1. Stop paying debt;
2. Calls from original creditor;
3. Debt transferred to debt collector, calls from debt collector start;
4. Lawsuit summons arrives;
5. Default judgment enters against you;
6. Supplementary process proceeding filed;
7. Arrest warrant (“capias”) issued.

Again, this is what usually happens if you do nothing. (Note: wage garnishment proceedings can also start at step 6 if you are employed.)

What we find is that even the last holdouts usually spring to action at step 4-6. Many of our bankruptcy clients come to us during those steps, so it’s never too late: Absent unusual circumstances, a bankruptcy discharge will discharge even your debt lawsuit judgments. However, most of our clients see the writing on the wall earlier on, and wishing to avoid the steps above, get started at the beginning stages of default or before.

So, what about steps 6-7, which is what this post is really about? Supplementary process is a new case filed to enforce a judgment. It has nothing to do with whether or not you owe the debt, which has already been established by the judgment, but it instead asks the question, “what can you pay?” The law is here, G. L. c. 224, § 14, for those wanting to read it. Just like regular lawsuits, a supplementary process suit starts with a summons served onyou. However, this summons is different than the original lawsuit summons (step 4 above). You can ignore an original lawsuit summons and the only effect will be that judgment enters against you, but if you ignore a supplementary process, a capias warrant will issue.

It goes without saying that people don’t like arrests warrants or being arrested. Most people with debt problems have legitimately fallen on hard times. They are otherwise law-abiding citizens, and not criminals. Being the subject of an arrest warrant usually scares them a great deal. Although some of this fear is inevitable, a capias warrant, though serious, is a civil arrest warrant basically seeking to force your into court for skipping the supplementary process hearing. If you don’t skip the supplementary process hearing in the first place, you won’t be subject to a capias; even if you do get a capias, you can arrange to cooperate with the sheriff’s office or constable and voluntarily go to the next supplementary process hearing date. Once you comply with the summons, this “purges the contempt” and the effect of the capias is no more. Usually you’ll get a call from sheriff giving you one last chance to voluntarily appear before you’re arrested.

So, what happens at supplementary process–whether you end up going before or after a capias warrant issues? The bottom line is that at a supplementary process hearing the court determines what you should pay on the judgment. If you truly cannot pay anything–like if your only income is social security and you have no substantial property–the court is supposed to dismiss the supplementary process case with the priviso that the judgment creditor can bring it forward again in a year. If, on the other hand, you do have sufficient income to make a payment, the court will simply order you to pay what it considers appropriate. Any violation on this payment order can result in additional contempt proceedings (and a new capias). Bankruptcy end up being very popular at this point because it trumps all of the supplementary process payment orders and proceedings.

When you’re first called at the supplementary process hearing, the judge or magistrate is first likely to ask you to negotiate in the hallway with the lawyer representing the judgment creditor. Courts prefer when you can come to an agreement on a payment arrangement. They would prefer not to have to examine you and decide the matter. However, you can always decline to come to terms with the lawyer and go back and roll the dice in front of the judge.

If you’re reading this and are in the advanced stages of debt default, consider submitting this form for a free bankruptcy consultation or calling us at 617-716-0282.

On schedule C to their bankruptcy petition the Lawrences claimed an exemption in the Maine condominium, invoking the Massachusetts homestead exemption pursuant to Mass. Gen. Laws ch. 188 § 3. David M. Nickless, the chapter 7 trustee in this case, filed an objection to the debtors’ claimed exemption asserting that the Massachusetts homestead exemption did not protect out of state property. In response, the debtors sought and were granted leave to file an amended schedule C switching from state to federal exemptions and declaring the Maine condominium exempt under Bankruptcy Code § 522(d)(1).

As a preliminary matter, it warrants mention to state again that individuals in bankruptcy can choose between the federal and Massachusetts exemptions.

In contrast to the Massachusetts homestead, which protects up to $500,000 in home equity, but which was unavailable to the Maine property, the federal homestead protects $21,625 of equity in a property the debtor “uses as a residence.” The Trustee argued that the debtors’ main home was in Massachusetts and not in Maine at their vacation condo. The debtors had moved out of their Massachusetts property and into Maine a couple of days before filing their bankruptcy. This didn’t matter to Massachusetts Bankruptcy Judge Melvin Hoffman, however, who noted that people may have multiple residences–as highlighted by the multiple uses of the qualified “principal residence” in the Bankruptcy Code and elsewhere–and, consequently, whether the Maine home was the primary home of the debtors on the petition date was immaterial. However, the court delved a bit further and noted that “use” of the residence was also required by the statute’s plain language. Here, the debtors satisfied that test easily, but the court noted that “where a debtor had never used a residence prior to filing, bankruptcy courts have held that the residence may not be exempted under [the federal homestead].

The timeline of a normal consumer Chapter 7 case: After a Chapter 7 case is filed, the court sets a date and time for a meeting of creditors. This date is usually about 30 days from the filing date, but it can be a bit longer during the winter holiday season. An important period is created based on this first-scheduled date of your creditor meeting: A 60-day period for creditors or the government to object to your discharge. This waiting period is the same in all Chapter 7 cases and is created by Federal Rule of Bankruptcy Procedure 4004. Usually there are no objections, so once the 60-day period passes, the Court issues you your discharge and the case is closed. To summarize, once filed, a Chapter 7 case lasts about three months. You can read more about Chapter 7 bankruptcy here.

The timeline of a Chapter 13 case: Chapter 13 bankruptcy cases last either three or five years. If you’re below median income based on family size (you can see the new median income figures effective May 1, 2012 here), your plan is three year; if you’re above median income based on family size, you’re plan is five years. See 11 U.S.C. 1325(b)(4). However, even though you’re still technically in bankruptcy during your repayment period, as long as you make your Chapter 13 payments and don’t return to the court for any extraordinary relief, you will have no contact with the bankruptcy court after your meeting of creditors, which like in a Chapter 7 case, will be about 30 days after your case is file.

You can read more about Chapter 13 bankruptcy here and choosing between chapters of bankruptcy here.

Here is the direct link to the U.S. Trustee’s web site.

We tend to be asked about this issue when elderly parents with dementia or Alzheimer’s disease have granted a power of attorney to a son or daughter. The “attorney in fact”–the person granted the power of attorney–wants a discharge of the parent’s debts due to creditor harassment and lawsuits. There is also at times an incentive for children or other heirs to seek a bankruptcy discharge for their parents when they are elderly: if the parent dies with undischarged debt, their creditors will have claims against their probate estate. This might require the sale of a family home to satisfy debts and, in any event, would reduce the amount that children or other heirs would otherwise get under a will or via the laws of intestacy.

So, with this in mind, is a POA-based bankruptcy possible in Massachusetts? As the Vermont Bankruptcy Court put in in 2001:

It appears well-settled that a bankruptcy case may be commenced through an attorney-in-fact under appropriate circumstances. An attorney-in-fact may commence a bankruptcy case so long as the debtor qualifies for relief under 11 U.S.C. § 109, the commencement of the case is within the scope of the specific language contained in the document granting the power of attorney, and such action by the attorney-in-fact does not constitute the practice of law.

In 1999, the New Hampshire Bankruptcy court also allowed a POA bankruptcy and set out some detailed requirements. Essentially, it said that:
1. The petition must be properly executed by the attorney in fact in his representative capacity.
2. A copy of the durable power of attorney must be attached to the petition which serves, among other things, that the attorney (at law, not in fact) for the debtor has made certain inquiries regarding the power of attorney and has no reason to believe that it’s invalid.
3. The “attorney in fact shall appear at the first meeting of creditors and the trustee shall require the attorney in fact to state on the record the reasons necessitating the commencement of the case under a power of attorney.”
4. The petition must be served on the debtor.

There are reasonable safegaurds meant to protect the integrity of the bankruptcy system and ensure that attorney-in-fact-initiated bankruptcies are only filed when necessary. Although, the Massachusetts Bankruptcy Court has not gone on record as allowing POA bankruptcies, it would likely follow the majority of courts, but require a showing of necessity like the New Hampshire court did.

One novel issue here in Massachusetts, however, is that we repealed our durable power of attorney law in 2009 and replaced it with a customized version of the Uniform Probate Code. At least one attorney commentator believes that this invalidates pre-2009 POAs. Consequently, it may be prudent to update your POA, if possible, before filing bankruptcy based on one. If the debtor is already incapacitated, however, this may be impossible. It is my opinion that the Massachusetts Bankruptcy Court would not dismiss a bankruptcy case due to a pre-2009 POA. However, if it did, the appointment of a conservator or guardian–a step certain to increase complexity and expense of a case–would be necessary to proceed with a bankruptcy case on behalf of the debtor.

Who Qualifies?

So why does it matter?  What is so good about Chapter 12?

There is also no means test in Chapter 12 or prohibition on seasonal or balloon plan payments.  Although you will need some predictability of income in order to create and fund a feasible reorganization plan, the relaxed requirements of Chapter 12 make a fisherman bankruptcy more flexible and potentially more beneficial and likely to succeed.

Debts (claims and interests, technically) are divided into classes in Chapter 11.  There can be many controversies about which debts are lumped together for reasons we will see, but in a very simple scenario, let’s say, the business in bankruptcy has a secured bank loan and several unsecured vendor debts.  The secured debt will occupy Class 1 and the vendor debt will make up Class 2.  The voting totals emerging from each class is what will matter.

In a standard reorganization scenario, the business debtor’s lawyer will draft a lengthy document telling the story of the business, how it ended up in bankruptcy, what it’s financial picture is like, what the business intends to do in its bankruptcy plan, and what the alternatives to the plan’s approval is.  That document is called a disclosure statement.  The court must ensure that the disclosure statement provides adequate information.  This is largely a discretionary standard, but it is defined quite intelligently as enough information so that a hypothetical investor in a class of claims being treated under the plan would be able to make an informed judgment about whether to invest in a claim of that class.  Anyway, the court will approve this document after one or more amendments and it will then be transmitted to all creditors along with a copy of the plan and a ballot.  The voting will begin.

Whether a class of claims accepts the plan or not is based on whether more than half of the creditors in the class holding at least 2/3 of the dollar amount of the class who actually cast a vote do so in favor of the plan.  In general, all classes of claims who are “impaired” (basically have their normal rights outside of bankruptcy modified) have a right to vote on the plan and must accept the plan.  However, and this is a big however, there is an alternative route to getting a plan confirmed, and that is called “cramdown.”  A cramdown plan is possible when not all impaired classes accept the plan (but at least one must) as long as the plan is held to be fair and equitable.  The phrase “fair and equitable” is a whole subject matter in itself, and I will plan to get to that in another post.  However, if the plan is accepted by all classes of creditors or the cramdown requirements are met, and the plan otherwise complies law and stands a decent chance of working out (is “feasible”), the court will confirm the plan.  In a classic reorganization scenario, once that happens the business (a “debtor in possession”) is reorganized and tie up loose ends and emerge from bankruptcy.  The business will still be bound to carry out what it promised in its plan (i.e. make certain payments to pre-bankruptcy creditors), but otherwise it will be free to operate unimpeded and unsupervised with a new capital structure and a discharge of pre-bankruptcy debts.

Wait, I’m keeping my house and paying on the mortgage, did I reaffirm?  Probably not.  90 plus percent of bankruptcy debtors in Massachusetts who want to keep their homes just “keep and pay.”  That means they keep their house and pay on their mortgage.  The twist with reaffirmation is that it revives your discharged personal liability on the mortgage while this is wiped out in the keep and pay option.  Liability on a secured debt comes in two forms: the lien and the personal liability.  A bankruptcy discharge removes the personal liability, even on a mortgage, but the mortgage lien remains.  That prevents people from getting free houses by virtue of their bankruptcy discharge.  If a mortgage liability is reaffirmed, both the lien and the personal liability stay in place, and not just the lien.

So why isn’t reaffirmation more popular?  First, it’s a separate process that costs more in legal fees.  Second, it keeps you on the hook for the debt. So, if you ever stop paying and the property gets foreclosed you may be subject to a deficiency judgment.  There are simply not too many benefits from reaffirming.  If there is one, it’s that you get the convenience of the mortgage servicer handling the debt normally, i.e. sending you statement, allowing online access to the account, etc.  When a mortgage is not reaffirmed, this may not happen.  However, you can also get these benefits by refinancing the mortgage a few years after your bankruptcy case.

There is always a senior mortgage with superior rights and first dibs on the money from a foreclosure sale.  Tax and condo fee creditors may even exist with rights that trump a junior mortgagee.  Consequently, unless there is obvious equity above and beyond all outstanding liens and the expected costs of the foreclosure process, a junior mortgagee is extremely unlikely to press a foreclosure.  We often see people with second mortgages that are in severe default with no attempts on the part of the junior mortgagee to foreclose.  However, unless the junior mortgage is wholly unsecured because it is completely out of the money and can be stripped in a Chapter 13, that mortgage lien will stay with the property and so will have to be paid off with interest upon a normal sale.  That could happen with real estate prices rising again in the future leaving homeowners with more opportunities to sell or refinance property.

Note: I mention this all the time, but it warrants repeating….Wholly unsecured junior mortgage liens can be stripped off and eliminated in a Chapter 13 bankruptcy.  This is dramatic relief and is only possible now given the recent drop in home prices.  As prices appreciate again, the opportunity will no longer be available.