Many people shudder at the idea of having to spend money on dreaded attorney’s fees. Especially with respect to civil matters, such as bankruptcy, people look for ways to avoid spending money on legal services. While everyone has the right to represent themself in any legal matter, people must also understand that the laws and practices of a court apply to them just as much as they do a seasoned attorney. Below is a list, in no particular order, of the top five misunderstandings that many pro se consumer debtors encounter (and often lead to unintended consequences).
1. Misunderstanding Reaffirmation
Generally, in bankruptcy, when it comes to secured property, a debtor has one of three options: redeem (pay full value of the property to keep it), surrender, or reaffirm. In bankruptcy, the discharge terminates personal liability on a debt. A reaffirmation, in contrast, is where the debtor, pursuant to a reaffirmation agreement, reinstates personal liability on the debt that secures the property. A reaffirmation agreement must be filed within certain time periods, including before the discharge order is entered. Moreover, a hearing is held to determine whether the reaffirmation agreement should be approved.
Lenders, often in the case of vehicles and real property, will alter billing, restrict account access, or engage in other practices to strongarm a debtor into accepting a reaffirmation agreement. Without a careful understanding of what reaffirmation really does, in light of a debtor’s circumstances, a pro se debtor will often sign the reaffirmation agreement at the insistence of the lender to keep the property. A recent case out of the Bankruptcy Court for the Eastern District of New York evidenced this, where a pro se debtor signed and accepted a reaffirmation agreement, and then wanted to rescind the agreement after the case was over because she defaulted on payments (and, presumably, to add the debt as a debt to be discharged). In re Galloway-O’Connor, 15-70981-AST (Bankr. E. D. N. Y., Sept. 29, 2015). Ultimately, the lesson is that you should avoid entering into an agreement, especially in bankruptcy, if you do not fully understand the consequences that flow from the agreement.
2. Misunderstanding the Automatic Stay When There is a Repeat Filing
In light of the flood of foreclosures in the last half-decade, homeowners often turned to bankruptcy to take advantage of the automatic stay to stop a foreclosure sale from moving forward. It is true that, upon the filing of a bankruptcy case, an automatic stay goes into effect that prohibits activity attempting to enforce or collect a debt, including lawsuits. There are limitations on the automatic stay, however, especially for repeat filers.
Homeowners in this context often filed a chapter 13 bankruptcy petition to stop a foreclosure. Many would let the case sit there and, eventually, get dismissed. The lender, after dismissal of the bankruptcy case, would file papers to proceed with the foreclosure, only to have the homeowner again file a skeleton chapter 13 petition.
Sometimes this strategy would work, in the case of lender’s attorneys that did not understand bankruptcy law. Notwithstanding, in the case of repeat filing within six months, the automatic stay is limited to thirty days. The debtor has to file a motion asking for a court order extending the stay, and this motion must be heard before the expiration of the thirty days. Subsequent filings are presumed to be in bad faith.
Lacking an understanding of these rules and procedures have often left a homeowner thinking that they were under the protection of the bankruptcy stay, only to have their home foreclosed from under them.
3. Misunderstanding the Application of the Discharge
From my own experience with my clients, there is a misconception of the bankruptcy discharge. There is a pervasive belief that when someone files for bankruptcy and obtains a discharge, not only are their debts discharged, but all of their property rights are terminated. I have found this belief prevalent among homeowners that held investment properties out of state, were casualties in the foreclosure bubble, and wanted to walk away from their properties. They walked into my office to file bankruptcy “and just have the bank take the property back.” I had to explain to them that filing for bankruptcy terminates personal liability on the note; that it has no impact whatsoever on title to the property; and the mortgage remains enforceable against the property (although there is an increasing body of law where courts have entered orders outside of the main bankruptcy case returning real property back to the lenders). I always ask multiple times whether the client understands this, and, maybe in the excitement of the prospect of not being liable on the debt anymore, they respond yes.
Then comes that first phone call asking why monthly billing statements still have their name on it, or why the tax and sewer charges are still being billed to them. The bankruptcy discharge does not terminate ownership rights (unless the property is taken and administered by the trustee). The bankruptcy discharge does not terminate a mortgage or other lien (unless motions seeking such relief are filed and granted). The discharge terminates personal liability on secured debts. A creditor is still able to enforce any rights it may have against the secured property, such as foreclosure or repossession.
4. Misunderstanding Exemptions
Exemptions make or break a bankruptcy case. While laws exclude certain property from ever being part of a bankruptcy estate, exemptions must be used by debtors to protect and remove property that is part of a bankruptcy estate. A misapplication of exemptions can easily lead to monies in a bank account being turned over the trustee, a car being liquidated by the trustee, or even a house being liquidated.
I once sat and witnessed a hearing whether the pro se debtor failed to exempt her vehicle. I have witnessed hearings where pro se debtors will mix and match between state and federal exemptions, which is impermissible. I have witnessed pro se debtor hearings where, due to lack of planning, had to turn over funds that would have otherwise been exempt (or even not part of the bankruptcy estate). A firm understanding of exemptions and how they operate is crucial to a successful bankruptcy case.
5. Misunderstanding Tax Dischargeability
Tax liabilities are just one of those things. There is a vague idea that, in addition to student loans, debts owed to governments (most notably taxes) are not dischargeable in bankruptcy. The fact is that debts owed to government units (including certain kinds of tax liabilities) (and, even in some cases, student loans) are dischargeable. This just takes a very solid understanding of the details of bankruptcy and state law, which is beyond the scope of this post. Additionally, certain actions can make it more difficult to discharge a tax debt in bankruptcy, such as entering into some kinds of agreements. If tax liabilities are on your plate, consult with a bankruptcy attorney to see whether such liability may be discharged in a bankruptcy case.
If you have questions about bankruptcy and thinking about whether bankruptcy is right for you, contact LORK for a free, no-obligation consultation.