Disposal of Secured Property Prior to Bankruptcy

When the borrower on a secured loan against property, such as a mortgage on a home or a car loan, files bankruptcy, the debt is discharged against the property, but the security interest remains. Thus in the case of a car loan after the bankruptcy, the bank may repossess the car, if the borrower fails to make payments, but the bank may not go after the borrower for any deficiency, if they fail to sell the car for the entire amount of the loan.

The question that sometimes arises is what happens, if the borrower has disposed of secured property prior to filing bankruptcy. In the case of a house the mortgage holder could still foreclose on the house, and I suspect they would. What happens though, when a smaller item such as a television or a refrigerator is given away or thrown out before the bankruptcy. The legal answer is that the security interest stays with the property, and if you go bankrupt the retailer could trace down the computer you gave to your Aunt Millie for her birthday and demand it back. The practical answer is that with most types of property it is not worth the effort to trace the property to the new owner, and in affect the debt is discharged.

If the debt is large enough to make it worth while though, which is more likely to be the case in business bankruptcies than consumer bankruptcies, the secured creditor may have an additional remedy. Disposing of property in violation of the terms of the secured loan agreement is conversion, which is a tort. Under Federal Bankruptcy Law, if a debtor has committed a willful and malicious tort the creditor may bring an action in bankruptcy court to declare the debt nondischargeable.

Can Fraud Issue Be Raised For The First Time in Bankruptcy Court

While bankruptcy allows individuals in need of a fresh financial start to discharge many of their debts in bankruptcy, certain categories of debts are nondischargeable. Some debts are automatically not dischargeable, such as child support or criminal fines. Others types of nondischargeable debts though, such as loans obtained through fraud, place the burden of proof on the creditor to convince the bankruptcy court that he or she should be allowed to collect the debt.

Thus a bankruptcy attorney will sometimes find it necessary to defend an adversary action filed by a bank or a credit card company, seeking to hold the debt nondischargeable on the grounds of fraud. However, often by the time an individual files a bankruptcy, a creditor has already brought a lawsuit in a state court to collect the debt, and the question can arise whether he can claim fraud in his bankruptcy claim, when he never brought the matter up in the state court.

In most cases the bankruptcy courts have ruled that not having previously complained of fraud does not permanently bar pleading the grounds in a bankruptcy action. The courts realize that as a practical matter, whether fraud existed or not, the creditor has little reason to raise the issue in state court, when all he has to prove is that the money is owed, and the judges tend to believe that it would be unfair to permanently bar the creditor from raising the argument, merely because he or she failed to anticipate the subsequent bankruptcy filing.

Discharging Income Taxes In Chapter 13 Bankruptcy

As a bankruptcy lawyer I frequently have to inform people filing Chapter 7 bankruptcy that their income tax debts will not be discharged. Income taxes will not be discharged, if less than three years has passed since the due date of the tax return, if less than two years has passed since the actual filing of the tax return, or if the taxpayer made a willful effort to evade or defeat taxes.

Since a chapter 13 bankruptcy  discharges many debts that are not discharged in a Chapter 7 the next question is will the income taxes be discharged in a chapter 13. The answer is yes "sort of."

While a chapter 13 will discharge income taxes one of the rules for a chapter 13 plan is that it will have to pay off 100% of priority debts through the plan. And to make it more complicated, some nondischargeable income taxes are priority debt and others are not.

If it less than three years since the due date of the tax return, the unpaid taxes are a priority debt, and the chapter 13 plan must pay them off in their entirety. However, if the three years has passed, and it is less than two years since the actual returns were filed, or if the taxpayer made a willful effort to evade or defeat taxes, the taxes become general unsecured debts, and the plan merely has to pay the IRS the same percentage that unsecured creditors receive.

Personal Property and The Homestead Exemption

Illinois law allows an individual to exempt up to $15,000.00 of equity in his or her home from claims brought by a creditor. For a married couple owning the home jointly the exemption would go up to $30,000.00. In many cases this provision will allows people who file a Chapter 7 Bankruptcy to keep their home.

One does not necessarily have to own a house or a condo though to take advantage of the homestead exemption. The Illinois Statute provides that the homestead exemption will also apply to personal property provided it is used as one’s principal residence. Thus a couple, who live in mobile home, can protect up to $30,000.00 of the value of the home from creditors provided they own it jointly. The exemption would also apply to a boat, if the owner uses the boat as his or her principal residence.

The wording of the statute in fact covers all personal property, so it could even apply to a car, or a tent, or an airplane. The tricky part once you get beyond mobile homes and boats though, might be to convince a court that you are really using the item of personal property as your primary home.

Exemption of Your Home From Creditors

As a bankruptcy lawyer I frequently have people ask me whether they can stop creditors from taking their homes.

This is not a question where one answer fits all though, and while creditors can sometimes take a debtor’s home, there are a number of factors that will stop this from happening in most situations.

One such factor is the homestead exemption under Illinois law. The law allows you to exempt up to $15,000.00 of your home value from creditors. Or in the case of two people owning a home jointly up to $30,000.00.

While there are not many homes in Illinois that are worth less than $30,000.00 keep in mind that other than when dealing with a mortgage foreclosure you only need to protect your equity in the home. Thus a married couple with a jointly owned home worth $300,000.00 home and a $250,000.00 home should be safe. This is because after subtracting out the mortgage and the cost of selling the home (which would normally be more than $20,000.00 for a home of this value) there is less than $30,000.00 of equity which the homeowners need to protect.