Bankruptcy no problem

5/16/2004

MORE THAN 9,400 people in 21 northwest Ohio counties sought last year to have their debts forgiven in U.S. Bankruptcy Court in Toledo, and probably fewer than 100 were denied the chance.

The message is clear, said local bankruptcy attorney Elliott Feit: Very rarely does a bankruptcy petition get denied.

Bankruptcy trustees and creditors can raise objections during an initial review of a case and offer reasons why someone looking to get out of his or her unsecured debts should not be allowed to do so.

But Dave Fickel, clerk of the Toledo bankruptcy court, said the odds of that happening are slim. Rarely do unsecured creditors show up to object to someone's debts being discharged, he said.

"If they do object," he said, "then the burden is on the creditor to prove the debtor's conduct fits within one of the criteria in the debtor's code that prevents being granted a discharge."

The soaring number of local bankruptcy filings, which have set a record three years in a row, prompts the question of whether all those who file are eligible.

Exact numbers of rejected bankruptcy filings are unknown, but experts say the figure last year was probably fewer than 500 and more likely about 100.

Out of more than 40,000 Chapter 7 cases filed in 2003 in Toledo and across northern Ohio, 29 were dismissed and 155 were withdrawn or converted to Chapter 13 repayment plans upon bankruptcy trustees' objections, said Daniel McDermott, assistant U.S. trustee in Cleveland.

Toledo bankruptcy attorney Stephen Priestap said, "Usually it's not so much a matter of getting approval anymore, but whether they fit into the criteria of someone who's actually bankrupt.

"More often, they'll look to see if they have any ability to repay the debt and then they might file motion to convert it to Chapter 13 repayment."

Five trustees locally are responsible for reviewing the Toledo court cases, nearly 10,400 last year. Attorneys likely weed out bad cases before filing, Mr. Priestap said.

People filing Chapter 7 seek to have nearly all of their debts liquidated or forgiven, and those filing Chapter 13 generally seek to repay most of their debts but on an extended schedule, keeping creditors from badgering them.

Chapter 11 cases are for businesses seeking to repay at least some debts, and Chapter 12 cases are for farmers.

An objection to a filer being excused from debts requires the filing of a formal adversary complaint.

Only about 100 such complaints have been filed annually the past few years, Mr. Fickel said.

After a bankruptcy petition is filed, a hearing is held, attended by a trustee.

It is open to creditors, who have 60 days to raise objections. If none are raised, the court nearly always grants forgiveness of debt. The process normally takes four to six months.

Secured debt, such as taxes, alimony, and child support, is not forgiven.

Even as the number of personal bankruptcies has climbed to triple the number in 1995, creditor objections have declined, said Mr. Feit, an attorney.

Creditors, mainly credit card companies, began to be no-shows at the hearings starting about five years ago, he said.

The change, he explained, stems from a 1995 U.S. Supreme Court ruling in a New Hampshire case called Field v. Mans, involving two parties in a real estate deal gone bad.

The court ruled that creditors have some responsibility to ask reasonable questions to assess whether a borrower is making false financial statements before a financial deal is struck.

In its ruling, the court said that, when Congress passed the Bankruptcy Reform Act of 1978, it did it with an eye toward consumer finance companies, which sometimes encourage borrowers to seek credit knowing those borrowers might not have the ability to repay, and then rely on bankruptcy law to keep those people from getting relief from the debt they racked up.

"When you're using a credit card, there's an implied promise to pay that money back," Mr. Feit said.

"To keep you from getting a discharge, they'd have to prove that you used that credit without intending to pay it back. That burden is harder for them to prove now with that Supreme Court ruling."

It used to be, he said, that credit card companies would challenge bankruptcies in which the filer ran up charges just before the filing, but now that doesn't happen much.

Instead, Mr. Feit said, the credit card industry has been lobbying vigorously for bankruptcy reform.

The tactic is to get a new federal law passed that would prevent many credit card debtors from being able to file for Chapter 7 relief, he said.

Mr. McDermott, the bankruptcy trustee, said the last credit card company that challenged cases was Sears Roebuck & Co., which six months ago sent a representative to hearings to file objections. However, even Sears has given up the practice, he added.

When a bankruptcy petition is rejected, it usually is for one of the following reasons: the required six years have not elapsed since the person last filed bankruptcy, the person has more assets than debts, the person is found able to pay his or her bills, or the filer is found to have committed fraud to avoid debts.

Roger Whelan, the resident scholar at the American Bankruptcy Institute in Washington and a former bankruptcy judge, said that estimates by the court system suggest that only 5 percent of the 1.2 million Chapter 7 cases nationally last year were denied a discharge of debts.

One reason for denial falls under Section 707(b) of the code, in which a court feels absolving someone with primarily consumer debts would be a "substantial abuse" of bankruptcy law.

It usually is applied to filers with extravagant lifestyles who seek bankruptcy rather than live more austerely.

Mr. McDermott, the bankruptcy trustee, said the problem with abuse is that judges' opinions vary as to what constitutes it.

"A lot of it is driven by the facts and how egregious they are and how they are viewed by the person bringing the objection," Mr. McDermott said. "It all depends on whether they crossed the line, but Congress has not defined that line clearly."

The top reason for denial nationally is fraud, Mr. Whelan said.

Fraud, though, doesn't happen too often in the Toledo court.

The most recent area case involved Harry Wagner, of Lima, who was charged with fraud in 2002 and was convicted of interfering with the bankruptcy trustee who had taken control of his property.

Wagner filed for bankruptcy but federal prosecutors said he made false statements on his petition, attempted to conceal assets, and interfered with the trustee by changing the locks on rental properties he owned.

Yet even the standard for denial because of fraud has become less harsh in the last decade, Mr. Whelan said.

Proving fraud is the responsibility of the creditor and generally involves proving the hiding or transferring of assets. "Basically, it's where the person has money and transfers it to where it cannot be reached," Mr. Whelan said.

Contact Jon Chavez at:

jchavez@theblade.com

or 419-724-6128