December 2011

A fellow bankruptcy attorney recently asked me this question in the context of a Chapter 13 bankruptcy.  He had filed the case for the husband alone pursuant to 11 U.S.C. § 301 , and due to changed circumstances decided that it would be a good idea to make the case a joint case pursuant to § 302.  He wanted to know if it was sufficient to simply amend the Voluntary Petition to add the wife.

It may surprise you to learn that the answer is, “No.”  While there is a way to accomplish the desired goal, it’s a bit more complicated than simply amending the Voluntary Petition.
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A fellow bankruptcy attorney recently asked me this question based on his reading of 11 U.S.C. § 523(a)(7), which provides (with emphasis added):

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— . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss . . .

Since the obligation to repay a social security overpayment is a debt to a governmental unit, but could be characterized as “compensation for actual pecuniary loss,” the questioner wanted to know if it could be discharged in bankruptcy.
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In my last post I discussed reaffirmation of debts in bankruptcy.  Near the end of the post I described some loans I had seen my clients take out with interest rates as high as 496%.  At the end of the post I said that that loan shark rate was perfectly legal and promised to tell you why.  This post fulfills that promise by providing you with a bit of history.  I know, there’s no future in history – bad joke.  But this history may prove both enlightening and entertaining.

On April 20, 2005 President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) (uncharitably referred to by some as “BAPCraPA”).  BAPCPA made some sweeping changes to the Bankruptcy Code.  These changes affect not only debtors contemplating bankruptcy, but also attorneys – and not just bankruptcy practitioners.

I.          The Origins Of American Bankruptcy Law

Article 1, section 8 of the U.S. Constitution grants Congress the power:  “To establish . . . uniform rules on the subject of bankruptcies throughout the United States.”  Why did the Founders feel that it was necessary to include this power in the relatively short list of enumerated congressional powers?
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This question comes up all the time – either explicitly, or implicitly – during my consultations with prospective and current clients.  Because there is no shortage of misinformation on the subject, it’s about time I wrote on it.

I.          Secured Debts

In typical consumer bankruptcy practice reaffirmation comes up almost exclusively within the Chapter 7 context, and generally in dealing with secured debt.  A secured debt is a debt that is secured by some tangible asset.  If the debtor (i.e., the borrower) fails to make the payments, the creditor (i.e., the lender) can repossess the security – i.e., the collateral.  For example, a car loan is secured by the car, and a home mortgage is secured by the home.

In order to better understand what is at work here, it helps to know a little more about secured debts.  A simple example will suffice to set the stage.  When a person takes out a loan to purchase a car, two important things happen. 
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The answer differs depending on the nature of the debt and under which chapter the bankruptcy case was filed.

I.          The Key Exception To Discharge

The key provision of the Bankruptcy Code that we use to answer the question is 11 U.S.C. § 523(a)(3), which states (with emphasis added):

A dischargeunder section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . neither listed nor scheduled under section 521 (a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

If you’re not used to reading statutory language you may naturally ask:  What does all of this mean?  One thing is clear:  this statutory provision concerns debts that were “neither listed nor scheduled” in the bankruptcy papers “in time to permit . . .”  But to permit what?  There are two things that the creditor would have been able to do in a timely fashion if the debt had been properly scheduled, but cannot because of the oversight.
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