Question Discharge Debt not actually "discharged"?

[Pandorasbox]

I joined this forum for research on a paper I am writing for class on the topic of consumer credit and this forum has been a huge eye opener.
One of the things that I find most confusing is the "discharged debt" issue. As I understand it, once debt is discharged, the trustee can still spend as much time as he wants liquidating "assets" of the debtor to pay creditors.

This seems to be a contradiction in terms. If the debtors debt is formally discharged, I thought that meant that their obligation to pay their debt has been nullified, because they qualified for bankruptcy.

However, if their remaining assets can then be liquidated to pay their debts on an open ended basis, they are in effect paying at least part of their debt, so how is that considered to be a discharge?

My assumption is that if an individual qualifies for Chapter 7, it is because they truly can't afford to pay their debts. Otherwise, they would be moved to a Chapter 13....or disqualified to file altogether.

If they truly can't afford to pay their debt, how does selling their only assets that are non-exempt by often very draconian exemption rules (such as a car they need for work, or their home that has a current mortgage) giving them a "fresh start"?

I do understand the exemption issue in terms of homestead allowance, but it seems at times that homes are sold ( or at least attmpted to be sold) by the trustee even if the end amount is very small in comparison to debt owed.

This leaves the debtor homeless, with very little if any money to buy another car, or find adequate housing.
Where is the fresh sart in all of that?

Last but not least, it seems that the debtor should be told upon filing that their house and or car can be up for grabs in order that they can decide if bankruptcy would be a worse alternative and choose to not file.
It seems that people don' t find that out until later in the game.

If I am incorrect in any of my understandings I would appreciate some clarification,
Thanks in advance for any info that can be supplied.

[keepsmiling]

You bring up some very good questions.
Rules vary widely from state to state. Some states are truly draconian in certain areas. Others are far more lenient and that fresh start comes about more readily.
I believe the law should be the same in every state and set up to really give a fresh start.

However- the other part of the fresh start is often about increasing income- and that's not always so easy.

The solution partly is to make bankruptcy less secretive and scary and in general, for people to educate themselves about major life decisions in general. Society/banks have done such a good job of maligning even the the thought of it that many of us were terrified to even consider the possibility. It took me months to find this forum because I was so afraid of the whole concept. For some people, information comes too late if ever- once they have been pushed off the cliff.

From another perspective, once upon a time tt's salivated at the juicy equity growing in homes and were probably happy to "just" take them. Some of them are still living for the good old days with little concept of reality when it comes to market value and perhaps a sense of desperation. Nowadays with so many underwater properties and tt's expenses remaining the same or higher, they need to work harder at making a living. Kind of like realtors. The good part about that is that fewer people are losing their homes to a tt and a bk can often strip the underwater part and really give owners their new life.

It would be great if you would share your paper with the forum.

[despritfreya]

The point of fact is that bankruptcy is Federal law. It is the same law in every State, Puerto Rico and Guam. There are undertones of state law, such as the use of exemptions and what determine “property rights” but the core of the law is Federal and uniform. What is different is how each jurisdiction interprets the law. When there is a split in the interpretation, eventually the issue goes to the USSC for final resolution.

A discharge is nothing more than an court imposed injunction. It prohibits a creditor from trying to collect on a discharged debt against the debtor. Well, actually, it is a defense to such efforts. The Trustee’s liquidation of assets and then distribution of the funds to creditors in the bk is a separate issue. A debtor has to give up non-exempt assets if the debtor wants the protection of a discharge. That is the trade-off. A Trustee then uses those assets to pay as much of the discharged debt as is possible.

For the most part, the system is fair to both debtors and creditors alike. A debtor gets a fresh start and a creditor gets whatever it can out of the bk estate.

The issue of “fairness” however, is relative and, while it seems draconian for a debtor to lose a home because the equity exceeds the homestead, that same debtor had a choice not to file a Chapter 7. Hopefully that debtor was properly advised that filing a 7 would be a risk. Hopefully that debtor made an informed, intelligent decision not to elect a Chapter 13 or 11. The fact that he or she opted for a 7 does not necessarily mean he or she could not afford a 13. There are many ways to “fund” Chapter 13s in an effort to protect non exempt assets.

The problem lies in whether or not the debtor finds competent counsel, is given bad advice or simply decides to blindly file a bk without the necessary understanding of what can and cannot happen. This issue alone is why forums like bkforum are so important. It is also why when folks use such forums they need to be careful and investigate the information contained in them. They then need to take their new found “knowledge” and put it to the test by talking to many attnys. Just like when consulting with a doctor, one does not rely on just one or two opinions. The more knowledge the debtor acquires before filing bk the less likely he or she will be surprised with the outcome when he or she does file.

Please continue to read through the various threads at bkforum. As a long time practitioner I can tell you that the posts here are nearly always spot on accurate or, if wrong, are eventually corrected. It is by far one of the most accurate layperson sites I have seen and even rivals some of the lawyer sponsored roundtables I participate in.

Des.

[joshuagraham]

Here's the situation with bankruptcy discharge and assets. When someone files for Chapter 7 (NOTE: Chapter 13 is different), he agrees to forfeit all his non-exempt assets to the bankruptcy court (which goes into his own personal bankruptcy estate) - while, of course, keeping all his exempt assets - in exchange for the court to give him a legal discharge of his debts. That bankruptcy estate is then liquidated, with the proceeds to be doled out the creditors and the bankruptcy trustee (who earns a commission on whatever assets he can bring into the estate.) Typically, this commission is per a statutory formula that is a high rate for the first bracket of amount and then goes to lower rates for the higher brackets. What is left over then gets divvied up to the creditors. I know for my Chapter 7 case, all I had were unsecured creditors, so they each got an amount in proportion to the owed debt. (I can't speak for secured creditors, as I have no experience with them.) Also, if the debtor does want his physical assets (i.e., stuff, as opposed to cash in the bank or invested in stocks, etc.) liquidated, then he can negotiate with the trustee to buy them back, with cash he somehow gets after the filing date, either through income from a job, a distribution from a retirement account (which would be exempt), or a gift from someone; typically the trustee is quite interested in not having to sell the stuff at auction, and so will take a decent offer.

So you see, a Chapter 7 bankruptcy basically "zeroes out" the debtor so he has nothing (other than the exemptions, which can be a lot - they were about $300K for yours truly ) The court takes the debtor's assets and gives him a discharge. It is only from the bankruptcy estate (i.e., that contain the forfeited assets) that goes to paying back creditors.

As for Chapter 13, AFAIK, the deal is that the debtor is allowed a certain low level of basic living expenses (with the level of expenses being something being negotiated between the trustee and the debtor's attorney), with all the excess income being forfeited to the court, from which the trustee distributes to the creditors (after his commission, of course), for a period of 5 years. The key difference between Chapter 7 & 13 is that Chapter 13 does not require the forfeiture of assets, but essentially forces the debtor to forfeit all his disposable income for those 5 years - while Chapter 7 requires the forfeiture of assets, but without any proceeding forfeiture of disposable income afterwards.

So how to choose? If the debtor has an income below the median for his state (after certain deductions), then he has the ability to choose Chapter 7, and the trustee cannot force him to choose Chapter 13. However, if his income is above the median, then the trustee can enforce a choice - which he would do which would maximize his commission, and thus the amount recovered for the creditors. Since most folks going to bankruptcy have more or less exhausted their liquid assets and have little equity in their home (something very common these days!), a Chapter 7 bankruptcy would entail the least financial pain, so folks typically want to do a Chapter 7. You can go lurk in the Chapter 13 forum to read about the woes there.

[helpmeout]

So how to choose? If the debtor has an income below the median for his state (after certain deductions), then he has the ability to choose Chapter 7, and the trustee cannot force him to choose Chapter 13. However, if his income is above the median, then the trustee can enforce a choice - which he would do which would maximize his commission, and thus the amount recovered for the creditors. Since most folks going to bankruptcy have more or less exhausted their liquid assets and have little equity in their home (something very common these days!), a Chapter 7 bankruptcy would entail the least financial pain, so folks typically want to do a Chapter 7. You can go lurk in the Chapter 13 forum to read about the woes there.

It is my understanding that the Chapter 7 trustee and the Chapter 13 trustee are not the same. So if the case converts, there is going to be a new trustee who would be getting the commission from the Chapter 13 payments. The reason for that is so that the trustee doesn't attempt to illegitimately increase their commission by forcing someone who qualifies for a 7 into a 13.

[joshuagraham]

It is my understanding that the Chapter 7 trustee and the Chapter 13 trustee are not the same. So if the case converts, there is going to be a new trustee who would be getting the commission from the Chapter 13 payments. The reason for that is so that the trustee doesn't attempt to illegitimately increase their commission by forcing someone who qualifies for a 7 into a 13.

OK, that makes sense. IOW, the Chapter 7 trustee will have the incentive to try and squeeze the filer into a Chapter 7, with only being concerned that the US Trustee overlord will concur (and I suppose that such a trustee would not want to "rock the boat" by excessively squeezing such filers, lest he would lose his position.)