biblical bankruptcy principle had a place in our new nation because they explicitly gave Congress the power:
“To establish … uniform rules on the subject of bankruptcies throughout the United States …” (U.S. Constitution, Article I, Section 8, clause 4).
The modern Bankruptcy Code (Title 11 of the United States Code) is the result of Congress’s exercise of this constitutional authority. (Note: The various types of bankruptcy, such as Chapter 7, Chapter 13, etc., are so-called because of the corresponding chapters in the Bankruptcy Code where they are discussed.) Whatever their personal failings may have been, the framers of the Constitution certainly would not have included bankruptcy law in the Constitution if they had thought that there was anything immoral about the practice. Instead, they understood the idea of forgiveness as a way to give debtors a fresh start so that they could become productive members of society again.
Thus, neither the biblical author of Deuteronomy, nor Jesus, nor the founders of the United States, taught that bankruptcy was an immoral practice that should not be permitted. Indeed, the Deuteronomy law REQUIRED creditors to forgive debtors, just as United States bankruptcy law requires creditors to forgive debtors.
Ultimately, you will have to decide for yourself whether bankruptcy is morally acceptable for you. The thoughts expressed above are provided to help you reach that decision.
There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may even be able to challenge the debt.
However, certain types of debts are NOT DISCHARGEABLE in bankruptcy. Bankruptcy will not normally wipe out the following:
- Alimony, maintenance or support for a spouse or children.
- Mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).
- Student loans. Almost no student loans are canceled by bankruptcy. But you can ask the court to discharge the loans if you can prove that paying them is an “undue hardship.” However, this is very hard to do.
- Money borrowed by fraud or false pretenses. A creditor may try to prove in court during your bankruptcy case that you lied or defrauded them so that your debt cannot be discharged. A few creditors (mainly credit card companies) accuse debtors of fraud even when they have done nothing wrong. Their goal is to scare honest families so that they agree to reaffirm the debt. You should never agree to reaffirm a debt if you have done nothing wrong unless you can get much more favorable terms than you previously had. If the company files a fraud case and you win, the court may order the company to pay your lawyer’s fees.
- Most taxes. Some taxes are dischargeable in bankruptcy; however, complicated rules govern the discharge ability of tax liabilities and some taxes may not be discharged. For non-dischargeable taxes, we can help with an Offer in Compromise.
- Most criminal fines, penalties, and restitution orders. This exception includes even minor fines, including traffic tickets.
- Debts not listed on your bankruptcy petition.
I. Chapter 7
The chapter most commonly used is Chapter 7, and its big goal is the discharge of debts without any repayment. Thus, while there are some kinds of debts that are not dischargeable in a Chapter 7 bankruptcy ( see 11 U.S.C. § 523(a) for the complete list of non-dischargeable debts), for most debtors Chapter 7 provides a clean sweep of debt and gives a truly fresh start.
A. Exempt vs. Nonexempt Assets
One of the many things we are required to include in your Chapter 7 bankruptcy papers is a complete listing of everything you own – even down to the clothes on your body. Since in a Chapter 7 bankruptcy your creditors are, in effect, walking away like poor step-children, there must be limit on which of these possessions you get to keep. You are permitted to retain all of your “exempt” property, but the Chapter 7 trustee assigned to your case is empowered to seize your “non-exempt” assets and liquidate them for the benefit of your creditors.
B. The Exemption Tables
How can you tell which of your assets are exempt? While the Bankruptcy Code has an exemption table ( see 11 U.S.C. § 522 for details), it permits the states to use their own state exemption tables instead ( see § 522(b)). Some states use the federal table exclusively, some states have completely opted out of the federal table and only allow debtors to use their own state table, and some states allow debtors to choose between the federal and their own state tables. Note, however, that you don’t get to mix and match: once you choose a table you have to stick with it.
In particular, California has two exemption tables: one for homeowners with equity, the other for renters and homeowners without equity. And California permits the use of the federal table as well.
The tables are not all carbon copies of each other. Some state tables are more generous than others. Can you use any state’s table you want? No. Congress wanted to discourage “forum shopping” so it put restrictions on the use of the exemption tables. Therefore, you can’t simply move to another state and immediately use that state’s table.
C. Which Table Can I Use: The Domicile Requirement
Bankruptcy law underwent a major sea-change in 2005 with the enactment of the Bankruptcy Abuse and Consumer Protection Act (“BAPCPA”). Under the pre-BAPCPA Code, the debtor could indeed use the exemption table of the state in which the debtor lived the longest during the 180-day pre-petition period ( see 11 U.S.C. § 522(b)(2)(A) of the pre-BAPCPA Code).
However, under BAPCPA things are quite a bit more complicated. They are described in the current version of 11 U.S.C. § 522(b)(3)(A).
The gist of § 522(b)(3)(A) is this: If you have had your “domicile” in the same state for the entire 730-day ( i.e., two 365-day years) pre-petition period, then you can use either that state’s exemption table (if the state has one – as I previously mentioned, not all of them do), or the federal table found in § 522 if the state allows it. If you have not lived in a single state for the entire 730-day pre-petition period, then you must use either the exemption table for the state in which you lived for the longest part of the 180-day period immediately prior to the 730-day pre-petition period, or the federal exemption table.
D. Does Intent To Be Domiciled Play A Role?
Suppose you physically inhabited Pennsylvania for at least part of the last 730 days. Can you still be thought of as having been domiciled in California for the last 730 days if your intent was to be domiciled in California? Or do you have to wait the full 730 days after your return to California to use the California tables? This is a crucial exemption question if you did not live in California for the longest part of the 180-day period immediately prior to the last 730 days.
It is perhaps a bit surprising that not much BAPCPA case law exists on the subject. Indeed, the only published BAPCPA cases in the entire country appear to be: In re Urban, 361 B.R. 910 (Bankr. D. Montana 2007) (the only case in the Ninth Circuit – of which California is a part – but it is not at the appellate level), In re Dufva, 388 BR 911, 914 (Bankr. W.D. Mo. 2008), and In re Bunting, Case No. 07-20864 (Bankr. E.D. Mich. 2/27/2009).
All of these cases echo the pre-BAPCPA case law, which held that intent was key. For example, in one of its pre-BAPCPA decisions the United States Supreme Court distinguished the concepts of “domicile” and “residence” by holding:
“Domicile” is not necessarily synonymous with “residence,” Perri v. Kisselbach, 34 N. J. 84, 87, 167 A. 2d 377, 379 (1961), and one can reside in one place but be domiciled in another, District of Columbia v. Murphy, 314 U. S. 441 (1941); In re Estate of Jones, 192 Iowa 78, 80, 182 N. W. 227, 228 (1921). For adults, domicile is established by physical presence in a place in connection with a certain state of mind concerning one’s intent to remain there. Texas v. Florida, 306 U. S. 398, 424 (1939).
Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 48 (1989)(emphasis added).
Therefore, if intent still remains the operative measuring stick you might be able to use one of the California tables – even if you lived in Pennsylvania for part of the last 730 days – if you can convince the judge assigned to your case that your intent was to remain domiciled in California while you resided in Pennsylvania. In sum, it may come down to luck of the draw on judge and trustee assignment.
The safest move would, of course, be to wait the full 730 days before filing. However, some debtors do not have the luxury of being able to wait to file, perhaps due to a pending foreclosure sale or some other enraged 1,000-pound financial gorilla coming after them. If that is your situation, then the only thing to do is roll the dice and hope for a sympathetic judge who will accept your “intent to reside in California” argument.
II. Chapters 11, 12, And 13
If you file under chapters 11, 12, or 13 you commit to a multi-year debt repayment plan. Therefore, since you will be making payments over time, you are permitted to keep all of your possessions. However, you still are required to list all of your assets and divide them into the exempt and non-exempt categories because the dollar value of your non-exempt assets becomes the starting point for determining the size of your plan payments.
I. Joint Bankruptcy Filings
As you may already know, the Bankruptcy Code is divided into chapters, all of which (except for Chapter 12) are odd-numbered (give me a call and I’ll tell you why). Chapters 1, 3, and 5 serve as foundational chapters: their content comes along for the ride and is subsumed into any bankruptcy you file. Thus, for example, if you file for either Chapter 7, or Chapter 13, relief, you are simultaneously filing under Chapters 1, 3, and 5.
Individual cases under any chapter are therefore filed pursuant to 11 U.S.C. § 301, and joint cases are filed pursuant to 11 U.S.C. § 302(a), which provides in relevant part (with emphasis added): “A joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual’s spouse.” Therefore, according to this Code section, any two people who are not married to each other cannot jointly file for bankruptcy protection. They can, of course, file two separate bankruptcies as individuals, but in so doing they incur twice the cost of filing a single bankruptcy.
II. The Defense Of Marriage Act
For reasons connection with the aforementioned “much larger controversy”, on September 21, 1996, President Clinton signed the Defense of Marriage Act (“DOMA”), which states (with emphasis added):
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word “marriage” means only a legal union between one man and one woman as husband and wife, and the word “spouse” refers only to a person of the opposite sex who is a husband or a wife.
1 U.S.C. § 7.
Applying this statute to the restrictive language in 11 U.S.C. § 302(a) – which is part of the Bankruptcy Code, which is an act of Congress – leads to the conclusions that: (1) For federal law purposes (the Bankruptcy Code is federal law) same-sex couples cannot be considered married, and (2) same-sex couples cannot file for bankruptcy protection jointly.
If on the one hand, DOMA does not conflict with the U.S. Constitution, then it is constitutional – even if it conflicts with the constitution of one (or more) of the states (see U.S. Const., art. VI.). If that is the case, then a same-sex couple can never file for bankruptcy protection jointly because they can never be married for federal law purposes, and can never have a spouse – again, for federal law purposes – even if they have been legally married under the law of one of the states.
On the other hand, if DOMA does conflict with the U.S. Constitution, then it is unconstitutional – even if it is popular. If that is the case, then it is arguably the case that a same-sex couple who is legally married under the laws of a given state can file jointly.
III. New Legal Developments
A. The First Case On Point: Joint Filing Is Not Permitted
The first court that addressed the question of same-sex joint filing appears to have been the U.S. Bankruptcy Court for the Western District of Washington. In that case. a same-sex couple filed a joint Chapter 7, and the Court filed an Order to Show Cause for Improper Joint Filing of Unmarried Individuals (“OSC”). The Debtor filed a response, as did the Office of the U.S. Trustee (“UST”). The Court held:
. . . DOMA simply codified that definition of marriage historically understood by society. See Adams, 486 F.Supp. at 1123 (observing that marriage historically has been defined as the union between persons of different sex). . . . This Court concludes that DOMA does not violate either the Due Process or Equal Protection Clause of the Fifth Amendment. . . . The Court concludes that DOMA does not violate the principles of comity, or the Fourth, Fifth, or Tenth Amendments to the U.S. Constitution. The Debtors’ petition in bankruptcy shall be dismissed on September 3, 2004, unless the Debtors have filed a motion to bifurcate prior to said date.
In re Kandu, 315 B.R. 123, 148 (Bankr. W.D. Wa. 2004) (available at www.scholar.google.com).
B. The Central District Of California: Joint Filing Is Permitted
Very recently, Judge Thomas Donovan, one of the U.S. Bankruptcy Judges in Los Angeles, held in a Chapter 13 case in which the UST had filed a motion to dismiss:
The Debtors have demonstrated that DOMA violates their equal protection rights afforded under the Fifth Amendment of the United States Constitution, either under heightened scrutiny or under rational basis review. Debtors also have demonstrated that there is no valid governmental basis for DOMA. In the end, the court finds that DOMA violates the equal protection rights of the Debtors as recognized under the due process clause of the Fifth Amendment. . . . For the reasons stated herein and in the Debtors’ Opposition to the Motion and Debtors’ supporting authorities, the Motion to Dismiss Debtors’ chapter 13 case based on § 1307(c) is denied.
In re Gene Douglas Balas and Carlos A. Morales, Case No. 2:11-bk-17831-TD, (Bankr. C.D. Cal. June 13, 2011) (available at www.scholar.google.com).
Interestingly, 20 of the bankruptcy judges in the Central District of California signed the order issued by Judge Donovan. This is highly unusual; indeed, I am unaware of any other non-appellate bankruptcy cases in which multiple bankruptcy judges have signed the same order.
What can we conclude from these two cases? Less than you might think. First, each case was at the Bankruptcy Court level, meaning that no appellate court has considered the matter. Second, no other judges are bound to follow either decision because they have no precedential force. Third, if a court whose rulings have precedential force in the Ninth Circuit hands down a decision, it will make both of these decisions irrelevant.
C. The Position Of The U.S. Justice Department
In both of the cases we just discussed, the UST participated in the process of seeking dismissal. The UST is a subdivision of the U.S. Justice Department (“DOJ”). Therefore, if the DOJ decides against opposing joint same-sex filings, the UST will no longer seek to dismiss such cases.
On June 21, 2011, U.S. Attorney-General, Eric Holder, stated that the DOJ would no longer defend DOMA (see www.latimes.com for details). In practical terms, this means that since the DOJ will not defend DOMA, it will not oppose joint same-sex bankruptcy filings, so neither will the UST.
Does that settle the question? Not quite. In the Kandu case, it was the judge who initially issued the OSC. Although the UST filed a response, it was not required to do so. Thus, the case could have been dismissed by the judge without the participation of the UST or anyone else. Therefore, a judge in the Central District of California could dismiss a joint same-sex filing, without the participation of the UST, and without the imprimatur of the DOJ. Since there were some Central District judges who did not sign Judge Donovan’s order, it remains to be seen what will happen is such a case ends up in one of their courts.
In sum, stay tuned for further developments.
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