The Path of Bankruptcy Debts Pt 2: How Debts Are Treated During a Bankruptcy

Join us as we sit down with Bankruptcy Attorney, Darin Wisehart, to discuss the path of debts throughout the bankruptcy process, with a focus on how they're treated once a bankruptcy is filed.

If you would like to speak with one of our attorneys, please call our office at (503) 227-0200, or visit our website at https://www.pacificcascadelegal.com.

Disclaimer: Nothing in this communication is intended to provide legal advice nor does it constitute a client-attorney relationship, therefore you should not interpret the contents as such.

Transcript

Intro:
Welcome to Modern Family Matters, a podcast devoted to exploring family law topics that matter most to you. Covering a wide range of legal, personal, and family law matters, with expert analysis from skilled attorneys and professional guests, we hope that our podcast provides answers, clarity, and guidance towards a better tomorrow for you and your family. Here's your host, Steve Altishin.

Steve Altishin  0:32  
Welcome, everyone. I'm Steve Altishin, Director of Client Partnerships at Pacific Cascade Legal, and I'm here today with our bankruptcy attorney, Darin Wisehart, to talk about the path of debts as they flow through a bankruptcy proceeding, and how they're handled while the bankruptcy is going on. Hey, Darin, how you doing today?

Darin Wisehart  0:52  
I'm great. I'm great. Thanks for having me.

Steve Altishin  0:54  
Well, thank you for coming today. So we have talked about, in the past, debts before you actually file the bankruptcy. So what we're going to talk about now is debt during the pendency of a bankruptcy, and, you know, how those different kinds of debts are handled, any differences while they're actually pending, what goes on. And so let's just sort of start with that question, which would be, what happens to the debts when you file?

Darin Wisehart  1:24  
Debts when you file. So we have the biggest and most important aspect of a bankruptcy, which is what's called the automatic stay. And if you've read anything on bankruptcy, it's usually the first thing you read, because it's what most attorneys want to talk about when when it comes to I always term it as letting the dust settle. Okay, so when you file, you get a case number, and you notify all your creditors, you let them all know, hey, I'm under bankruptcy protection, I'm, you know, protected by the idea that I'm going to figure out what we need to do about these debts to resolve them. And to potentially give me that fresh start at the end of the case. Okay, so when you get in, you're protected. Now they cannot collect. Creditors can't call they can't contact you. Sometimes you want them to, and sometimes you're continuing to pay your mortgage. And it becomes difficult because the automatic stay is that idea that the creditors, hey, creditors have to get off your back, but cannot continue a judgment or a garnishment. Or they can't, they can't really do anything to collect on you. Okay, now that's important. And, and sometimes clients will call me and say, hey, well wait a second, I want to make sure I continue paying on my car, and they're making it tough for me to pay on my car. Well, the automatic stay. Plus, it's a double edged sword, it's got a minus two. And so I tell clients, hey, just stay on it, just try to keep paying that debt that you want to now if you do that, of course, you're talking to your attorney to make sure that you know, this is a debt that I'm going to continue to pay on. And most attorneys will tell you, it's it's going to be rough sometimes with paying your mortgage. And, you know, creditors will make it difficult because they don't want to violate the rules, they want to make sure that they're doing everything they need to and that automatic stay is a strong, strong thing. Dealing with bankruptcy, the credit cards can't contact you, they can't call you now, usually with a reasonable window of seven days is something that we give to the creditors maybe 14 days to let them populate their systems of your bankruptcy to make sure that they know some attorneys jump on him right away. Some attorneys give them a little more time. But typically you want to be polite with the with how much time because it's you know, Chase is a big business, you know, Capital One big business, it takes them a little time to stop the wheels on the calls and the and the letters. Typically, though, electronic notices what happens when you file an automatic stay if you've done this correctly. And typically, the calls will stop right away, you won't get very many, you might get a letter that maybe crossed in the mail of the bankruptcy documents, that automatic state just tells everybody I'm going to I'm in the bankruptcy, I need to figure out what we're doing about these debts. And then, you know, when we talk about the cubbyholes of what category the different debts are in, then we have to figure out what we're going to do about those but your automatic stays what gives you that chance to really gather where you are with your debts. What are the balances and what categories are in there. And what do you have to deal with? You have tax debt, do you have support a rear edge? Do you have a rear edge on your house? Are you behind on your mortgage? How much credit card debt, how much medical debt, how much personal loan debt, all of these different things, it gives you a chance to get some quiet and get your you know all your ducks in a row for what you're going to do about each one of these categories. 

Steve Altishin  4:33  
Okay, I've got a question. You said that it starts when you file. Is it something that the court, the bank's record, actually, has to affirmatively do? Let's say you file bankruptcy papers and for whatever reason they're not complete or right or whatever it is. Does the automatic state go in just on the physical filing or is there something that comes from the court after looking at your filing that says, Okay, now it starts?

Darin Wisehart  5:04  
It starts the second you file, you push the button, the second you file, you get that protection now whether they know about it yet, that's a question. But you get that protection if you file right now. And that's why sometimes people want to talk about, okay, you want to make sure you file before a foreclosure happens, right. And you want to make sure that you protect your interest in the house that you live in. So you want to file before that, if you file 10 minutes before that foreclosure happens, you should be safe now do not do that i Please baby do not do that. Because you don't want that extra stress. And that extra I mean, that'll take years off your life. And you don't need that you can call the attorney a month before the foreclosure start putting your ducks in a row and get it filed a couple of weeks in advance so that everybody is comfortable and knows what they're doing with it. And there's no extra stress with that. So you know, please, please do not call your attorney the day before the foreclosure and say, Hey, I gotta file today. But the automatic stay happens the second you push a button and get a case number. And that's when it gets docketed with the court, the court clerk then we'll send out notices to all the creditors that you listed, it's called a creditor matrix. And that's, that's who will get notice, generally you'll you'll name, you know, all of your creditors that you owe money to, and you sign something when you file to say I have listed all my creditors, okay, now, sometimes you have a skeleton petition or a smaller petition, where you just need a case number quick. And that is just the list of creditors, and your personal information. And then you have to fill in all the other documents to make sure that you're getting this thing done correctly. different processes in different cases require different things. But the key though, is when you file when you get a case number, those creditors need to get off your back, they gave you that moment of of contemplation, what are you going to do about these debts? How are you going to deal with the debts? And they may be reaching out to your attorney to say, Okay, I see that we have a car loan, does this person want to keep the car? Or are they looking to give it back? Because if they're gonna give it back, we'd like to get it sooner rather than later. And that's, these are all the questions of what do you have? And what debts are out there? And how, you know, how do you deal with them?

Steve Altishin  7:12  
Are there any debts that for some reason aren't covered under an automatic stay?

Darin Wisehart  7:20  
There are, there are some, there are some. It's limited, and it's designed to be limited. The idea is that you get that automatic stay to really get your feet under you. And to really figure out where you're at now criminal proceedings don't stop there, we'll get to continue. There's a few others that will come into play. Small things, I've done this for a long time. And those don't come in is as often, as you know worth our time to mention here. If you do have something that you think is questionable there, of course, ask an attorney and get that get get that information from a person that does this for a living, because you want to make sure that you know how the bankruptcy is going to play to the debt that you're you're looking at maybe to the big gorilla in the room, right. And criminal is usually the one that can to get to continue. Some of the processes also get to continue if they request with a petition a court for what's called relief, the motion for relief, to be able to continue maybe a family law event, if you're having a divorce in the same time somebody calls a bankruptcy or, you know, there's there's a bunch of those that might fall in line with that. But the idea is, you get a pause on what debts are out there and from the pressure of those debts. And that pause allows you a little bit of time to then tell the court and the trustee and the creditors what you plan to do with each one of those debts.

Steve Altishin  8:42  
So automatic stay doesn't actually discharge the debts, does it? Doesn't that come later?

Darin Wisehart  8:54  
Yes, it's the start of the race. So here's the the pop of the gun, here we are, we're going and now you're you're moving. And when you're moving, of course, you got to stay in the race, you can't follow or you can't, you know, run off the track, you got to make sure you stay and you got to get to the finish line, the finish line is the all important discharge. And that's the discharge of debt in a chapter seven that doesn't have any assets that can't be protected. Nothing non exempt is what term you would use there. Your normal discharge would apply to all the credit card, the medical, all those those types of things. And that's that's the end of the race. The automatic stay is that thing that keeps us intact throughout the case that just allows us to to have people off of our backs while we figure out what we're going to do. And that's that's an important point because if that didn't happen, then people would continue to guard and shore continue to take money out of your account or do whatever they're doing. And then you wouldn't really have the opportunity to figure out what you owe them or what you're going to do about the debts. You need that pause in the middle of the case so that you can really itemize and stack these things up and figure out what's going to happen with each each category of debt. So when does the discharge at the tail end of the case is the discharge and, and so you'll go through the process of normal bankruptcy case, we'll take, let's say just no asset, Chapter Seven case, you file your case, about 30 days later, you'll meet with a trustee. And then you'll figure out whether it's a no asset case, whether the trustee is going to do anything additional to act on any assets or get any money for the for the creditors. If there's nothing, which is pretty typical for a normal chapter seven, then there's really not very much to do after that you have to wait a certain window of time, because it allows the creditors then to object if they feel they need to. And at the end of that, then the judge gets a chance to review it, the trustee will file something to say, Hey, I'm not doing anything more with this case, I'm done, I'm gonna wash my hands a bit and be finished. And then after a little while, we don't have any objections by the creditors, there's nothing else that pops up, then the judge will review their case, say everything is in order, you guys did everything, the way you should do it, it looks like you qualify, it looks like everything is where it needs to be, I'm going to sign this order of discharge. And that is when you're out of the case, they'll close the case about the same time, they'll they'll have that order discharge, now there's a different weighing of what happens if it's an asset case. So we could get into that we're not going to talk about that in this one. But it's it's a different road. But the idea is the same, that order and discharge is what discharges the debts that were not paid, whatever money they received in the estate, is what they get, and they gotta be happy about that. And they gotta move on with life. And that's, that's the unsecured portion. And if they keep trying to collect on that thing, especially after that discharge, gotta get an attorney involved, because that's something they're not supposed to do.

Steve Altishin  11:51  
So automatic stay, discharge, what happens, what broiles around and goes on with those debts between the automatic stay happening, and the discharge happening? How do they get paid? Can I go ahead and pay some people? What goes on with those guys?

Darin Wisehart  12:13  
So we're getting off path on this one, if and I'll give you kind of the short version of this, all the different cases will do different things, it depends on whether the trustee is going to get money to pay the creditors, it depends on whether you file a Chapter seven or chapter 13. Now if there's money to be had, if there's money to be distributed to those creditors, then the creditors will file a claim, okay, and they get a certain time period to file that claim. When they file the plan, they're telling the court, this is how much money I am owed. And this is where you would send a payment if you're going to do that. And they also attach some documents so that so that we can check the the person who filed or the attorney can check to make sure that it's a valid debt. And they have to be able to verify that very quickly. Right. So when they do that they file their claims, they say this is how much we get paid. Now, now it's a question of which cubby hole do they go in to they go in that unsecured cubby hole, that's a portion whatever portion is going to get paid out to those guys, they will share that portion equally. And if it's a secured debt, maybe it needs to be paid in full? Who knows? It depends on chapter 13 Or seven, it depends on a lot of things there we can get in the mud quick. But what we want to focus in on is how much of that money is going to get paid? How much of the debt is going to get paid? And what is our idea for getting through the thing. Now those claims are filed. If they don't get paid, or if they get paid just a little, then those creditors have to be quiet about it or they can object they can talk to the court. But valid objections are, you know, the person abused the process of bankruptcy, the person lied on their documents, the person misrepresented information to us. These are things that you do see periodically, but not very often. And I answer those questions all the time, because of course, most clients come to me with this unknown idea. And they they want to have answers to questions that aren't even there. So a lot of times you can set their mind at ease. And part of the stress free process of this not stress free stress limited process of this is that you answer those questions so that they have an idea that now we don't need to talk too much about this. But here's the skinny on that, you know, whatever it is. 

Steve Altishin  14:23  
What about non-dischargeable debts? Kind of going back also a little bit to the stay, if they're not dischargeable, don't you just have to keep paying them even during the bankruptcy?

Darin Wisehart  14:35  
Automatic stay depends on that category. Of course. So sometimes every once in a while we recommend that you keep paying on and that's talking to your attorney and and your your specific case, but the automatic stay applies to creditors whether they're dischargeable or not. So even if they are not dischargeable those student loans or those, you know the criminal restitution or something to that effect that is not dischargeable those credit IRS have to sit and wait for your process to finish, or they can file a motion for relief to talk to the court to say, Hey, court, we want to move forward on taking this money. Now, if it's just a normal bankruptcy, and this is a normal debt, we get overpayment of unemployment a lot in these these types of issues, tax debt a lot, they still have to sit and wait until the case is finished, unless they petition the court specifically, to be able to collect that automatic stays powerful. And it's powerful to them, even though they might be standing at the end of the case with their handout to get paid. They have to wait their turn. And so sometimes, if you file a Chapter 13, and you've got a non dischargeable debt, they have to sit and wait for that chapter 13, to finish. And that's, I mean, sometimes that's a reason to stay with a 13 and just say, All right, I'll stay in for five years, at least I get quiet from this debt that is hounding me. And it does happen periodically, where you have a debt that somebody cannot manage, and they're having a really hard time living a normal life, because this creditor is just pestering them, and getting into a chapter 13 to just smooth that out and pay your disposable income pay what's fair, that can give you that three to five year window of time to be able to live your life, a definite reason to look at a 13 if you have one of those deaths.

Steve Altishin  16:17  
Well, last question, which makes sense because of the question, how does a bankruptcy end? The discharges, you talked about it being near the end. But what finally ends the bankruptcy?

Darin Wisehart  16:36  
That is the discharge. That is the discharge, which is generally the closing of the case, if there's assets, it may be different in a Chapter Seven, because they might order they might sign an order or discharge prior to closing and finishing, there's a couple of windows of things that that you will certainly talk with your attorney, if you have assets in chapter seven, you should have an attorney, because that's that's one of those that you don't want to dance without knowing exactly or having a prediction on what's going to happen with certain things. You risk losing things if if you don't have an attorney that knows what they're doing there. But the discharge is usually the finish of the case. That's that's usually right after that, typically you'll see the closing of the case. And then shortly after that, you may see a trustee report of distribution on money that may have been paid off to the creditors. But that's that's really it, the order of discharge is you're done. You got it on your shoulders, and you're moving on with life. And your automatic state, when you file that case, you should have some relief. And you should have some of that weight lifted from your shoulders. Because that's creditors have to get off your back. And they have to climb off and just say, All right, we're going to tell you how much we owe. But we're going to figure out, we're going to wait to see what you're going to do with our debts whether you pay them or not. So that discharge is usually your finished. That's that's your closing. And then you know, a final review of your attorney. And they'll usually send you a letter shortly after that to say, here's your discharge order. Looks like looks good. A couple of things to remember after that, and they'll close the case in their office as well. And that's, that's usually being done.

Steve Altishin  18:11  
Got it. Got it. Well, thank you again, this is again, just great information about understanding just what the heck happens to debts during the bankruptcy. So again, I always, as always, thank you again for sitting down to talk with us today. And it's just real informative. So thank you, man. 

Darin Wisehart  18:31  
No problem. Thanks for having me. 

Steve Altishin  18:33  
And thank you everyone else for joining us. And again, always, if you have further questions on today's topic, post it here, we'll get you connected with Darin. Until then, stay safe, stay happy and be well.

Outro:
This has been Modern Family Matters, a legal podcast focusing on providing real answers and direction for individuals and families. Our podcast is sponsored by Pacific Cascade Legal, serving families in Oregon and Washington. If you are in need of legal counsel or have additional questions about a family law matter important to you, please visit our websites at pacificcascadelegal.com or pacificcascadefamilylaw.com. You can also call our headquarters at (503) 227-0200 to schedule a case evaluation with one of our seasoned attorneys. Modern Family Matters, advocating for your better tomorrow and offering legal solutions important to the modern family.