Southern California Bankruptcy Law Blog

Bankruptcy vs Debt Settlement

Posted in Debt

In a recent issue of the L.A. Times, Liz Weston compared bankruptcy and debt settlement as ways to deal with overwhelming debt.  Her column was good, but given the limited space she had, it was a bit brief.  In this post I will expand on her discussion.

 

I.  Debt Settlement

 

The idea behind debt settlement is pretty simple:  You ask the creditor to accept less than you owe in full satisfaction of the debt.  You can do the negotiation yourself, or you can hire someone to negotiate on your behalf.

If the creditor agrees to lower the balance, you pay the reduced amount, either in one lump sum, or in a stream of payments.  Unless you have a friend or relative to help you, the lump sum approach isn’t too likely because if you had the lump sum the creditor would assume you could get more and would demand more. Continue Reading

Drunk Driving Debt: Dischargeable If Debtor Was The Injured Person?

Posted in Nondischargeability

Suppose you’re driving home from a New Year’s Eve celebration.  At the party you had one too many glasses of Krug Champagne.  Suddenly a light pole leaps in front of you and you hit it.  You’re badly injured.  You get fine treatment at the hospital, and later receive a bill for $100,000 for the care.  You can’t pay it, so you file for bankruptcy protection.  Is the medical debt dischargeable?

Notice that the party who was physically injured in the accident is the bankrupt debtor ― not some third party.  But is the hospital a party that was also injured as a result of your drunk driving?

 

I.  A Brief History Of Drunk Driving Debts In Bankruptcy

 

Let’s change our hypothetical fact pattern a bit.  Suppose that when you drove home from the New Year’s Eve bash, you hit, not an errant light pole, but another car.  In the process you injured the other driver ― someone you didn’t know.  Now you have a bill for $100,000 for the other driver’s medical care.  Is that debt dischargeable in bankruptcy?  There was a time in American history when the answer was a resounding, “Maybe.”  (That’s a nice vague answer.  Someone once told me that if he didn’t know what he was talking about, he kept his comments vague.  However, in this case “maybe” is not a vague answer because it comes with the qualification that it depended on the facts and the court in which the case was heard.)

 

     A.  The Relevant Statute At The Time

 

At the time when the answer to our question was maybe, the relevant statutory provision that plaintiffs used was:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.

11 U.S.C. § 523(a)(6). Continue Reading

Harvey Weinstein, et al., and Bankruptcy

Posted in Chapter 11, Chapter 13, Chapter 7, Nondischargeability

For those of you who have been living in a cave without access to any news of the day, I would bring you up to speed on the ever expanding sex abuse/sexual harassment scandal that implicates many famous Hollywood types, politicians, religious leaders, big business execs, . . . , and the list just keeps on growing; but if you’re still living in your cave, you probably won’t read this post.

For those of you who aren’t living in a cave, but haven’t been paying attention to the salacious details, here’s the classic comic book version.  Many famous and powerful people have recently been accused of sexual harassment.  The list of the accused includes both men and at least one woman.  As the list grows, the likelihood that at least one accuser (maybe many more) will file civil actions against the accused increases.  Since this is a bankruptcy blog, our question of the day is:

Question:  Can the accused discharge any financial liability associated with the (alleged) harassment in bankruptcy?

 

Leaving aside the fact that most, if not all, of the accused are multimillionaires who probably won’t seek bankruptcy protection, the question is still worth addressing because people who don’t occupy the rarified world of big ticket corruption can still face such accusations. Continue Reading

The Ninth Circuit’s Martin Decision

Posted in Chapter 7, Tax debts

Tax debt not dischargeable after SFRI have written several times about discharging income tax debt in bankruptcy.  Some time ago I wrote a post that dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  At the time, I reported that the question hadn’t been addressed by the Ninth Circuit Court of Appeals.  That statement is no longer correct.

 

Martin Smith v. IRS

 

I watched the oral arguments in Martin Smith v. IRS case that took place on May 12 at 9:00 a.m.

The Court sided with the IRS in this case, and held that Mr. Smith’s tax debt was not dischargeable in his Chapter 7 bankruptcy case.  This case illustrates the old maxim that bad facts make bad law.

The Court summarized Mr. Smith’s history with the IRS:

After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on information it gathered from third parties.  In March 2006, the IRS mailed Smith a notice of deficiency.  Smith did not challenge the notice of deficiency within the allotted 90 days and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for the year 2001 on which he wrote “original return to replace SFR.”

The fact that Mr. Smith filed his return seven years late, and three years after the IRS had filed an SFR clearly bothered the Court.  On that basis the panel held:

Here, Smith failed to make a tax filing until seven years after his return was due and three years after the IRS went to the trouble of calculating a deficiency and issuing an assessment.  Under these circumstances, Smith’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax code.

Suppose Mr. Smith had filed his return a month after the IRS filed the SFR.  Would the Court have sided with him?  Probably not because of the locution:  “. . . after the IRS went to the trouble of calculating a deficiency and issuing an assessment.”  In sum, it appears that a return filed after an SFR is not a return for bankruptcy discharge purposes in the Ninth Circuit.

 

Discharging tax debt:  Late filed return, but before the IRS files an SFR

 

What if you file a return late, but before the IRS files an SFR?  Will that return qualify as a return for bankruptcy discharge purposes?  The Court never considered the question.  Therefore, the Fifth Circuit’s draconian holding in In re McCoy, 666 F. 3d 924 (5th Circuit 2012) (a late filed return is not a return for bankruptcy discharge purposes) has not yet polluted Ninth Circuit jurisprudence.  So, at least for now, if you’re in the Ninth Circuit and you filed your return late, but there was no SFR, then if you satisfy the three-year, two-year, 240-day rule, you should be able to discharge the tax debt in bankruptcy.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Based on Flicker Image  (Licensed) by Chris Potter

Zombie Debt Redux

Posted in Debt

ZombieIn today’s LA Times, Sean Pyles wrote a nice summary of the problem of zombie debt.

He began with the observation that when the statute of limitations has passed on debt collection actions, creditors are estopped from suing you to collect.  However, I suspect that in the interest of saving columnar space, he elided over some of the details.  One of my previous posts fills in the lacuna:

According to Cal. Civ. Proc. Code § 337, the statute of limitations for most debt collection lawsuits in California is four years.  Therefore, if you receive a summons telling you that you are being sued by a debt collector, review your records.  If it has been more than four years since the end of the grace period after the last time you made a payment, you may have a statute of limitations defense.  But you must assert it immediately by filing a written response with the court within thirty days of being served with the summons.  Otherwise that defense is deemed forever waived.  And just because you assert it, does not mean that you will win.  Be prepared to prove that the defense is valid.  By the way, successfully using the statute of limitations defense does not mean that the debt is invalid.  It just means that the collector cannot use a lawsuit to collect it.  If the debt is valid, the collector can still call you to try to collect the debt.  However, if the collector loses the lawsuit because you successfully applied a statute of limitations defense, you will probably never hear from that collector again.

Because debt collectors can still try to collect time-barred debt ― they just can’t use the courts to facilitate their efforts ― Mr. Pyles suggested bankruptcy as an option for dealing with zombie debts.  And, of course, he’s right.  Bankruptcy will take care of the problem once and for all.  But in Chapter 13 there’s a wrinkle.

Unlike Chapter 7, which just wipes out debts without you paying a dime on them, in a Chapter 13 bankruptcy you enter into a multi-year debt repayment plan that is administered by the Bankruptcy Court.  If a creditor is to be paid in Chapter 13, it must file a proof of its claim in a timely fashion.  Otherwise, it gets left out in the cold.

There is a species of alleged humans that buy debts in bulk.  Their purchases include debts discharged in bankruptcy, and debts that are time-barred.   Debt collectors with time-barred debts have tried to resurrect them by filing proof of claim in Chapter 13 bankruptcy cases.  I have written about this problem, so I won’t get too thick into the weeds.  Instead, I will say that the most effective tool for challenging the claims is the Fair Debt Collection Practices Act (“FDCPA”) that is alive and kicking in other circuits, but not in the Ninth Circuit because of the unfortunate holding in Walls v. Wells Fargo Bank, NA, 276 F. 3d 502 (9th Cir. 2002) decision.  If you have a case with good facts, it might be worth asking the Ninth Circuit to reconsider its Walls holding.  If you have the right fact pattern, I would be delighted to discuss representing you in the litigation.

The reasoning in Johnson vs. Midland Funding, LLC, Nos. 15-11240, 15-14116 (11th Cir. 2016) would be a good starting point.  Here is the gist:

In two separate Chapter 13 proceedings, two different “bulk debt buyers” filed proofs of claim, both of which were time-barred.  The case eventually bubbled up to the Eleventh Circuit.  The Court held the Bankruptcy Code did not preclude an FDCPA claim in a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows is time-barred.

The Court held that while the Bankruptcy Court has the authority under the Bankruptcy Code to disallow improper claims, that authority does not preempt the FDCPA:  “The FDCPA easily lies over the top of the Code’s regime, so as to provide an additional layer of protection . . . .”  If only the Ninth Circuit would drink of the sensible ambrosia of the Eleventh Circuit’s Johnson decision.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Image courtesy of Flickr (Licensed) by Omar Bariffi

Arguments On SFRs Before The Ninth Circuit

Posted in Tax debts

CourtroomI have written several times about discharging income tax debt in bankruptcy.  My most recent post on this topic dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  I reported that the question hasn’t been addressed by the Ninth Circuit Court of Appeals.  That is about to change.

In a society with a government class and a nongovernment class, the government class will naturally protect itself against the nongovernment class.  I hope the Ninth Circuit will break from that mindset and do the right thing in the Martin Smith v. IRS case.  Oral arguments are scheduled for May 12 at 9:00 a.m., and I intend to watch them at: http://www.ca9.uscourts.gov/media/live_oral_arguments.php.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Image courtesy of Flickr (Licensed) by Karen Neoh

Voluntary Sales And The Homestead Exemption

Posted in Chapter 11, Chapter 13, Chapter 7

oh no We sold our house TT seized the moneyI have written several times about exempting assets in bankruptcy.  The gist is that in a Chapter 7 bankruptcy, the debtor gets to keep all assets that are exempt using the appropriate exemption table, but the Chapter 7 Trustee assigned to the case is empowered to seize and liquidate the nonexempt assets for the benefit of the debtor’s creditors.  And in other chapters the value of the nonexempt assets is one of the factors that are used to determine how much the debtor must repay the general unsecured creditors through the plan.

I have also written about the six-month reinvestment requirement for a homestead exemption after a debtor receives the exempt proceeds from the sale of the debtor’s primary residence.  The idea here is that if the debtor has nonexempt equity in the primary residence, the Chapter 7 Trustee will sell the property for the benefit of the creditors, and write the debtor a check for the exemption amount; but the debtor must reinvest the proceeds in a new domicile within six months of receiving the check from the Trustee or else the Trustee can reclaim the money.

When the Trustee sells a nonexempt asset, the sale is, from the debtor’s perspective, an involuntary sale.

In this post I will discuss what happens to the homestead exemption when the debtor voluntarily sells the primary residence, either in bankruptcy, or outside of bankruptcy. Continue Reading

Fair Debt Collection Practices Act And Bankruptcy: Part II

Posted in Debt

FDCPA- Part IISome time ago I wrote in great detail about a split among the circuits over whether the Bankruptcy Code preempts the Fair Debt Collection Practices Act (“FDCPA”).

The gist of the split is over whether a debtor can simultaneously sue a creditor under both the Bankruptcy Code and the FDCPA for violating either the automatic stay of 11 U.S.C. § 362(a) or the discharge injunction of 11 U.S.C. § 524(a).

In my previous post I wrote that on the one hand the Seventh Circuit permits this sort of suit, reasoning that no federal statute preempts another federal statute absent a clear congressional statement, or the presence of an absurd result due to an irreconcilable conflict between the statutes.  See Randolph v. IMBS, Inc., 368 F. 3d 726 (7th Cir. 2004).  And on the other hand, the Ninth Circuit does not permit this sort of suit, holding that the debtor is only entitled to relief under the Bankruptcy Code.  See Walls v. Wells Fargo Bank, NA, 276 F. 3d 502 (9th Cir. 2002).  I also gave my reasons for thinking that the Walls decision was wrong.

Well the Second Circuit just held that there is no preemption, meaning that a debtor can get relief under both the Bankruptcy Code and the FDCPA against a violator.  See Garfield v. Ocwen Loan Servicing LLC, 2016 Westlaw 26631 (2d Cir.).

As with the Seventh Circuit’s Randolph holding the reasoning is sound.  It remains to be seen whether someone will take the circuit split to the Supremes for resolution.  In the meantime, if you’re in the Ninth Circuit ― like me ― you’ll just have to settle for relief under the Bankruptcy Code.

If you’re a debtor in the Central District of California who is facing a creditor who has violated either the automatic stay or the discharge injunction, call an excellent litigator to represent you in a suit against the offender.

 

The Absolute Priority Rule Applies To Individual Chapter 11 Debtors

Posted in Chapter 11, Chapter 11 for Individuals & Married Couples

Absolute Priority Rule (1)Some time ago I wrote in great detail about personal Chapter 11 bankruptcy.  In that post I discussed the application of one of the complexities of Chapter 11 bankruptcy to individual (as opposed to business) cases.  That complexity is the absolute priority rule.  At the time of the post, we had a patchwork of inconsistent case law on the topic, making the success of a personal Chapter 11 case dependent, in part, on the identity of the judge assigned to the case.

Things have been resolved ― at least in the Ninth Circuit ― and not in favor of individuals.  Let’s recall the setting:

 

I.  The Absolute Priority Rule

 

The absolute priority rule is an important idiosyncrasy of Chapter 11 that has no analogue in either Chapter 7 or Chapter 13 bankruptcy.  We’ll begin by describing the absolute priority rule in the business Chapter 11 context.

 

A.  The Business Chapter 11 Absolute Priority Rule

 

In bankruptcy not all debts are treated equally.  For example, the law distinguishes between secured debts ― debts that are secured by collateral that can be repossessed in the event of a default ― and unsecured debts.  Secured debts are not treated the same as unsecured debts because the secured creditor has special rights attached to the collateral securing the debt.

Even among unsecured debts there are distinctions.  Some are given priority over others.  The various priority classes are listed in 11 U.S.C. § 507(a).  This distinction sets the stage for the so-called absolute priority rule for Chapter 11. Continue Reading

IRS Will Never Call To Demand Immediate Payment Over The Phone

Posted in Debt, Tax debts

Oh no The IRS will arrest me if I dont pay nowI’ve written before about IRS scams involving a call or robocall supposedly from the tax agency demanding immediate payment and threatening arrest if the payment isn’t made.  However, I’m still getting calls from anxious clients rattled by these calls.  Let me repeat, the IRS will never call you to demand immediate payment over the phone.

Here’s what the IRS has to say about this scam:

The IRS will never:

  • Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you several bills.
  • Call or email you to verify your identity by asking for personal and financial information.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • Ask for credit or debit card numbers over the phone or e-mail.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money or to verify your identity, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:

  • Do not give out any information. Hang up immediately.
  • Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

 

Stay safe, my readers.  Do not fall for these IRS scams.

However, if you really do have debts and are being harassed, either by legitimate collectors, or by scam artists, consider filing for bankruptcy protection.

And if you are a debtor in the Central District of California, and want to get relief from your creditors, or deal with overwhelming tax debt, contact an extremely knowledgeable and highly skilled bankruptcy/tax attorney to guide you through the process.

 

Image based on Flickr (Licensed) by zenjazzygeek