Chapter 13 Bankruptcy Information

Today, December 29, 2009, was a cold and miserable day in Atlanta, Georgia.   Unfortunately I had a Chapter 7 bankruptcy 341 hearing to attend at the federal courthouse in Atlanta.  I bundled up the best I could, took the train to the nearest stop – about 1/2 a mile from the courthouse – and braved the cold windy weather.

As my client and I sat and waited for our case to be called, I noted case after case was called and heard by the trustee and that in none of them during my hour stay did any creditor show up.

I previously wrote about the rule against unfair discrimination between similarly classed creditors in Chapter 13. There is an important and under-utilized exception to this rule. Section 1322(b)(1) of the Bankruptcy Code allows a debtor to treat unsecured co-debts differently than other unsecured debts. What this means is that debtors may propose plans in which they pay consumer debts that another individual cosigned for at 100 percent while paying other unsecured creditors only a portion of what they are owed. Depending on local practice, there may be controversy on whether this payment can be direct or must go through the plan. However, the bottom line is the same: if a debtor chooses, he can protect a co-signor by maintaining full payments on the debt to the detriment to other creditors. If this were not the case, the co-signor would end up on the hook for the balance of the debt not paid in the bankruptcy.

By Mark Buckley, Rhode Island Bankruptcy Lawyer on Dec 28, 2009 in Benefits of Bankruptcy, Chapter 7 Bankruptcy, General Bankruptcy Information

First of all, the type of discrimination referred to in the title of this post pertains to creditor claims. In general, creditor claims of the same class must be treated the same in a Chapter 13 bankruptcy. Broad classes of claims include priority, general unsecured, and secured claims. Trouble can start when a debtor proposes to treat creditors of the same class differently. This is because the Bankruptcy Code prohibits unfair discrimination among similarly classed creditors. This is sometimes implicated when it comes to student loans. Student loans are almost always nondischargeable in bankruptcy, however they are still classified as general, unsecured claims–just like credit card debts. Consequently, when a debtor proposes to continue direct payments to a student loan lender and pay credit card creditors only a small percentage of what they are owed, the bankruptcy trustee will sometimes object to this treatment on unfair discrimination grounds. It is very difficult to prevail in the face of such an objection, but one sometimes can. I represented a debtor in 2007 who was allowed, over the trustee’s objection, to continue direct student loan payments. See In re Machado, 378 B.R. 14, (Bkrtcy.D.Mass. 2007). However, the Court’s ruling allowing this was unusual and fact-specific. The Court’s ruling can be accessed here (requires pdf reader).

In discussing why bankruptcy is important, I am met with a number of viws regarding bankruptcy.  For people that do not seem to have issues involving too much debt, they seem to view bankruptcy with a sort of disdain.  For those who do have a lot of debt, being free of that debt is a breath of fresh air–a new lease on life.  Any any rate, it is very common for misperceptions to persist with regards to bankruptcy law and practice.

People often ask if they can keep a credit card after filing bankruptcy. Maybe they have a credit card they use for travel, maybe it’s one used for everyday purchases and paid in full at the end of every billing cycle, maybe it’s one with a zero balance. However, in all these cases the answer is, no: One cannot keep a credit card through a bankruptcy. There are two reasons for this. First, a debtor is obligated to list all debts in bankruptcy and affirms this under the pains and penalties of perjury. The bankruptcy discharge, once entered, will then discharge the credit card balance. Although it’s theoretically possible, no credit card creditor that I know of has ever extended new credit on the same account once the balance was discharge. So, this begs the question: What about cards with no balance due at the time of the bankruptcy? Well, these are not “debts” and technically do not need to be listed in a bankruptcy. However, credit card creditors are some of the biggest customers of the credit reporting agencies and, consequently, receive reports about the bankruptcies of their account holders. After learning of the bankruptcy from the credit bureaus, it is normal for a credit card creditor to simply cancel the account, even if it’s not listed in the bankruptcy.