Page 74 - Encyclopedia of Business and Finance

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Bankruptcy

Nondischargeable Debts. The act provides that certain medium income for a family of equivalent size or if the
debts may not be discharged since Congress has deter- debtor’s monthly income less allowable expenses exceeds
mined that bankrupt persons should continue to be an amount allowed under the act for a family of equiva-
responsible for such debts even if they cannot currently lent size, then there is a presumption of abuse; otherwise,
make payment. The reasons for the nondischargability of
no such presumption may be inferred.
such debts include: the nature of the debt, policy reasons
The court may also use noneconomic factors in
to protect the creditors (e.g., support obligations for one’s
determining if abuse does exist. The formulas presented
family), and debts arising because of the debtor’s miscon-
duct. They are as follows: are quite complex and may necessitate the services of pro-
fessionals. Thus, the act seeks to require debtors able to
• Taxes, including state and local taxes, and customs pay their debts over time to adopt the provisions of Chap-
duty ter 13 and pay all or a portion of the debt over a period of
• Money or other financial benefit received by reason years rather than expeditiously having a clean slate to start
of false pretenses anew. The debtor thus has extensive filing requirements,
• Consumer debts incurred within ninety days before including the credit counseling certificate, pay stubs, and
filing totaling more than $500 owed to a single statements of pre- and postpetition income and expenses.
creditor for luxury goods and services; cash advances A previous source of abuse was that debtors could use
of $750 from a single creditor within seventy days either the act’s exemptions or the exemptions provided in
of filing
the state in which they resided, whichever was greater.
• Debts not listed Thus, certain states had homestead exemptions that per-
• Debt for fraud, embezzlement, and larceny mitted multimillion-dollar homes to be exempt from
claims of creditors. The act now limits the exemption to
• Domestic support obligation
$125,000 if there is an abuse in the filing or other defined
• Willful or malicious injury to another person or
bases.
property
The revised statute makes use of attorneys potentially
• Fines, penalties, forfeitures payable to a governmen-
very costly or otherwise inaccessible. The signature by an
tal entity, including for state and local taxes, that is attorney on the bankruptcy petition is a certification that
not compensation for actual money loss, other than
a tax penalty imposed before three years before date he or she has no knowledge, after a diligent inquiry, that
of filing of petition the information on the schedules is incorrect. The effect
of this provision is that an attorney has to make a detailed
• Educational benefit funded by government unless
investigation of the debtor’s finances and be ready to be
undue hardship; also, student loans payable to for-
subject to expenses of a trustee in making a motion to dis-
profit and nongovernmental entities
miss as well as to incur potential fines. Thus, many attor-
• For death or injury by auto, vessel, or an aircraft neys may refrain from representing debtors or
while intoxicated from drugs, alcohol, or other sub- significantly increase the fees they charge for services ren-
stance
dered because of the additional time required in assisting
• To a spouse or former spouse debtors, as well as the heightened potential liability for the
• Fee or assessment due to condominium or coop attorneys.
• Fee imposed on a prisoner
Discharge. After the assets are distributed, then the
• Debts owed to a pension, profit-sharing, or stock
bonus plan unpaid claims are discharged. Partnerships and corpora-
tions must liquidate under state law before or on comple-
• Violation of the federal securities laws
tion of the proceeding. The debtor cannot file another
Chapter 7 proceeding until the expiration of eight (for-
Dismissal of Petition for Abuse—The Means Test. The merly six) years.
revised act mandates the dismissal of a Chapter 7 filing if
the grant of relief would constitute an “abuse” of the act
by individual consumer debtors. The tests that may be Other Liquidation Provisions. There are separate liquida-
used by the Bankruptcy Court in dismissing a petition for tion provisions for stockbrokers, commodity brokers, and
abuse include a median income test and a means test. If clearing bank liquidations. Also, municipal governmental
the debtor’s current monthly income exceeds the state’s bankruptcies are treated under Chapter 9 of the act.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 51