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Consumer Bankruptcy Law and Practice: 15.5.5.6 Tax Consequences of the Discharge

The law is clear that, generally speaking, the discharge of a debt in bankruptcy, unlike most other types of discharge of indebtedness without payment, is excludable from gross income for tax purposes.1035 Nonetheless, some creditors believe that they are required to send a bankruptcy debtor a 1099 Form when a debt is discharged in bankruptcy.1036 Although this problem may eventually disappear as a result of clarifying tax regulations,1037 an

Consumer Bankruptcy Law and Practice: 14.3.2.6 Recoupment Claims in Bankruptcy After Expiration of Limitations Periods

Bankruptcy court can also be an important forum for raising consumer claims against creditors after the statute of limitations on those claims has run.212 In In re Coxson,213 for example, the Fifth Circuit concluded that a Truth in Lending Act claim could be raised defensively by way of an adversary proceeding objecting to a proof of claim in a chapter 13 case—even though the limitations period had passed.214

Consumer Bankruptcy Law and Practice: 14.3.2.7 Avoiding Mandatory Arbitration Agreements

Mandatory arbitration clauses are now prevalent in consumer contracts of all kinds. These clauses force consumers to submit their claims to an arbitrator who issues a final, binding ruling on the merits, with virtually no opportunity for judicial review. Bankruptcy court can sometimes be a favorable forum for avoiding arbitration clauses so that consumer claims may be litigated in court.

Consumer Bankruptcy Law and Practice: 14.3.2.8.1 Introduction

Legal claims against third parties are property of the debtor that is frequently overlooked in bankruptcy cases. Failure to identify and list these claims on the bankruptcy schedules can have significant consequences. The debtor may be deprived of standing to pursue an omitted claim either during or after the bankruptcy, or the debtor may be judicially estopped from pursuing the claim after the bankruptcy case is closed. Debtors can avoid these problems by carefully listing all potential claims and asserting available exemptions.234

Consumer Bankruptcy Law and Practice: 14.3.2.8.2 Standing

The commencement of a bankruptcy case creates a bankruptcy estate that consists of all the debtor’s property, which includes potential causes of action.235 Such claims remain property of the estate unless exempted by the debtor, administered by the trustee, or abandoned by the trustee.236 In a chapter 7 case, prepetition claims not exempted by the debtor may be administered and liquidated by the trustee.237 When administering prepetition causes of

Consumer Bankruptcy Law and Practice: 14.4.1.1 Generally

A dispute may be brought into the bankruptcy system in a number of ways. Depending upon the nature of the dispute and the tactics of the parties, most litigation takes place through either adversary proceedings or contested matters within the bankruptcy case.266

Consumer Bankruptcy Law and Practice: 14.4.1.3 Procedure After Removal

Upon removal, any other party to the case who has filed pleadings in the removed case is required to file a statement as to whether or not the party consents to entry of final orders or judgment by the bankruptcy court.283 It must be filed within fourteen days of the notice of removal and be mailed to every other party.284

Consumer Bankruptcy Law and Practice: 14.4.2.1 Generally

In addition to jurisdiction over a broad array of cases, 28 U.S.C. § 1334 also confers the power to decline to exercise that jurisdiction. The court is allowed to abstain, under 28 U.S.C. § 1334(c), from hearing proceedings arising under title 11 (the Bankruptcy Code) or arising in or related to cases under title 11, “in the interest of justice, or in the interest of comity with State courts or respect for State law.” Moreover, in certain circumstances it is required to abstain upon timely motion of a party.

Consumer Bankruptcy Law and Practice: 14.4.2.2 Mandatory Abstention

As the result of strong pressure from states’ rights advocates in the United States Senate, the 1984 bankruptcy amendments introduced another new concept into the bankruptcy jurisdictional scheme—that abstention is mandatory if certain requirements are met.305 These requirements, set forth in 28 U.S.C. § 1334(c)(2), are:

Consumer Bankruptcy Law and Practice: 14.4.2.3 Discretionary Abstention

The 1984 amendments preserved the power of the bankruptcy forum to abstain from other proceedings as well. The statute added to the previous language, which allowed abstention “in the interest of justice,” language permitting abstention “in the interest of comity with State courts or respect for State law.”317 As these were considerations already taken into account by most courts, it is unclear whether this additional emphasis changed the results in many cases.

Consumer Bankruptcy Law and Practice: 14.4.4.4.2 Escrow overcharges

One of the most common problems found in reviewing mortgage claims is abuse in the collection of escrow arrears.418 Often, this occurs because servicers fail to consider the effect of a chapter 13 cure plan and use the total amount of escrow arrears in reevaluating the borrower’s escrow account after the chapter 13 case is filed. This review of the escrow account is then used as the basis for calculating the debtor’s new postpetition escrow payment going forward.

Consumer Bankruptcy Law and Practice: 14.4.4.4.3 Interest overcharges

Several problems related to interest charges can arise as well. A common problem arises when servicers itemize or otherwise include in the proof of claim interest on arrears432 claims that will accrue postpetition under the plan. In jurisdictions where the trustee automatically calculates and pays that interest, some debtors end up paying double.

Consumer Bankruptcy Law and Practice: 14.4.4.4.4 Late charge abuses and other mistakes in crediting payments

Despite a chapter 13 plan to cure arrears, some creditors continue to treat timely payments received postpetition as if they were late. This occurs based on the industry practice of crediting payments received to the oldest outstanding installment. Although this practice may be appropriate if there is no bankruptcy pending, it is not appropriate in situations in which the prepetition arrears are being paid according to a proof of claim (which may already include late charges for those payments) and the debtor’s chapter 13 plan.