A Settlement between the 50 State Attorneys General and the Big Mortgage Lenders–Or Not?

Is the most infamous home mortgage story of late 2010—the “robo-signing” of foreclosure documents—finally coming to closure in early 2012?

For those of us who keep an eye on this stuff, we’ve wondered throughout all of 2011 whether the states’ attorneys general could do what the federal banking and housing regulators seemed unable to do: hold the mortgage lenders responsible for their glaring problems in loan servicing and foreclosure processing.  “Robo-signing” itself involved loan servicing company employees signing countless foreclosure documents in which they asserted personal knowledge about essential facts, when in fact those employees had no knowledge whatsoever of those facts. This then led to the uncovering of one major set of irregularities after another, including the giant MERS fiasco involving serious challenges to the legal authority of mortgage lenders and servicers to foreclose under any circumstances.

When all 50 of the states’ attorneys general got together in late fall of 2010 to address this set of problems, there was hope that they would be able to accomplish what the national regulators could or would not. They were seen as being closer to Main Street than Wall Street, and experienced with dealing pragmatically with both consumer abuses and business concerns. Indeed within a few months detailed draft settlement terms were drafted and being circulated. But then major rifts quickly arose. Last spring, eight Republican attorneys general—from Virginia, Texas, Florida, Oklahoma, South Carolina, Alabama, Georgia and Nebraska—announced that they did not support the draft settlement as being too tough on the banks and unfair to people who were paying their mortgages. Around the same time, the watchdog National Institute on Money in State Politics issued a report stating that the “campaign war chest” of the Democratic attorney general Tom Miller of Iowa

“got a dramatic boost after he announced his leadership of the 50-state attorneys general investigation into foreclosure irregularities. Out-of-state law firms and donors from the finance, insurance, and real estate sector gave $261,445-which is 88 times more than they had given him over the previous decade.”

And now more recently, as the settlement again seems to be finally reaching a close, some of the more liberal attorneys general, from among the most populous and influential states, such as New York and California, as well as perhaps Massachusetts, Nevada, and Delaware, seem to be backing out of the deal because they say that their homeowners would simply not be getting adequately compensated by the banks.

So is there going to be a deal or not, whether it covers all 50 states or not? It certainly now looks highly unlikely that a universal 50-state agreement will happen. And if some of the largest states—such as California and New York—and some with the worst foreclosure problems—such as Nevada and Florida—are not participating, then the banks lose a great deal of incentive to stay in the deal either. There continues to be some indication that a settlement will come together—here’s a very recent Time magazine blogger’s summary of its anticipated terms, which he figures will be “finally unveiled” as early as January. You can read about them there it you want—I won’t be telling you more about any deal terms here until I think there’s a better chance that it will ever come to pass and have any practical impact on my clients.

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What Stops a Creditor from Chasing You After Its Debt Has Been Written Off in Bankruptcy?

Even though it’s illegal for creditors to try to collect on a debt that’s been discharged (legally written off) in bankruptcy, once in a while they may try. What makes chasing a discharged debt illegal? And what penalties can get awarded to you if a creditor breaks the law?

 

In my last blog I wrote about Capital One Bank illegally filing documents in 15,500 bankruptcy cases demanding payment on debts which had already been written off in prior bankruptcies. This extensive pattern of bad behavior was discovered when the U.S. Trustee in Massachusetts learned about one case in which the Bank was trying to get payment from a couple whose $5,500 debt had been discharged in a bankruptcy 14 years earlier. The U. S. Trustee (an office of the U.S. Department of Justice which acts to protect “the integrity of the bankruptcy system”) came to realize that this was not an isolated event for Capital One, and sued the bank because of all of its illegal filings. Nobody—including Capital One–knew how many cases all over the country it had filed claims for money it was not owed. So as part of the settlement of that lawsuit, the bankruptcy court required Capital One “to hire an independent auditor, chosen by the court and paid for by Capital One” to do an audit of about 2.2 million claims that it had filed in bankruptcy cases from the beginning of 2005 through 2010. It is from this audit that Capital One’s 15,500 illegal filings were uncovered.

While the Bankruptcy Code makes it perfectly clear that trying to collect on discharged debt is illegal, it does not clearly say what, if anything, the penalties are for a creditor caught doing so. Section 524(a)(2) of the Code says a discharge of debts in a bankruptcy “operates as an injunction against” any acts to collect debts included in that bankruptcy case. But that section of the Code says nothing about what happens if a creditor violates that injunction. Feel free to read the whole section through the link above. Have fun—Section 524 goes on for pages!

Well, even though no penalties are specified in Section 524, there is a strong consensus among courts all over the country that bankruptcy courts can penalize creditors for violating the discharge injunction through another section of the Bankruptcy Code, Section 105, titled appropriately enough “Power of Court.” The basic idea is that the injunction against pursuing a discharged debt is a court order, and so a creditor violating it is in contempt of court. So the standard penalties for being in civil contempt of court apply.

Depending on the circumstances, the penalties for civil contempt can include “compensatory” damages and “punitive” damages. Compensatory damages are to compensate you for harm you suffered because of the creditor’s violation of the injunction. These potentially include actual damages such as time lost from work or other financial losses, emotional distress caused by the illegal collection, and attorney fees and costs you’ve incurred as a result. Punitive damages are to punish the creditor for its illegal behavior, and so the judge looks at how bad the creditor’s behavior was in determining whether it punitive damages are appropriate and how much to award.

The vast majority of the time creditors in a bankruptcy case write the debts off their books and you never hear about those debts again. But, as the Capital One story illustrates, some creditors don’t keep good records or simply aren’t all that vigorous about following the law. So if, after you receive your bankruptcy discharge, you hear from one of your old creditors trying to collect its discharged debt, contact your attorney right away.  It’s something that you want to nip in the bud. And if the creditor’s behavior is particularly egregious, you and your attorney may want to discuss whether to strike back at the creditor for violating the law. There might possibly even be some money in it for you.

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Audit Shows Capital One Bank Illegally Filed $24.7 Million in Claims for Debts Previously Discharged in Bankruptcy

One can understand if a major U.S. credit card company forgets that one of its customers had earlier written off that company’s debt in bankruptcy. But forgetting this very important fact for 15,500 of its customers?!?

It is bad enough that Capital One lost track that its old debts had been legally written off (“discharged”). But in each one of these 15,500 cases it didn’t bother to check if the debts were discharged, and so it actually filed documents in subsequent bankruptcy cases asserting that the debts were still legally owed. Each of these “proofs of claim” were dated and signed by a Capital One representative, with the signature right next to this statement: “Penalty for presenting fraudulent claim: Fine of up to $500,000 or imprisonment for up to 5 years, or both.” Now, I don’t think anyone is alleging that Capital One is purposely and fraudulently chasing stale debt, but they sure are being awfully negligent in their internal recordkeeping, or maybe even reckless in blindly chasing debts without bothering to find out if they are still legally owed.

This whole ugly mess was uncovered by the “U.S. Trustee.” People filing bankruptcy may hear that the U.S. Trustee is somebody who is not on your side, mostly someone who can turn your Chapter 7 case into a Chapter 13 one if you don’t follow the rules. But its watchdog role is much broader–it “protects the integrity of the bankruptcy system by overseeing case administration and litigating to enforce the bankruptcy laws.“ Obviously, a creditor filing a document in a bankruptcy case saying that it is owed money when it not is in violation of the bankruptcy laws. Doing this in 15,500 cases is majorly bashing the integrity of the bankruptcy system, and causing havoc to “case administration.”

How so? Think about it. A creditor’s proof of claim is generally considered accurate unless somebody challenges it. The creditor usually attaches some documentation, which makes the debt look authentic. The debtor usually has little incentive to spend time or money on the issue because usually that proof of claim does not change how much the debtor has to pay, instead only how the creditors will divide up the money. When Capital One gets paid on a false claim in an asset Chapter 7 case or a Chapter 13 case, that inappropriate payment reduces the trustee’s payouts to all the other creditors, the amount of reduction depending on the size of each one of the other creditors’ claims. So now in 15,500 individual cases Capital One has to give back whatever money it actually received—amounting to $2.35 million—and the trustee in each case has to precisely recalculate how much each one of the other creditors was short-changed, and then cut checks for all those other creditors in those amounts. What a huge waste of time.

What does this mean for you? As to Capital One, if it is or was one of your creditors and you are (or will be) in either a Chapter 13 case or asset Chapter 7 case, have your attorney keep a close eye on any proofs of claim this creditor files. As to creditors in general, this is good reminder that creditors sometimes file inaccurate documents—purposely or not—in bankruptcy court. Proof of claims specifically, and other documents as well (such as motions for relief from stay) need to be scrutinized carefully, not just accepted as face value. Much of the time most creditors keep decent records and file accurate documents in court. Just don’t assume all of them do all the time. Especially Capital One.

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Quick Rules about Preserving Your Home through Bankruptcy

When does filing bankruptcy save your home?  When is “straight bankruptcy”—Chapter 7—the right tool, and when do you need Chapter 13?  

If your most important goal is to preserve your home, here’s how each kind of bankruptcy helps (or doesn’t help) in different circumstances.

1. If you’re current on your home mortgage(s) but struggling to keep that up, and are behind on some or many of your other debts:

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Would also stop those other debts from turning into judgments, which would likely be liens against your home. May also enable you to avoid falling behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.

Chapter 13:  Does the same as above, plus is often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to get rid of a second or third mortgage.  Is better at protecting assets, if you either have more equity in your home than your homestead exemption allows or have any other “non-exempt” asset(s).

2. If you’re not current on home mortgage(s) but are only very few payments behind, with no foreclosure started:

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies will agree to give you several months—sometimes up to a year—to catch up on your mortgage arrears. That’s a “forbearance agreement”—they agree to “forbear” from foreclosing as long as you make the agreed payments. Tends to work only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if the Chapter 7 filing will allow you to stop paying enough to other creditors so you will be able to pay off the mortgage arrearage quickly.

Chapter 13:  Even if you’re only a few thousand dollars behind, you may well not have enough extra money each month to catch up quickly on that mortgage arrearage.  Lenders seldom voluntarily give you more than 10-12 months to catch up, but a Chapter 13 forces them to give you a much longer period to do so—three to five years. That greatly reduces how much you need to pay towards the arrears every month, often turning the impossible into the achievable.

3. If you’re many payments behind on your mortgage(s), regardless whether a foreclosure has started:

Chapter 7:  Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, cannot get rid of a second or third mortgage.

Chapter 13:  Again, gives you the option of up to five years to slowly but surely pay off the mortgage arrearage, during all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not, under current law, enable you to reduce the first mortgage payment amount, although again might be able to get you out of your second or third mortgage

If any of this looks like it could provide the help that your home needs, please give me a call. Remember: these are just the broad rules. There are lots of other twists and turns which will likely apply to you. To understand the advantages and disadvantages of each option, and to get practical advice about what direction to go, you should see an attorney. Let me show you how the law can help meet your needs.

 

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The Morality of the American Airlines Chapter 11 Reorganization

A corporation which files bankruptcy is considered to be proactively using a strategic business tool. But a human being who files bankruptcy is considered to be irresponsibly breaking promises to creditors.  

Let’s see if this difference in attitude makes sense using the example of the bankruptcy filing of American Airlines in late November.

Selecting just a very few characteristics of the American Airlines Chapter 11 “reorganization,” here’s how they compare to a consumer Chapter 13 “adjustment of debts”:

1. Reason for filing:  As I said in my last blog, at the time of its bankruptcy filing the airline had no immediate financial reason for filing. But it had a mediation hearing scheduled in early December in its drawn-out negotiations with its pilots union. The Chapter 11 filing canceled that mediation and gives management much more leverage against its employees, especially its pilots, who would be hurt the most by American defaulting on its pensions.

In digging a little deeper since my last blog, there in fact WAS a financial deadline that the November 29 filing clearly intended to beat. American had financed an engineering and maintenance center in its Fort Worth, Texas headquarters in the early 1990s, and related to that was obligated to pay close to $50 million in unsecured municipal bonds on December 1. Those bonds lost most of their value with the bankruptcy filing. Who are the bondholders thatwho got hurt? New York Life was a major holder of these bonds, meaning that their life insurance customers were indirectly affected.

In Chapter 13, consumers similarly often file to stop some bad event from happening—a foreclosure, wage garnishment, a vehicle repossession. How would you weigh the morality of preserving a family home or vehicle or paycheck against threatening the loss of employee pensions or eating away at the value of investors’ life insurance?

2. Cash on hand:  When American Airlines filed its case, it had more than $4 billion in cash or cash-like assets, by far more than any other airline that has ever filed Chapter 11. It announced that it expects to be able to ride through the Chapter 11 case without having to borrow any more. So it filed when it was nowhere close to being financially strapped. Why did it do so, besides to gain leverage against its unions and to avoid big payments to bondholders so that it could hang onto its money longer? Because having that much money gives it more independence, so it has more leverage to dictate the terms of any potential merger.

In contrast, most consumers filing bankruptcy wait until the bitter end, when they have exhausted all their other alternatives, often when putting off filing is not in their best interest. Classic examples: using otherwise protected retirement money or borrowing from relatives. Most people delay at least in part out of a sense of moral obligation—they want to pay their creditors, don’t want to see themselves as irresponsible. So what’s more honorable, learning about your options early and then prudently filing bankruptcy when it can best serve you (and your family and your future), or instead doing everything possible to avoid filing no matter the long-term costs? Maybe consumers can learn something from business bankruptcies here, but if anything consumers seem to weigh bankruptcy decisions much more morally than businesses do.

3. Assets:  One bit of controversy that has come out of American Airlines case is a swanky piece of real estate it owns, apparently free and clear, used by its highest executives. It’s a five-story home in one of the most exclusive areas of London, worth about $30 million.  Now that amounts to only one thousandth of its $30 billion in debt, a relative drop in the bucket. But if you are trying to wrestle concessions out of your labor unions, and have a judge overseeing your operations, that kind of opulence obviously doesn’t help make your moral case.

In a consumer bankruptcy, you can protect assets that are “exempt,” but those exemptions generally cover only your bare essentials. In a Chapter 13 case you can usually also keep exempt assets that are not exempt, but you need to pay for the privilege. Businesses tend to get away with a lot more on the grounds of “business necessity.” So what’s a more moral procedure, a consumer bankruptcy which makes you account for and then either surrender or pay for any nonexempt assets, or a business bankruptcy which is not as restrictive about assets?

Business decisions, including and especially to file a bankruptcy reorganization, are moral decisions because they can hurt people. American Airlines will likely break many thousands of promises through its Chapter 11 case. Likely a large portion of those broken promises will be to employees who invested in and counted on those promises for many years. In contrast, most individuals who file bankruptcy are not directly harming other individuals. That doesn’t necessarily make it better morally, but my point is personal bankruptcies are at the very least not morally worse than business bankruptcies, even though that is how they are commonly portrayed. Both business and personal bankruptcies have a moral component. Maybe that component should be emphasized more in the former and less in the latter.

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Anatomy of the American Airlines Bankruptcy

The reason American Airlines filed Chapter 11 bankruptcy is so that it could break promises it made to its employees and its aircraft suppliers. It is the only major airline that had not filed bankruptcy after 9-11.

According to its website, the airline “took this action in order to achieve a cost and debt structure that is industry competitive and thereby assure our long-term viability and ability to continue delivering a world-class travel experience for customers.”

In other words, they couldn’t stay in business if they had to keep their promises.

It couldn’t “achieve” a “cost and debt structure that is industry competitive” without bankruptcy for two main reasons.

1) Its management made some bad bets about leasing jets which are now outdated and much less fuel efficient than newer ones. It can’t get out of these lease contracts without bankruptcy.

About 40% of American’s jet fleet of 619 planes are MD-80s made by McDonnell Douglas Corp. before it was bought out by Boeing, so they are no longer in production. They are being replaced by newer jets which are about one-third more fuel efficient. Just last July the airline announced it would buy 460 single-aisle jets in the industry’s biggest-ever order, and now says it wants to still go through with that order.

2) The airline’s negotiations with its labor unions have been dragging out, with mediation scheduled to start in early December with its pilots’ union. A Chapter 11 gives management major leverage against its employees, including with the ever-sensitive issue of pension benefits.

To enable American to avoid filing bankruptcy back in the years immediately after 9/11—during 2005 Delta, Northwest, United Airlines and US Airways were all in Chapter 11—its unions made concessions worth about $1.6 billion annually. “We agreed to sacrifice based on the expectation that our airline would regain its leadership position,” wrote David Bates, president of the Allied Pilots Association. We “will fight like hell to make sure that front-line workers don’t pay an unfair price for management’s failings,” according to James Little, the international president of the Transport Workers Union, which represents aircraft mechanics and baggage handlers.

Why did American file Chapter 11 now? It did not have an immediate cash crunch—it had $4.1 billion in cash and short-term investments to fund current operations. It did not even have to look for immediate “debtor-in-possession” financing when it filed its Chapter 11 case, as is often the case. The timing must surely have had to do with its labor negotiations. Plus the company had some big debts coming due next year, and ever increasing pension funding costs that it hopes to dump or trim. So instead of waiting until it had not choice, the company filed the bankruptcy reorganization as a strategic move.

Check back here for my next blog, which I’m calling “The Morality of the American Airlines Chapter 11 Reorganization,”comparing it to an individual filing a consumer bankruptcy.

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Keeping the Vehicle You Owe On in a Chapter 7 Bankruptcy

Chapter 7 is the take-it-or-leave-it bankruptcy when it comes to your vehicle with a loan against it. In most cases you either keep on making the payments or you surrender the vehicle, nothing much in between.

To be clear I’m talking here about a vehicle that you owe on, with the lender as a lienholder on your vehicle title, and with no more equity (value beyond the debt) than is covered by your available vehicle exemption. In other words, this is not a vehicle that your Chapter 7 trustee is going to be interested in, either because it has no equity—it’s worth less than the debt against it—or the amount of equity is protected by the exemption.

But if your trustee wont’ be interested, your vehicle creditor will be very interested, in the vehicle and in your bankruptcy.

So back to the take-it-or-leave-it part. Here are the two straightforward choices.

First, even f you don’t want to or need to keep your vehicle, you can surrender it to your creditor after your bankruptcy is filed. (Or you can surrender it before you file, but that gets risky—be sure you have talked to your bankruptcy attorney and have a clear game plan beforehand.) You likely know that if you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance”—the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added. (You can usually count on that deficiency balance to be shockingly high.) The bankruptcy will write off that deficiency balance, which could well be one of the reasons you decided to file bankruptcy.

Second, if you want to keep your vehicle, in most cases you have to be current on your loan, or quite quickly get current. You will almost for sure be required to sign a reaffirmation agreement legally excluding the vehicle loan from the discharge (the legal write-off) of the rest of your debts. And you have to sign that reaffirmation agreement and get it filed at the bankruptcy court within quite a short period of time—usually within 60 days after your bankruptcy hearing. Then you have to stay current if you want to keep the car, just as if you had not filed a bankruptcy. And also just as if you had not filed bankruptcy, if that vehicle later gets repossessed or surrendered, you could very well be hit with a deficiency balance.

When I say take-it-or-leave-it, I mean there usually aren’t any other more flexible options. Almost always—especially with conventional, national vehicle loan creditors—you are stuck with the terms of your original loan contract—no reducing the balance of the loan or the interest rate. If you’re behind, almost always you must pay up the arrearage and be current within a month or two. There can be exceptions, especially with local finance companies and other smaller players who would rather minimize their losses by being flexible. So be sure to ask your attorney whether your vehicle creditor has that kind of history. And if you do need more flexibility—if you must hang onto your vehicle, and owe more than it is worth, and you can’t afford the payments—ask about Chapter 13 as a possible solution to your dilemma.

In general, “straight bankruptcy”—Chapter 7—can be the best way to go if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it and are current or can get current within a month or two of your bankruptcy filing.


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Keeping Everything You Own Through Chapter 13 Bankruptcy

One good reason that people filing Chapter 7 don’t lose any of their stuff to the bankruptcy trustee—if they did have something to lose, they  likely file a Chapter 13 instead. How does Chapter 13 protect what you’d otherwise lose in a Chapter 7 “straight bankruptcy”?

As I said at the beginning of my last blog, protecting assets that are collateral on a loan—like your home or vehicle—is a whole different discussion than protecting what you own free and clear. Chapter 13 happens to be a tremendously powerful tool for dealing with secured creditors—especially with homes and vehicles. But that’s for later. Today I’m talking about using Chapter 13 as a way to hang onto possessions which are worth too much or have too much equity so they exceed the allowed exemption, or simply don’t fit within any available exemption.

Right off the bat you should know that if you have possessions which are not exempt, you may have some choices besides Chapter 13. You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need.  There are also some asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures well beyond what I can cover today.

But depending on your overall situation, if you have an asset or assets which you really need (or simply want to keep), you can file a Chapter 13 and keep that asset by paying for the privilege of not surrendering it.  You do that by paying to your creditors as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee. But you have 3 to 5 years to do that, while you are under the protection of the bankruptcy court. Your Chapter 13 Plan is structured so that your obligation is spread out over this length of time, making it relatively easy and predictable to pay (in contrast to, for example, negotiating with a Chapter 7 trustee to pay to keep an asset).

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset. Often people with assets to protect have other reasons to be in a Chapter 13 case, and the asset protection feature is just one more benefit. And believe it or not, depending on the amounts and nature of your assets and debts, you may be able to hang onto your non-exempt assets in a Chapter 13 case without paying anything more to your creditors. This tends to be more likely if you owe taxes or back support payments. One of the biggest advantages of Chapter 13 is that it can play your financial problems—like having too much assets and owing back taxes—against each other. So that you get an immediate solution—assets protected right away and the IRS off your back–and a long-term solution, too—assets protected always and IRS either written off or paid for, until you’re done and are free and clear.

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Keeping Everything You Own in Bankruptcy

You want to know: “Can I really keep everything I own if I file bankruptcy?”

A two-part answer:

1) Yes, you can, usually, keep those possessions that are all yours (you don’t owe any money on them).  

2) Yes, you can, usually, keep those particular possessions on which you are making payments to a creditor (like your home or vehicle), IF you want to keep it them, AND are willing and able to meet certain conditions. (Hint: those conditions are usually lots better in bankruptcy than without one.)

In today’s blog I’ll get into the first part of that answer. I’ll get to the second part later.

Most people who file bankruptcy can keep what they own for two reasons: 1) exemptions and 2) Chapter 13 protections. I’m covering exemptions today.

Make no mistake: at the heart of bankruptcy is the basic principle that your debts are discharged—legally written off forever—in return for you giving all your assets to your creditors. Except you can keep any of your assets which fit within an exemption. As the saying goes, this exception swallows the rule. Most of the time, all assets are exempt and so debtors get a Chapter 7 discharge without giving anything to the trustee.

Exemptions are simply a list of the types and amounts of assets that are protected from your creditors, and thus from the Chapter 7 trustee acting for those creditors. But exemptions are anything but simple.

First, the Bankruptcy Code contains its set of federal exemptions, and each state also has its own exemptions. If you file a bankruptcy in certain states, you have a choice between using the federal exemptions and the state ones, while in other states you can only use the state exemptions. In states where you have a choice, picking which of the two exemption schemes is better for you is often not at all obvious and you need an experienced attorney to advise you.

Second, if you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s rules can differ wildly, thousands of dollars can be at stake depending on what day your bankruptcy is filed.

Third, once you know which set of exemptions apply to you, whether any of your particular assets is covered by an exemption, and thus protected from your creditors, is often not clear. The exemption statues were often written many decades ago, use archaic language, and have a whole history of court ruling to interpret what they include. Plus the local trustees often have unwritten rules about how they interpret the exemption categories in practice. So, determining whether an asset is exempt or not is often much, much more than checking down a list of exemptions. By way of example, if you and your spouse each have one vehicle that you use for getting to work, and a third one used by your 18-year-old to get back and forth to school, will your vehicle exemption cover all three vehicles? Under what circumstances?

So navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by a bankruptcy attorney.

The fact remains that among most people who do end up filing a Chapter 7 bankruptcy case, everything they own DOES fit within the exemptions. So the bankruptcy trustee takes nothing from them.

But what if you DO own one or more assets which do not fit any of the available exemptions? How can those still be protected through a Chapter 13 case?  I cover that in my next blog.

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The Very Rocky History of U.S. Bankruptcy Law

You think the present Congress can’t get anything done? It took more than a hundred years for Congress to pass the first permanent bankruptcy law.

Lots of people know that bankruptcy was important enough to our founders to be included in the U.S. Constitution. But that’s just the very beginning of the story:

  • The Bankruptcy Clause, giving power to Congress to “pass uniform laws on the subject of bankruptcies” was added with very little debate, late in the Constitutional Convention’s proceedings. There had been no provision for nationwide bankruptcy in the earlier doomed-to-fail Articles of Confederation.
  • The only vote against the Bankruptcy Clause was by Connecticut, which already had a detailed bankruptcy law and wanted to keep it instead of ceding that authority to the federal government. One of their delegates also was concerned that a federal bankruptcy law would include the death penalty for debtors for certain bankruptcy offenses, as English law still did at the time.
  • But just because Congress was empowered by the Constitution to pass bankruptcy legislation, for nearly half our history it did so in an extraordinary irregular and knee-jerk fashion. Three different times during the 19th century a federal bankruptcy law was passed, each time immediately after a devastating financial “Panic,” only to be repealed after just a few years. During the majority of the time that no federal law was in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws, which became less and less effective as commerce became ever more interstate.
  • Then finally Congress passed the Bankruptcy Act of 1898, which lasted 80 years.  Although primarily inspired by commercial creditor interests, it included the following debtor-friendly provisions: most debts became dischargeable, creditors no longer had to be paid a certain minimum percentage of their debts, and no longer could withhold their consent to the debtor’s discharge.
  • The Bankruptcy Act of 1898 survived many attempts at repeal, in contrast to its predecessors. It was amended numerous times, in a major way in 1938 in response to the Great Depression. That 1938 amendment added the “chapter XIII “wage earners’ plans, the predecessor to the current Chapter 13s.
  • The 1978 Bankruptcy Reform Act, which brought into existence the Bankruptcy Code, was the result of a decade of study and debate. It is the only major enactment of bankruptcy law in U.S. history which was not enacted in reaction to a severe economic downturn. It has been tweaked every few years since then, most significantly in 2005.
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