Paying Your Special Creditor After Filing Bankruptcy

Posted by Kevin on March 29, 2013 under Bankruptcy Blog | Be the First to Comment

If you file bankruptcy, it’s okay to voluntarily repay any debt. But there can be unexpected consequences.

The Bankruptcy Code says “[n]othing…  prevents a debtor from voluntarily repaying any debt.” Section 524(f).

But that doesn’t mean that repaying a debt won’t have consequences, including sometimes some highly unexpected ones. So what are those consequences?

To start off let’s be clear that we’re NOT talking about a creditor which you want to pay because it has a right to repossess collateral that you want to keep. Nor is this about paying a debt because the law does not let you to discharge (write off) it. Those two categories of debts—secured debts and non-dischargeable ones—have their own sets of rules governing them. We’re talking here about voluntary repayment, paying a debt even though you’re not legally required to.

And let’s also make a big distinction about the timing of those voluntary payments. We’re NOT talking here about payments made to creditors BEFORE the filing of bankruptcy. That was the subject of a blog a while back.. Be sure to check that out because the consequences of paying certain creditors at certain times before bankruptcy can be very surprising and frustrating, seemly going against common sense.

Instead, today’s blog is about paying creditors AFTER filing your bankruptcy case. The straightforward rule here is that you can pay your special creditor after filing a “straight” Chapter 7 case, but can’t do so in a “payment plan’ Chapter 13 case. For that you must wait until the case is completed, which is usually three to five years after it starts. So, if you would absolutely want to start making payments to a special creditor—such as a relative who lent you money on a personal loan—right after filing your bankruptcy case, you would have to file a Chapter 7 case instead of a Chapter 13 one.

Why is there such a difference between Chapter 7 and 13 for this? Basically because Chapter 7 fixates for most purposes on your financial life as of the day your case is filed, while Chapter 13 cares about your financial life throughout the length of the payment plan. You can play favorites with one of your creditors right after your Chapter 7 is filed because doing so doesn’t affect your other creditors. In contrast, in a Chapter 13 case your payment plan is designed so that you are paying all you can afford in monthly payments to the trustee to distribute to the creditors in a legally appropriate fashion. Here the law does not allow you to favor one creditor over the other ones just because you have a special personal or moral reason to do so. You can only favor a creditor AFTER the case is completed, again usually three to five years after filing.

So what would the consequences be of paying your special creditor “on the side” during an ongoing Chapter 13 case? The simple answer is that it’s illegal so don’t do it. Beyond that it’s difficult to answer because it would depend on the circumstances of the case (such as how much you paid inappropriately) and would depend on the discretion of the Chapter 13 trustee and of the bankruptcy judge. You’d be risking having your entire Chapter 13 case be thrown out. You would be wasting a tremendous investment of time and money, risking years of your financial life. Clearly, things you want to avoid.

Bankruptcy Filings Continue Down- Better Economy??

Posted by Kevin on March 10, 2013 under Bankruptcy Blog | Be the First to Comment

In May, 2012, I published a blog entitled “Bankruptcy Filings Down- Better Economy?.  My conclusion was that filings were down but the increased cost of filing bankruptcy  may have had more to do with the decrease in filings than the economy getting better.

Well, ten months have passed.  There has been a presidential election.  Certain segments of the economy are doing much better (like the stock market), others not so well (housing).  Filings are down in New Jersey17% from March 1, 2012 to February 28, 2013.   But does that mean that we have a better economy?

Maybe and maybe not.  A few days ago, the Labor Department announced that unemployment was 7.7%, the lowest since the meltdown/recession.  But is that an accurate number?   You see, the unemployment number goes down when employment goes up.  But, it also goes down when  people stop looking for work or take part time work instead of full time. If you consider the number of people who have dropped out the work force or who are working part time, the unemployment number (known as the U-6 unemployment number) is greater than 14%.  So, if you factor in the broader measure of employment (U-6), the economy is still struggling.

How do you apply that to number of bankruptcy filings.  While it is true that if you cannot afford the filing fee, you usually cannot afford bankruptcy, it is also true that if you don’t have any assets or income, creditors have nothing to go after.  So, if you can put up with a few unpleasant telephone calls, people can generally avoid their creditors.  As they say, you cannot get blood out of a stone.  So, why file?

Unless the US slips back into recession, real unemployment should go down eventually.  People will shift from government benefits to wage paying jobs. Rather than writing off your debts like in the old days (1980’s),  credit card companies, hospitals and even doctors are selling your debt for pennies on the dollar to hedge funds or other debt collection agencies.  Those guys do not go away.  First, you will get letters and calls.  Eventually, when they find out where you work, you will get judgments against you (if they do not have them already), and then wage garnishments.  Something to think about.

So, if you have been out of work for a year or more, and get a job- congratulations.  But if you also have judgments or owe lots of money and you get a  job, you may want to give serious thought to speaking with a reputable debt counselor or bankruptcy attorney.  Why?  Because at that time you have options.  However, if you want until your wages are garnished, your only recourse may be bankruptcy.   The automatic stay, which occurs when you file a bankruptcy petition, will stop a garnishment dead in its tracks.

Word to the wise.