Appellate Panel Reverses Bankruptcy Court Ruling that Had Refused to Reopen Debtor’s Bankruptcy

A panel of the United States Court of Appeals for the Sixth Circuit recently published an opinion reversing a bankruptcy court’s decision to refuse a Chapter 7 debtor’s request to reopen his bankruptcy case nearly four years after he was granted a discharge. The debtor had asked the court to reopen his bankruptcy so that he could address judgment liens against his home that were not properly avoided during the bankruptcy, possibly by mistake.

dollarsAlthough the debtor could easily have removed the liens during the bankruptcy, none of his creditors objected to reopening the bankruptcy, and the code specifically allows for the reopening of a case to address the issue, the bankruptcy judge refused the debtor’s request, suggesting instead that the debtor could possibly obtain relief by suing his attorney for malpractice. The appellate panel acted more humanely and sympathetically than the bankruptcy judge, whom they reversed.

Ultimately allowing the case to be reopened, the panel remembered that bankruptcy laws exist to help debtors address their financial issues and move forward in life, while allowing creditors a fair chance to stake their claims if they choose. Since no creditors objected to the debtor’s request, the bankruptcy judge could not justify refusing the debtor’s request.

During the 2011 Bankruptcy, the Debtor’s Attorney Did Not Find It Necessary to Address Liens Against the Debtor’s Home

According to a discussion between the debtor’s attorney and the bankruptcy judge quoted in the appellate opinion, the debtor in the case of In re: McCoy and his attorney did not address the liens in the initial bankruptcy because the debtor did not intend to keep his home after the discharge, and his attorney believed that avoiding the liens was unnecessary at the time. After the initial discharge, the debtor discovered he may be able to keep his house and refinance the loan to a lower rate, but his bank would not go forward with a refinance because of the liens existing from earlier. At this point, the debtor and his attorney likely realized that they were mistaken not to address the liens during the initial bankruptcy.

Legal Bases to Reopen a Bankruptcy After Discharge

Under federal law, a bankruptcy may be reopened after discharge and modified to benefit the debtor, as long as no creditor objects and is prejudiced by the modification. Realizing that his failure to address the liens during the bankruptcy was a mistake, the debtor’s attorney gave notice to the court and lienholders that he sought to reopen the case and avoid the liens, as he should have done earlier.

None of the creditors objected to the plan, and the mistake was nearly resolved without detriment to the debtor, until the bankruptcy judge refused to reopen the case in what was later found to be an erroneous abuse of his discretion. Although the appellate panel ultimately reached the correct decision, and the debtor was not unduly prejudiced by the bankruptcy judge’s mistaken view of the law, the additional delay, expense, and uncertainty of the extra litigation required by the appeal could have been avoided had the debtor’s attorney addressed the liens against his client’s home from the start.

Make Sure a Bankruptcy Is Handled Correctly the First Time

The end result of In re: McCoy was fair; the rights and interests of the debtor, as well as those of his creditors and the government, were ultimately upheld properly in accordance with federal law. Unfortunately, the debtor still did suffer avoidable delay and uncertainty because of his attorney’s failure to address the liens against his home before the initial discharge. Bankruptcy judges occasionally make decisions that hurt debtors and aren’t consistent with the law. Appeals are not always an option, and they are not always successful. A bankruptcy needs to be handled properly the first time around so that there is no need for an appeal.

Are You Considering Bankruptcy?

If you are seeking debt relief, let the knowledgeable Louisville and Southern Indiana bankruptcy attorneys working at the Schwartz Bankruptcy Law Center help you prepare and file a case to get your finances back on the right track. Our experienced bankruptcy lawyers know that your financial situation may change with time, and we will not make oversights that may give you an unnecessary headache later. We’ll help you get your bankruptcy right the first time so that you’re not spending any more time in court than necessary. Get your financial freedom back by contacting us today. At the Schwartz Bankruptcy Law Center, we represent clients throughout the U.S. in all bankruptcy proceedings. Call 866-366-3328 or contact us through our website to schedule a risk-free consultation.

More Blog Posts:

Appeals Panel Upholds Dismissal of Pro Se Debtor’s Bankruptcy Case, Kentucky Bankruptcy Lawyers Blog, published December 2, 2016.

First Circuit U.S. Court of Appeals Affirms False Oath Charge Against Bankruptcy Debtor, Kentucky Bankruptcy Lawyers Blog, published November 10, 2016.

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