- Chapter 7 Trustee Exemption Objections
- Abusive Chapter 7 Filings
- Debt Dischargeability Disputes
- Violations of the Automatic Stay & Discharge Injunction and Motions for Relief from the Automatic Stay
- Lien Avoidance Actions
- Chapter 13 Bankruptcy: Routine Litigation
- Litigation in Michigan Bankruptcy: The Bottom Line
The majority of Michigan Chapter 7 and Chapter 13 bankruptcy cases do not require any adversarial litigation to speak of.
Instead, a typical consumer bankruptcy case in Michigan, when its required petition and schedule and other component documents are properly drafted and filed by an experienced bankruptcy attorney, generally goes as planned. That is, a lot of information is disclosed, a predictable and routine Federal legal process unfolds—and the debtor walks away from unmanageable debt with a truly fresh start in life ahead.
However, bankruptcy is, at the end of the day, an adversarial process like most other legal processes.
That is, it is not simple “form-filing.” Presuming that it is or that a bankruptcy attorney will not be needed for your Southeast Michigan Chapter 7 or Chapter 13 bankruptcy case is often the thing that makes a “simple” case even more adversarial.
Your creditors do not love having their debts discharged, in particular. They would much rather continue to hound you for payment than to raise their hands in defeat before a Federal Bankruptcy Judge.
Most professional creditors (and, certainly—for the most part—the attorneys working for creditors in the bankruptcy process) understand what the US Bankruptcy Code requires of them from the moment a Chapter 7 or Chapter 13 bankruptcy case is filed. Regardless, if there is a way to have an order entered exempting their debt from your discharge or to have your case dismissed entirely, they will pursue it.
That’s how the US legal system works: you against somebody else, nearly always. Your creditors are the “somebody else” in the bankruptcy process.
But they aren’t the only ones.
There are other parties of interest in your bankruptcy case. Your Chapter 7 or Chapter 13 Trustee, certainly, are possible litigants in your “easy” bankruptcy case. Likewise, the United States Trustee can have your case dismissed. Your ex-spouse can cause a lot of trouble. Your business partners or employees can even raise litigation in your bankruptcy case if you are a business owner or investor.
This Article will describe a few of the possible scenarios in which litigation can happen in a Michigan bankruptcy case.
Chapter 7 Trustee Exemption Objections
The Chapter 7 Trustee is the US Department of Justice minion assigned to “administer” a Chapter 7 Bankruptcy case by what is known as the US Trustee’s Office (“UST”). The UST is responsible for, generally, ensuring that those acting within the bankruptcy process in the US do so in compliance with the US Bankruptcy Code.
The UST charters Chapter 7 Trustees to administer Chapter 7 bankruptcy cases and Chapter 13 Trustees to administer, you guessed it, Chapter 13 bankruptcy cases.
More on the UST and Chapter 13 Trustees below.
In the case of Chapter 7 bankruptcies, the Chapter 7 Trustee administers the case in the sense that he or she will review everything that you file, ensure that it is not correct or fraudulent, preside over your 341 Meeting of Creditors hearing and file various reports with the Bankruptcy Court to move your case along toward discharge after that.
The Chapter 7 Trustee, really, however, administers the assets of the so-called “bankruptcy estate” that is created automatically by function of law when you file your (Chapter 7 or Chapter 13) case. The moment you file a bankruptcy case, all of the property you own or have an interest in or a claim upon becomes an asset of this bankruptcy estate.
Why is this?
Chapter 7 is a “liquidation” bankruptcy. That is, if you own property that is valuable, it will be seized and liquidated in order to generate a pool of cash from which your creditors can be at least partially paid on the debts you owe to them.
Most Chapter 7 bankruptcies in Detroit, however, do not result in any property liquidation. This is because the Bankruptcy Code allows you to remove some (or even all) of your property from the “bankruptcy estate.” This is accomplished through the process of applying statutory “exemptions” from the Bankruptcy Code or Michigan state law to each item of property disclosed in your petition schedules.
Exemptions are just statutory language, in other words, that allow you to remove certain types of property up to certain dollar-value maximum caps only from the bankruptcy estate.
If an item of property is fully exempted up to its full fair-market value, the Chapter 7 Trustee cannot seize and liquidate it.
However, Chapter 7 Trustees are paid for their efforts with a percentage of everything that they do liquidate for creditors. If they don’t think that the exemptions you or your bankruptcy attorney apply to an item of property, they will object to it—and you’ll end up arguing the point in front of your bankruptcy judge.
Abusive Chapter 7 Filings
The US Trustee’s Office mentioned above doesn’t just sit around chartering Chapter 7 and Chapter 13 Trustees. It plays its own oversight role in the bankruptcy process.
It acts, essentially, as the “bankruptcy police.” If you prepare your petition schedules fraudulently, file Chapter 7 bankruptcy when your Means Test and circumstances require you to file Chapter 13 instead, hide assets, misrepresent the value of assets, among other things, the US Trustee will move to dismiss your case.
In some cases, the US Trustee will also pursue you criminally for bankruptcy fraud, which is a Federal felony crime carrying a potential 5-year prison sentence.
Debt Dischargeability Disputes
What can your creditors do when you file for bankruptcy? Generally speaking, not much, except file claims with the court and otherwise monitor your case from afar.
However, if you have incurred a debt fraudulently or are attempting to discharge one of the forms of debt that is not actually dischargeable, your creditors do have the right to contest either the dischargeability of their particular debt or your discharge entirely, if they can allege that it was filed in “bad faith.”
What is bad faith? Different bankruptcy courts have elaborated different definitions, but the recent dismissal of Alex Jones’ Infowars bankruptcy case, which was filed in sad attempt to shield Jones from the defamation claims of Sandy Hook victims’ families is one recent example.
You also have the ability to file an adversary proceeding within your own bankruptcy case to obtain order stating that a certain debt IS dischargeable when your creditors might otherwise be inclined to disagree.
This is, in fact, the only way to have student loan debt discharged in the Sixth Circuit Federal Court of Appeals jurisdiction, which includes Michigan. Student loans are otherwise non-dischargeable by default.
Violations of the Automatic Stay & Discharge Injunction and Motions for Relief from the Automatic Stay
Litigation in Michigan bankruptcy cases can also be something that your own bankruptcy lawyer initiates on your behalf, such as in the case of student loan dischargeability noted above.
There are other opportunities to go on the attack in a bankruptcy proceeding as well.
When you file for bankruptcy, a Federal injunction known as the Automatic Stay against Collections activates. This Automatic Stay prohibits all creditors, with only a few exceptions, from engaging in any sort of collections activity throughout the pendency of your bankruptcy case. In the case of a Chapter 13 bankruptcy, this can be as long as 5 years.
A creditor who violates the Automatic Stay can be sanctioned on your motion. And should be.
Likewise, once you receive your discharge, a creditor whose debt has been discharged who then attempts to collect it anyway can still be sanctioned under the separate (and permanent) Discharge Injunction. (This requires an initial motion by your Michigan bankruptcy attorney to reopen your case, first.)
During your bankruptcy case, a secured creditor, landlord, or other can also seek relief from the Automatic Stay by motion if they are entitled under the Bankruptcy Code to proceed with a foreclosure, repossession, eviction, or other such action.
Lien Avoidance Actions
To a limited extent in Chapter 7 and to a greater extent in Chapter 13 bankruptcy, you have the ability to avoid or remove liens that have been recorded your assets or income.
In Chapter 7, Michigan state court-ordered judgment liens can be avoided on your motion, for example.
In Chapter 13, on the other hand, you can avoid not only judgment liens but also second or third mortgages on properties worth less than is owed on a first, primary mortgage, “cram” the value of the balance owed on a secured vehicle loan to the actual value of the vehicle, as well as a number of other enormously valuable options.
The ability to avoid a lien is a principal advantage of the US bankruptcy process. Depending on the sort of lien being avoided, it is accomplished by the filing of a motion or a separate adversary proceeding (lawsuit) within the bankruptcy case.
Chapter 13 Bankruptcy: Routine Litigation
Despite the claim at the top of this Article that litigation is somewhat uncommon in the bankruptcy process, this is far less true in Chapter 13 bankruptcy proceedings. Rather, it is more true to say that litigation of one sort of another is part of the routine Chapter 13 process.
That is, it is routine if you have retained an experienced bankruptcy attorney who does not simply say, “Okay” to all assertions made by the Chapter 13 Trustee and your secured creditors.
It is the job of a Chapter 13 bankruptcy lawyer to be aggressive and to litigate as needed to preserve the affordability of what can be, for you, an expensive and lengthy legal process.
In order to be paid anything, for example, creditors in Chapter 13 proceedings must file a document called a Proof of Claim with the Bankruptcy Court, on your case docket.
These forms ought to contain all of the information and documentation necessary to prove to the Court and to the Chapter 13 Trustee, who pays these claims from your monthly Chapter 13 Plan payment, that the debt is legitimately and legally owed.
Yet—a great many Proof of Claim forms filed in the Eastern District of Michigan fall short of accomplishing this. It is your bankruptcy lawyer’s job to review each and every Claim filed and to object by a form of motion to any legal insufficiencies, unless there is some reason not to (a claim for $1.02, for instance, may not be worth worrying about).
In Detroit in particular, further, Chapter 13 Trustees love to object to the Confirmation (approval) of nearly each and every debtor’s Chapter 13 Plan. The Trustees locally (less so elsewhere in Michigan) routinely file a profuse number of objections to debtors’ Plan provisions, income, expenses, documentation—whatever.
If they can latch onto it, they will object to it.
A Chapter 13 Plan will not be approved unless these objections are overcome. They are “instant litigation.”
After a Chapter 13 Plan is finally approved and Confirmed, any change or modification of your Plan that you initiate after a change in your income, employment, or other life circumstances is very likely to be met with opposition as well.
Litigation in Michigan Bankruptcy: The Bottom Line
The bottom line is that, to ensure the success and the comprehensive effect of your Chapter 7 or Chapter 13 bankruptcy discharge of debt in Michigan, you need to work with an attorney experienced in bankruptcy litigation.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Chapter 7 and Chapter 13 clients in the Detroit area for over 30 years.
If you are considering filing for bankruptcy in Michigan, contact us now to schedule you initial consultation—and begin our conversation.