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Questions and Answers (Q & A) about the New Bankruptcy Law Amendments (continued)

50. Will it be harder to get credit cards and other debt once the New Law is in effect.

a. No, credit card companies will loan to even less credit worthy consumers than they do now, because the credit card companies, car lenders, etc. will know that it will be harder to file bky than before the New Law, and harder to discharge debt, and that few kinds of debts will be dischargeable, and that more people will have to do 5 year Chapter 13s, so the lenders will give even more people credit/loans, despite those consumers having a high danger of defaulting on paying

51. How do the New Law provisions affect discharge?

a. The New Law provisions adversely affect discharge in 3 ways:

i. First, the New Law reduces the types of debts that can be discharged in bky–primarily “super-discharge” almost totally revoked, and tax debt harder to discharge.

ii. Second, all consumer debtors are required to jump through more hoops to get a discharge of those debts that are still eligible to be discharged under the New Law.

iii. Third, under existing law and caselaw, there is a presumption that a debtor is entitled to a discharge, e.g.727 “the court shall grant the debtor a discharge, unless....” certain exceptions apply. New Law 707(b) turns that presumption in favor of discharge into a presumption that debtor is abusing Chapter 7, and should not be allowed a Chapter 7 discharge, wherever the 707(b) presumption of abuse applies.

52. What is the “super discharge” under existing law, and what happened to it under the New Law?

a. So called “superdischarge” was that in Ch 13 , if a debtor confirmed and fully performed Ch 13 plan, the plan could discharge debts for fraud, conversion, embezzlement, breach of fidudicary duty, and willful and malicious acts, including, in some cases, tax evasion, plus could discharge property division debts arising from divorce. This “super-discharge” was due to the fact that in Chapter 7 and 11, the full list of “nondischargeable” debts specified in 11 USC §523(a)(1) through __ applied; but in Chapter 13, only a few of those grounds for “nondischargeability applied”, because 11 USC §1328(a)(2) under the old law states that a Chapter 13 discharge discharges any debt,

“(a)...except any debt–(2) of the kind specified in paragraph (5)(8), or (9) of section 523(a)”...

But the New Law adds back into §1328(a)(2), as being exceptions from discharge, several kinds of §523(a) debts, as follows:

“(a)...except any debt–(2) of the kind specified in section 507(a)(8)( C ) or in paragraph (1)(B), (1)( C ), (2), (3), (4), (5), (8), or (9) of section 523(a);”

These are added exceptions to discharge in Chapter 13 are tax debte where there was fraud or intent to evade or defeat tax, or where the tax return was not filed or was filed less than 2 years before the Chapter 13 case was filed; debts for fraud; debt sfor conversion, embezzlement or breach of fiduciary duty; and debts that are 11 USC §523(a)(3) debts of certain types. The 523(a)(3) debts that are excepted from discharge even in Chapter 13 are 523(a)(2)–fraud debts-- or 523(a)(4)–conversion, embezzlement, breach of fiduciary duty debts, where the debt in question was not scheduled in the petition, and where the creditor did not find out about the bankruptcy in time to file a timely “nondischargeability adversary proceeding to seek to hold that debt nondischargeable.

In addition, the New Law adds new subsection 11 USC §1328(a)(4), which excepts from discharge debts:

“(4) for restitution or damages, awarded in a civil action against the debtor as a result of a willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual”.

b. Are there ANY kinds of debts you can discharge in Chapter 13 under the New Law that you cannot discharge in Chapter 7 or 11? Yes, the rest of the kinds of debts specified in 11 USC §523(a), other than the ones listed in §1328 as exceptions to discharge, can still be discharged in Chapter 13 if the debtor confirms and fully performs a Chapter 13 plan.

c. Which is the most important kind of debts that can still be discharged in Chapter 13, even where it can’t be discharged in Chapter 7 or 11?

i. Debts that are debts owed to a spouse or child pursuant to a property division in a divorce are the most significant category of debt, 11 USC §523(a)(15), that can be discharged in Chapter 13, but not in Chapter 7.

d. What’s the bottom line here?: You can still abuse your ex-spouse by discharging the property division (so long as it wasn’t a secured debt) in Chapter 13, if you can confirm and perform a Ch 13 plan; but you can no longer use Chapter 13 to discharge debts for fraud, conversion, embezzlement, breach of fiduciary duty, or wilful and malicious acts that injured or killed someone, or tax fraud/evasion.

e. How does the New Law amend old law §523(a)(15)?

i. The New Law amends §523(a)(15) debts owed to an ex-spouse or child pursuant to a divorce property division to make those debts absolutely NOT dischargeable in Chapter 7 and 11; whereas under the existing law, (a)(15) property division debts are dischargeable if the burden on the debtor if those property division debts are NOT discharged, is greater than the burden onto the ex-spouse if those property division debts are discharged.

53. Does the New Law make any changes regarding alimony and child support, and divorce property divisions?

a. Under existing law, alimony and child support at not dischargeable, per 11 USC §523(a)(5), and this continues to be the case under New Law.

b. However, under existing law, if the alimony or child support debt had been assigned to a governmental agency, then the debt became dischargeable. Assignment to a governmental agency of a debt for alimony or child support occurs where the ex-spouse the Court has ordered to pay the alimony or child support does not pay it, and the other spouse (who is supposed to be receiving the support) and kids therefor have to live on welfare; and as a condition of getting welfare, the wife has to assign the alimony and child support arrearages to the welfare agency. New Law 11 USC 507(a)(1)(A) removes the “assigned to governmental agency” exception, so under the New Law, a debt for alimony or child support will be nondischargeable, even where that debt has been assigned to a governmental agency.

c. Under existing law, alimony and child support are not a priority debt, just a general unsecured nondischargeable debt. The New Law makes alimony and child support an 11 USC §507(a)(1) priority, ie highest priority, regardless of whether claim filed by exspouse/child, or whether the claim has been assigned to a governmental agency, and is filed by the governmental agency. So if there is any money left after paying secured creditors from their collateral, that money will go to pay the domestic support obligation,

i. All other administrative priorites move down one notch, so administrative expenses (except for turstee) are no 507(a)(2) priority, when they used to be 507(a)(1) priority.

ii. DIP counsel is an administrative priority, so DIP counsel in an individual Chapter 7 or 13 case gets paid after the alimony and child support.

iii. Does any other priority claim get paid ahead of child support/alimony?

(1) Trustee fees will be paid before the support obligations, per 11 USC 507(a)( C ), “to the esxtent that the trustee administers assets that are otherwise available for payment of such [the domestic support cliams]” Unclear what that means.

d. Priority claims are not dischargeable in any chapter, and must be paid in full during the life of any Chapter 11 or 13 plan, unless the priority claimant agrees otherwise, which in the case of an ex-spouse is not very likely. Where the pre-petition alimony or child support arrearage is large, it will be infeasible to confirm a Chapter 11 or 13 plan, because the debtor will not be able to pay that arrearage in full over the life of the plan (max. 60 months in Ch 13).

e. New Law expands definition of alimony and child support from pre-petition, to amounts owed DURING case. New Law definition 11 USC §101(14A) “domestic support obligation”. Under New Law, debtor can’t get a Chapter 13 discharge unless the debtor files a certification with the bankruptcy court that the debtor has paid all “domestic support obligations” that came due during the Chapter 13 case, per 11 USC §1328(a). This means you, the attorney, will have to get and file that certification.

f. What about nondischargeability of divorce property divisions under existing versus New Law?

i. Under existing law, 11 USC §523(a)(15) has a balancing test, ie would it be greater hardship on debtor if property division debt is not discharged, or greater hardship on ex-spouse if property division debt is discharged.

ii. New Law strikes the balancing test language out of §523(a)(15), so that divorce property divisions are nondischargeable, period, in Chapter 7 and 11. However, in Chapter 13, property division debts are discharged if the debtor gets a Chapter 13 discharge, because the 11 USC §1328(a)(1)-(4) list of debts NOT discharged by a Chapter 13 discharge does NOT §523(a)(15) in it. Consequently, divorce property division debts can still be discharged in Chapter 13, so long as the Court finds debtor and debtors plan are in good faith, confirms the plan, the debtor fully performs the plan, and the plan provides the property division debt will be discharged to extent not paid through plan.

53A. Under the New Law, what effect do alimony and child support that come due during the Chapter 11 or 13 case have on debtor’s ability to confirm a plan, and get a discharge in Chapter 11 or 13?

g. Per New Law 11 USC §1325(a)(8) and §1129(a)(4), can’t confirm a Chapter 13 or 11 plan unless debtor is current on domestic support that came due after bky filed, as of date plan is being confirmed.

h. Debtor can’t get a discharge in Chapter 13 unless the debtor certifies that all alimony and child support ordered by a court or administrative order that came due during the Chapter 11 or13 case has been paid by the debtor. [11 USC §1328(a) and §1141 ] Is a similar certification required before discharge in 11? [No similar provision I could find].

54. Are there additional changes to nondischargeability in the New Law?

a. Yes, the presumption that chages for luxoury goods are nondischargeable under existing law is presumption that consumer debts owed to a single creditor and aggregating more than $1,225 for luxury goods or services incurred within 60 days before the bankruptcy is filed are presumed to be nondischargeable; and that cash advances aggregating more than $1225 incurred within 60 days before filing bankruptcy are presumed to be nondischargeable; and under the New Law, lower amounts, incurred during a longer period before bankruptcy are presumed to be nondischargeable.

b. What amounts, what periods? Under the New Law, luxury goods aggregating $500, owed to a single creditor, charged within 90 days of filing bankruptcy, are presumed to be nondischargeable; and cash advances aggregating more than $750, charged within 70 days before bankruptcy, are presumed to be nondischargeable.

c. What else in added to 523(a) nondischargeability:

i. The types of educational loans that are nondischargeable are expanded, so that its NOT just “federally insured” education loans that are covered by 11 USC §523(a)(8) “nondischargeability” standard of can’t discharge unless undue hardship to pay back. Now all educational loans fall under 523(a)(8), even where NOT federally insured loans.

(1) And if you take out a loan to pay tax that would be nondischargeable, that loan is nondischargeable. [11 USC §523(a)(14A)].

(2) And loans owed to pension and profit sharing plans are nondischargeable [11 USC §523(a)(18)].

(Section 7 of 10)
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