Settling debt or Claim after Ch. 7 discharge

[mindblown]

My wife filed ch 7 a few years ago. We had litigation pending as the plaintiff's when she filed. She was discharged several years ago but the trustee placed a claim on the suit to recover any damages that would go to my wife to satisfy her debts. So even though she was discharged it appears she will now have to pay her debts in full plus the trustees share because the damages will exceed her debts.

In this case it is to our advantage to settle the debts for anything less than 100% because of not the trustee is going to pay them all off. We made contact with the 6 creditors that filed proof of claim forms. 3 of them have no interest in settling. 2 of them are getting back with us. 1 of them which is the SBA for a disaster loan with a balance of 35,000 has agreed to accept an Offer in Compromise or OIC of 5,000.

The case worker with the SBA said they do not usually file anything with any court when accepting payment. She sent me a draft of what they would send me with the payment of 5,000.00.

The letter from SBA will be similar to:

"SBA has applied your recent voluntary payment of $X,XXX to the balance of Loan #. In addition to this account being discharged for John Doe, the SBA accepts the voluntary payment of $X,XXX as a settlement of the $35,000.27 remaining balance. "

The question is once I receive this letter what has to happened for the court to recognize it? Obviously they do not file a release of the claim with the court so in this case can I or is sending the letter to the trustee sufficient? I do not know what happens if lets say after I have settled with the SBA the court sends them a payment on the claim they filed I don't believe they will send it to me. Then there is the other issue of not wanting to pay the trustee a percentage of something that was already settled and gone.

For clarification purposes, we had pending litigation for damages against others for a substantial sum prior to her filing bk. When asked she had to disclose the suit to the bk court and trustee in her filing. The trustee laid claim to any damages she recovered as a result of the suit. Here we are years later and the case is resolving. One of the defendants settled which will pay a good bit of her creditors. We suspect the other will settle soon and there will be enough to pay the rest. Obviously if we can get them to settle the debts for less than what is owed then we save money opposed to paying all at the full amount owed including all the interest tacked on and attorney fees as well as trustee fees.

The question becomes how do we use a letter from the creditor agreeing to settle or stating that it is settled to transfer that into a release or cancellation of the claim filed with the court?

[justbroke]

If you filed your Chapter 7 through an attorney you need to immediately stop what you're doing and speak with your attorney. If you filed your Chapter 7 Pro Se, you need to stop what you're doing to speak with an attorney immediately.

You can't just dismiss a Chapter 7!!! Now that the discharge is entered, the Trustee will fight you tooth and nail to not allow you to "benefit" from the proceeds of a settlement. It reads though the lawsuit settlement/judgement is not exempt (or is partially exempt) and it would pay all the creditors at 100%. It also reads as though this lawsuit was "scheduled" when you filed and is already part of the bankruptcy estate that was created upon your filing.

I am not a tax professional but even if you were to settle, you may need to consider the impact of settlements and taxable income (1099-C). There are so many things that require one or more licensed professionals to review. I can't recommend anything or say what to do because you need legal advice. Some of that may include just what portion of the settlement may be exempt and/or whether you can negotiate the amount of the settlement with the Trustee. Please do not do this on your own.

This has disaster written all over it. (Or I could be completely wrong and you have a strange Trustee that sees no problem with you dismissing a Chapter 7 with assets pending... thereby eliminating their guaranteed commission on perhaps $XXX,XXX dollars.)

[despritfreya]

You only need to worry about creditors that actually file a Proof of Claim. The Proof of Claim needs to be withdrawn upon payment of the settlement amount so you will have to get the settling creditor to agree to withdraw its claim.

Des.

[justbroke]

Is it "that" simple Des? Wouldn't the Trustee be interested in this, minimally, to get their commission??? Or is the plan to still surrender the value of all "allowed" and "active" claims to the Trustee after you have convinced the creditors to withdraw their claims?

[mindblown]

She filed ch.7 with an attorney who is now no longer in practice. We arent asking to dismiss her Ch.7. We are going to the creditors who filed a proof of claim and are the only ones who can be paid and asking them to settle the debt in exchange for withdrawing their claim form. My problem is the SBA rep who has agreed to chop 30k off the debt in settlement wasn't aware of what I was talking about when I mentioned the proof of claim that was filed. I had to send it to her. She replied and spoke with her supervisor and said they usually don't file anything with the court and provide a letter with the above language. So the issues becomes how can we use the letter from the SBA stating the settlement was made to have the claim withdrawn of the creditor doenst object but at the same time doesnt file on their own?

[justbroke]

I would listen to any information provided by despritfreya (Des) over me on this topic since they have direct professional experience! The strategy which Des wrote about and which you are contemplating is just interesting to me.

I'm just wondering out loud, but after you settle, could you then object to the proof of claim (if SBA won't amend or withdraw their claim)?

Maybe Des has some better strategy for you. I'd hate to see you settle, not have the claim withdraw, and the Trustee pays the creditor (and themselves) anyhow!

[despritfreya]

JB and Mindblown,

I will get back to this tonight - after I go for a ride on my horse. There is a "right" and "wrong" way to deal with the SBA in what you are attempting to accomplish.

Des.

[justbroke]

Thanks Des!

[despritfreya]

Ok, so here is the deal. There is nothing wrong with settling claims. The problem is that once settled you have to get the creditor to withdraw the Proof of Claim. Some will. Some, like the SBA may not. The problem is getting to a person in authority who can make a decision. It is easier to deal with an attorney representing the creditor since he/she will understand what you are trying to accomplish. This is a double edge sword. The attorney will assume (correctly) that the reason for your request is that there is sufficient funds in the kitty to pay the claim in full. The question becomes more akin to how much is the creditor willing to take "now" vs. getting paid in full in the future by the Trustee - maybe a year or more down the road. Look at each claim. If there is an attorney involved contact the attorney instead of the creditor.

There is another catch. If you settle but cannot get the creditor to withdraw the claim you will have a problem since the Trustee makes payments based upon the claims on file. I suppose you could file a Motion to compel the withdrawal of the claim but I have never tried this - mainly because it is an issue that simply does not come up if the process is done correctly.

If a creditor will not agree to withdraw the claim someone (NOT YOU) must purchase the claim for the settlement amount. Once purchased, that person can withdraw the claim. This requires that the purchaser file a "transfer of claim". Here is a link (if it works - if not try cut and paste) to the form:

http://www.uscourts.gov/forms/bankruptcy-forms/transfer-claim-other-security-0

You and/or your spouse cannot purchase the claim. It must be purchased by some third party. This usually means an adult child, parent or very good friend. You can supply the funds to the third party and the third party purchases the claim and then files the transfer of claim with the purchaser being the transferee.

Before you proceed down this path I do recommend you discuss this with a local attorney. In my jurisdiction the path to reducing claims is not typical but it is done and done with much success. Normally a client of our Firm, working with a third party, does this in the context of either a Chapter 13 (100% plan) or a Chapter 11 (trying to control voting) but we have also done this in a couple of Chapter 7 cases (without any animosity by the trustee).

Hope this helps.

Des.

[justbroke]

Des, thanks for the explanation as I know this is what happens in Chapter 11s (consolidation) but didn't ever think of this for Chapter 7s. Impressive.

[mindblown]

Des, I do appreciate your reply. Looking at her case in Pacer tonight it appears I am having a lucky streak. Of the 6 claims I needed to resolve for less than what was owed, two of them are managed by the same "agent" and filed their own request with the court to withdraw their claim. I wrote them a letter asking them if they were ever able to get any reply from the OC from the dispute she filed over the amount of the debt they claim was owed in compliance with the FCRA and hinted that I would consider the matter resolved with the withdrawal of their claim and I also offered them the chance to call me to discuss a settlement of the entire amount they claim is owed. Just like that almost 16k in claims gone without giving them a dime. So if I can settle the 35k for 5k then that leaves me with a balance of only 12k in liability spread out over the three remaining claims. It kind of makes me wish I had offered SBA less just to see what they would have rejected/countered with.

Des, let me ask you this. Of the three remaining claims, two of them are also handled by the another "agent" where one agent is handling both claims. The agent was real ugly in their reply and refuses to negotiate anything. Looking at their claims they listed themselves as the agent for the OC. They filed a form Proof of Claim and unlike Discover they filled out the section on the form of the breakdown of what was owed such as interest, principal etc. but all they filled out was the form and that information. They were both an unsecured credit card that produced the unsecured claims. Can I object to those two claims because they didnt file a copy of a statement showing the debt and what was owed? The trustee's attorney is supposed to call me this week to discuss claims I object to but was quick to point out that she claimed them on her schedule of debts under penalty of perjury. The issue with that is her attorney listed the debts as he found them on her credit report and said you file any debt or amount someone can claim against you. It was never explained that her schedule of debts had to be to the penny correct.

Either way I was just curious if the lack of a single credit card statement would be enough in itself to disqualify a claim since they literally completed the form and claimed those were the amounts owed but did not attach any statement from he credit card company or anyone else showing the debt. This is the single agent on both claims that refuses to bargain. Just curious what way I can have their claims tossed?

[justbroke]

"mind blown".... indeed!

[despritfreya]

Can I object to those two claims because they didnt file a copy of a statement showing the debt and what was owed? The trustee's attorney is supposed to call me this week to discuss claims I object to but was quick to point out that she claimed them on her schedule of debts under penalty of perjury. . . I was just curious if the lack of a single credit card statement would be enough in itself to disqualify a claim since they literally completed the form and claimed those were the amounts owed but did not attach any statement from he credit card company or anyone else showing the debt.

This may be Circuit specific but in the 9th Circuit a debtor does not have standing to object to the amount of a claim unless there is a solvent estate, meaning the assets held by the Trustee exceed the amount of all claims, including trustee’s fees. If there is no money going back to the debtor (estate not solvent) then the debtor has no pecuniary interest in the outcome of claims litigation and therefore has no standing. As to the perjury argument, it is a good one.

Assuming the estate is solvent, an objection to POC based upon only a lack of documentation may also be Circuit specific. We use to file such objections all the time. At some point we stopped but I can’t remember if it was because a case came out that the lack of documentation was not a sufficient reason (debt listed on schedules and not listed as "disputed" ) or if it was because the creditor would just amend its claim thus mooting out the objection. Sorry.

Des.