The importance of disclosing all debts.

Recently, I experienced a string of Chapter 13 cases that were in danger of failing within just the first few months.  It turned out that the reason in each case was the same: the debtors were paying and trying to play catch-up with their utility services (Wisconsin Public Service) and couldn’t afford to make their plan payments.
The thing is, WPS should have been included in their bankruptcy case and not paid separately from the Chapter 13 Plan.  In each case, the debtor never informed me that they were delinquent on their utility bills.  Why WPS didn’t show up on their credit reports is a different mystery, but the point remains that a debtor needs to tell their attorney about any debts they may not have shown up on a routine credit check.
I could get into a detailed discussion about WPS and when and why their debts need to be included in bankruptcy.  But I think this story illustrates a much broader issue that I find myself repeatedly having to hash out with clients.  And that’s the “I don’t want to file against so-and-so” problem.
Here’s the thing, and I can’t stress this point nearly enough.  Listing a debt on your bankruptcy schedules is NOT synonymous with having the debt discharged.  Whether a debt is discharged depends on the nature of the debt, not whether it was disclosed.
A non-dischargeable debt is what it is.  You could file bankruptcy 20 times and list your student loans on your schedules each time, and without a demonstration of hardship, those loans aren’t going away.
Similarly, someone who wishes to keep a store credit card open for future purchases does themselves no favors by omitting the creditor from their schedules.  The bankruptcy discharge is good against the world.  And the credit card debt is discharged, whether they were listed on schedules or not.

Stated another way, the Chapter 7 discharge is “good against the world,” including unscheduled creditors.  The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523.

And listing your home mortgage or car loan does not mean you’re going to lose your house or your car.  Most people get to pick and choose what secured debts they will reaffirm or surrender.  Listing these creditors on schedules is not an affirmation of intent.
So if a debt will be discharged whether or not it is listed on schedules, or if a debt is non-dischargeable whether or not it is listed on schedules, then why is it is so important to list creditors on schedules?
Because no matter who the creditor is – a non-dischargeable student loan, your dischargeable credit card, or your home mortgage that you intend to reaffirm – they are all legally affected by your bankruptcy case.  Your bankruptcy case automatically endows you and all of your creditors with certain rights and responsibilities.
So disclosing all debts becomes a matter of proper notice and of due process rights.  Each of your creditors is entitled to be made aware of your bankruptcy so that they can act accordingly.  If their debt is dischargeable, they may be entitled to object to your discharge for allegations of fraud.  Although your student loans may not be discharged, your lender is still required to not make collection attempts while the bankruptcy is pending.  And although you intend to reaffirm your home mortgage, the debt is technically dischargeable, so your lender needs to know to execute a reaffirmation agreement.
If your case is an “Asset Chapter 7” (non-exempt property available to the trustee to be sold for the benefit of unsecured creditors) or a Chapter 13 (which includes monthly plan payments to be redistributed among creditors), then all of your creditors have a right to know about the bankruptcy so they can file claims.
Sure, there are other reasons to list all creditors.  (1)  So you get the full force and benefit of your automatic stay and discharge injunction protections.  (2)  Because your debt to income ratio, who your creditors are, and how much your creditors are owed (regardless of class) may very well have a material impact on your case and how it is administered.  (3)  Because keeping unsecured debts “out of bankruptcy” usually means you’re still making payments to them, which would constitute all sorts of preference payment issues.
But mostly, it’s a due process issue.  Each and every one of your creditors, regardless of your intent to pay and regardless of dischargeability, will be affected by your bankruptcy case and have a right to know that you filed for bankruptcy.

Median Income Levels

The median income levels are due up for a change something in the next month or two (usually mid-October or November 1).  Median income levels change twice each year.  Being below median means you are presumed to qualify for a Chapter 7 Bankruptcy.  Being above median means you are presumed to have to file Chapter 13 Bankruptcy (although there are exceptions to both of these presumptions).  While I don’t yet know what the new median income levels will be, it has been reported that the income levels are dropping.  That means that your income could be below median now, but by the end of the year, you will instead be above median.
The median income levels are a reflection of the average household income in each state for any given household size.  So if median income levels drop next month, that generally means that Americans are earning less money than they were 6 months ago.  That probably doesn’t come as much of a surprise to anyone, but here’s what might…  When the median income level drops, more Americans are presumed to have to file Chapter 13 (debt repayment) even though Americans are, as a whole, making less money.  When the median income level increases, more Americans qualify for Chapter 7 (simple discharge), even though we’re making more money as a nation.
Regarding the bankruptcy laws passed in 2005, one of my colleagues is fond of saying, “Morons wrote this law.  It doesn’t make sense, but it is what it is.”  And when you think about this correlation between median income levels and what it means for bankruptcy filings, you have to agree with the sentiment.

Threats of Criminal Prosecution

A growing number of my clients have reported incidents to me of a collection agency or cash store threatening criminal prosecution for fraud or passing bad checks, in order to get my clients to pay them the debt owed to them.
First, let’s get the bad news out of the way.  Yes, it is technically possible for any creditor to press criminal charges against a debtor if they believe they can make a case for fraud.  Even once a bankruptcy case is filed, the automatic stay does not prevent formal criminal proceedings from commencing or continuing.

As a criminal proceeding, the burden of proof is on the creditor to demonstrate fraud, which requires a showing of intent by the debtor to defraud.  That intent is very difficult, often impossible to prove.  So while it is possible, and certainly does happen from time to time, it is rare for fraud to be prosecuted based solely on a check bouncing or the act of incurring a debt, unless there is additional evidence that supports the intent element.  If you are not sure about the circumstances of your case, I strongly recommend consulting with a criminal defense attorney, preferably one who specializes in these sorts of cases.
There is a difference between criminal proceedings and threats to commence criminal proceedings.  And this is what I want to focus on and discuss in this article.
While the automatic stay in a bankruptcy case does not prevent a creditor from pressing criminal charges, it does prevent a creditor from making idle threats of criminal prosecution.

Acts of criminal prosecution, which are excepted from the automatic stay under 11 U.S.C. § 362(b)(1) are distinguishable from acts to collect a debt (prohibited under 11 U.S.C. § 362 (a)(6)) using the threat of criminal prosecution.  Desert Palace, Inc. v. Baumblit (In re Baumblit), 15 Fed. Appx. 30, 35-36 (2d Cir. N.Y. 2001) and Batt v. Am. Rent-All (In re Batt), 322 B.R. 776, 779 (Bankr. N.D. Ohio 2005).

Therefore, it is possible to prosecute a creditor for a violation of the automatic stay and to receive sanctions for that violation.  But what if you don’t intend to file for bankruptcy?  Or what if you intend to file for bankruptcy, but haven’t filed yet?  Does that mean you are without protections?
The answer is no.  (What follows is based on Wisconsin statutes.  If you live in another state, check with an attorney licensed to practice in your state to make sure that your state has a similar statute to what is described here.)
Again, while actual criminal prosecution is permissible (assuming the creditor can make the case), it is unlawful for a creditor to threaten criminal prosecution in order to induce payment on a debt.  It is criminal extortion.

Wis. Stat. § 943.30: Whoever, either verbally or by any written or printed communication, maliciously threatens to accuse or accuses another of any crime or offense, or threatens or commits any injury to the person, property, business, profession, calling or trade, or the profits and income of any business, profession, calling or trade of another, with intent thereby to extort money or any pecuniary advantage whatever, or with intent to compel the person so threatened to do any act against the persons will or omit to do any lawful act, is guilty of a Class H felony.

Remember, it is possible for a creditor to press criminal charges if they can prove the element of intent to defraud.  However, they can prosecute you whether you pay the debt or not.  If a creditor is threatening criminal prosecution, but tells you that they will not prosecute you if you pay the debt, that’s a good sign that they do not actually intend to prosecute you, but they are attempting to extort you.  If you have received harassing phone calls like this from creditors (especially debt collection agencies or payday loan stores / cash stores), I strongly urge you to contact the district attorney’s office for the county you live in.  If your district attorney is unwilling to help you, you can also consider contacting the state attorney general’s office.