Veterans' Benefits and Bankruptcy

“I Didn’t File Bankruptcy On That!”

Nonlawyers sometimes use bankruptcy phrases that don’t have parallels in the Bankruptcy Code or in actual practice.  Here are some examples:

“Thrown into bankruptcy.”  This phrase is probably a leftover from the distant memory of English debtors’ prisons.  It is possible to be figuratively “thrown into” a Chapter 7 or Chapter 11 bankruptcy using a complicated and arcane tactic known as an “involuntary” petition.  It usually requires three or more creditors to join together and file a petition against someone else.  It is not to be embarked upon lightly and involves no actual throwing, tossing or defenestration.  The vast majority of bankruptcy cases – and all Chapter 13 cases – are filed voluntarily.  Can you throw yourself into bankruptcy?  It sounds physically impossible.  One bad cliché deserves another, so remember that it’s always best to look before you leap.  If you are considering bankruptcy, start by wading in.  Talk to an experienced bankruptcy professional and review all of your options. 

“The bankrupt.”  A person filing for relief under the Bankruptcy Code is referred to as a “debtor.”  Calling them “a bankrupt” went out of style in 1978 when the Bankruptcy Code replaced the Bankruptcy Act of 1898.  Referring to a debtor as “the bankrupt” in 2019 will make you sound like C. Montgomery Burns from The Simpsons! 

“Use bankruptcy against me.”  This one is closer to the mark when used by someone with a claim in a bankruptcy case.  Bankruptcy cases should be filed in good faith and are rarely used “against” a particular person.  Instead, debtors exercise their rights under the law to deal with their debts.  Creditors have rights under the Bankruptcy Code too.  Bankruptcy tends to be far less adversarial than other areas of the law.  Law suits are usually styled “plaintiff versus defendant,” but most bankruptcy cases are about adjusting or reorganizing debts; nobody has to be “against” anyone. 

“Not in the bankruptcy.”  This last one is the source of much confusion, and the subject of the rest of this post. 

Sometimes at the meeting of creditors (a meeting that takes place in every bankruptcy case, where the debtor is examined under oath), the trustee asks the debtor about motor vehicles or other property, and the debtor responds: “Yes, but I didn’t file bankruptcy on that!”  The Bankruptcy Code requires complete, accurate and truthful information.  When filing bankruptcy you are required to list all of your debts and assets.  This allows everyone (you, your attorney, creditors, the trustees and court) to have a complete picture of your financial situation. 

So what’s “in the bankruptcy”?  Practically everything.  Section 541 of the Bankruptcy Code says that when a bankruptcy case is filed an “estate” is created, consisting of virtually any interest that you would have in any property “wherever located and by whomever held.” 

Leaving required information out of your bankruptcy case is not an option.  The far better course is to carefully list all assets and debts, then address them appropriately in the bankruptcy case.  Disclose, then explain.  This is the best way to deal with the notion that something you own or a debt you owe should “not be included in the bankruptcy.”  Here are some examples:

• “It’s not really mine.”  You might have a vehicle titled in your name that someone else actually pays for, or you might be named on a bank account for emergency purposes but never put money in the account.  In those situations you might only have “bare legal title,” or would not be the “equitable owner.”  But the fact that you are listed on the title or bank account means you need to disclose that connection.  It’s very helpful in these situations to have documentation showing, for example, that someone else made the vehicle payments, or the money in the account came from a source that has nothing to do with you.  

• “A cosigner is paying for that.”  If a cosigner will continue to make payments on the debt, there may not be a problem.  Schedule H to the bankruptcy petition requires disclosure of all cosigners, so the details need to be listed.  Chapter 13 has a special rule that protects cosigners on a consumer debt while the bankruptcy case is pending.  You can also pay cosigned debts in full in a Chapter 13 case to protect a cosigner.

• “I’m keeping that.”  Bankruptcy is often all about keeping your property.  But you do need to list the property and declare that you intend to keep paying.  In a Chapter 13 case you do this in the plan.  You can sometimes reduce the principal and interest that you are paying, or you can choose to leave the creditor as is, totally unaffected by the bankruptcy filing.  In a Chapter 7 case, where the creditor has collateral you have to indicate whether you want to keep paying according to the contract (reaffirm), pay off in a lump sum (redeem), or surrender the property. 

• “I’m paying that outside the bankruptcy.” The phrase “outside the bankruptcy” makes Chapter 13 Trustees wince.  As explained above, just about everything is “in the bankruptcy,” but debts can be treated many different ways in the case.  What is often meant is that you intend to pay the debt “directly” to the creditor, and not as part of your Chapter 13 plan payment.  In a Chapter 7 case that often means a debtor wants to keep paying the debt, reaffirming it if necessary. 

• “I’m not behind on that debt.”  Even if the bankruptcy filing had nothing to do with a particular debt, it still needs to be listed, for all of the reasons explained above. 

• “It isn’t worth anything.”  Even an old car or boat rotting in your back yard should be listed.  The same goes for an open bank account with no balance, even if you never use it.  You are probably correct that these items are more of a burden than anything else.  Maybe you just haven't gotten around to getting rid of the car or boat, or closing the account.  But the fact that you do own these items means they should be listed, even if you place a value of $0.  Leaving an item out of your list of assets can raise unnecessary questions, and could lead to concerns about whether your list of possessions is really complete and accurate.  

It has never been easier for someone to research and discover information about you.  Asset searches are widely available. The information in your bankruptcy petition can be verified in a matter of seconds.  Leaving even a minor asset out of your list of possessions can lead to complications in your case.  You could be giving ammunition to a creditor who has a bone to pick, could slow down the processing of your case or, in a worst-case scenario, you could be investigated or prosecuted for federal bankruptcy crimes.  In the vast majority of cases, information isn’t held back for dishonest reasons, but from a simple misunderstanding about what the Bankruptcy Code requires, or the reason why providing the information is necessary. 

The7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit the website at narmorelawoffice.com. 

Narmore Law Office LLC is a debt relief agency that helps people file for relief under the Bankruptcy Code.