Debtors who have filed Chapter 13 bankruptcy and are later unable to complete their plan payments due to financial difficulties often consider converting their case to a Chapter 7 bankruptcy.  Most times the conversion of a Chapter 13 bankruptcy to a Chapter 7 bankruptcy goes forward without a problem. But sometimes a Chapter 13 bankruptcy conversion is challenged by the bankruptcy trustee. Usually the basis of the challenge is that the debtor did not pass the means test when they initially filed for bankruptcy and therefore should not be allowed to convert their case to a Chapter 7 bankruptcy.  Other times the bankruptcy conversion is challenged because it is believed that the debtor must take another means test and pass it in order for them to convert their Chapter 13 bankruptcy to a Chapter 7 bankruptcy.  For most debtors who have low-income, taking another bankruptcy means test should not be a problem. But for those debtors who have failed the means test and whose original means test income figures are being used to determine their eligibility for the a conversion to Chapter 7 bankruptcy, this means test challenge can present a problem.

Debtors who were high income earners when they first filed Chapter 13 bankruptcy and are now earning less than the median income for their state, should consider requesting that they take the means test again if their bankruptcy attorney believes their conversion will be challenged.  If it is not possible for the debtor to retake the means test, then they may want to allow their Chapter 13 bankruptcy to be dismissed and then file a new Chapter 7 bankruptcy so that they can take the means test without challenge and use their now lower income to qualify for a bankruptcy discharge. But before the debtor moves forward on any strategy they should discuss their situation with their bankruptcy attorney.

In a recent Chapter 7 bankruptcy case where a debtor was facing a challenge to his bankruptcy discharge, the bankruptcy court ruled that the debt was dischargeable. Below are the details of the case:

Jeff Kleindienst and Kathleen Wisely (the “Plaintiffs”) filed a complaint against the Debtor on June 7, 2010. The complaint objects to the dischargeability of the debtor’s debt to the Plaintiffs and, alternatively, objects to the Debtor’s discharge. The underlying facts as alleged in the complaint are that the Plaintiffs sued the debtor in state court on June 26, 2006, regarding the defendant’s alleged failure to construct the home properly. The Plaintiffs alleged that the Debtor failed to comply with minimum building standards applicable to residential construction under the Texas Residential Construction Commission Act. The Plaintiffs also alleged that the Debtor violated section 17.50(a)(1) of the Texas Business and Commerce Code (the “Texas Deceptive Trade Practices—Consumer Protection Act” or the “DTPA”) by engaging in the use or employment of a false, misleading or deceptive act or practice that is specifically enumerated in a subdivision of section 17.46(b) of the DTPA. (See Compl. at p. 3).

The Plaintiffs maintain that the arbitration award (since reduced to a final judgment) establishes collateral estoppel on the issue of whether the Debtor made knowing and intentional misrepresentations in violation of the TDPA. The plaintiffs argue that the arbitrator’s finding establishes that the Debtor’s debt to the Plaintiffs “is non-dischargeable under sections 523(a)(4) and 523(a)(6) of the Code, as the Judgment was a result from the knowing and/or intentional misrepresentations in violation of the Texas Deceptive Trade Practices Act (the “DTPA”) made by Richard Horne of a willful and malicious injury to the Judgment Creditor.” (MSJ, p. 3.)

The Plaintiffs mistakenly believed that because the debtor had intentionally misrepresented their licensing to them that this meant their debt could not be discharged in bankruptcy. But the bankruptcy court disagreed with the Plaintiffs saying that the debt could only be declared nondischargeable if the debtor intentionally tried to harm the Plaintiff.  The bankruptcy court concluded that there was no evidence that the debtor intentionally tried to harm the Plaintiffs, and that neither the Plaintiffs nor the state court ever accused the debtors of willfully and maliciously trying to harm the Plaintiffs.  The bankruptcy court also went on to say that engaging in deceptive business practices does not equal willfully and maliciously trying to harm someone. Therefore the bankruptcy court ruled that the debt could not be declared nondischargeable.

(source: http://leagle.com/xmlResult.aspx?xmldoc=In%20BCO%2020110202846.xml&docbase=CSLWAR3-2007-CURR)

One of the great myths surrounding bankruptcy is that debtors who file Chapter 7 bankruptcy or Chapter 13 bankruptcy will find it difficult to find employment.  That simply is not true.  While there are some employers who may be concerned about a bankruptcy filing if the debtor is applying for a job handling cash or sensitive financial information, those same employers are concerned about debtors who haven’t filed bankruptcy but have lots of debt. If you’re a debtor who is considering bankruptcy and have concerns about how it will impact your employment prospects, here’s what you need to know:

1. An employer cannot fire you solely because you have filed bankruptcy.  If you’re currently employed it is not required that you tell your employer about your bankruptcy. We’re not saying you need to be top secret about the bankruptcy filing; but just reminding you that you are not obligated to share that information with your employer.

2. An employer is not allowed to refuse to hire you solely because you have filed bankruptcy. If you’re applying for a job and the employer does a credit check discovering your bankruptcy and then refuses to hire you, you may have legal recourse.  But it’s important to mention that most employers are not going to refuse to hire someone because of their bankruptcy filing. Employers understand that the last few years have been particularly hard financially for everyone.

3. If you are applying for a job where a credit check is required because you will be handling cash or financially sensitive information, you may want to casually mention your bankruptcy during the interview. Briefly explain why you sought debt relief and how your financial situation has improved since your bankruptcy filing. The biggest concerns employers have is that a debtor who is financially stressed will be tempted to abuse their access to cash for financially sensitive information.

Parents filing bankruptcy are often worried about how their bankruptcy will impact their kids.  Below are a few things that parents should know about bankruptcy’s impact on children:

1. No, the bankruptcy trustee is not going to seize your kids’ clothes and toys. One of the fears that many bankruptcy debtors have is that their household items, including things belonging to their kids, will be seized by creditors during a bankruptcy. The truth is that in the typical bankruptcy, exemptions protect most or all of the debtor’s household items.

2. Many debtors fear that their children will be embarrassed by their bankruptcy filing. But the reality is that unless the parents tell their children what is going on, they probably won’t even notice.  However, it is best for the parents to mention to their children in an age appropriate way that they will need to make some financial changes.  This is important so that their kids can be a part of the post-bankruptcy recovery.

3. If there are bank accounts or trust funds in a child’s name, the bankruptcy trustee won’t be able to seize these funds unless the parent has treated the account as their own. For example, if the debtor has a bank account in the child’s name and regularly pays bills out of the account, the child’s bank account might not be protected in bankruptcy.

4. If a bankruptcy debtor is sending their child to a private school, the bankruptcy trustee may scrutinize the expense to determine if it is excessive. While no debtor is prohibited from placing their child in a private school, the bankruptcy trustee must determine if the costs associated with the school are so much that it squanders resources which should go to creditors.

1. If you can no longer afford your vehicle, bankruptcy gives you an opportunity to surrender it to the lender.  Even if you owe a balance and the lender is unable to sell the car for enough to cover what you owe, you still won’t owe them any money after bankruptcy.
2. A bankruptcy debtor can usually keep the car and continue making payments after bankruptcy according to the original terms of the loan.  The only thing with this option is that you will need to catch up on any delinquent payments if you want to keep your car. So if you file bankruptcy, don’t stop making payments on your vehicle if you plan to use this option.
3. Bankruptcy debtors may be asked to reaffirm their car loan if they want to keep the vehicle.  Most bankruptcy attorneys advise against this route because it legally obligates the debtor to pay the existing loans as if they never filed bankruptcy.  In option #2 mentioned above, if the debtor stops making payments, the only recourse the lender has is to repossess the vehicle.
4. If the bankruptcy debtor’s vehicle is upside down – they owe more than the car is worth, the bankruptcy court may allow them to refinance the vehicle at its true value while discharging the balance of the original loan. There are very few lenders who will do this, but some bankruptcy debtors have taken this route.  Alternatively, some lenders may be willing to cram-down a bankruptcy debtor’s car loan so that it is in line with the vehicle true market value.

(b) On request of a party in interest, the bankruptcy court shall, and on bankruptcy court’s own motion, the bankruptcy court may—(1) protect an entity with respect to a trade secret or confidential research, development, or commercial information….

Bankruptcy Rule 9018, which implements section 107(b), provides:

On motion or on its own initiative, with or without notice, the court may make any order which justice requires (1) to protect the estate or any entity in respect of a trade secret or other confidential research, development, or commercial information.

The bankruptcy court may be required to seal “documentary information” which is filed with the court if it is critical enough to the operations of the entity seeking protection that its disclosure would unfairly benefit the company’s competitors.  The “documentary information” does not need to rise to the level of a trade secret; but it does need to be essential to the business and secret enough that competitors don’t have previous knowledge of it.

Information that is simply embarrassing or something the entity does not want the world to know is not protected by the bankruptcy code.  The bankruptcy court does not have to seal information that is simply embarrassing or damaging to the entity’s reputation even if the release of that information may cause the company to lose money.

(source: http://www.leagle.com/xmlResult.aspx?xmldoc=In%20BCO%2020101012563.xml&docbase=CSLWAR3-2007-CURR)

1. The bankruptcy debtors made a representation to the creditor that they knew was false.  For example, maybe the debtor said that he/she earned $60,000 a year when in fact he/she only earned $30,000 a year.
2. The misrepresentation that the bankruptcy debtor made was for the purpose of deceiving the creditor.  For example, maybe the bankruptcy debtor lied about their income because they knew they would not be able to get the line of credit any other way.
3. The creditor relied on the representation and relying on that representation was justified.  For example, a creditor is justified in relying on the bank statements of a debtor to determine if they are eligible for a certain amount of credit.  On the other hand, if the creditor only relied on a verbal income statement made by the debtor, that would not qualify as justified.
4. The creditor sustained a loss because of the bankruptcy debtor’s misrepresentation.  For example, maybe the creditor only received a small amount of payments on the debt because the bankruptcy debtor does not earn enough income as demonstrated in point #1.

Adversary proceedings challenging the dischargeability of debt in bankruptcy have come up a lot in regards to credit card debt and mortgage loans, especially secondary liens.  Many creditors are digging through their paperwork to find material misstatements so that they can prevent the debtor from discharging the debt in bankruptcy.  Bankruptcy debtors must be prepared to defend themselves against these accusations if they want to protect their discharge.

(source: http://www.leagle.com/xmlResult.aspx?xmldoc=In%20BCO%2020110127619.xml&docbase=CSLWAR3-2007-CURR)

1. A bankruptcy case may be opened by the debtor or trustee if assets are discovered which should have been part of the bankruptcy estate but where not.  For example, if the bankruptcy trustee discovers that the debtor was hiding assets during bankruptcy, the case can be reopened and the assets seized.  Or, even if there were assets discovered that were unknown to the debtor, the bankruptcy case can be reopened and the assets placed into the bankruptcy estate.
2. A bankruptcy case can be reopened if the debtor wants to amend their schedule to include an additional creditor which was overlooked.  In most “no asset” bankruptcy cases the additional creditor can be added to the closed bankruptcy case without any penalty.  However, if there are assets involved in the bankruptcy the process may be a little more complicated.
3. A bankruptcy case may be reopened if the debtor is doing so to avoid a post-bankruptcy lien that would encumber a property which was exempted in bankruptcy.
4. A bankruptcy case may be reopened if a creditor wants to challenge the discharge of a debtor’s debts. In order for the creditor to do this, they must submit sufficient evidence that the debtor’s debt should not be discharged.  For example, if the creditor has sufficient evidence that the debtor engaged in fraud, then the bankruptcy case could be reopened and a discharge revocation considered.

(source: http://bankruptcy.lawyers.com/consumer-bankruptcy/Grounds-for-Reopening-a-Bankruptcy-Case.html)

1. If the drunk driving debt stems from an accident where the creditor/victim was injured or killed, then the debtor will NOT be able to discharge the debt in bankruptcy.  A matter of fact debts which stem from drunk driving accidents which caused death or injury are automatically exempted from discharge.  The bankruptcy code states that if “death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance,” then the debt will be deemed non-dischargeable. In this case the creditor/victim won’t even need to file a claim in the bankruptcy court.
2. If a debt stems from a drunk driving accident which did not cause death or injury but did cause property damage then the debt cannot be discharge if the debtor’s actions were deemed willful and malicious. The creditor/victim must file a bankruptcy claim and an adversary proceeding within the allotted time.  If they fail to file an adversary proceeding challenging the debtor’s bankruptcy discharge or if they are late filing, the debt will be discharge.
3. A bankruptcy debtor who is not able to discharge his/her drunk driving debts; may be able to discharge them at a later date if it is later found that they were not illegally intoxicated at the time of the accident. For example, if the debtor is appealing their drunk driving verdict while they are going through bankruptcy and their bankruptcy case is closed before they receive a verdict in their favor, they may be able to reopen the bankruptcy case and discharge the debt.

(source: http://www.bankruptcylawnetwork.com/2008/12/29/does-bankruptcy-wipe-out-drunk-driving-debts/)

• The BAPCPA prohibits bankruptcy petition preparers from giving legal advice to debtors.  This means that bankruptcy petition preparers cannot tell a debtor what chapter of bankruptcy they should file or how they can best protect their assets in bankruptcy. Any bankruptcy petition preparer who gives legal advice to debtors or does something else to break the law will be heavily penalized.
• The BAPCPA prohibits debt relief agencies from offering services which they know they cannot or have no intention of providing.  For example, a debt settlement company which says they can stop creditors from suing as debtor would run afoul of the BAPCPA because only bankruptcy can stop creditor actions such as lawsuits and garnishments.
• The BAPCPA guarantees that creditors must stop their collection efforts once a debtor files a petition for bankruptcy. If the creditor fails to stop collection efforts after a debtor files bankruptcy they could face sanctions and heavy fines.
• The BAPCPA makes qualified retirement plans and children’s savings accounts untouchable by creditors during bankruptcy.  Debtors filing bankruptcy can protect their retirement income under the BAPCPA and the assets of their children.
• The BAPCPA requires that debt relief agencies who are offering a debtor a repayment plan give the debtor time to review the payment plan and reconsider it.

(source: http://www.bankrate.com/finance/personal-finance/consumer-protection-laws-know-your-rights-1.aspx)