I remember the conversation clearly, even though it took place more than 10 years ago: I had just finished meeting with a client - let’s call him “Josh” - to review a draft of the petition and schedules our office prepared for his Chapter 7 Bankruptcy. We reviewed the draft carefully to make sure that we were listing all of the assets Josh owned and that he had listed all of the creditors to whom he owed money. We took a good look at his payroll records to make sure that his monthly income was being reported accurately. We made sure that any unusual financial transactions that took place shortly before our meeting were disclosed, and the requisite detail provided. Once we knew the information was accurate, Josh signed the papers...
Then I previewed what would happennext on his case. We talked about when the case would be filed and how he and his creditors would receive notice that the case was filed with the bankruptcy court. Last, I previewed the questions Josh could expect from the Chapter 7 trustee when he had his meeting with the trustee. All in all, a fairly meticulous exercise to make sure correct information was contained in the petition, schedules and statements, as well as making sure that Josh know what was going to happen next and when it was going to happen. The meeting itself took close to two hours.
The Unexpected Questions
As we were getting up from the conference table at the conclusion of our appointment, and I was putting the paperwork in order, Josh looked at me and said “Bill, what else should I know about this bankruptcy?” It was a great question, and it was one that I was not expecting. Hadn’t we discussed a significant amount of information? Hadn’t we discussed Josh’s financial situation in detail during a couple of different appointments? But I realized when I heard the question that in fact Josh had a point: no matter how carefully I try to make sure that clients get their questions answered and try to eliminate the mystery that surrounds a legal proceeding that very few of my clients have experience with, there are still issues that arise in some bankruptcy cases that we don’t always discuss before the case is filed.
So, in that moment of clarity, I said to Josh “there are probably 50 things you should know about and if I could think of five of them I’d be the smartest MN Bankruptcy Lawyer and right now I can’t think of any.” Josh thought my answer was a semi-joke; he laughed at my answer. But I wasn’t joking, or at least not completely joking. In some MN Bankruptcy cases there questions pop up that we don’t deal with commonly and that we don’t always anticipate. So I thought I could write a bit about unexpected, unanticipated situations clients of our office have experienced and how, if the unanticipated happens, the things we do to fix problems.
How Our MN Bankruptcy Lawyers Obtain Information
At our office we try to be a careful, accurate and complete as possible in our drafting of bankruptcy petitions and schedules in order to prepare for bankruptcy. We research some of the information we provide in bankruptcy petitions and schedules. We do this by using a unified credit report and a Lexis-Nexis public records search to make sure that we receive as much information as possible, and incorporate that information into the petition, schedules and statements that we file with the Bankruptcy Court. We also ask our clients to help us out in collecting information - we ask clients to provide us with payroll information, copies of tax returns and deeds, as well as asking our clients to bring in statements that they receive from creditors to make sure that all creditors are listed properly.
Then after we get the information from the online services that we use as well as from the clients themselves, we do even more: an assistant and the responsible MN Bankruptcy Lawyer meet with the clients to review a draft of the petition and schedules to make sure that information is accurate and complete, and to make sure that when the case if filed with the Bankruptcy Court we know, and our client’s know, that the information contained in the Bankruptcy case is accurate. And when we are complete and accurate, the amount of questions the client has decreases, and the likelihood of a surprise - whether pleasant or unpleasant - is small.
But surprises still do happen despite our best efforts. And some situations develop that catch us off-guard temporarily. So what else does any client need to know that may not come up commonly at office appointments? Here are some questions I get frequently:
What about Your spouse When You File?
Some couples thinking about bankruptcy come in to see me assuming that if a bankruptcy case is the best course of action to take both spouses will have to file. This assumption comes, I’m convinced, from family law. In a divorce case, the property and debt couples own is divided into marital and non-marital. And if couples have marital debt - that is, debt incurred while the couple was still married, then that debt is the equal responsibility of both spouses. So debt that might have been incurred solely by one spouse during the course of a marriage becomes, when the couple divorces, a shared responsibility. In a sense, in a divorce case, both spouses owe the debt that only one of the spouses incurred. But this is not the case in bankruptcy law. To understand the way that bankruptcy law deals with this situation, it’s good to know what family law does, and doesn’t do, with respect to marital debt. Family law only determines the responsibility for debt payment between the spouses - not with respect to the creditor, at all. So in a family law case, one spouse can agree to be responsible for a debt that the other spouse incurred solely in his or her name.
But commercial law does not worry about that. In commercial law, only the individual who incurred the debt is liable to pay the creditor (there’s one large exception to this that I will discuss shortly). The creditor can only collect from the individual who is obligated on the loan - the creditor has no right to collect from the non-obligated spouse. And bankruptcy law is commercial law. So in a case where a married couple are facing significant financial challenges, it is not always true that both spouses have to file a bankruptcy case if, in fact, the debt was incurred solely, or largely by one spouse and not the other.
There’s an exception to this rule in Minnesota. In Minnesota, a spouse is responsible for the other spouse’s medical bills. So when couples are thinking about filing a bankruptcy, it’s good to be aware of any medical bills that are payable. But if there aren’t extensive medical bills, it isn’t required that both spouses file a bankruptcy case if the debt, or at least the bulk of the debt, is in one spouse’s name only.
And there are advantages to families if one spouse does not need to file a bankruptcy case, if the other spouse does. Having an income-earner in the household without a bankruptcy filing on his or her credit record is advantageous for future borrowing. The non-filing spouse does not need to worry that if his or her spouse files a bankruptcy his or her credit score will be affected. Credit reporting agencies are usually very mindful of who exactly has filed a bankruptcy case, so if a person shares a last name, or an address with a person who filed a bankruptcy case, that person will not receive negative credit reporting because of the spouse’s bankruptcy filing. There are debts I don’t want listed in the Bankruptcy This issue comes up fairly frequently - and it most often involves secured loans where clients want to retain the collateral for the loan. The most common secured debts that clients intend to pay, even if they file a bankruptcy case are car loans and home mortgages.
The Good News
The good news for people in this situation is that as long as they continue to make their loan/mortgage payments on time and according to the terms of the loan debtors will almost always be able to retain the property secured by the loan. The notable exception to this is for car loans in which a client has not signed a reaffirmation agreement, although the frequency of a vehicle being repossessed where the bankruptcy debtor is current on a car loan are very small indeed.
So that’s the good news. But what clients need to understand is that even if they make the payments on the loans to insure that they retain their house/car, their loan has still been listed in their bankruptcy case as a secured debt. The creditor has received a notice of the case being filed, and the lenders are subject to bankruptcy law just the same way that other creditors - the creditors collecting on debt that the debtor intends to discharge.
I frequently get calls from clients whose case has been filed, and who have received a discharge of debts years before wondering why their vehicle loan or home mortgage are being reported on their bankruptcy case as being involved in a bankruptcy. Why, they ask me, am I getting this report when I (the debtor) kept this debt “out” of the bankruptcy?
The answer is that the debt was, in fact, listed in the bankruptcy. The reason the client thinks that it wasn’t included is that the debtor treated this debt differently than other debts. This was the debt the client continued to pay, that the client always planned to pay. So why does it show that it was included in the bankruptcy case.
The reason is that while the debtor certainly knew that he or she was going to pay on this account, the creditor had no way of knowing the debtor’s intentions. So when the secured creditor received the notice that a bankruptcy case had been filed, that creditor did all of the internal actions that need to be taken - in most cases the account is transferred to another department and it is identified as being the account of a person who filed bankruptcy. Notices for payment can no longer be sent directly to the bankruptcy debtor and no other contacts can be made to ask the debtor to pay on the account.
When the debtor makes a voluntary payment, that payment is received, and the payment is applied to the principal balance of the loan as required in the original loan document. But the loan is noted for both internal action and external reporting as being “in bankruptcy.” So clients need to know that there will be some negative notation on accounts, even if the payments on these accounts are current and remain so while the bankruptcy is pending, provided that the obligated party on the account filed a bankruptcy case.
The Possible After Effects Of Signing A Re-affirmation Agreement
The other issue that comes up often with respect to secured loans has to do with mortgage loans. It is the most common unpleasant surprise that bankruptcy clients encounter after their case is over. The situation comes up when debtors who are homeowners have filed a Bankruptcy case. In this situation the debtors have continued to make house payments in a timely fashion. But they haven’t signed a written reaffirmation agreement to re-impose personal liability on the mortgage loan (typically this is because no reaffirmation agreement was offered by the bank). Now the debtor, after discharge and in a situation where his or her credit score is back in shape, would like to refinance the mortgage to receive more favorable terms.
Unfortunately the debtor/borrower is told by the mortgage holder that the lender will not consider a refinance because the loan is reported as being “in bankruptcy.” When borrowers ask the lender why they are still listed as having a loan in bankruptcy when their case has long since been discharged and the mortgage payments are, and have been current, they are told that nothing can be done because no reaffirmation agreement was signed. It’s a tremendously frustrating experience for people who have struggled financially but have maintained current status on their mortgage loan to be turned down for a technical reason. But not to worry. There’s a solution. And we’ll discuss that in next week’s blog.
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Brainerd Bankruptcy Attorneys MN - 218-822-3300