Chapter 11 cases are filed for many reasons. One reason is a for an individual or business reorganization. Another possible reason is for a business liquidation. Why would a Chapter 11 case be used for a liquidation, when Chapter 7 already is available for that purpose? The reasons are many. In most situations, more value will be gained when the business is “wound down” by the owner gradually over time, rather than sold at “firesale” prices by a Chapter 7 trustee.
Bankruptcy trustees and courts permit debtors to make charitable and religious contributions. Reasonableness is the operative guideline, as it is in much else in the bankruptcy world. Historically, courts in the United States have been very deferential towards issues implicating religious or cultural freedom. Even if tithes or charitable contributions are permitted, what is the limit? Is there a bright line rule? Or will the court evaluate such gifts on a case by case basis?
And if tithes are so allowed, will that prevent a debtor from claiming the “undue burden” standard in the context of a student loan dischargeability action? One recent case from the Northern District of Iowa illustrated the interplay between contributions to religious organizations and the possible dischargeability of student loan debt. The case in question was In Re Lovell (N.D. Iowa, 2012).
In Lovell, the debtor disclosed that she contributed about 11% of her gross income as tithes to a religious organization. She filed an adversary proceeding seeking the discharge of her student loan debt, arguing (in accordance with 8th Circuit standards) that repayment of the student loan would impose and “undue burden” on her living standards.
She wished to continue her practice of charitable giving, and still discharge her student loans at the same time. She was employed and was making an income that placed her solidly in the middle class.
The bankruptcy court first held that contributing 11% of one’s income in tithes was not per se unreasonable. Rather, the better approach would be for an in-depth inquiry into be undertaken to determine whether the expenditure was reasonable, based on a consideration of all the attendant circumstances.
The 8th Circuit’s view of the “undue burden” standard for student loan dischargeability essentially focuses on all the facts and circumstances that a debtor is facing: current monthly income and expenses are probed into in detail, to determine exactly what the debtor’s prospects might be for paying the loan back. See, e.g., Walker v. Allie Mae Servicing Corp., 650 F.3d 1227 (8th Cir. 2011).
Of particular interest to the court was the fact that the debtor was still in the early stages of her career. This being the case, there was a substantial likelihood that her earning power would increase as the years went by. In addition, she stated that giving to her church was an important part of her religious beliefs.
Interestingly, the court found that whether tithing was “compulsory” was not a determinative factor in weighing the reasonableness of the expense. This “hands off” approach is in keeping with the long tradition of deference that courts have shown in matters involving religious faith. Bankruptcy courts in both Kansas and Missouri have both been very generous in their allowances for charitable contributions. Debtors are often relieved to find out just how much leeway and freedom they are given in this regard.
The Religious Liberty and Charitable Donation Protection Act (RLCDP) is a factor in the background that courts have also been mindful of. See 11 U.S.C. 1325(b)(2)(A). Congress passed RLCDP as a remedial law after anecdotal evidence accumulated that charitable donations were being avoided as preferential transfers by bankruptcy trustees. Section 548 of the Bankruptcy Code was amended to allow charitable donations made in good faith, providing some relief to debtors and religious organizations with little ability to fight preference actions in bankruptcy court.
In fact, a survey of the relevant case law shows that most courts have been tolerant of religious contributions that approach 15% of a debtor’s annual income. Contributions of up to 15% have generally been held to be not presumptively unreasonable, although some creditors in student loan discharge cases have tried to argue that such a contribution would indicate a lack of “undue burden.”
In sum, the Lovell court made the point that no “bright line” rules can be set out for religious contributions. Like everything else, charitable donations must be viewed in conjunction with everything else that is going on in a debtor’s financial life. Tithing alone, absent other circumstances, will not disqualify a debtor from satisfying the “undue burden” standard.
Read More: Student Loans In Bankruptcy In Kansas And Missouri
Attorneys who deal with Chapter 13 and Chapter 11 cases will often see, in the claims registers listing the filed proofs of claim, corporate entities that have “bought up” proofs of claim from smaller creditors. There are many companies, businesses, distressed debt investors, and hedge funds that specialize in purchasing bankruptcy debt. There are also situations where larger creditors in Chapter 11 cases will make offers to buy the claims of smaller creditors, in an attempt to control the voting and direction of the Chapter 11 case. Small creditors in bankruptcy cases may find themselves in confusion about what to do if they are contacted by a large organization asking to buy their claim.
What issues should be considered? What are the advantages and disadvantages of selling a proof of claim?
Claims buyers can scrutinize bankruptcy court records and comb cases to see if it makes economic sense for them to purchase claims. Claims buyers will prefer to purchase claims that are listed as “undisputed” rather than “contingent” or “disputed”, since undisputed debts are less likely to subject to litigation in a bankruptcy case. They are seen as less of a risk.
Claims buyers will frequently sent out documents called “claim assignment agreements” or “confirmation” documents. These documents should be reviewed carefully with an attorney with bankruptcy experience, before the claim is sold. Things are not often what they appear. Claims buyers have as their goal the maximization of their profit with a minimization of their risk. With this in mind, let us examine the pros and cons of selling a bankruptcy proof of claim.
Pros
One of the most attractive reasons for selling a claim is the prospect of cash now, rather than the uncertainty of knowing when (if ever) the creditor will recover any funds in the bankruptcy estate. Cash now has a real attraction to many small creditors who may not want to participate in the bankruptcy process. Small creditors are enticed with the prospect of immediate liquidity, rather than dealing with the possibility of drawn-out legal proceedings. Selling a claim now carries with it the perception of cutting one’s losses and eliminating future risk. This “immediacy” value is the primary attraction of selling a claim.
Cons
But this immediate liquidity can be deceptive. For one thing, it is important to remember that claims buys always want to buy at a steep discount. It is a numbers game to them, and they buy claims in volume. The amount you may be offered for your claim will be a fraction of what it may be worth. Bankruptcy cases can be unpredictable. Many cases that initially appear to offer nothing to unsecured creditors can generate significant funds down the road. You never know when assets can and will be recovered. To sell your claim too early can be a mistake.
Buying debt in bankruptcy cases, for large claims buyers, is all about making a profit. Their goal will be to maximize their profit potential, while minimizing their risk. Small creditors in bankruptcy cases should be aware of this. The enticement of immediate money may be an illusion. A small creditor who ignores the risks may find that he got more than he bargained for. It is critical to consult with a bankruptcy attorney before selling your claim, so that you are aware of all the risks involved.
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The Supreme Court’s recent (June 2011) opinion in Stern v. Marshall left open questions regarding the scope of a bankruptcy court’s jurisdiction to enter final judgments in adversary proceedings. Another recent case from the Ninth Circuit Court of Appeals, Executive Benefits Insurance Agency v. Arkison, shed additional light on the issue. The Ninth Circuit interpreted Stern itself. It held that a bankruptcy court cannot enter final judgment on a claim to avoid a fraudulent conveyance against a non-creditor to a bankruptcy estate.
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Can a school refuse to issue a transcript to a debtor who had wiped out his outstanding balance owed to the school in a bankruptcy case? No. A recent case demonstrates the power of the bankruptcy discharge in dealing with all types of collateral issues that might come about from the wiping out of debts in a case.
In In re Moore, 407 B.R. 855, 861 (Bankr. E.D. Va. 2009), the United States District Court for the Eastern District of Virginia found that Novus Law School violated a discharge injunction by refusing to issue a transcript or award a degree to Moore, a law student, until he paid his outstanding tuition balance, which had been discharged in Moore’s chapter 7 proceeding.
If your automobile is repossessed before you file a Chapter 13 bankruptcy, the creditor will need to return the vehicle to you in most situations. In some Chapter 13 scenarios, a case is filed right after a repossession has taken place, and a debtor will need to have the asset returned to him or her so that it can be taken care of in the Chapter 13 plan.
Can a creditor continue to hold the collateral, or must it be turned over to the Chapter 13 debtor? One case is illustrative. In Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), a court was called upon to determine whether an asset lawfully seized pre-petition must be returned to the estate after debtor files for chapter 13 bankruptcy, and if so, whether the asset must be returned even without a showing by the debtor that he can adequately protect the creditor’s interest.
Adversary proceedings contesting the dischargeability of debt in a bankruptcy case are rare, but they do happen. There are various types of nondischargeability actions that a bankruptcy debtor can face under 11 U.S.C. 523. One of these is an adversary proceeding under Sect. 523(a)(4) for “fraud” or “defalcation” while “acting in a fiduciary capacity.” This type of action is often brought as an additional count in an adversary petition along with other Section 523 claims, such as claims under 523(a)(2). They seem to be appearing more often than in the past, as creditors increasingly seek to have commercial debts classfied as “trusts” or “trust fund proceeds.”
The advent of the BAPCPA (Bankruptcy Abuse and Consumer Protectioni Act) of 2005 brought some changes to the treatment of domestic obligations within the context of a bankruptcy case. Changes were also made to the operation of the automatic stay within the context of divorce proceedings, property divisions, and the modification of child support orders.
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There are situations where people will take out a short term loan against their car or some other vehicle. Typically, these loans have high rates of interest, and are marketed to people who are unable to secure credit in more traditional ways. Their treatment in bankruptcy can come as a great relief to debtors who find themselves paying and paying, yet never making any headway in paying off the loan.
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Payday loans are extremely high-interest, short-term loans that are targeted to people who have an immediate need for a loan. Are these loans treated any differently in bankruptcy from other debts? Are the threats and harassment from these companies to be taken seriously? Persons filing bankruptcy with payday loan debt need to be aware of several issues when it comes to payday loans.
First, payday loan companies are creditors like any other,and their debts will be discharged like any other unsecured creditor or signature loan. However, there are some special nuances to these types of creditors that you should be aware of, so that you can better protect yourself.
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