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Bankruptcy Basics: Exemptions

In keeping with the “fresh start” purpose of bankruptcy relief, debtors are permitted to claim certain property as exempt in the bankruptcy process and are allowed to retain this property after bankruptcy free from most creditor’s claims. 11 U.S.C. § 522(b), (c). Section 522(d) lists the exemptions available under the federal exemption scheme. In some states the debtor is given a choice between using either the state exemptions or the federal bankruptcy exemptions (in a joint case, both spouses must choose the same exemption scheme).

Bankruptcy Basics: Discharge

The primary goal of most consumer bankruptcies is the discharge of debts, thereby providing the debtor with relief from creditor collection actions and an opportunity for a fresh start. As discussed below, the discharge in a chapter 7 or chapter 13 case comes at the conclusion of the case, which may be approximately four months after filing in a chapter 7 case and generally three to five years after filing in chapter a 13 case.

Bankruptcy Basics: Evaluating the Dischargeability of Debtor’s Student Loans

Section 523(a)(8) provides that student loans can only be discharged if the debtor demonstrates that not discharging the debt “will impose an undue hardship on the debtor and the debtor’s dependents.” Many bankruptcy courts have adopted a three-prong test for determining undue hardship, based on the decision in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). The Brunner test requires the debtor to show that:

Bankruptcy Basics: Overview of Chapters 7 and 13

The Bankruptcy Code provides for two main types of consumer cases: chapter 7 and chapter 13. The debtor will need to decide which chapter is better for them. Although the debtor may be able later to convert from one type of bankruptcy to another, it is always best to give this choice due consideration from the start.

Types of Consumer Bankruptcy Cases

Chapter 7

Bankruptcy Basics: Income Eligibility.

To be eligible for a chapter 7 filing fee waiver, the debtor’s income must be less than 150% of the applicable official poverty line based on family size. The poverty line figures used are those provided by the Office of Management and Budget, and are revised annually in accordance with section 673(2) of the Omnibus Budget Reconciliation Act of 1981.

Collection Actions: 3.2.1 Does the Court Have Jurisdiction?

Except in unusual circumstances, there is no federal jurisdiction for a collection action, and collectors must bring the case in state court. This also means that consumers cannot successfully remove the case to federal court. Raising a federal claim in a counterclaim is not a basis to remove a case to federal court.1

Collection Actions: 3.2.2.1 Limitations on State Court Venue

A collector’s action must comply with state venue rules and also with the federal Fair Debt Collection Practices Act (FDCPA). The FDCPA requires that a debt collector bring a lawsuit only in the judicial district in which the consumer signed the contract or resides at the time of the lawsuit.7 The judicial district refers to the state district and not the federal district.8

Collection Actions: 3.2.2.2 Implications of a Collection Suit Brought in Violation of Federal or State Limits

If a collection action is brought in a venue violating the FDCPA, the consumer has an action for actual and statutory damages and attorney fees under the FDCPA19—and may also have a cause of action under the state deceptive practices statute. But the availability of such a damage action does not resolve the question of whether the federal or state law violation can be grounds to dismiss or move a collection action brought in a venue violating the federal or state standard.

Collection Actions: 3.2.3 When a Collection Action Is Brought Before an Arbitrator

Until 2009, hundreds of thousands of collection actions were brought before the National Arbitration Forum (NAF), instead of in court. The NAF is a private arbitration forum with no governmental connection. An arbitrator selected by the NAF, pursuant to NAF rules, would issue an award (invariably for the collector). When the collector confirmed that award in court, the award had the same effect as a court judgment, allowing the collector to garnish wages and seize bank accounts.

Collection Actions: 3.3.1 Introduction

This section considers a number of reasons why the collector may not be qualified to bring the collection action in a state’s courts. The entity bringing the action may not be entitled to bring any type of action in the state’s courts. Or the entity may be unqualified to bring consumer collection actions. Or the entity may not be qualified to bring an action without representation from an attorney.

Collection Actions: 3.3.2.2 When a Registered Collector Buys Debt from Unregistered Out-of-State Corporation

A state statute may provide that if an entity owning a debt fails to register, not only can it not sue in a state’s courts, but anyone taking assignment of that debt cannot sue upon that debt in the state’s courts either.46 Such a rule prevents a non-qualifying corporation from merely assigning the action to another. These rules have important implications for collection actions because what is at issue is not only whether the collector is qualified to bring an action but whether every owner up the chain of ownership is qualified.

Collection Actions: 3.3.3 Can a Collector Sue Under a Fictitious Name?

Some states have a statute pertaining to fictitious business names that requires filing of a business name before the entity is granted the capacity to sue under that name in the state’s courts. Until then, neither the business nor its assignee can bring suit. For example, California, Ohio, and Pennsylvania have such requirements.47

Collection Actions: 3.3.4 Partnership or Trust’s Capacity to Sue in Its Own Name

The common law aggregate theory of partnership holds that a general partnership has no legal existence separate from its members.48 Thus, in states adopting this theory, a general partnership has no authority to sue in the firm name alone.49 Significantly, debt buyers often are partnerships and thus cannot sue solely in their own name in these states.50

Collection Actions: 3.3.5.1 States Requiring Licensure As a Precondition to a Collection Action

The failure of a debt buyer or other collector to be properly licensed may prevent it from bringing suit.53 Many states have licensing requirements for debt collectors, and these are set out in another NCLC treatise.54 A number of these statutes require that only licensed debt collection agencies can bring suit55 or “engage in the business of debt collection in this state without first obtaining a license.”56

Collection Actions: 3.3.5.2 Must Debt Buyers Comply with Debt Collector Licensing Requirements?

An important question is whether the state debt collection agency licensing requirement applies to a debt buyer suing on a debt it owns itself. Is an entity in the business of buying and suing on defaulted loans a debt collection agency within the meaning of the state debt collection licensing statute? If the debt buyer is required to be licensed as a debt collector, but fails to do so, it may be prevented from suing in the state’s courts.66