Who Will Know I Filed Bankruptcy?

A lot of people are nervous, frightened, terrified–you pick the word–about who will find out that they filed bankruptcy? We get asked this quite often, and here’s the answer:

Bankruptcy is a court proceeding and, therefore, creates a public record. The fact that a person filed bankruptcy will be available to anyone at the bankruptcy court or anyone who has access to bankruptcy information online. However–and this is key point–this information is not free. You must have a PACER account to obtain bankruptcy information. And you must pay for it. Bankruptcy attorneys like us have access to the system in order to check on our cases and get other information, but other people rarely pay for access to this system. It is highly improbable that your landlord, employer, neighbors or friends spend their time searching and paying for bankruptcy information through PACER, and it’s even more improbable that they visit the courthouse to check bankruptcy records.

Basic bankruptcy information is also available on credit reports. The fact that someone filed bankruptcy will appear on a credit report for 10 years after a Chapter 7 case and for seven years after a Chapter 13 case. So, every time you apply for credit during these time periods, the lender will find out about your bankruptcy. This is not as bad as you think because many, many people have filed for bankruptcy, and bankruptcies diminish in importance as time goes on during the reporting periods. As an example of how bankruptcy doesn’t destroy your credit, here’s what one former client wrote me in June, 2012:

Hi Nick,

I just wanted to let you know that as of 4:30 this afternoon, Frankie and I are homeowners again! We have worked out butts off, and built our credit back up to scores of 770+ and we were able to make it happen again, just shy of the 5 year anniversary of our filing.

I know I have said it before but again, thank you!
[Name withheld here]

Who else will find out about a bankruptcy? Well, notice of a bankruptcy also goes out to every person or company you owe money to. (Note: it will not go out to your employer just because you have a 401(k) loan. A 401(k) “loan” is not really a debt: it’s the withdrawal of your own money from a tax-deferred account).

Information about consumer bankruptcies is also not published in the newspaper. Here in Massachusetts, Banker and Tradesman publishes information about corporate bankruptcy filings, but no paper anywhere that we’ve ever seen of heard of publishes information about individual consumer bankruptcies.

So, what’s the bottom line? Who will know about my bankruptcy? Past and future creditors are usually the only people and companies that will ever know about your bankruptcy.

Bankruptcy: The Great Financial Mercy

This is going to be a philosophical post about bankruptcy. If you’re looking for answers about anything substantive, you might try here, but what I write below is something that I have been thinking about recently.

What are we to think about bankruptcy? Is it something that people get away with? When some people hear about it, that’s exactly what they think. The notion of a no-asset bankruptcy case is hard for some to swallow. People with any traditional sense of morality know that it’s the right thing to re-pay just debts. So, let’s take an example: a person incurs $20, 30, 40 thousand in credit card debt and then is able to pay a couple thousand dollars to a lawyer and the court, their creditors get nothing, and the individual gets a full debt discharge. This is possible when someone qualifies for Chapter 7, but isn’t this like getting off scott free?

I was wondering about this the other day. And I was specifically wondering why most of my clients don’t treat us like we’re accomplices to a crime. That is definitely not the relationship we have with our clients, and when they leave our sphere of influence they don’t seem to feel like they’ve gotten away with something. But how is that possible? Why don’t they slink off like thieves in the night? I think the reason is tied up with mercy.

What is mercy? Well for one thing, mercy is only possible when you’ve screwed up. The bankruptcy system is ultimately the greatest expression of our society’s financial mercy. Though fractious and polarized, we have agreed on it. We do not want to become a society of debtors’ prisons. Some may reach this conclusion based on the economic efficiency of purging bad debt and rehabilitating new borrowers, but for others, there is an element of mercy in it.

A person who humbly receives mercy is made larger just like the person who humbly extends that mercy, knowing that they themselves need mercy in their lives. When I assume this stance, as the humble emissary of the system’s mercy, and people accept the system’s mercy, I see them emerge from bankruptcy with a lightness of spirit and a joy for the new financial life ahead. Most of the time…this is not true for everyone. It takes some degree of vulnerability to accept mercy, and sometimes people emerge from bankruptcy suspicious and, although I am not usually in a position to see it, probably more likely to judge others harshly. These are often the same people who blame the groups or people who lent them the money they won’t be re-paying. This is abetted by some in the debt relief field who talk about the “evil credit card companies” and “predatory lenders.” This is the wrong way to get over the physiological hump of filing. If you can’t pay your debts, the healthy way to prepare yourself for help is to allow yourself to receive mercy. If you come to it gracefully and humbly, pay your psychic (and credit-reporting) penance, you will emerge happier, healthier, and without the suspicious feeling of having gotten away with something criminal. Your life story will include times in which you give and receive mercy and, ultimately, that’s okay–it means you’re human.

You may qualify for Chapter 7 and be able to fully discharge your debts (this remains on your credit for 10 years) or Chapter 13, which requires that you pay back some of your debts, but which only stays on your credit for seven years. Here’s more about choosing between those chapters.

The IRS and Plan-Busting Tax Claims

Unlike other creditors, taxing authorities like the IRS and the Massachusetts Department of Revenue can file proofs of claim in Chapter 13 bankruptcy cases for post-petition taxes. This right comes from Section 1305 of the Bankruptcy Code, and it usually happens when a bankruptcy debtor doesn’t stay up-to-date on taxes after the filing of a bankruptcy.

In Massachusetts, it is possible for a payment plan for taxes to be arranged outside the plan. Whether this makes sense or not depends on some specifics of the Chapter 13 plan in place. If the plan is paying out little to no money to unsecured creditors, a direct payment plan for the taxes often makes sense. This is because any Chapter 13 plan amendment to include the taxes in the court payment, will just make the monthly payment go up by the amount of the taxes plus the trustee’s (approximately) 10 percent commission. A payment plan directly with the taxing authority will save the commission amount and better allow the debtor to keep tabs on the accrual of post-petition interest (which will accrue no matter what route is taken).

However, often it is preferable to seek a bankruptcy plan amendment. There are two circumstances in which this will usually be so. First, when IRS or MDOR is requiring too large a payment, stretching payments for up to five years in the Chapter 13 plan can help. Second, and most importantly, when a sizable amount is being paid out to unsecured creditors in the Chapter 13 plan, an amendment can shift some or all of this money to the taxing authority and, in essence, will shift the tax burden to general unsecured creditors (like credit cards, etc.). This is done all the time, and creditors do not have a strong basis to object to this treatment because all Section 1325(b)(1)(B) requires is:

The plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.

The key is that a recent tax claim will be an unsecured debt just like a credit card (the fact that it will be a “priority” claim unlike the credit card is not relevant here). All the law requires is that the plan pay out all disposable income to the entire unsecured creditor body. Therefore, it is in a debtor’s interest to ensure that, to the extent that there is any money for unsecured creditors, it goes towards the nondischargeable tax claim.

Bottom line: If you can amend to redirect money towards the taxes, it’s usually best to do so. However, if there is no money to shift, a direct payment plan will usually be the preferred course.

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After Getting Sued on a Debt in Massachusetts: Supplementary Process and Capias Warrants

This post isn’t about bankruptcy, but it’s about something that a lot of people who are deciding to file bankruptcy deal with. What happens after you stop paying a debt? The basic timeline of debt default goes like this (if one does nothing):

1. Stop paying debt;
2. Calls from original creditor;
3. Debt transferred to debt collector, calls from debt collector start;
4. Lawsuit summons arrives;
5. Default judgment enters against you;
6. Supplementary process proceeding filed;
7. Arrest warrant (“capias”) issued.

Again, this is what usually happens if you do nothing. (Note: wage garnishment proceedings can also start at step 6 if you are employed.)

What we find is that even the last holdouts usually spring to action at step 4-6. Many of our bankruptcy clients come to us during those steps, so it’s never too late: Absent unusual circumstances, a bankruptcy discharge will discharge even your debt lawsuit judgments. However, most of our clients see the writing on the wall earlier on, and wishing to avoid the steps above, get started at the beginning stages of default or before.

So, what about steps 6-7, which is what this post is really about? Supplementary process is a new case filed to enforce a judgment. It has nothing to do with whether or not you owe the debt, which has already been established by the judgment, but it instead asks the question, “what can you pay?” The law is here, G. L. c. 224, § 14, for those wanting to read it. Just like regular lawsuits, a supplementary process suit starts with a summons served onyou. However, this summons is different than the original lawsuit summons (step 4 above). You can ignore an original lawsuit summons and the only effect will be that judgment enters against you, but if you ignore a supplementary process, a capias warrant will issue.

It goes without saying that people don’t like arrests warrants or being arrested. Most people with debt problems have legitimately fallen on hard times. They are otherwise law-abiding citizens, and not criminals. Being the subject of an arrest warrant usually scares them a great deal. Although some of this fear is inevitable, a capias warrant, though serious, is a civil arrest warrant basically seeking to force your into court for skipping the supplementary process hearing. If you don’t skip the supplementary process hearing in the first place, you won’t be subject to a capias; even if you do get a capias, you can arrange to cooperate with the sheriff’s office or constable and voluntarily go to the next supplementary process hearing date. Once you comply with the summons, this “purges the contempt” and the effect of the capias is no more. Usually you’ll get a call from sheriff giving you one last chance to voluntarily appear before you’re arrested.

So, what happens at supplementary process–whether you end up going before or after a capias warrant issues? The bottom line is that at a supplementary process hearing the court determines what you should pay on the judgment. If you truly cannot pay anything–like if your only income is social security and you have no substantial property–the court is supposed to dismiss the supplementary process case with the priviso that the judgment creditor can bring it forward again in a year. If, on the other hand, you do have sufficient income to make a payment, the court will simply order you to pay what it considers appropriate. Any violation on this payment order can result in additional contempt proceedings (and a new capias). Bankruptcy end up being very popular at this point because it trumps all of the supplementary process payment orders and proceedings.

When you’re first called at the supplementary process hearing, the judge or magistrate is first likely to ask you to negotiate in the hallway with the lawyer representing the judgment creditor. Courts prefer when you can come to an agreement on a payment arrangement. They would prefer not to have to examine you and decide the matter. However, you can always decline to come to terms with the lawyer and go back and roll the dice in front of the judge.

If you’re reading this and are in the advanced stages of debt default, consider submitting this form for a free bankruptcy consultation or calling us at 617-716-0282.

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Massachusetts Bankruptcy Court Allows Federal Homestead Exemption in Second Home

In the interesting yet simple case of in re Lawrence, No. 11-42045-MSH (Bankr.D.Mass. 2012) the court confronted the following uncontested facts.

On schedule C to their bankruptcy petition the Lawrences claimed an exemption in the Maine condominium, invoking the Massachusetts homestead exemption pursuant to Mass. Gen. Laws ch. 188 § 3. David M. Nickless, the chapter 7 trustee in this case, filed an objection to the debtors’ claimed exemption asserting that the Massachusetts homestead exemption did not protect out of state property. In response, the debtors sought and were granted leave to file an amended schedule C switching from state to federal exemptions and declaring the Maine condominium exempt under Bankruptcy Code § 522(d)(1).

As a preliminary matter, it warrants mention to state again that individuals in bankruptcy can choose between the federal and Massachusetts exemptions.

In contrast to the Massachusetts homestead, which protects up to $500,000 in home equity, but which was unavailable to the Maine property, the federal homestead protects $21,625 of equity in a property the debtor “uses as a residence.” The Trustee argued that the debtors’ main home was in Massachusetts and not in Maine at their vacation condo. The debtors had moved out of their Massachusetts property and into Maine a couple of days before filing their bankruptcy. This didn’t matter to Massachusetts Bankruptcy Judge Melvin Hoffman, however, who noted that people may have multiple residences–as highlighted by the multiple uses of the qualified “principal residence” in the Bankruptcy Code and elsewhere–and, consequently, whether the Maine home was the primary home of the debtors on the petition date was immaterial. However, the court delved a bit further and noted that “use” of the residence was also required by the statute’s plain language. Here, the debtors satisfied that test easily, but the court noted that “where a debtor had never used a residence prior to filing, bankruptcy courts have held that the residence may not be exempted under [the federal homestead].

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How Long Does a Bankruptcy Case Last?

Understandably, bankruptcy is something people like to put behind them. That’s the whole concept: a court proceeding and a fresh start. The two types of bankruptcy individuals file, Chapter 7 and Chapter 13, have different timelines.

The timeline of a normal consumer Chapter 7 case: After a Chapter 7 case is filed, the court sets a date and time for a meeting of creditors. This date is usually about 30 days from the filing date, but it can be a bit longer during the winter holiday season. An important period is created based on this first-scheduled date of your creditor meeting: A 60-day period for creditors or the government to object to your discharge. This waiting period is the same in all Chapter 7 cases and is created by Federal Rule of Bankruptcy Procedure 4004. Usually there are no objections, so once the 60-day period passes, the Court issues you your discharge and the case is closed. To summarize, once filed, a Chapter 7 case lasts about three months. You can read more about Chapter 7 bankruptcy here.

The timeline of a Chapter 13 case: Chapter 13 bankruptcy cases last either three or five years. If you’re below median income based on family size (you can see the new median income figures effective May 1, 2012 here), your plan is three year; if you’re above median income based on family size, you’re plan is five years. See 11 U.S.C. 1325(b)(4). However, even though you’re still technically in bankruptcy during your repayment period, as long as you make your Chapter 13 payments and don’t return to the court for any extraordinary relief, you will have no contact with the bankruptcy court after your meeting of creditors, which like in a Chapter 7 case, will be about 30 days after your case is file.

You can read more about Chapter 13 bankruptcy here and choosing between chapters of bankruptcy here.

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