Posted by Kevin on February 23, 2015 under Bankruptcy Blog | 
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues. If your business doesn’t have any assets you don’t need to worry about how to protect them, or how to distribute them to the business’ creditors
BUT, what if your business DOES have some assets?
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such. That’s because the assets of your business are legally treated as your assets, and are thus protected by your bankruptcy.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral. Unless the collateral is worth more than what is owed on it—not likely—your Chapter 7 trustee would have no interest in the collateral.
Instead, the trustee will be interested in your “free and clear” business assets (not subject to a lien). However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. In NJ, you can choose; however, since the NJ exempts are so puny, about 98% of debtors pick the federal exemptions.
The federal tool of trade is as follows:
The debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.
(the $2,175 amount is for cases filed through March 31, 2013). This amount is doubled for married couples filing jointly, as long as the asset is jointly owned. Admittedly, that does not sound like a lot of money. However, you do not value the property as if it were new. It is valued in its “as is, where is” condition. In some cases, the value can be pennies on the dollar. If the trustee differs with your valuation, he or she will have to bring in an appraiser to challenge your valuation. If the trustee loses this battle in court, then there is no money in he estate to pay the appraiser. A trustee does not want to get into that position, so he or she will either abandon the property to the debtor or engage in some “horse trading”. The bottomline is that the debtor stands a good chance of getting the bulk of his business property for free or at a nominal cost.
Posted by Kevin on December 23, 2014 under Bankruptcy Blog |
Protect your business assets immediately with the “automatic stay” and permanently with property exemptions.
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues.
BUT, even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way for dealing with those remaining business assets. You may be able to keep those assets if you need them, or if not, you can let your Chapter 7 trustee sell them and pay some of your most important creditors.
Business Assets Protected by the “Automatic Stay”
You may want to keep business assets which you need to use to generate income after your bankruptcy—either as an employee or through self-employment.
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral.
Business Assets Protected by Property “Exemptions”
Instead, the trustee will be interested in your “free and clear” business assets. However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. NJ allows a debtor to choose; however, it is not much of a choice. Why? Because the state exemptions are so puny that about 99.9% of debtors use the federal exemptions. Under the federal exemptions, you get to keep a little over $2,000 of business tools. Under NJ, it would come under the general exemption of $1000. Clearly, in either case, the exemption is far from generous. However, if the assets are older but usable to you, you can make an offer to the trustee. Most trustee will entertain even a lowball offer rather than go through an auction, especially on used items of questionable value.
Posted by Kevin on December 13, 2014 under Bankruptcy Blog |
Careful: if your business is not a sole proprietorship, legal disputes against your business are not “stayed” by your personal bankruptcy’s “automatic stay.”
This series of blogs has been about the benefits of filing a bankruptcy case when closing down your business. Through the power of the “automatic stay”— any ongoing lawsuit against you or your property must stop. But there are some important exceptions to this, situations in which the automatic stay would not apply
Bankruptcy and its automatic stay protect the “person” filing bankruptcy and his, her, or its assets. Other “persons” are generally NOT protected. The issue is whether you and your business are considered to be the same or separate “persons” for this purpose.
If your business is a sole proprietorship, the law considers you and your business to be the same “person.” So a lawsuit against the business would be stopped by your personal bankruptcy filing. But what if your business was set up as a corporation, a limited liability company (LLC), or a partnership, and you are dealing with a lawsuit against both you and the business?
Disputes Against Your Corporation, LLC, or Partnership
- If your business was set up as a corporation or LLC and it is still operating when you file a personal bankruptcy, that filing does not “stay” any litigation against the corporation because it is a separate legal entity, a separate “person.” To the extent the dispute and/or lawsuit is against you personally, that portion would be stayed. But this may not help much if the lawsuit continues to disrupt and threaten your business.
- Even if your business in the form of a corporation or LLC is no longer operating, but itself still owns some assets, those assets are not protected by your personal bankruptcy filing. This includes assets that the business might own outright—such as receivables that it was waiting to receive, or business assets that are the collateral on business loans—such as vehicles or equipment.
- If your business is or was a formal or informal partnership, the partnership’s creditors or adversaries would very likely be able to continue pursuing the partnership and its assets, as well as pursuing your partner and his or her assets, regardless of your personal bankruptcy filing. That’s because partners are generally jointly liable for the obligations of a partnership, and your partner and the partnership itself are both “persons” separate from you. So you have the same problem just outlined above as to partnership assets.
That leads to the main lesson here. If your business legally qualifies as a separate “person,” and has assets that need to be protected, it may need to file its own separate bankruptcy. Since we are focusing on closing down your business in this series of blogs, the filing would be under Chapter 7.
You should really consult with a bankruptcy lawyer on these issues.
Posted by on December 2, 2014 under Bankruptcy Blog |
Don’t assume that just because your income taxes are too new to be written off that 1) bankruptcy can’t help, or 2) only Chapter 13 can help.
Even if none of your taxes can be discharged (written-off), or most of them can’t be, a Chapter 7 bankruptcy may STILL set you up so you can deal with those taxes in a constructive way. You may not need the extra expense and time of going through a three-to-five-year Chapter 13 case.
Clean Your Slate of Other Debts So You Can Pay Your Taxes
So the simple-to-ask, maybe not-so-simple-to-answer question is whether a straight Chapter 7 bankruptcy will help you enough? More precisely, if you filed a Chapter 7 case, after it was done would you reliably be able to make large enough monthly payments to the IRS (or New Jersey) on whatever tax debt(s) that your bankruptcy would not discharge so that those taxes would be paid off safely and in a reasonable time?
“Safely” refers to the fact that you would no longer have protection from your creditors—including your tax creditor(s)—after the three months or so your Chapter 7 will usually take to complete. So after that you’d be on your own dealing with the IRS/NJ. That’s OK if you are confident that you would be able to make consistent monthly installment payments at the required amount—not just right after your bankruptcy is completed but throughout the time until it is paid off. A Chapter 7 is a good idea if you don’t need one of the most important benefits of a Chapter 13 plan as to your tax debts—the continuous protection from creditors that you get throughout the payment process. That’s especially valuable if your circumstances change and you need to lower your payments. At that point you’d probably not want to rely on the flexibility of the IRS or NJ (which can often be more rigid than the IRS).
“Reasonable time” refers to the fact that the IRS and state agencies, in almost all circumstances, will continue adding interest and penalties throughout the time you are making installment payments. Even if they are relatively flexible about stretching out the payments, you need to look at how much the ongoing interest and penalties will add to the amount you must pay before you’re done. In a Chapter 13 case, usually no more interest and penalties get tacked on once the case is filed, which can save a lot of money if you owe a fair amount of non-discharged taxes.
So how do you know whether you will be able to make tax installment payments safely enough and large enough to pay off the tax debt(s) in a reasonable time?
First, it means calculating how much a Chapter 7 case would help your monthly cash flow and your longer term financial stability by discharging your other debts.
Second, you need to know what the IRS and/or state tax authority will likely accept as monthly payments, given the amount of your remaining tax debt and other financial information. From there the amount of additional interest and penalties can roughly be calculated.
Your bankruptcy attorney will help you with these projections and calculations. He or she will then advise you about whether you are a good candidate for cleaning your slate with Chapter 7 and then paying your remaining tax debt directly.
Posted by Kevin on November 29, 2014 under Bankruptcy Blog |
Ongoing litigation, or the threat of it, against you and/or your business, usually dies with your bankruptcy filing.
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A Chapter 7 case can help by:
- immediately stopping most litigation against you and/or your business, at least temporarily;
- permanently stopping most litigation by legally discharging the disputed claim; and
- providing strong disincentives for your adversary to keep pursuing you after your bankruptcy filing.
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This series of blogs is about the benefits of filing a bankruptcy case when closing down your business. The reality is that businesses are often closed as a consequence of litigation, or the threat of litigation, against the business or business owner. These disputes can take every possible form—by way of example, simple collection actions by creditors, contractual disputes with customers, enforcement action by governmental regulators, and fights with other business owners or investors. A bankruptcy often becomes necessary when either the opposing party wins a judgment against the business and/or the owner, or the business runs out of money to pay the attorney fees and other costs of litigation. The business is often already on the ropes, and the judgment, or just the financial and emotional costs of the lawsuit, or sometimes even just the threat of one is enough to persuade the business owner to throw in the towel and close down the business.
The question is: what will happen to the dispute and/or litigation against you and/or the business?
Litigation Immediately Stopped by the “Automatic Stay”
The automatic stay legally stops creditors from taking any new collection action against you, and from continuing any action, including litigation. It is imposed simultaneously with the filing of your bankruptcy, without a judge needing to sign an order. The automatic stay requires your adversary to at least take a pause in his efforts against you, and often persuades him to do nothing further against you.
Why Most Disputes Will End at Your Bankruptcy Filing
This immediate stopping of collection and litigation usually ends up being permanent, for a number of reasons.
Your adversary is usually trying to get you or the business to pay something, and that alleged obligation is discharged—legally written off permanently—in your Chapter 7 case.
Bankruptcy law does allow any of your creditors (including those with alleged claims of any kind) to try to object to the discharge of their debts or claims. But these objections are relatively rare, for two reasons:
1. They are difficult for a creditor to win. The legal grounds for objections are relatively narrow. Debts are assumed discharged unless the creditor can prove to the bankruptcy court that those narrow grounds are met. Instead of just proving the existence of a valid debt or claim, as in a conventional lawsuit, the creditor has to provide convincing evidence that you engaged in certain specific bad behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to a person or property.
2. The creditor is faced with practical indications that it is wasting its time and money to pursue you further. In filing bankruptcy, you present to the court a rather detailed set of specific information about your finances. You are able to be questioned by the creditors about those documents and about anything else relevant to the discharge of the debts. When these reveal that you genuinely have nothing worth chasing—which is almost always the case—most creditors accept that pursuing you further will do them no good.
The Exceptions: Disputes Not Be Stopped by Your Bankruptcy Filing
There are two sets of exceptions: 1) when you are not protected by the automatic stay; and 2) when a creditor challenges the discharge of its debt or claim. These will be addressed in the next two blogs.
Posted by Kevin on October 1, 2014 under Bankruptcy Blog |
There are pros and cons to the above statement. That is why we say “Can Help” as opposed to “Will Help”
What happens when a small business goes under. It usually means that not enough money is coming in to pay bills and employees (much less the owner). This can lead to collection efforts from vendors which go from holding back product to suing the business entity and perhaps even the owner for money. Multiple, disgruntled vendors lead to multiple, usually unwinnable lawsuits. Ultimately, you realize that you cannot stay open any longer.
Shutting down a business can be very time consuming and emotionally draining, especially when the vendors are suing the company and you. You have to deal with vendors and suppliers, advertisers, workers, customers, etc. You may have physical plant which will be subject to foreclosure or tenancy action. You may have product that needs to be liquidated. You may need to go after accounts receivable. That is a lot of work, and your inclination is to put everything behind you and move on.
If your business is incorporated or an LLC, it cannot receive a discharge under Chapter 7. For that reason, many of my colleagues at NACBA believe that you should not put a small corporation (sometimes called a close corporation) or an LLC in bankruptcy. However, if the corporation is being sued by multiple creditors and needs to be liquidated in an orderly fashion, a Chapter 7 may be helpful. The automatic stay will stop the lawsuits. The trustee will be responsible for the liquidation. This can free up the owner to move on to new pursuits. (In NJ, this process can be accomplished also but means of a State court Assignment for the Benefit of Creditors.)
On the other hand, if the corporation or LLC is service oriented as with few assets, bankruptcy may be an unnecessary expense.
Under either scenario, a possible issue can be what to do if the principal of the corporation or LLC finds himself as a defendant in multiple lawsuits. If the principal guaranteed the obligation, then he is SOL. Even if principal did not guarantee, a favorite tactic of NJ collection attorneys is to sue the entity and sue the principal under theory of piercing the corporate veil. This is usually a bogus lawsuit but requires that you interpose an answer and move for summary judgment. This can be a major expense especially if you get sued by 10-12 aggressive creditors and may lead to consideration of filing a individual 7. This decision, however, would have to be made on a case by case basis.
If the business entity is a sole proprietorship (d/b/a), then the debtor is really the owner. d/b/a’s can fail for the same reasons that close corporations or LLC’s fail. But, in this case, it is the owner of the business that is on the hook so the owner files the Chapter 7. Filing a Chapter 7 will stop most collection actions because of the automatic stay, and the owner/debtor can receive a discharge. Of course, the bankruptcy will include both the business assets and the personal assets. Most, if not all, of the business assets will probably be sold and the proceeds will be used to pay the trustee and the creditors. The debtor is able to utilize his or her exemptions to save many of his or her personal assets such as the house, car, household furniture and furnishings, clothing and other things.
If you are running a small business that is failing, you need to speak with your accountant first, and then an experienced bankruptcy attorney.
In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.
Posted by Kevin on September 22, 2014 under Bankruptcy Blog |
Filing Chapter 7 bankruptcy while letting go of your home can be a smart combination.
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Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:
- Have more control over when you leave:
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.
- Avoid house-related debt following you:
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from various directions. Sometimes you could be liable for any deficiency on the first mortgage. Surrendering your house to a first mortgagee does not take you off the hook on a second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, property tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy.
- Have an attorney in your corner:
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.
- Get a fresh financial start instead of a continuation of a vicious cycle:
If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy. Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to get legal advice about your financial situation and your realistic options. You can then be pro-active to turn your situation around rather than waiting for the other shoe to drop.
Think about it
Posted by Kevin on March 25, 2014 under Bankruptcy Blog |
One advantage of filing a Chapter 13 case is that you can get out of it “at any time.”
Chapter 13 comes with a right to dismiss. This means that at any point of your case you can get out of the case and out of the bankruptcy system altogether. Since this type of bankruptcy generally takes three to five years to complete, and involves projecting your income and expense that far out into the future, you’re only being sensible to ask what happens if your financial circumstances change during that period.
There are a number of other options for dealing with changes in your income and expenses, such as making adjustments in your Chapter 13 plan, or converting your case into a Chapter 7 one. There’s even something called a “hardship discharge” which in limited circumstances allows you to complete your case early. We’ll look at these other options in future blogs.
Dismissing your case is probably the most extreme of all the options. But it can be the best one in some situations.
If you dismiss your case, here are some of the main consequences:
- Once the bankruptcy judge signs the order dismissing your case, you no longer need to make payments under the Chapter 13 plan, and neither the court nor the Chapter 13 trustee has any further jurisdiction over your income, your tax refunds, or anything else addressed in your Chapter 13 plan.
- You lose the immediate benefit of being in a bankruptcy case, the “automatic stay” preventing your creditors from collecting on their debts and repossessing or foreclosing on any collateral. So before dismissing your case, be sure you know how each of your creditors is likely to act in response to the dismissal.
- Because under Chapter 13 you do not get a discharge of your debts until successful completion of the case, if you dismiss your case you will owe all your creditors as before except to the extent that they received payments during the case. Most interest and penalties stopped during the Chapter 13 case will usually be able to be added onto your debts, including for the period of time that you were in the case.
So why would somebody ever want to dismiss their Chapter 13 case? Simply because in some situations the advantages of dismissal outweigh any disadvantages. Chapter 13 cases can take such different forms and be filed for so many different reasons that it’s impossible to give a neat and tidy answer to this. So here is one scenario that illustrates when a dismissal can be the best choice.
Assume that a single mom with a young child has a vehicle loan, a home mortgage, and owes back income taxes. During a period of 10 months of unemployment she had managed to keep current on her vehicle loan because that was her absolutely highest priority. But while she was unemployed she could only do this and still take care of her necessary living expenses by not paying her mortgage. So she fell behind 10 payments of $1,500, or a total of $15,000. She also owed $2,000 to the IRS for the prior year’s income taxes because of not paying any withholding on her unemployment benefits. So she filed a Chapter 13 case a year ago in order to have three years both to catch up on that $15,000 mortgage arrearage and to pay off the income tax. She continued paying the vehicle loan so she’s still current on that.
But now she got a job offer in a neighboring state, where her parents live, who could help raise her child. So she’s ready to surrender the home to the mortgage company, and under the terms of her mortgage she would owe them nothing if she did so. The income from her new job would be enough to allow her to continue making her vehicle payments, and to set up an installment payment plan with the IRS to pay off the tax debt outside of bankruptcy. With her changed circumstances, and all her creditors taken care of, a dismissal of her Chapter 13 case would be appropriate and the best option here.
Posted by Kevin on January 18, 2014 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse, and under Chapter 7 or Chapter 13, may affect what protection you each receive.
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The last few blogs have been about what happens if you file bankruptcy with or without your spouse, and whether you file under Chapter 7 or 13. Today’s blog addresses the protections you and your spouse get or don’t get from collection activity by the IRS (and any pertinent state income tax agencies) under those options.
The “automatic stay” which you get with any bankruptcy filing stops the IRS and state agencies from any further collection actions just like any other creditor. But to get this protection, whoever owes the tax has to be in on the bankruptcy filing. The co-debtor stay of Chapter 13 does not apply to income taxes, so that does not give any help to a non-filing spouse.
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The “Automatic Stay” Applies to Income Tax Debts
Some people have the misimpression that the IRS and other income tax authorities are exempt from the “automatic stay,” the protection from creditor collection you receive immediately when your bankruptcy is filed. Not true. If the IRS continues to pursue a tax debt after being given notice of a bankruptcy filing, it is breaking federal law just like any other creditor. And the bankruptcy court can order the IRS to pay damages if it does break the law. Since the IRS and similar state agencies have been punished for this in the past, they tend to follow the law and stop collections right when you file bankruptcy, like most other creditors.
There ARE some exceptions to the “automatic stay” that apply to taxing authorities—actions that they can still take in spite of a bankruptcy filing, but these actions are very limited.. They can “assess” a tax (determine the amount of tax) and send out a notice about it, make a demand for tax returns, send a notice of tax deficiency (but not act to collect on that deficiency), and conduct an audit (but again not act to collect any debt arising from the audit). So these permitted actions are deemed not to involve actual collection activity.
The “Automatic Stay” Applies Only to the Filing Spouse(s)
The “automatic stay” protects only the debtor—the person or persons filing the bankruptcy case, and his or her, or their, assets. On a jointly owed tax, if only one spouse files the bankruptcy, the IRS or state agency can continue pursuing the non-filing spouse as if the bankruptcy was not filed. And because the tax debt is jointly owed, the non-filing spouse can be required to pay the debt in full.
Chapter 13 “Co-Debtor Stay” Does Not Apply to Income Taxes
The lack of protection for the non-filing spouse is true both under Chapter 7 and 13, because the usual protections for non-filing “co-debtors” in Chapter 13 under the “co-debtor stay” do not work. As discussed a couple blogs ago, the ‘co-debtor stay” provides a way to protect even non-filing spouses from consumer debts owed jointly with a spouse filing under Chapter 13. But it’s inapplicable to income taxes owed to the IRS or other tax agencies, basically on the rationale that the “co-debtor stay” applies only to “consumer debts,” and courts have determined that income taxes are not “consumer debt.”
Applying the Stay Rules to Income Taxes
Because the tax agencies can pursue a non-filing spouse who jointly owes an income tax—under both Chapter 7 and 13—both spouses need to file bankruptcy whenever there is any significant joint tax debt.
Usually this means a joint filing—two spouses filing together on one bankruptcy case. But sometimes—when their financial circumstances are different enough, or perhaps when the marriage is not stable—they may find worthwhile for each to file a separate case, and maybe for one to file a Chapter 7 case and the other a Chapter 13 one.
Lastly, the IRS has been known to not pursue a non-filing spouse if the taxes are being paid in full through the other spouse’s Chapter 13 plan. But this would be done purely at the discretion of the IRS, and should not be counted on unless first carefully discussed with your attorney. But even in these situations, the non-filing spouse is on the hook for penalties and interest that can be wiped out in a Chapter 13 plan. This is yet another reason to include both spouses in the Chapter 13 filing.
Posted by Kevin on January 6, 2014 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse affects the discharge of debts you each receive, and also affects whether you file under Chapter 7 or 13.
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Continuing from the last blog:
- There are consequences to filing separately or together, consequences affecting:
- the discharge of your debts.
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The last blog was about what happens to a spouse who doesn’t file bankruptcy when the other spouse does, specifically as to the “automatic stay,” the immediate protection from creditor collection activity. In a nutshell, there is NO protection from joint creditors for the non-filing spouse in Chapter 7, while there IS some important but limited protection in Chapter 13 through the “co-debtor stay.”
The “automatic stay” is temporary protection that goes into effect at the beginning of and can last the length of the case. The “discharge”—the permanent legal write-off of a debt which is the topic of today’s blog—happens at the end of either a Chapter 7 or Chapter 13 case.
Debts Are Individual
A debt is an individual liability. Discharging a debt in bankruptcy is not so much a destruction of that debt as a legal pronouncement that an individual is no longer liable on that debt.
Each person owes a debt individually—we are not automatically liable for our spouse’s debts. So if ALL of a couple’s debts are owed by one spouse and only that spouse, then a bankruptcy by that spouse will leave the couple with no debts (assuming the debts are of the kind that can be discharged).
Chapter 7 Discharges Debts Only of the Filing Spouse(s)
Much more common is the situation in which two spouses each have some individual debts and some joint debts.
If they file a JOINT Chapter 7 straight bankruptcy, at the completion of the case their debts will be discharged (legally written off). That includes debts that each spouse owes individually, as well as those for which they are both legally liable.
If only ONE of two spouses files a Chapter 7 case, only that spouse’s debts will be discharged. That includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse. But the non-filing spouse’s debts will not be discharged. And that includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse.
Distinguishing Individual and Joint Debts
What this means is that one spouse should not file without the other unless they know exactly how much debt the non-filing spouse is legally liable for—both his or her separate debt and their joint debt.
This is not always obvious. A seemingly non-liable spouse can in fact be legally liable on a debt in numerous possible ways. A creditor’s monthly bill that is addressed to only one spouse does not necessarily mean that the other spouse did not sign and become obligated under the original loan agreement. Under certain states’ laws a spouse is obligated for the other spouse’s debts under certain circumstances. Also, specific creditors—such as the IRS—are favored with special laws creating liability for the other spouse. So both spouses’ debts need to be reviewed carefully to see who is liable on each contractually and as a matter of law.
There’s No “Co-Debtor Discharge” in Chapter 13
There is no discharge of a non-filing spouse’s liability analogous to the special “co-debtor stay” of Chapter 13. The filing spouse has the opportunity to protect the non-filing spouse during the course of the 3-to-5-year Chapter 13 case through the “co-debtor stay,” but if the debt is not paid in full during the case then the creditor can pursue the non-filing spouse once the case is over. That’s true even though the filing spouse’s liability for the same debt is discharged at the end of that Chapter 13 case.
Take as an example a husband and wife owing $5,000 on a credit card that they both thought only the husband was liable on because they understood it was tied to his business that failed. They’d forgotten that long ago they had both signed the credit card application. If only the husband files a Chapter 13 case, the “co-debtor stay” would immediately prevent the credit card creditor from pursuing the wife. That creditor may not bother to object to the “co-debtor stay.” Then at the end of the husband’s Chapter 13 case, any of his remaining liability on that credit card debt (beyond whatever portion was paid through his plan, if any) would be discharged, and his case completed and closed. That would terminate the “co-debtor stay,” allowing the creditor to pursue the wife for the full $5,000 debt (less any payments made in the Chapter 13 plan), plus years of interest and late charges.
The Bottom Line
Be very cautious about filing a separate bankruptcy case—Chapter 7 or 13—without your spouse. Discuss your debts thoroughly with your attorney, getting strong verification that the non-filing spouse is liable neither contractually nor by operation of law on debts. Use the “co-debtor stay” to protect the non-filing spouse on a limited joint debt(s), but only to give the filing spouse time to pay off the debt(s) in full so that there is no surviving liability at the end of the Chapter 13 case for which the non-filing spouse would continue to be liable.
Posted by Kevin on December 27, 2013 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse affects the protection from creditors each of you receives, and also affects whether you file under Chapter 7 or 13.
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Continuing from the last month’s blog:
- There are consequences to filing separately or together, consequences affecting:
- protection from your creditors’ collection activity.
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Bankruptcy Only Protects Bankruptcy Filers, Right?
Start with the sensible proposition that if you want bankruptcy protection from your creditors, you need to file bankruptcy to get it. Sounds obvious and sensible, but it’s only partly true.
It’s True in Chapter 7
If you file a Chapter 7 straight bankruptcy case by yourself—without your spouse—and one of your debts is owed by both you and your spouse, the creditor will be able to continue pursuing your spouse to pay that debt. That’s because the “automatic stay” which stops creditors from collecting debts immediately upon the filing of a Chapter 7 bankruptcy only protects the person who files. The section of the federal Bankruptcy Code which provides for the “automatic stay” says that it stops “any act to collect… a claim against the debtor.” And a “debtor” is a person who has filed a bankruptcy case.
So if your spouse did not join in your bankruptcy case (and didn’t file his or her separate case), nothing stops this spouse’s creditors from pursuing the debts owed by him or her. And that includes debts that the two of you owe jointly. That’s the simple reason that usually married folks file joint bankruptcies—besides any individual debts each may have, most spouses have joint debts which both spouses need protection from.
But Chapter 13 Could Protect a Non-Filing Spouse
Bankruptcy CAN protect a co-obligor, such as a spouse, in a limited but potentially crucial way, ONLY under Chapter 13. The “co-debtor stay” of Chapter 13 extends the “automatic stay” immediately upon the filing of the case not just to the filing “debtor” but to also to co-debtors—any individual that is liable on a consumer debt with the debtor. A spouse who does not join the other spouse’s bankruptcy filing is a protected by this “co-debtor stay” as to any of their joint consumer debts.
But this protection comes with conditions. If the creditor challenges the co-debtor stay as to the non-filing spouse, the bankruptcy court will allow the creditor to pursue him or her EXCEPT to the extent the filing spouse is paying that debt through the Chapter 13 case. So the filing spouse can fully protect the non-filing spouse by arranging through the Chapter 13 plan to pay that debt in full. That way the debt is slowly paid off during the 3-to-5-year plan while both are protected from collections—the filing spouse by the “automatic stay” and the non-filing spouse by the “co-debtor stay.” Chapter 13 debtors are generally allowed to favor such consumer joint debts in their plans over other non-joint debts in order to protect co-debtor. So if the amount of such joint debt is relatively modest, this can be a way for only one spouse to file bankruptcy and still protect the other spouse from a joint creditor or two.
Since the “co-debtor stay” is available only under Chapter 13, if there are good reasons for only one spouse to file bankruptcy, and both spouses are liable on a limited amount of consumer debt, then Chapter 13 could well be the better option.
Posted by Kevin on October 1, 2013 under Bankruptcy Blog |
“Straight” Chapter 7 bankruptcy can give some relief for dealing with your back and current taxes, but Chapter 13 can help so much more.
The last blog showed how Chapter 7 can help you with your income tax debt, mostly indirectly, by writing off your other debts so you can financially concentrate on getting the IRS happy. It may also help by discharging (writing off forever) some tax debts, but only if at least three years have passed since that tax’s returns were due, AND you meet some other conditions. But if you owe a lot, and especially if you owe a number of years of taxes, Chapter 7 will often not be enough. So what more is it that Chapter 13 can do?
Chapter 13 and Income Taxes
There are many situations in which you ought to look closely at the Chapter 13 option. Focusing on income taxes, the rule of thumb about when to do so is pretty simple:
File a Chapter 13 case if Chapter 7 does not gain you enough cash flow to allow you to get caught up on your back and current taxes through manageable monthly payments, made over a reasonable period of time. In other words, file a Chapter 13 if you need the extra protection provided by Chapter 13.
What extra protection? In a Chapter 7 case you are NOT protected from the IRS beginning about three months after that case is filed-when the discharge is entered and the “automatic stay” terminates. So that means you’re arranging and then making the catch-up tax payments without any protection from the IRS’ collection procedures. That’s generally not a problem if 1) you deal with the situation very proactively, 2) the payment amount that you can comfortably handle is acceptable to the IRS, 3) it’s an amount you can pay it consistently, and 4) you do pay it perfectly until you pay it off.
In contrast, under Chapter 13 your protection from the IRS’ collection efforts continues throughout the whole 3-to-5-year length of the case. That’s protection you’ll need if you can only afford payment smaller than what the IRS wants, and/or you need more flexibly than the IRS would allow.
Under Chapter 13 you are generally allowed to pay other even more important creditors ahead of the IRS—such as mortgage arrearage, vehicle payments, and back child support. Plus you will generally not pay additional penalties and interest on the taxes, and may not have to pay all or most of the previous penalties. If the IRS has recorded a tax lien, you will have the opportunity to pay off that lien without the IRS being able to enforce that lien, resulting in the lien being released at the completion of your case.
Chapter 13 often allows you to adjust your monthly plan payments in advance based on anticipated seasonal adjustments in your income and expenses, and change those payments mid-stream as your circumstances change. You do need to deal responsibly throughout the process, or else you will lose your protection from the IRS and from your other creditors. And if you are not in fact able to do what your plan states and what the Chapter 13 rules require, so that you don’t finish your Chapter 13 case successfully, you will not get a discharge of ANY of your debts. But if your plan was put together sensibly and you follow it carefully, you should end your Chapter 13 case being current on all your past and present taxes.
Posted by Kevin on September 22, 2013 under Bankruptcy Blog |
If you need bankruptcy protection but already filed a bankruptcy case within the last few years, you may still be able to file a new one now.
There are some strict rules about when you can file a bankruptcy case after having filed a previous one. But as with so many other areas of law, there are opportunities when we look more closely.
Previous Bankruptcy Filing vs. Discharge
It’s not necessarily previously FILED bankruptcy cases that count, but only ones in which you received a DISCHARGE of your debts. All the timing rules in the Bankruptcy Code dealing with when you can file a new case refer to the length of time since “the debtor has been granted a discharge” or “has received a discharge” in the previous bankruptcy case.
In other words, if your previous case was not successfully completed—it was dismissed before you finished it—that case would not prevent you from filing a case now, no matter how long or short of a time since that previous case was filed.
So make sure—absolutely sure—that you got a discharge in your earlier bankruptcy case. If you distinctly remember that your case finished the way it was supposed to, you very likely DID get a discharge. But you definitely want to make sure. Find out from your former attorney. Or dig up the discharge order issued by the Bankruptcy Court from your old paperwork, or we can likely find out for you when you come in for your initial consultation.
The Timing Rules
If you’ve heard that you have to wait 8 years between bankruptcy filings, be aware that only applies to one of a number of possible scenarios: the length of time from the previous discharged Chapter 7 case to the filing of a new Chapter 7 case.
If your previous case was a Chapter 7 one and you now want to file a Chapter 13 case, the applicable length of time is only 4 years.
If your previous case was a Chapter 13 one and you now want to file a Chapter 7 case, the length of time is only 6 years. And in fact if that previous Chapter 13 case was one in which your unsecured creditors were paid at least 70% of their debts, then there is NO limitation on filing a Chapter 7 case afterwards.
And if your previous case was a Chapter 13 one and you now want to file a Chapter 13 case, the applicable length of time is only 2 years.
And very important: on all of these the clock starts running NOT at the time of discharge—generally at the end of a case—but rather earlier, at the date of filing at the very beginning of the prior case. So what count is the date of filing of the prior case to the date of filing the new case. For example, if your previous case was a Chapter 13 one that was filed on October 1, 2006, and it took five years to complete so that the discharge was entered on October 1, 2011, you would be able to file a Chapter 7 case starting October 1, 2012.
Why File a Bankruptcy Case If You Can’t Get a Discharge?
So if you need bankruptcy protection but not enough time has passed, you can still file the case but you just won’t receive a discharge of your debts. Why would you ever want to do that?
Probably never for a Chapter 7 case, since almost always the main benefit of a Chapter 7 case is the discharge of your debts.
But Chapter 13 provides a number of other benefits distinct from the discharge of debts. For example, it stops a foreclosure and gives you years to catch up on your mortgage arrears. It also stops extremely aggressive collection of unpaid support payments, including the suspension of professional/occupational/driver’s licenses, again giving you years to bring it current. It may be able to significantly reduce what you pay for your vehicle through a “cram down.” For these and other reasons it can make a lot of sense to file a Chapter 13 case while knowing that you’ll not get a discharge of any of your debts. You may not even have any debts to discharge, but just need one or more of those other powerful benefits.
In fact that’s usually the situation with the so-called “Chapter 20.” This usually involves, first, the filing of a Chapter 7 case, which results in the discharge of most of the debtor’s debts. Then, second, immediately after that’s done, a Chapter 13 is filed to use one or more of its benefits. (Chapter 7 + 13 = 20.) Since most of the debts were discharged in the prior Chapter 7, the debtor doesn’t need a discharge in the Chapter 13 case.
This blog should make it clear that a simple rule—8 years from one bankruptcy to the next one—is often woefully incomplete and misleading. In addition, there are complicated rules concerning whether the automatic stay will apply in case involving multiple filings. This is another good argument that you truly need to talk with an attorney who focuses on bankruptcy instead of making misassumptions that could cause you lots of unnecessary grief.
Posted by Kevin on under Bankruptcy Blog |
If you and someone else jointly owe a debt, bankruptcy can protect you against the debt and against your co-signer. Or if you want, bankruptcy can instead protect your co-signer.
Let’s look at two essentially opposite scenarios involving you and your co-signer getting sued on a debt you both owe:
1) You’ve had a falling out with the co-signer, and all you care about is escaping the debt; or
2) You believe you have a moral duty to protect the co-signer, so that is your highest priority.
We’re going to address the first scenario today, and then the second one in the next blog.
Protecting Yourself…
If you and your co-signer are being pursued by your creditor, and you cannot and will not pay the debt, you have two distinct obligations to worry about—a definite one to the creditor and a likely one to the co-signer.
… from the Creditor Itself
The obligation to the creditor is based on your promise to pay the debt. Most likely that obligation can be discharged (legally written off) by filing bankruptcy.
Like any other creditor, this one could object to the discharge on grounds of your fraud or misrepresentation, but those objections are rare.
You could discharge this debt through either Chapter 7 or Chapter 13, depending on whichever is in your best interest otherwise. Chapter 13 happens to come with the “co-debtor stay,” some extra protection for your co-signer which will be discussed in the next blog, because here we are assuming you don’t care about protecting the co-signer.
… from the Co-Signer
You very likely have a closely related but still distinct obligation to your co-signer, one that is likely less clear than the one you owe directly to the creditor. This obligation to the co-signer is indirect, likely only to arise if your co-signer pays all or part of your debt to the creditor. Even then you may or may not have a legal obligation to the co-signer. There is a good chance that you and the co-signer did not write out the terms of your obligation. So your obligation to the co-signer could be merely inferred, based on an unspoken assumption that you would make the co-signer whole if you ever failed to pay the debt and the co-signer paid the creditor all or part of it. But there could also be a sensible inference—depending on the facts of the case—that the co-signer did not expect you to pay it in that situation. So you could possibly defend against that liability.
But practically speaking, the creditor is going to pursue both you and your co-signer. If you can’t pay the creditor who you clearly owe, there may well not be much point in putting a lot of time and expense into defending against a legal obligation to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.
If you do file bankruptcy, be sure to list among your creditors not just the direct creditor but also your co-signer. Otherwise you could remain liable to the co-signer after your bankruptcy case is finished.
As with your direct creditor, your co-signer could object to the discharge of his or her claim against you, based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. Although these objections are rare, they ARE more often raised by former friends, ex-spouses, ex-business partners. Why? Because 1) they have a personal axe to grind, 2) misunderstanding tend to arise more in informal arrangements, and 3) these kind of folks may know more damaging information about you than would a conventional creditor.
The best way to protect yourself from such challenges is to explain the situation thoroughly to your attorney when you first meet. That way your bankruptcy documents can be prepared in a proactive way, and you’ll avoid being blindsided.
Posted by Kevin on September 12, 2013 under Bankruptcy Blog |
If you owe income taxes, and are at the point that the IRS is about to seize your assets, you need to consider bankruptcy. It can help in surprising ways.
Here are FIFTEEN ways that filing either a straight Chapter 7 bankruptcy or a Chapter 13 payment plan could relieve a major income tax headache. And even this long list is only a partial one!
1. Both Chapter 7 and 13 stop the IRS’ collection activities against you, including levies on your paycheck, bank account, and vehicles, and tax liens on your home and other real estate.
2. Both Chapter 7 and 13 can completely discharge (legally write off) some income taxes.
3. A Chapter 7 case would likely discharge all or most of your non-tax debts, more likely giving you the financial means to enter into a manageable installment payment plan afterwards with the IRS, to pay off whichever taxes not discharged in that bankruptcy case.
4. If you have an “asset” Chapter 7 case—the relatively unusual kind in which the bankruptcy trustee claims one or more of your assets to sell and distribute to creditors—non-dischargeable tax debts will generally be paid in that distribution ahead of other dischargeable debts, either paying off or at least paying down those tax debts.
5. Even if you cannot discharge a tax debt right now, you will likely be able to do so at some point in the future. There are strategies for buying time until that point.
6. Chapter 13 allows you to pay off non-dischargeable income taxes through payments based not on the IRS’ demands but rather on your own realistic budget.
7. If you have other conventional debt—credit cards, medical bills and such—along with back income taxes that can’t be discharged, Chapter 13 generally allows you to favor the tax debt ahead of these other creditors. So you would be allowed to pay the taxes in full before anything would trickle down to the conventional debts.
8. Once the Chapter 13 case is filed, that generally stops any further interest and penalties from being added to the nondischargeable tax debts, which reduces the amount that you need to pay.
9. During the time that payments are being distributed to creditors through the Chapter 13 case, the IRS has to wait its turn in line, often waiting behind debts that are even more important to you, such as back payments on your home mortgage, your child or spousal support arrearage, or even vehicle and furniture payments.
10. Even if you only have tax debts that would otherwise be discharged in Chapter 7, but you need to file Chapter 13 to deal with other debts that are important to you—such as on your home and vehicle and support arrearage—these other obligations can legitimately reduce how much you pay on your tax debts. Sometimes you pay nothing on the taxes. So Chapter 13 can be the best of all worlds: protection from all your creditors including the IRS while you take care of other debts, along with paying little or nothing on your tax debts.
11. If you have multiple years of income tax debts—some of which are dischargeable and some not—in most Chapter 13 cases your plan can arrange to pay the taxes that would not be discharged in full before paying a dime to the rest of the taxes. You may even avoid paying anything on those dischargeable taxes before they are discharged forever at the completion of your case.
12. Throughout all this time during a Chapter 13 case—three to five years—the IRS cannot take any collection action against you or any of your assets, unless it gets specific court permission, which would usually only happen if you failed to comply with your own plan commitments.
13. Even if the IRS recorded a tax lien against your home before your Chapter 13 case was filed, the IRS would be prevented from executing on that lien until you had the opportunity to pay off the debt behind that lien, and get a release of that lien.
14. If you are behind in estimated or withheld income taxes during the current tax year, you can file a partial-year tax return, and pay the taxes for that partial tax year through your Chapter 13 plan—with no additional interest and penalties. Then you can put together your budget from that point forward with appropriate estimated tax payments or withholdings so you have no tax owing from that remaining part of the tax year.
15. When your Chapter 13 case is successfully completed you can be tax-free and debt-free.
Posted by Kevin on September 11, 2013 under Bankruptcy Blog |
If you’re behind on child or spousal support, the support enforcement agency can be extremely aggressive. Chapter 7 doesn’t help much. Chapter 13 CAN.
In most states an ex-spouse—or the state’s support enforcement agency acting on his or her behalf—has extraordinary ways to collect on current and back support obligations. These include not just ways of getting directly at your money, but also ways to hurt you with the intent of forcing you to pay.
So we’re not just talking about garnishing your wages and bank accounts, taking away income tax refunds, or putting liens on your real estate. We’re talking coercive action. Your driver’s license can be suspended. This includes your commercial driver’s license, so that you can’t work if you’re a truck driver or have any other job requiring that license. Your professional or occupational license could also be suspended, preventing you from legally working in your profession or business as a nurse, doctor, realtor, insurance agent, mortgage broker, lawyer, or even in some places athletic trainer or funeral director!
There’s more. Your hunting, fishing, boating and other recreational licenses could be revoked. You can even be denied a U.S. passport.
Chapter 7 Gives Very Limited Help
“Straight bankruptcy” under Chapter 7 unfortunately does not stop any of these collection methods. The “automatic stay” that stops just about all other collection efforts has an exception for child and spousal support. (See Section 362(b)(2)(B) of the Bankruptcy Code.) The only way that Chapter 7 can help is that it can often legally write off (“discharge”) all or most of your other debt so that you would have the money to pay your support. But that does not help deal with your financial emergency if you’re in the support enforcement’s crosshairs.
Chapter 13 CAN Help Where it Counts the Most
The filing of a Chapter 13—the three-to-five-year “adjustment of debts” kind of bankruptcy—DOES stop all these aggressive ways of collecting on support obligations. The “automatic stay” does apply in most respects to Chapter 13, as long as it affects the collection of your assets that did not exist at the time your case is filed, such as future income. But to make this protection last more than just a few days or weeks, you must rigorously meet a number of conditions:
- Your Chapter 13 plan must show that you are going to catch up on all the back support during the life of the plan. And then you must make your monthly plan payments on time to show that your plan is feasible and that the back support will in fact be paid in full.
- Your budget must show that you will be able to start (or continue) making the regular monthly divorce court ordered support payments, AND then you must actually pay those on time. And that starts with the first one that is legally due on whichever day it’s due immediately after your Chapter 13 is filed, and then every month thereafter.
- At the end of your Chapter 13 case you must certify that you are current on your ongoing support payments, or else you cannot complete your case and get a discharge of your remaining debts.
On the positive side, Chapter 13 neutralizes most of the extremely dangerous firepower of your ex-spouse or the support enforcement agency, and gives you the opportunity to solve an otherwise very difficult problem. Chapter 13 is often a great tool for catching up on your back support, because you are allowed to favor that debt over just about every other one. You could end up paying very little if anything else to your other creditors, except those other ones that matter to you, such as your mortgage, vehicle loan, taxes and such.
But you must be financially able to meet the above conditions, and then strictly abide by them. If during the Chapter 13 case you miss one of your regular monthly support payments, or one of your plan payments, you can expect your ex-spouse or support enforcement to ask the bankruptcy judge for “relief from the automatic stay,” that is, for permission to resume or even intensify their earlier collection efforts. At that point the judges will tend not to be very sympathetic to you, since you are not complying with the conditions that you had agreed to at the beginning of your case.
Posted by Kevin on July 16, 2013 under Bankruptcy Blog |
Getting sued by a creditor is a wake-up call to consider filing bankruptcy. If it is the right thing to do, there are advantages to filing before your deadline to respond to the lawsuit.
If you get sued by a creditor, as discussed in my last blog it’s dangerous both short-term and long-term not to consult with an attorney. Today’s blog is about the immediate effect on that lawsuit if you do file bankruptcy.
The Basic Automatic Stay
The filing of your bankruptcy stops that lawsuit instantaneously. It doesn’t take a separate court order or any action by the bankruptcy court or judge to stop it. It’s the mere act of filing the bankruptcy case of itself that stops the lawsuit against you. The word “stay” in that statute means “stop.”
The Immediate Effect of the Automatic Stay
Timing is important with a lawsuit. A judgment will be entered against you if you don’t formally respond to the lawsuit by the stated deadline, and that judgment would give the creditor more ways to get money out of you. The entry of a judgment can also create a lien against your real estate, and filing bankruptcy afterwards will create complications in trying to clear that lien off your title.
So stopping the judgment from being entered in the first place can be very important. The safe way to do that is to file bankruptcy plenty of time before your deadline to respond to the lawsuit. But if you are cutting it close, it helps that the automatic stay is effective instantaneously. If the creditor’s attorney is about to file documents to enter a judgment at court, but your bankruptcy is filed before that happens, that attorney can’t try to get a judgment quickly before the bankruptcy court acts, because the bankruptcy court doesn’t need to act. As its name says, the stay is automatic.
Telling the Suing Creditor about the Bankruptcy Filing
All your creditors will receive a formal notice of your bankruptcy filing, by mail and in some situations perhaps electronically. But that mailed notice is of course not instantaneous. It is mailed out a few days after the filing of your bankruptcy case, so that all of your creditors should know about it within about a week after you file. But that may well not be fast enough to stop the judgment documents from being filed by the creditor’s attorney and entered by that court. So in urgent situations either you or your attorney need to directly inform that attorney about the bankruptcy filing.
Creditors’ Violations of the Automatic Stay
But what if that attorney just goes ahead and submits the judgment papers, either from not finding out in time about your bankruptcy filing or in spite of knowing about it?
The judgment will not be effective, and the attorney will be required to undo the paperwork. If the entry of the judgment results in any damage to you (such as a garnishment of your bank account), the creditor would likely have to compensate you for the damage it (or its attorney) caused. These damages can include your attorney’s fees for enforcing the automatic stay. In circumstances where the bankruptcy court is persuaded that the creditor needs to be taught a lesson, the court may order the creditor to pay you punitive damages. Because of these potential penalties, most creditors are cooperative about stopping their lawsuits immediately when they are informed about a bankruptcy filing.
The Bottom Line
As soon as you are sued by a creditor, the clock is ticking for a judgment to be entered against you. So use this lawsuit as an incentive to see an attorney right away to find out the short-term and long-term ways the judgment could hurt you. Find out whether bankruptcy is or is not a sensible option, and whether it is in your best interest to file a bankruptcy case before a judgment can be entered against you in the lawsuit.
Posted by Kevin on July 10, 2013 under Bankruptcy Blog |
Bankruptcy quashes a garnishment, but only if it’s filed in time.
It’s all about federalism. OK. Take a deep breath. This is a little technical, but we can get through it.
Under our federalist system of government, first, federal law trumps state law in those areas of law—such as bankruptcy—in which the U.S. Constitution gives Congress the power to write laws. But second, federal law respects state law in areas of law where the states have the right to make laws—about the collection of debts, for instance.
So, state garnishment law and federal bankruptcy law butt up against each other when a garnishment and bankruptcy filing happen at about the same time.
Bankruptcy stops virtually all garnishments once the bankruptcy case is filed. But this power of bankruptcy—called the automatic stay—only kicks in at the moment of filing, not before that. So if a garnishment order is entered by the state court and your employer delivers money over to the garnishing creditor the minute before the bankruptcy case is filed, the garnishment is not prevented by the automatic stay. But the automatic stay stops all future garnishments, because now the federal law is trumping state court in the area of law where it reigns supreme.
So it’s a race between a creditor completing a garnishment in the state court, and you filing a bankruptcy in bankruptcy court.
Close Calls Depend on the Details of State Garnishment Procedures
More about the automatic stay.
Bankruptcy law simply says that a bankruptcy filing “operates as a stay” (a “freezing”) of “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case.” A garnishment is an “enforcement… of a judgment obtained before” the bankruptcy case was filed. “Property of the estate” consists of everything that you own at the time your bankruptcy is filed, including a paycheck that’s been earned but not yet paid to you.
So the creditor is stopped from garnishing from that paycheck, UNLESS according to that state’s laws at the moment of the bankruptcy filing the garnished money no longer belongs to you, and thus, not to your new “bankruptcy estate.” Exactly when that happens depends on that state’s exact garnishment procedure and on its property law. For example, who does the money being garnished belong to—you or the creditor—if the employer has cut the check for the creditor but not yet delivered it to the creditor at the moment the bankruptcy is filed. You get the idea how complicated this can get.
The Main Idea
Regardless how these hair-splitting issues would be resolved in your state, the main lesson here is to avoid this problem by having your bankruptcy case be filed well before a creditor has the right to garnish your wages. Yes, in the real world that may be harder said than done, but you can see why it makes sense.
In the next blog, we will re-visit this issue
Posted by Kevin on May 29, 2013 under Bankruptcy Blog |
If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman. It starts with a much more robust “automatic stay.”
The last blog explained how filing a Chapter 7 “straight bankruptcy” gives you certain leverage over secured creditors. In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.
Stopping Creditors from Taking the Collateral
The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:
1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.” (usually because the debtor fails to make make multiple payments to that creditor).
2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.
As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected.
3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”
Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid. As long as you abide by the Plan, the automatic stays continues in effect, and the taxing authority cannot foreclose.
Posted by Kevin on May 21, 2013 under Bankruptcy Blog |
Chapter 13 protects you while you catch up on your vehicle loan, or you may not need to catch up on that loan at all.
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Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. Chapter 13 gives you many months, or even a couple years, to catch up. And if you got your loan more than two years and a half years ago, and you owe on it more than the vehicle is worth, you probably won’t even have to catch up on any missed payments. And you will likely pay less per month, and pay less on the loan overall until you own it free and clear.
The Law of Vehicle Loans Arrears
A vehicle loan is in effect made up of two commitments you’ve made to your lender:
- a promise to pay a certain amount each month, plus interest, until the debt is paid off; and
- a lien on the vehicle, giving the lender a right to repossess your vehicle if you fail to keep your promise to pay.
If right before filing bankruptcy you were behind on your vehicle payments, your lender would have the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay” stops any repossession. This protection lasts as long as the bankruptcy case is open, unless the lender files a motion to get “relief from the automatic stay” and gets earlier permission to repossess.
Vehicle Loans in Arrears in Chapter 7
If you are not current on a vehicle loan and want to keep that vehicle, a Chapter 7 would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the likely practices of you lender when you discuss your vehicle loan options.
Vehicle Loans in Arrears in Chapter 13
If you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you. In most situations you would be allowed to catch up over a period of many months, potentially even a few years.
In some situations you may not even need to catch up at all. This happens if, and only if, 1) you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and 2) your vehicle is worth less than your debt against it. If so, you will not only NOT need to catch up on the loan, you will usually be able to pay a lower monthly payment, often a lower interest rate, and less on the loan overall, and then you will own the vehicle free and clear at the end of the case.
This is informally called a vehicle loan “cramdown,” and can ONLY be done under Chapter 13, not under Chapter 7.
Even if you are current on your vehicle loan, or could catch up within two months or so, and therefore would likely be able to keep your vehicle under Chapter 7, IF your vehicle is worth significantly less than what you owe on it you should talk with your attorney about how much money a Chapter 13 could save you through a “cramdown.” This might especially make sense if Chapter 13 also helps you in other ways.
