Can I Discharge my Traffic Tickets in Bankruptcy?

One of the questions we receive quite often is whether or not traffic tickets and other court costs are dischargeable in bankruptcy?  Many debts are not dischargeable such as some income taxes, child support, and most student loans.  For traffic tickets we have to look at the Bankruptcy in detail.

 

Section 523(a)(7) of the bankruptcy code states:

 

"a discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual from any debt – to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty."

 

In a Chapter 7 case, government fines are not dischargeable, including criminal fines.  A Chapter 13 debtor, however, who completes his case and receives a discharge may be able to discharge certain non-criminal government fines.  Section 1328(a)(3) of the bankruptcy code states that a Chapter 13 debtor who completes all payments under the Plan receives a discharge "of all debts provided for by the plan or disallowed under section 502 of this title, except any debt – for restitution, or a criminal fine, included in a sentence on the debtor's conviction of a crime."

 

Therefore, if your fine is for a criminal act determined by state law, it is not dischargeable in Chapter 7 or Chapter 13. If the fine is considered a civil penalty, it is not dischargeable in Chapter 7, but  it is dischargeable in your Chapter 13 case.

 

 

What is a Chapter 20 Bankruptcy?

       A Chapter 20 Bankruptcy is the situation where a debtor files for Chapter 7, and then immediately refiles another case under Chapter 13.  The purpose are a few reasons why a debtor would want to take this strategy.  The first purpose is to reduce the monthly payments that will be required in a Chapter 13 plan.  If a person has $50,000 of general unsecured consumer debt (such as medical bills and credit cards) and also has $50,000 of student loans, which is not dischargeable, then chapter 13 payments to pay everyone in full would be $1,666.67 per month for 60 months.  However, if the debtor first files Chapter 7 bankruptcy, then $50,000 of the consumer debt would be discharged. After the case is closed the debtor can immediately refile under Chapter 13 in order to pay the nondischarged student loans.  That monthly payment would be $833.33 for 60 months. 

       Another reason to file a chapter 20 is because the debtor exceeds the Chapter 13 debt limits.  Currently, a debtor cannot file a Chapter 13 bankruptcy if the unsecured debt exceeds $360,475.  Chapter 7 has no debt limits.  Thus, a debtor may have $400,000 in unsecured debt, which is mixed with dischargeable and nondischargeable debt, as well as secured debt of a house and car.  The debtor (if he qualifies for a chapter 7) file the chapter 7 first reduce the overall debt to be under the debt limit.  Then the debtor could file a Chapter 13 bankruptcy in order to cram-down the car loan or strip off a second mortgage on a house.

       Now, one thing to remember is that by filing a Chapter 7 first, the debtor will not be eligible for a second discharge in the Chapter 13 bankruptcy.  All of the consumer debt would've already been discharged in the Chapter 7, but the debtor would be liable for any deficiency if he later choose to surrender the house or car in the chapter 13 bankruptcy.  

Bankruptcy Case Update: Student Loan Discharge

In a recent decision out of the Central District of Illinois, the Court held that while a debtor's prior, sporadic payments on her student loans were likely all that she could afford, given that she was unemployed, her unexplained failure to participate in the income contingent repayment plan (ICRP), along with her extreme hesitance to consider jobs outside her chosen field of study and admission that, after unsuccessfully applying for such jobs, she had effectively given up looking for work, precluded a finding that the debtor had made the requisite "good faith" effort to repay her student loans and prevented her from obtaining an "undue hardship" discharge of this debt. To find that the debtor had made a "good faith" effort to repay her student loans, based on the fact that the debtor had paid off one of these loans with proceeds of a divorce settlement and made sporadic payments on others, the bankruptcy court, at a minimum, had to correctly explain why the ICRP or a similar program was a bad deal for that particular debtor, and could not simply dismiss her admitted unwillingness to participate in the ICRP as "not dispositive."

Educational Credit Management Corp. v. Krieger

Student Loans and Hardship Test

Recent Case Updated from the 9th Circuit:
In re Jorgensen 2012 WL 3963339

       Under the Brunner “undue hardship” test, a debtor seeking discharge of student loan debt must prove that (1) she cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if required to repay the loans, (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period, and (3) the debtor has made good faith efforts to repay the loans.

       The Court of Appeals held that the lower Bankruptcy court did not abuse its discretion by refusing to discharge $8,045.02 of Chapter 7 debtor's approximately $36,285 in student loan debt; the court refused to discharge $6,050 because debtor would not be paying rent during the five and one-half months that she was teaching abroad and she did not satisfactorily explain why the excess $6,050 was necessary to maintain a minimal standard of living, and the court refused to discharge $1,995.02 because debtor purchased a new vehicle prior to her trip and her car payment while abroad was not necessary to maintain a minimal standard of living.

When Can Someone File Bankruptcy Again?

       A common question we receive is: "I filed bankruptcy [x] years ago, does that affect me?"   Section 727 of the Bankruptcy Code lists the amount of time that a person must wait if he has received a bankruptcy discharge.  The following are the amounts of years that must be between the filing dates of the bankruptcy cases and their respective Chapters:

                                     Between Chapter 7 and Chapter 7:   8 Years
                                     Between Chapter 7 and Chapter 13:  4 Years
                                     Between Chapter 13 and Chapter 7:  6 Years
                                     Between Chapter 13 and Chapter 13: 2 Years

       The six year requirement between a Chapter 13 and a Chapter 7 has two exceptions: (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor's plan was proposed in good faith and the payments represented the debtor's best effort.

The Automatic Stay and Creditor Harassment on Surrendered Property

       One of the most important and influential aspects of Bankruptcy is the Automatic Stay.  The Automatic Stay is just that, automatic.  As soon as the bankruptcy petition is filed, all of a debtor’s creditors are stayed (prohibited) from making any attempts whatsoever to take any property, money, income, etc., from the debtor.  This means that all lawsuits, phone calls, repossessions, foreclosure proceedings, EVERYTHING must immediately stop otherwise the debtor can receive money damages from the creditor for a stay violation. 

        Now just focusing only on Chapter 13 cases, a creditor does have the right to ask the court for permission to be relieved from the stay (Motion for Relief from Stay), for instance, in order to repossess a car that the debtor is not paying for or is uninsured.  Furthermore, many times in a bankruptcy a debtor will voluntarily surrender a car or home to the creditor. When this happens, the creditor usually does not need permission from the court to recover the collateral, as such permission is typically included in a confirmation order.  Here is an example from an actual order:  “The plan surrenders the debtors interest in collateral to the creditors listed below. The automatic stay has been lifted to allow these creditors to repossess the collateral upon which they have liens.”  Well when the stay is lifted, does that mean the creditor can begin harassing the debtor again?  As counsel for debtors, we say no; however, there are creditors who say yes!  While in my research I have yet to find a case that addresses this particular issue, I found many cases that are analogous. 

       For example, a reaffirmation agreement is a voluntary agreement between a debtor and creditor that allows a debt to be exempt from discharge and remain in effect after the bankruptcy (This is done for debtors who wish to keep cars or houses).  It has been held by many bankruptcy courts that a creditor can contact debtors about such an agreement since both parties have this right. However, litigation soon followed because the creditor was trying to harass the debtor into such an agreement.  Courts have held that while a creditor is allowed to contact the debtor for this purpose, the creditor cannot do so through harassment, threats, or coercion, as this defeats the purpose of the Bankruptcy Code protections.

       Usually, when property is being surrendered, the discourse between the creditor and debtor is tranquil and they arrange a time for the surrendered car to be picked up or a time limit for the debtor to move out of a house.  There is currently a case going on right now where the debtors moved out of their house, which was surrendered, two years prior but are still getting harassing and threatening phone calls about transferring the property.  Though the stay had been lifted, the debtors are contending that like reaffirmation agreements, surrenders cannot be coercive.  It will be interesting to see how the case turns out.

Waiver of Bankruptcy Discharge is Unenforceable

       Recently I was talking to one of our client's creditors on the phone about our client's case. Our client had filed bankruptcy in Nashville. The creditor was trying to explain to me that their debt was not to be included in the bankruptcy because they have their borrower's check a box on the loan application that states that the borrower waives their right to include the debt in bankruptcy and that the debt would be non-dischargeable. I quickly reassured this creditor that such contract provisions are prohibited by the Bankruptcy Code and 6^th Circuit case law.

       There are only two avenues which allow a debtor to waive a debt's discharge in bankruptcy. The first is through a reaffirmation agreement through §524. A reaffirmation agreement is a post-petition contract entered into by the debtor and creditor wherein a debtor will reaffirm the debt and waives its discharge in the bankruptcy. The reaffirmation agreement, however, is only valid after being approved by the bankruptcy court judge and meeting other strict conditions.

       The second way a debt passes through discharge is through §727(a)(10), which states that the court shall grant a discharge of the debtor's debts unless “the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter.” This waiver of discharge is unilateral and does not need to be agreed upon by the creditor, however, it still requires court approval.

        These two methods of waiving discharge have two things in common: (1) both require court approval and, (2) both must be entered into post-petition.

        The 6^th Circuit Court of Appeals in 2005 interpreted these two provisions to conclude that any prepetition agreements which waive the discharge of a debt contradict the Bankruptcy code and are void because they offend the public policy of promoting a fresh start for individual debtors. Lichtenstein v. Barbanel, 161 Fed. Appx. 461 (6th Cir. 2005). Therefore, in order for any waiver of discharge to be valid it must be through either §524 or §727 and cannot be merely waived by the checking of a box on a loan agreement.  

       Please remember that a debtor who enters into a loan agreement with no intention of paying the money back, but to file bankruptcy instead, can be prosecuted for fraud.

       It must also be noted that a prepetition stipulation can waive the discharge of certain debts, but that is a totally different animal than contractual waiver agreements. For an in depth discussion of this topic please see Line Drawing and the Bankruptcy Discharge: Why Prepetition Stipulations Are Enforceable but Prepetition Waivers Are Not by Kristin Ballobin.