The United States Bankruptcy Appellate Panel for the Eighth Circuit recently released a decision affirming a lower federal bankruptcy court’s decision permitting a bankruptcy debtor to discharge a debt he owed to a county jail for incarceration costs as part of his Chapter 7 bankruptcy. Representatives of the county to which the debt was owed appealed the bankruptcy court’s ruling, but the appellate panel’s decision favored the debtor, holding that federal bankruptcy law allows the discharge of the debts. Based on the recent appellate ruling, the debt owed by the man for his incarceration costs will remain discharged, and he has no obligation to repay it.

Jail FenceThe Debtor Attempts to Discharge a $3,500 Debt for Incarceration Expenses Through Bankruptcy

The debtor in the case of County of Dakota v. Milan was a man who sought debt relief through a Chapter 7 bankruptcy proceeding in 2014. Among other debts and obligations, the debtor requested the discharge of a $3,500 debt that he owed to the appellant, the Dakota County Sheriff’s Office, for the costs of his 179-day incarceration at the Dakota County Jail. Like many jails and prisons throughout the country, the appellant charges inmates daily fees to contribute toward the expenses of their incarceration. During the initial bankruptcy proceedings, the court ruled that the unsecured debt owed to the appellant should be discharged, leading the Sheriff’s Office to file an appeal.

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A popular online meme that came out earlier this year pointed out that over 500,000 Americans declare bankruptcy because of medical bills each year, and it was often used to criticize the medical and financial institutions of the United States. According to a recent fact check performed on the claims behind the meme, the numbers may not be exact but appear reasonably accurate. The larger issue surrounding the viral spread of the meme online is the misguided criticism of the United States bankruptcy code. In reality, many Americans are able to use U.S. bankruptcy protections to regain control of their finances after incurring excessive medical debt that was necessary to save their own life or the life of a loved one.

StethoscopeMore Personal Bankruptcies Are Filed Over Medical Debts Than Any Other Type of Debt

Putting the relatively insignificant dispute over the exact numbers aside, both the source of the popular meme and the fact checkers who wrote the article agree that more personal bankruptcies are filed to address medical debt in the U.S. each year than over any other source of debt. The reasons for this vary, but medical debts may result in so many bankruptcy filings because they are rarely secured by collateral, can increase very quickly to reach levels that are impossible for many debtors to pay off, and are often incurred while patients are suffering from medical problems that prevent them from working. According to a 2013 congressional report cited in the article, over 640,000 medical bankruptcies were filed in American courts in 2013. Many of these cases resulted in large amounts of medical debt being discharged.

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The United States Court of Appeals for the Seventh Circuit recently released a decision allowing creditors to make claims in a debtor’s bankruptcy case for the repayment of debts that would otherwise be time-barred and ineligible for collection through a standard debt collection lawsuit. The Seventh Circuit decision was in line with other federal appellate court rulings that declined to apply the protections of the federal Fair Debt Collection Practices Act (FDCPA) to creditors’ actions within a debtor’s bankruptcy. Although the recent ruling allows creditors to pursue stale claims without violating the FDCPA, it appears the creditors will still be unable to collect on the stale claims as long as the debtor or their legal representative objects to the validity of the debt properly in the bankruptcy proceeding.

GavelMost Federal Bankruptcy Courts Will Allow Creditors to Claim Stale Debts Without Violating Federal Law

The most important point of the ruling in the case of Owens v. LVNV Funding, LLC was the court’s finding that creditors are not in violation of the FDCPA by adding a claim for a stale debt to a debtor’s bankruptcy. The court focused on the specific protections of the FDCPA to find that a creditor would not be violating federal law by including a stale debt claim in a bankruptcy, since a bankruptcy is not a collection case per se, and the FDCPA was not enacted to prevent creditors from bringing claims to the attention of a bankruptcy court, even if those claims are ultimately not recoverable by the creditor.

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Across the United States, varying factors result in statewide and regional differences in the number of bankruptcies filed. A recently discussed statistical analysis of per capita personal bankruptcy filings has revealed that most of the states with the highest rates of personal filings are located in the South, the Midwest, and the Great Lakes regions. Although many factors contribute to each state’s per capita rate of personal bankruptcy filings, the existence of beneficial state debt protection laws appears from the data to correlate negatively with the per capita filing rate.

Which States Have the Highest Personal Bankruptcy Rates?Money

A recent report on the per capita filing rate for personal bankruptcies between April 2015 and March 2016 demonstrates that the states with the very highest personal bankruptcy rates are clustered in the South, with key Great Lakes states close behind. According to the report, Tennessee is the state with the highest rate of personal bankruptcies, with 553 filings for every 100,000 residents. Indiana and Kentucky are both in the top 10, with 387 and 345 filings for every 100,000 residents, respectively. The national median over that time period was 224 filings per 100,000 people.

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The United States Seventh Circuit Court of Appeals recently released a decision in a bankruptcy appeal that affirmed a lower court’s ruling that voided a debtor’s pre-filing transfer of a farm to her father, allowing the trustee to take partial possession of the property. The debtor’s claim that the property was given to her father in exchange for his cessation of unrelated legal proceedings against her was rejected by the appellate court as unjustified and not reasonably related to the value of the asset that was transferred before the debtor filed for bankruptcy.

FarmFourteen Months Before Debtor’s Bankruptcy, She Transfers a Farm to Her Father Without Compensation

The appellant in the case of Griswold v. Zeddun was a Chapter 7 bankruptcy debtor who appealed the bankruptcy court’s decision to avoid the transfer of a farm to her father before she filed for bankruptcy. The lower courts agreed that the transfer of the property was a “fraudulent transfer” under the meaning of the bankruptcy code, since the debtor was not adequately compensated for the property, giving the appearance that the transfer was made to allow the debtor and her father to avoid the jurisdiction of the bankruptcy court. The debtor had claimed that the transfer was legitimate because her father assumed the debt on the property, and he agreed to stop pursuing an unrelated legal claim against her as compensation for the remaining equity in the property.

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The United States Court of Appeals for the D.C. Circuit recently released a decision affirming a lower court’s ruling dismissing a plaintiff’s employment discrimination lawsuit against her former employer. The ruling was not based on the merits of the lawsuit itself but on the fact that the plaintiff failed to disclose the case in a prior Chapter 7 bankruptcy proceeding. The ruling, based on the principle of judicial estoppel, was entered by the lower court based on the equitable consideration that a party should be prohibited from asserting a claim in a legal proceeding that is inconsistent with a position taken by that party in a previous proceeding. Based on the latest ruling, the plaintiff will be unable to take her employment discrimination case to trial to recover compensation on the claim.

GavelThe Plaintiff Was Required to Disclose All Pending Lawsuits or Claims to the Bankruptcy Court

U.S. bankruptcy cases require a debtor to disclose all of their assets and liabilities to the court so that a resolution can be reached that upholds the rights of the creditors to collect on any of the debtor’s debts before they are discharged. A pending civil lawsuit or administrative claim is a potential asset in the eyes of the bankruptcy code because the plaintiff may recover valuable damages as part of their claim, and the bankruptcy trustee has the right to know about a possible source of additional assets of which the debtor may be in control before agreeing to a discharge. The plaintiff in the case of Marshall v. Honeywell Technology Systems filed for bankruptcy after she filed the wage discrimination lawsuit, but she failed to include the civil case on the required bankruptcy schedule, and the trustee had no knowledge of the plaintiff’s civil claim until after her bankruptcy had been confirmed.

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The Ninth Circuit U.S. Court of Appeals recently released an opinion in which they agreed with a bankruptcy court’s ruling that rejected a creditor’s request to bar the discharge of a bankruptcy debtor’s debt to him, based on allegations that the debtor had fraudulently transferred property before the bankruptcy proceeding. These allegations were based upon the fact that the debtor transferred a piece of property from himself to his own living trust prior to the bankruptcy proceeding. The court rejected the creditor’s arguments, finding that the debtor had waited over one year from the time he transferred the property before filing the bankruptcy petition, and the creditor’s debt was therefore validly discharged.

HouseThe Creditor Argued that the Debtor Transferred the Property Illegitimately

The creditor’s claim in the case of DeNoce v. Neff was based upon a provision of the U.S. Bankruptcy Code that bars the discharge of debts if the debtor, within one year prior to filing the bankruptcy, has fraudulently transferred property with the intent to hinder, delay, or defraud a creditor. The creditor acknowledged that the property at issue was transferred more than one year before the debtor filed this bankruptcy petition, but he argued that the debtor had filed two other bankruptcy petitions (that were dismissed) within less than a year from his transfer of the property. The creditor requested that the court “equitably toll” the one-year time frame, in other words stopping the clock from running while the debtor was pursuing the previous bankruptcies.

Equitable tolling is a legal creation that is generally applied only to statutes of limitations or similar rules. A statute of limitations should be extended if a plaintiff could not have known about their claim until after the statute of limitations had expired. For example, in a medical malpractice case in which a medical instrument is left in a patient’s body, the statute of limitations will not start to run until the plaintiff discovers the mistake or reasonably should have discovered it. In applying the rules of equitable tolling to the creditor’s claim in the DeNoce case, the courts determined that equitable tolling should not apply, since the one-year time limit in the bankruptcy code is not a statute of limitations, nor is it substantially similar enough to warrant the application of the equitable tolling rules.

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The Ninth Circuit U.S. Court of Appeals recently released an opinion that demonstrates the complexity and confusion that can accompany bankruptcy cases, and the necessary steps to protect a debtor’s property pending an appeal of a bankruptcy court order. The Ninth Circuit’s decision in the case of In the Matter of Castiac Partners II, LLC essentially dismissed a debtor’s appeal of a decision allowing the creditors to sell foreclosed property because the property had already been sold, and the debtors failed to seek a stay of the bankruptcy court’s order allowing the property to be sold pending the initial appeal. As a result of the Ninth Circuit’s ruling, the sale of the debtor’s assets cannot be challenged, and the debtor will be unable to pursue the bankruptcy case.

Dollar BillThe Debtor Appeals an Unfavorable Ruling that Allowed Creditors to Sell Their Assets

The debtor and petitioner in the case was a corporation that held several properties that had gone into foreclosure prior to the bankruptcy filing. The debtor filed a Chapter 11 bankruptcy case and was granted an automatic stay of the foreclosures pending the bankruptcy case resolution. The creditors then motioned and successfully argued to the bankruptcy court that the foreclosure sales should be permitted to proceed, and the debtor appealed the decision to the district court.

The Debtor Fails to Stay the Bankruptcy Court Order Pending the Appeal, Resulting in the Bankruptcy Being Dismissed

The debtor did not seek a stay of the bankruptcy court’s order allowing the foreclosures to proceed pending their appeal, and the creditors continued with the foreclosures, eventually taking possession of the properties at a foreclosure sale. After the properties had been sold, the U.S. bankruptcy trustee asked that the bankruptcy be dismissed, since the properties were the only assets that had been part of the bankruptcy estate. Concluding that the bankruptcy estate contained no property for it to make rulings upon, the bankruptcy court dismissed the bankruptcy cases without an objection from the debtor.

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The U.S. Court of Appeals for the Eighth Circuit recently released a ruling that demonstrates when and how a bankruptcy trustee may take possession of a debtor’s inherited property and order it to be sold for the benefit of the bankruptcy estate. The appellants in the case of Peet v. Checkett challenged a bankruptcy court’s decision allowing the trustee to order the sale of a home and vehicle that the debtors inherited from one of their parents after the bankruptcy was filed. Both courts agreed that the sale was appropriate because the debtors shared ownership of the property with their parents as joint tenants before the bankruptcy was filed, and upon the parents’ death, the property transferred directly to the debtors’ bankruptcy estate, instead of becoming a part of the parents’ estate as other property had become.

Dollar BillsThe Type of Joint Ownership is Dispositive

The courts’ decisions in the Peet case were determined by the type of joint ownership with their parents that the debtors shared of the property. There are two main types of joint ownership of real property, joint tenancy and tenancy-in-common. Property held by two or more persons as joint tenants will not go through the estate of an owner who dies while other joint tenants remain alive. If one or more joint tenants of a piece of property passes away, the title to the property continues to be shared equally among the remaining owners. In the event of the death of an owner of property held by tenants in common, the deceased owner’s share of the property will go through their estate, and the surviving owners will possess the same share of the property as they did before the other owner’s death. The differences between these two types of joint ownership are important in many areas of law, including bankruptcy law.

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The Ninth Circuit United States Court of Appeals recently released a decision that reversed several lower court determinations that a $5,700 debt owed by an attorney and debtor to a former client was not dischargeable. The decision was important because the debtor was attempting to reinstate her law license and could not have any non-dischargeable debts owed to client or governmental organizations on her credit to do so. The Ninth Circuit’s liberal reading of the bankruptcy code in the case may help future debtors discharge their debts in bankruptcy, especially if the analysis is followed in other jurisdictions.

GavelDebtor Was Refused Discharge Because the Debt Was Seen as a “Fine” Rather Than “Compensation”

The plaintiff and debtor in Scheer v. State Bar of CA was a suspended attorney who filed suit against the bar to have her license reinstated. The defendant refused her request, claiming that a debt that she owed to a former client was not eligible to be discharged and barred her from readmission. The defendant claimed that the debt was a “fine, penalty or forfeiture” that was owed on behalf of a government unit, and therefore it was ineligible for discharge.

After appealing the ruling in several jurisdictions, the plaintiff argued the issue at the Ninth Circuit Court of Appeals. The plaintiff contended that the debt she owed was compensation for an actual pecuniary loss to her former client, rather than a penalty as the lower courts determined. After evaluating similar cases from multiple jurisdictions, the Ninth Circuit agreed with the plaintiff and entered a ruling that the debt is dischargeable.

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