I have written several times about the automatic stay of 11 U.S.C. § 362(a)

I.          The Automatic Stay

I wrote:

Simply put, the automatic stay stays all actions by the debtor’s creditors against the debtor as a person (in personam), and against the property (in rem) of the debtor and of the bankruptcy estate that is created upon the filing of the papers.  In practical terms – with a few exceptions listed in § 362(b) – this means that creditors must stop all direct communications with the debtor, all attempts to collect money or other assets from the debtor, all lawsuits against the debtor, and all attempts to exercise control over the debtor’s (or the estate’s) property.  Willful violations of the automatic stay can be expensive mistakes because the debtor who successfully sues in the Bankruptcy Court under § 362(k) can collect damages including costs, attorney’s fees, and punitive damages.

Thus, the automatic stay provides some very important protection to a debtor who files for bankruptcy protection. 

II.        The Chapter 13 Codebtor Stay

If the debtor files under Chapter 13 there is another stay that is triggered that protects, not only the debtor, but also codebtors of the debtor.  Unsurprisingly, it is referred to as the codebtor stay, and it is found in 11 U.S.C. § 1301(a).  The portion I will focus on today is:

[A]fter the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor . . . Continue Reading The Codebtor Stay In Chapter 13 Bankruptcy

This post gathers my thoughts on three eye openers.  Some were in the news, and some I experienced first-hand in my bankruptcy practice.  The common thread among these eye openers is a profound threat to the freedom and wellbeing of the citizenry.

I.          Debt Collector Abuses

A.        Whole Lotta Collectin’ Goin’ On

In the February 16, 2012 Los Angeles Times, Jim Puzzanghera reported on the recently formed Consumer Financial Protection Bureau and noted:

Debt collection has been second only to identity theft in consumer complaints to the Federal Trade Commission in recent years. The bureau estimated that 30 million Americans have debts in the collection process.

Thirty million!  Wow!  That’s one-tenth of the entire U.S. population.  So it’s not just my clients who are facing debt collection agencies and their corrupt and abusive tactics.  And given the volume of complaints it appears that abuses by debt collectors are widespread – it’s not just a few bad apples. Continue Reading Debt Collectors; Sheriff’s Department Corruption; A Justice’s Nutty Opinion

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. Continue Reading What Happens If I Forgot To List A Creditor In My Bankruptcy Papers?

I.          The Growth Of Government-Held Debt

The managing director of Economics1, a nonpartisan policy-research institute, reports:

In reviewing the latest Fed data, Investor’s Business Daily noticed that the total amount of government-financed consumer credit (the vast majority of which is mortgages) stood at $6.3 trillion, just slightly below the private sector’s total, $6.5 trillion.  As recently as 2006, the private sector far outpaced the government:  $8.5 trillion to $4.4 trillion.

Christopher Papagianis, House of Doubt, NATIONAL REVIEW, Aug. 15, 2011, at 21.

In addition, the various bailouts that have not been repaid mean that the government holds a great deal of non-consumer debt.  For example, Mark Modica of the New York Post observes:

Taxpayers still own about 26 percent of GM, and it looks increasingly unlikely that they’ll ever get their money back:  The share price would have to rise to more than $54, and it’s stuck in the low thirties.

Most important is the enormous debt the feds owe foreign countries who hold American debt – most notably, China.  Moreover, the recent battle over raising the debt ceiling led to the downgrading of American debt, and the subsequent current scramble to lower the federal deficit, suggests we may be nearing the point at which the feds will no longer be able to fund any more bailouts.

With the reliability of the banks in question, is it any wonder that the loan modification has failed to produce the hoped for results?

II.        The Bankruptcy Option

Bankruptcy is a federal law option that is administered by the federal government through the bankruptcy courts and the U.S. Trustee’s Office.  Therefore, the cost is already part of the funding of the judiciary and the Justice Department, so there is no need for large subsidies or bailouts.  Moreover, unlike the programs I discussed in the previous post, there is no doubt about the constitutionality of the bankruptcy system:  it is explicitly authorized in article I, section 8, of the U.S. Constitution.

How does bankruptcy help a homeowner deal with mortgage problems? Continue Reading Home Mortgage Modification And Bankruptcy – Part III

Question:  “I just received a summons and am being sued by one of my creditors to collect an unpaid debt.  What does this mean, and how will bankruptcy help me deal with this?”

I.          The Meaning And Implications Of The Action Against You

When a creditor sues you to collect an unpaid debt, it does so under California state law.  The creditor’s goal is to obtain a judgment against you in California State Court, and use that judgment to garnish wages, levy funds from your bank account, or record liens against your assets. 

If you take no action to defend yourself, the creditor will request a default judgment against you.  Once the default judgment is granted, the creditor will use the local Sheriff as an intermediary to garnish wages and levy funds.

If you wish to dispute the claim, you must file a written response within thirty days or else face the possibility of a default judgment.  If you file the response the State Court will set the matter for hearing.  Due to the current huge caseload backlog, State Courts are generally setting the hearing dates many months into the future.  Thus, filing the written response will buy you some time.  However, two caveats are in order: 

  1. Courts generally frown on the filing of frivolous papers.  Therefore, if the debt is legitimate and no statute of limitations is implicated, it is unclear what sort of defense you will be able to assert.
  2. If the action was filed in Small Claims Court Division of the California Superior Court, your response will not buy very much time because that court is a sort of “rocket docket.”

II.        What Bankruptcy Can Do

As previously noted, collection actions are prosecuted pursuant to California state law.  On the other hand, since the Bankruptcy Code is Title 11 of the United States Code, bankruptcy cases are prosecuted under federal bankruptcy law.  Indeed, the Bankruptcy Code was enacted pursuant to Congress’s enumerated bankruptcy power found in Article I, section 8 of the U.S. Constitution:  “The Congress shall have power to . . . establish . . . uniform laws on the subject of bankruptcies throughout the United States . . .”  Why is this important?

Article VI of the U.S. Constitution provides:  “This Constitution, and the laws of the United States which shall be made in pursuance thereof . . . shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any state to the contrary notwithstanding.”  As we saw in the previous paragraph, the Bankruptcy Code was enacted “in pursuance” of the U.S. Constitution, so it is part of the supreme law of the land.  This means that your bankruptcy filing will trump the State Court action.

Consequently, as long as the underlying debt in question doesn’t fall within the ambit of any of the non-dischargeability categories of 11 U.S.C. § 523(a) that we discussed in an earlier blog, the debt will be discharged in your bankruptcy.

In addition – and this is really important – when you file for bankruptcy protection the stay of 11 U.S.C. § 362(a) goes into effect.  In fact, the very act of filing your papers triggers the stay, so it’s called the “automatic stay”.  A stay in law says:  “Stop!”  In this case, the automatic stay stops all actions by your creditors against you as a human being, against any of your possessions, and against the bankruptcy estate that is created upon your bankruptcy filing.  In particular, the automatic stay immediately stays the State Court lawsuit