Special issues concerning debtors
- Debts owed to the federal government may be dischargeable;
- Income taxes may be dischargeable if return has been filed at least 2 years ago and tax liability is at least 3 years old. Example: Bankruptcy filed July 27, 2010, taxes owed for 2006 are dischargeable if no extensions to file were granted;
- Non-tax debts are dischargeable unless they would be nondischargeable for specific reasons, such as fraud or theft.
- Student loan debts are not discharged unless denying discharge would cause "undue hardship." 11 U.S.C. §523(a)(8). The Seventh Circuit applies this test very strictly. See, e.g., Goulet v. Educational Credit Management Corp., 284 F.3d 773 (7th Cir. 2002). In Goulet the bankruptcy court had found undue hardship, but the District Court reversed, and the Seventh Circuit affirmed the denial of discharge. Although debtor faced employment barriers due to substance abuse problems and a felony conviction, those barriers existed when he incurred the student loans, and "did not rise to the level of those additional, exceptional circumstances' necessary to satisfy the second prong of the Brunner v. New York State Higher Educ. Serv. Corp., [831 F.2d 395 (2nd Cir. 1987)] ‘undue hardship' test."
- Alternative for most federally subsidized student loans - Loan consolidation with income based repayment plans (IBRP). Check if your loans are federally subsidized on the Federal Student Aid website.
Bankruptcy affect on cases in other areas
- Child support and alimony are nondischargeable. 11 U.S.C. § 523(a)(5);
- Any other obligations arising out of a divorce or separation agreement, such as an obligation to pay debts, are nondischargeable in Chapter 7 but may be dischargeable in Chapter 13. 11 U.S.C. § 523(a)(15).
- If your former employer files Chapter 11 bankruptcy, you must file timely claim paperwork or your claim will be barred from collecting any claims to unpaid wages or other compensation
- If an employee filed bankruptcy and did not list employment discrimination claim on bankruptcy schedules. After the bankruptcy is closed, employee comes to you, and you start litigating the case. The employee may be judicially estopped from pursuing the case. See, e.g., Burnes v. Pemco Aeroplex Inc., 291 F.3d 1282 (11th Cir. 2002) (employee was judicially estopped from recovering monetary relief, but was allowed to pursue claims for injunctive relief). Even if the case is not dismissed, because the claim was not scheduled, it belongs to the trustee, not the employee. The trustee often settles the case cheaply and the employee gets nothing.
Claims against lenders, brokers, home improvement contractors and other general claims
- Mortgage companies file Chapter 11 bankruptcy. Several large lenders have filed Chapter 11 in the past few years. See, e.g, In re United Companies Financial Corporation, Bankr. Nos. 99-450 to 99-461 MFW (D. Del. 1999). Other large lenders or brokers who have filed bankruptcy include Contimortgage and First Alliance.
- In some cases filing a proof of claim will be sufficient to protect the consumer from having his or her rights erased by the Chapter 11 bankruptcy.
- However, if the Chapter 11 debtor attempts to sell the loan portfolio, purportedly "free and clear" of all defenses which could be raised by the consumer, the consumer may have to object to the treatment of the claim in the Chapter 11 plan in order to preserve his or her right to assert the defense against the subsequent owner of the loan.
- Judicial estoppel is a problem when a homeowner has a claim against a mortgage lender, contractor or anyone else. If the bankruptcy filer fails to list any such potential claim in a Chapter 7 or 13 bankruptcy, it may be dismissed by judicial estoppel when later filed in state court.
Landlord files bankruptcy
- Landlord was not providing utility service prior to filing bankruptcy. Bankruptcy may actually help tenants, because utility must now provide service despite landlord's failure to pay bills.
- Tenant has claim for breach of implied warranty of habitability or other conditions problems. If no action is taken, tenant's damage claims may be discharged or paid at cents on the dollar. Tenant may need to object to landlord's Chapter 11 or Chapter 13 plan to increase payout to tenant.
- Private claims for injunctive relief are stayed. (Governmental enforcement actions are not stayed). Tenant may have to seek relief from automatic stay to be able to pursue action to have conditions fixed.
- Landlord does not return security deposit. In Chicago and any other jurisdiction where landlord is required to keep security deposit in a separate account, landlord's failure to return deposit may be a nondischargeable debt. See 11 U.S.C. § 523(a)(4). However, the tenant must file a timely complaint objecting to discharge of this debt.