One of the great things about a Chapter 7 bankruptcy is that it allows you to walk away from debts you would otherwise have no hope of paying.
It's very freeing.
But you should anticipate the possibility that your creditors may fight to be paid, using an adversary complaint. Having a skilled Louisville bankruptcy attorney on your side will mean you will be well-prepared for this scenario.
One couple had to endure just such an ordeal, though they did ultimately emerge victorious after their case was appealed to the U.S. Court of Appeals for the Eighth Circuit. In Unterrieiner v. The Samuel J. Temperato Revocable Trust, the appellate court affirmed the Bankruptcy Appellate Panel's reversal of an earlier verdict granting summary judgment to the creditor in an adversary complaint.
Here's what happened:
A husband and wife were the sole shareholders of a management company that operated three fast-food franchise stores. One of those stores was owned by the the Samuel J. Temperato Trust.
In late 2005, the management company was doing very poorly. In fact, without a loan, it was going to have to shut down. The trustee for the Trust arranged to set up a $235,000 loan for the management company from Cass bank. In order to secure it, the married couple signed personal guarantees, as well as a Commercial Security Agreement. The franchise also guaranteed the loan.
The couple never spoke to the trustee or with anyone from the franchise or even anyone from Cass before signing the loan documents. In fact, until the Trust filed the complaint, the couple had no idea that the Trust actually owned the franchise - didn't even know the Trust existed.
The Security Agreement listed the management company as the borrower, and the couple as the guarantors. The agreement listed all business assets at two of the franchise locations as collateral. The Trust was never mentioned. Cass sent the loan directly to the franchise, which retained a portion of it to cover outstanding debt from the management company.
About a year after the loan was granted, the husband told the bank that, contrary to statements made in the security agreement, the management company didn't actually own most of the collateral, and there was a misrepresentation. He said he and his wife hadn't read it carefully before signing it.
Regardless, the management company defaulted on the loan in late 2007. The following spring, the bank released the couple of any further liability after they paid $20,000. The bank demanded that the Trust pay the rest.
Then the couple filed for Chapter 7 bankruptcy, after which the Trust filed an adversary complaint against them, claiming they owed the Trust as co-guarantors of the loan. The claim was that the debt to the trust was not dischargeable, according to the terms of 11 U.S.C. 523.
This statute outlines exceptions to discharge - meaning debts you can't shed in a Chapter 7 filing. These include things like child support obligations, student loan repayments, court-ordered restitution or back taxes. They also include over $500 worth of luxury goods bought within three months of the filing or cash advances of over $750 within 70 days prior to filing.
Section 523(a)(2)(B) also disallows discharge of debts that are made by use of a written statement that is false regarding the debtor's financial condition and on which the creditor reasonably relied. It was on this basis that the Bankruptcy Court granted a summary judgment in favor of the Trust.
However, the couple appealed and the Bankruptcy Appellate Panel reversed the earlier decision, saying that the Trust did not meet the strict statutory requirements. Essentially, the representation was made to Cass Bank - not the Trust, the court ruled.
This story had a happy ending for the debtors - but it certainly did not come without a fight. Particularly if you are a business owner or sense you may have a more complicated Chapter 7 filing, contact our attorneys as soon as possible for a consultation.
If you need to speak to a Kentucky bankruptcy attorney or Louisville foreclosure defense firm, contact the Schwartz Bankruptcy Law Center at 866-270-4495 for a free and confidential consultation to discuss your rights.
In re: Unterreiner v. The Samuel J. Temperato Revocable Trust, U.S. Court of Appeals for the Eighth Circuit, Appeal from the U.S. Bankruptcy Appellate Panel for the Eighth Circuit, Nov. 8, 2012
More Blog Entries:
Louisville Bankruptcy Won't Stop You From Getting a Home Loan, Sept. 26, 2012, Louisville Chapter 7 Bankruptcy Lawyer Blog