File for Chapter 7 during an Arbitration process

[ch7kyc]

Hi folks,

I have tremendous amounts of debt. The debts were incurred due to a technical error on a brokerage.

For this reason, I may be about to enter an arbitration process (settling a dispute).

Before I pull the trigger and begin this process, I must ask, am I allowed to file for chapter 7 during the arbitration process?
I really want to see the case through because I believe the evidences of wrongdoing are overwhelmingly in my favor. That said, this whole ordeal, constantly worrying about money, takes a tremendous toll on you. Over the months, I've incurred much more debt (credit cards, loans, etc.) in trying to beat the market and pay off the brokerage debts. Of course, I've just dug myself into a deeper hole.

I feel, there may be a point where the stress is too great and I'd need to just file for bankruptcy (especially if the lawyers keep dragging out the case over years).

That begs the question, does anyone know concretely if filing for bankruptcy during arbitration pose any issues?

My intuition is that I am able to file for chapter 7, and the trustee discharges me, my case would simply be settled (since the awards would be considered an asset). The end. (I suppose my lawyers can still duke it out if they want the awards, but my awards would be used to pay off my creditors, so it doesn't matter on my end, regardless). Does that sound correct?

[ch7kyc]

Forgot to ask... If worse comes to worse and we lose the case, can the brokerage mandate that the debt follows me even after bankruptcy?

I know these sort of questions are probably very context dependent ("should speak with a lawyer"). To be sure, I've already spoken with my lawyer representing me in this case, and they simply said there's nothing FINRA-specific (the government entity that moderates legal financial industry matters) that would prevent me from declaring bankruptcy.

Still, I just want to be sure, if anyone has further insights/thoughts.

[despritfreya]

With only a few exceptions, all matters pending outside of the bankruptcy will be stayed by the filing of a bankruptcy. However, the ramifications of filing a bk need to be thought through before you pull the plug. Just remember, any alleged wrongdoing will simply invite the filing of a 523 Complaint against you in the bankruptcy.

You should be discussing your situation with a well qualified bk attny. Bankruptcy may not be the solution you may think it is.

Des.

[kindabroke]

To be clear, I’m pretty certain if I filed for bankruptcy today, there’s nothing the brokerage can do. The fault is on them and they know it. It’s why they haven’t sent me to debt collections etc even though it’s been many months.

My fear though is that if I do engage in an arbitration with them, their many lawyers can find a way to skirt paying. For example, delaying long enough that we just give into an unfavorable settlement. If that happens, and it’s still not enough to cover my debts, my fear is that they can use some sort of legal mandate that ensure it haunts me even if I do file for bankruptcy.

Does the additional context I provide change anything? Additionally, I have called bankruptcy lawyers. All the ones I’ve counseled with push off the case. It’s mostly because I make it clear it’d be many months before I’d file and that loses their interest; but I also think it’s because just the idea of a complicated case makes them squirm. Especially now, with so many people applying for bankruptcy, they have their choice of easy cases.

[justbroke]

As despritfreya wrote, the bankruptcy would remove your personal (in personam) liability to repay the debt, so long as there are no Dischargeability Complaints (a/k/a the 11 USC 523 issues related to proven fraud). There was one case that I looked at where, despite the in personam discharge, the debtor was still subjected to the arbitration clause because there were a.) other performance considerations and b.) the debtor didn't want to pay any of the arbitration fees (including, but not limited to, the "American Rule" where all attorney costs are borne by each party), on a "discharge injunction" issue related to credit reporting (the debtor was going to bring forth the arbitration action).

I think Des was trying to say that a bankruptcy would be useless if there is a successful Dischargeability Complaint (Adversary Processing/AP) against you as the defendant, as you would still be liable. While some bankruptcy pre-planning is warranted, most bankruptcy attorneys aren't going to talk to you much especially when they a.) know that you're window shopping, and b.) know that you're not filing for "many months" in the future.

I would also venture to guess that any attorney that took on this case, may think about whether this would be dragged into a protracted case with an Adversary Proceeding and all the costs associated with those mini -- but "not-so-mini" -- lawsuits within the bankruptcy court. To get around the issue where attorneys don't want to go into depth, you may offer to pay for an hour or two of their time. Paying for their itme could still be pricey as most attorneys charge a (medium) rate of $300/hour(1).

Take that with a grain of salt as this is solely my opinion.

(1) National Median Rates for Practice (Bankruptcy), U.S. Consumer Law, Attorney Fee Survey Report, 2015-2016.

[kindabroke]

Thanks so much, justbroke. Your additional clarity is incredibly helpful.

I guess I want to reiterate there is absolutely no fraud on my part. I’m the victim.

Sorry to repeat myself, but again I’m just afraid (because I don’t know much about legal), that by me (not THEM) pursuing an arbitration, that allows them to do some legal shenanigans (Make the debt follow me even if I filed bankruptcy) that otherwise wouldn’t have been possible if I simply filed for bankruptcy (and chose not to engage in the arbitration process). The flaw in their brokerage system made me incur such a huge debt, that they’d definitely must be thinking of ways to make sure it haunts me for the rest of my life, since there’s no way I can pay for it in even a five years time.

I'm guessing by not addressing that point I’ve made, you’re implicitly noting that there’s nothing you’re aware of that can put me in that nightmare scenario, correct?

My arbitration lawyers are working on contingency fee only; they think I have a great case. They say there’s nothing they know that would ruin my plan for bankruptcy if we lose. But I want to double check with this forum, since maybe they’re just saying that since they see my case as a high probability win.

[justbroke]

The debt can't follow you personally (in personam) if the debt is discharged. If there were other performance considerations in the agreement, then they may be able to enforce those through arbitration.

My guess is that you're just looking at various scenarios and wanting to know if there are any gotchas. If there is no fraud and the creditor is unlikely to bring up an Adversary Proceeding (AP) regarding dischargeabilty, then you would be personally discharged from the debt upon the entry of the discharge order. There are no two-ways about this. Unless the debt is determined, by the court and not by opinion of the creditor, that the debt is non-dischargeable, the creditor cannot personally pursue you.

(If you pledged any collateral (e.g. consensual lien) then that collateral lien would survive the bankruptcy.)

Since you are expecting that you may be paid from this (arbitration) lawsuit, that would pique the curiosity of the Chapter 13 Trustee and any proceeds would likely be property of the (Chapter 13) bankruptcy estate. While Chapter 7 (Panel) Trustees like to insert themselves into lawsuits, the Chapter 13 Trustee may likely want to be involved in a small way. At the minimum, the (arbitration) lawsuit must be listed as "Personal Property" (on Schedule B), and marked contingent. Such a lawsuit may not be exempt from administration from the estate.

What's interesting is that your debt would have been discharged, but what if the lawsuit recovered the money? Does this mean that the recovery is property of the bankruptcy estate and then subject to distribution to all creditors that filed an allowed claim?

So many questions which makes this more complex. I would make sure that any bankruptcy attorney is acutely aware of the arbitration suit and that they know that you have attorneys working on that case. Filing bankruptcy, while in arbitration, would only bring the contingent lawsuit as a potential asset of the Chapter 13 bankruptcy.

[kindabroke]

Note: you’ve addressed my questions plainly and clearly. You’re doing so much good by posting on this forum. Thank you so much again. The below is just me ranting, so no need to read.

My lawyer is pretty much all set to file the complaint, and is just waiting for my go ahead.

It sounds like if I were to OK and begin the arbitration process, I better buckle up and see it through, as bankruptcy in the middle of the arbitration would be highly confusing. This is what’s especially giving me pause, but I think I may give the go ahead to my lawyers tomorrow.

The sad fact is that my income is way too high (six figures) so it may be tough to argue for chapter 7 but it’s the only path. My debts are far too high for chapter 13.

I initially wanted to get rid of my debts by simply making it all back. I’ve always been good in the markets. So I took out cash advances, etc. but the last few months of the market have been anything but normal. I can’t gamble away anymore. I have just been depressed and my employer is letting me go on leave with 75% pay, which is still far too high for chapter 7.
I need to support my parents now (owns restaurant), by paying for all the house bills, food. I’m hoping this is what allows me to pass the DMI test. After maybe 4 more months, I think the DMI from my paycut + household expenses makes a good case for chapter 7.

Anyways, I’m definitely revealing too much information. I just want to let out the stress. If the arbitration is settled as that I simply don’t owe the broker money (even though their error costed me close to $1 mil, not even counting the amount I “owe” them), it’s going to be a tough spot. Perhaps, the right amount of debt that I wouldn’t file for bankruptcy, yet feel constant stress per financial burden.

[kindabroke]

Note: the above is the same account as the OP.

just made a separate account and accidentally posted from that, but it really doesn’t matter

thanks again

[justbroke]

The below is just me ranting, so no need to read.

Challenge accepted.

The sad fact is that my income is way too high (six figures) so it may be tough to argue for chapter 7 but it’s the only path. My debts are far too high for chapter 13.

Maybe you can qualify for a Chapter 7 discharge. I don't know if your brokerage debt is consumer debt. If it's non-consumer debt and is more than 50% of your total debt, then you would qualify for a discharge under Chapter 7. That's why it would be important to speak with the right attorneys. For example, if your brokerage debt was because you had a "profit motive" in trading (day trading or other stock-market trading), then it may be considered non-consumer debt.

The distinction between whether it's consumer or non-consumer debt is important. My Chapter 7 was a non-consumer case even with my income well into 6-figures.

Iinitially wanted to get rid of my debts by simply making it all back. I’ve always been good in the markets. So I took out cash advances, etc. but the last few months of the market have been anything but normal. I can’t gamble away anymore. I have just been depressed and my employer is letting me go on leave with 75% pay, which is still far too high for chapter 7.

You know, this is the classic issue with gamblers; the true belief that they can "win it all" back. I am lucky that I never got to that point, in gambling, but I certainly felt that I could have easily fallen into that trap.

I need to support my parents now (owns restaurant), by paying for all the house bills, food. I’m hoping this is what allows me to pass the DMI test. After maybe 4 more months, I think the DMI from my paycut + household expenses makes a good case for chapter 7.

Look at the non-consumer path... if you were trading more as a business and not just "dabbling" in the stock market.

I wish you the best.

[despritfreya]

You do understand that, in the context of a Chapter 7, any claim you have against the brokerage firm belongs to the Chapter 7 Trustee unless you can find an exemption to cover it?

You have not described the cause of action. Who is suing whom and why? If the brokerage firm thinks you improperly took funds you will be facing a 523 action in the bankruptcy. If you think you have a claim for some wrong the brokerage firm did against you, that claim will be subject to sale by the Chapter 7 Trustee (unless exempt). The brokerage firm will offer to buy it from the bankruptcy estate and, while such a (Section 363) sale is an auction sale, you will not outbid the brokerage firm in an effort to be the successful bidder.

And. . . as to the arbitration provision in your employment (or other) contract, such a provision is potentially enforceable inside of bk. The party who wants to utilize mandatory arbitration will file a Motion to Lift the Automatic Stay for the purpose of enforcing the non-monetary provision in the contact. The bankruptcy court will then decide if it wants to hear the matter or send it to arbitration. The arbitration proceeding will determine liability. The bk court will then determine if that liability is non- dischargeable if a timely 523 complaint was filed.

Again, you need to discuss this with a well qualified bk attny because, you need to be careful what you wish for.

Des.

[ch7kyc]

despritfreya Please re-read my responses. I think I sufficiently covered your all your responses already.

You do understand that, in the context of a Chapter 7, any claim you have against the brokerage firm belongs to the Chapter 7 Trustee unless you can find an exemption to cover it?

Yes, I do understand that. My bankruptcy consideration is that of constant stress.

You have not described the cause of action. Who is suing whom and why? If the brokerage firm thinks you improperly took funds you will be facing a 523 action in the bankruptcy. If you think you have a claim for some wrong the brokerage firm did against you, that claim will be subject to sale by the Chapter 7 Trustee (unless exempt). The brokerage firm will offer to buy it from the bankruptcy estate and, while such a (Section 363) sale is an auction sale, you will not outbid the brokerage firm in an effort to be the successful bidder.

It's the broker's fault. I'm initiating the arbitration. What's happened is clearly their fault. My concern is by initiating, there's possible legal shenanigans they can initiate. Justbroke has addressed my concern.

And. . . as to the arbitration provision in your employment (or other) contract, such a provision is potentially enforceable inside of bk. The party who wants to utilize mandatory arbitration will file a Motion to Lift the Automatic Stay for the purpose of enforcing the non-monetary provision in the contact. The bankruptcy court will then decide if it wants to hear the matter or send it to arbitration. The arbitration proceeding will determine liability. The bk court will then determine if that liability is non- dischargeable if a timely 523 complaint was filed.

Again, you need to discuss this with a well qualified bk attny because, you need to be careful what you wish for.

This is incredibly good information to have and one that will continue my tremendous stress, but is important but for the most thoughtful decision. Really appreciated.

justbroke
Is there any way I can personal message (PM) you for an additional question? I don't see a PM option on your profile.
It relates to the point you brought up:

Maybe you can qualify for a Chapter 7 discharge. I don't know if your brokerage debt is consumer debt. If it's non-consumer debt and is more than 50% of your total debt, then you would qualify for a discharge under Chapter 7. That's why it would be important to speak with the right attorneys. For example, if your brokerage debt was because you had a "profit motive" in trading (day trading or other stock-market trading), then it may be considered non-consumer debt.

The distinction between whether it's consumer or non-consumer debt is important. My Chapter 7 was a non-consumer case even with my income well into 6-figures.