Can Criminal Debts Be Discharged?

Suppose you’ve run into trouble with the law—maybe you’ve incurred criminal penalties for drunk driving or have been ordered to pay restitution for malicious destruction of property or embezzlement. If you are facing financial challenges, you may be considering a Chapter 7 bankruptcy filing, so that you can permanently discharge some of your debts. Can any of the obligations arising out of the criminal proceeding be discharged in bankruptcy?

The answer—it depends. There are some criminal obligations that are not subject to discharge. For example, any debt you owe for fines or restitution that accompany conviction for a crime simply cannot be discharged. In addition, any fine or penalty imposed by a government agency is not subject to discharge.

However, in New Jersey, certain motor vehicle convictions result in a “motor vehicle surcharge”. This is payable to a state insurance fund. For that reason, courts have ruled that these surcharges can be discharged in either a Chapter 7 or Chapter 13 bankruptcy.

If you have criminal fines, traffic tickets, or non-tax penalties, these will not be dischargeable. We recommend taking steps to pay these, or plan to be paying them.

That said, for many people, a bankruptcy which clears away other debt makes it easier to pay the fines or penalties that must be paid.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know that the bankruptcy process can be intimidating and confusing.  We offer a free initial consultation to every client. For an appointment, call our office at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

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Mortgage Modification? Try filing bankruptcy…

Many people wanting or needing a mortgage modification are drowning in debt. Indeed, it may well be that in a fruitless effort to stay caught up on credit card debt that they let their mortgage payments slide… which is exactly the wrong thing to do.  Surprisingly, a bankruptcy filing may be the best avenue to getting the relief that overburdened borrowers may need.

To begin the process of saving a home through mortgage modification, you need to shed excess debt so that you can free up more income for paying housing costs. And since your ability to pay is a major factor in whether you get a mortgage modification or other relief, anything which reduces other expenses is quite helpful.

For some people, a Chapter 13 Plan in which they cure their mortgage arrears over 3 to 5 years, often without interest, is the best course of action. Many other tools can be used in Chapter 13, including possibly removing second or third mortgages (see other posts by me in this blog)

Even better, in New Jersey, (and in a few other places) the court has implemented a “Loss Mitigation” program which allows people filing bankruptcy to request mortgage modification or other forms of relief (such as a deed in lieu of foreclosure or short sale). Doing this has several big advantages. First, the process is under court supervision. Second and just as important, debtors have use of the DMM Loss Mitigation Portal. This is a specialized website that collects and makes available to borrowers and lenders (and in this case the court) any documents which have been uploaded in a particular case. As a result, no lender can claim they did not get the documents you filed, since they are always available right on the web portal, along with a record of when they were filed and by whom. This eliminates a big problems (and a big source of frustration for borrowers). Third, lenders have to designate a single point of contact on the lender side–a person who is responsible and answerable for the lender. Finally, the court monitors the process and sets deadlines by which things either happen or they do not. No more dragging things on interminably!

Some of these ideas are being adopted outside of bankruptcy. But in our view, when courts get involved, if anything good is going to happen it is more likely.

Cram down or strip off– a way to surface after being underwater

Many people have homes that are “underwater”, ie the mortgage balances are more than the home is worth. Under certain circumstances, in a Chapter 13 bankruptcy, relief is available through a “cram-down” or a “strip-off”. A cram-down is where you get the Court to reduce the lien to the amount of equity available for it. For example if the first mortgage is $150,000.00 and the house is worth $160,000.00, there is only $10,000.00 in equity for the second mortgage. If the second mortgage is more than this, it can be crammed down to the $10,000.00, in Chapter 13.

There are, however, two big catches. First, you cannot do this if the second mortgage is secured only by your  residence. You have to have given some other collateral as well. This could happen where the second mortgage was given in support of a business loan also secured by the assets of a business.

Secondly, if you do the cram down, you have to pay off the reduced balance through your Chapter 13 plan. However, once you do that, you have only the first mortgage.

Cram down is usually not available for most homeowners. But a “strip-off” can be. A strip-off is where there is ZERO equity for the second mortgage (ie the value of the house equals or exceeds the first mortgage). Many courts, including those in New Jersey, will allow this. The result is that the stripped off junior mortgage becomes an unsecured debt, treated the same as credit cards or other unsecured debt. And at the end of the plan, the second mortgage can be discharged.

Either way, the result is a court-ordered “mortgage modification” that can help beleaguered homeowners get back on track.

These are options that deserve careful consideration, and assistance of a qualified bankruptcy attorney. They also require careful consideration of your long term and short term financies and objectives.

An object lesson for creditors: Countrywide Home Loans hit with $85000.00 in legal fees for violation of the automatic stay

On February 22, 2012, Judge Kaplan in the US Bankruptcy Court for the District of New Jersey hit Countrywide with an $85,000.00 tax bill for attempting to collect prepetition mortgage escrow deficiencies from debtors in Chapter 13 bankruptcies. In re Rodriguez, case no. 07-24687. The decision highlights the importance for all creditors not to “shoot first and ask questions later”.  Doing so, as Countrywide learned, can be expensive.

In this case, Countrywide claimed it was entitled to add to the post-bankruptcy mortgage payments an amount to pay back pre-bankruptcy shortfalls in the debtor’s escrow account. The debtors claimed this was an unlawful attempt to collect a pre-petition debt, and that the deficiency amount should have been included instead in Countrywide’s claim which would be paid in the bankruptcy. The debtors originally claimed that Countrywide was violating the “automatic stay” that renders illegal any attempt after a bankruptcy is filed to collect a debt that pre-existed that filing. The question went all the way to the Third Circuit Court of Appeals which ruled that Countrywide was wrong.

Under section 362(k) of the Bankruptcy Code, an individual who suffers any actual injury from a wilful violation of the automatic stay may seek damages, punitive damages and counsel fees. A violation is wilful so long was the collection effort was intentional and made by someone who knew about the bankruptcy. The Third Circuit sent the case back to Judge Kaplan to determine whether Countrywide wilfully violated the automatic stay and what damages the debtors were entitled to.

Here Judge Kaplan found that Countrywide wilfully violated the automatic stay because it proceeded, without seeking permission from the bankruptcy court, to demand payment of escrow monies after receiving notice of the bankruptcy filing. He hit Countrywide with payment of all the resulting counsel fees incurred by the debtors as they fought the issue up to the Third Circuit. Since Countrywide chose to litigate the issues, Judge Kaplan found, they should not be faulted for defending their rights.

This case underscores  important lessons for any creditor receiving notice of a bankruptcy:

1. Get qualified legal advice right away;

2. Do not attempt to collect the debt except through the bankruptcy court process, without first seeking permission and authority to do so.  When in doubt, err on the side of caution.

Steven R. Neuner has over 29 years of experience helping creditors, trustees and debtors protect their rights in bankruptcy court. For more information about these and related topics, see our website at http://www.nv-njlaw.com.

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