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Putting a Stop, at Least Temporarily, to Your Home’s Foreclosure

Posted by Kevin on October 29, 2019 under Bankruptcy Blog | Be the First to Comment

Both Chapter 7 and Chapter 13 will stop a foreclosure.

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

When a Chapter 7 “Straight Bankruptcy” Helps You Enough on Your Home

Posted by Kevin on February 11, 2019 under Bankruptcy Blog | Comments are off for this article

Chapter 13 Is a Powerful Package

If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.

When Chapter 7 is Enough

But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?

Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?

Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7.

Buying Just Enough Time for What You Need

The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13.  So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.

But Chapter 7 usually buys you much less time than a Chapter 13 could.

If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.

Where do you get the money to make these extra payments?  By discharging your pre-petition debt in the Chapter 7, it could free up hundreds of dollars per month.  The key, then, is to make sure that you use that money to pay the mortgage arrearage and not spend it on other items.

If instead, you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.

The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts.  A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.

Or on the other extreme, a mortgage lender could potentially take no action during the 3-4 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer.  Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.

The “Means Test” Tries to Be Objective

Posted by Kevin on January 28, 2019 under Bankruptcy Blog | Comments are off for this article

In a Chapter 7 bankruptcy, the debtor makes no payments and gets to keep her exempt assets.  For a vast majority of debtors, this means they get to keep all their assets.  The average Chapter 7 is completed in about 4 months

Creditors did not like this and lobbied for 20 years for a major overhaul of consumer bankruptcies.  The result was the 2005 revisions to the Bankruptcy Code which was supposed to force more debtors to file under Chapter 13 where monthly payments of 36-60 months are required.  This was accomplished by imposition of the “means test” -supposedly an objective way to decide who qualifies to file a Chapter 7 bankruptcy.

The “Objective” Rule

If you make under the median income for your State based on household size, you pretty much qualify for Chapter 7.  If your income is above median, you must deduct from your income a combination of actual expenses and average local, State and national expenses to come up with your monthly disposable income.

    1. If your monthly disposable income is less than $128.33, then you pass the means test and qualify for Chapter 7.
    2. If your monthly disposable income is between $128.33 and $214.17, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
    3. If EITHER you can pay 25% or more of those debts, OR if your monthly disposable income is $214.17 or more, then you do NOT pass the means test. With rare exceptions, that means that you cannot file under Chapter 7.

There is not much difference between $128.33 per month and $214.17 per month- about $86 per month.  Just enough for dinner for 2 at a decent restaurant.  But at the low end, you can get through bankruptcy in 4 months and make no payments.  At the high end, you make monthly payments for 3 to 5 years.

So where do these hugely important numbers come from?  The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,700 and $12,850. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.

So where did those original $6,000 and $10,000 amounts come from?

They are basically arbitrary.  Maybe creditor lobbyists or congressional staffers floated the idea.  Who knows?   But, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts.

The Bottom Line

Sensible or not, if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7.   But if you are over the median income amount, then the amount of your monthly disposable income largely determines whether you are able to file a Chapter 7 case.

Advantages of Paying Your 2018 Income Tax through Chapter 13

Posted by Kevin on January 21, 2019 under Bankruptcy Blog | Comments are off for this article

Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt.  If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.

Chapter 13 can help.

Payment of 2018 Income Taxes in Chapter 13 Case

Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018.   In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.

Basic Benefits

No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.

1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.

2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).

3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.

Paying Off Your 2018 Tax For Free

Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?

The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them.  However,  priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).

An Example

Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000.  You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.

But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors.  Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.

Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors.  And you not only discharge your credit card debt but you paid your taxes in full. Not bad.

Taking Advantage of the Rigidity of the Chapter 7 “Means Test”

Posted by on January 13, 2019 under Bankruptcy Blog | Comments are off for this article

Because of how precisely the amount of your “income” is calculated, filing bankruptcy just a day or two later can make all the difference.

 

Passing the “Means Test”

“Income” for purposes of the Means Test includes income from any source except monies received under the Social Security Act.  It includes income from irregular sources such as child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits. Also, the Means Test is time-sensitive in that it is based on the amount of money received during precisely the 6 FULL CALENDAR months before the date of filing. This means that your “income” can shift by waiting just a month or two.

Why is the Definition of “Income” for the “Means Test” So Rigid?

One of the much-touted goals of the last major amendments to the bankruptcy law in 2005 was to prevent people from filing Chapter 7 who were considered not deserving. The most direct means to that end was to try to force more people to pay a portion of their debts through Chapter 13 “adjustment of debts” instead of writing them off Chapter 7 “straight bankruptcy.”

The primary tool intended to accomplish this is the “means test,” Its rationale was that instead of allowing judges to decide who was abusing the bankruptcy system, a rigid financial test would determine who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case, and therefore could not file a Chapter 7 case.

The Unintended Consequences of the “Means Test”

If your income is at or under the applicable median income, then you generally get to file a Chapter 7 case. If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. Having income below the median income amount makes qualifying for Chapter 7 much simpler and less risky.

Filing your case a day earlier or later can matter because of the means test’s fixation on the six prior full calendar months.

So if you receive some irregular chunk of money, it can push you over your applicable median income amount, and jeopardize your ability to qualify for Chapter 7.

An Example

It does not necessarily take a large irregular chunk of money to make this difference, especially if your income without that is already close to the median income amount. An income tax refund, some catch-up child support payments, or an insurance settlement or reimbursement could be enough.

Imagine having received $3,000 catch up support payment on July 15 of last year. Your only other income is from your job, where you make a $42,000 salary, or $3,500 gross per month. Let’s assume the median annual income for your state and family size is $45,000.

So imagine that now in January, 2019,  your Chapter 7 bankruptcy paperwork is ready to file, and you would like to get it filed to get protection from your aggressive creditors. If your case is filed on or before January 31, then the last six full calendar month period would be July 1, 2018 through December 31, 2018. That period includes that $3,000 extra money you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus the extra $3,000 received, totals $24,000 received during that 6-month period. Multiply that by 2 for the annual amount—$48,000. Since that’s larger than the applicable $45,000 median income, you would have failed the income portion of the “means test.”

But if you just wait to file until February 1, then the applicable 6-month period jumps forward by one full month to the period from August 1 of last year through January 31 of this year.  That new period no longer includes the $3,000 you received in mid-July. So your income during the 6-month period is $21,000, multiplied by 2 is $42,000. This results in your income being less than the $45,000 median income amount. You’ve now passed the “means test,” and qualified for Chapter 7.

Pass the Means Test by Filing Bankruptcy in 2018

Posted by Kevin on December 10, 2018 under Bankruptcy Blog | Comments are off for this article

The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.

The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.

Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This can create potential timing advantages and disadvantages.

The Means Test Definition of Income

When considering income for purposes of the means test, don’t think of income as you normally would. Instead:

1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year.

The Effect of this Unusual Definition of Income

This timing rule means that your means test income can change depending on what month you file your case.

So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31.  Think year end bonus. Remember, if you file bankruptcy in December, only money received June through November gets counted.

So let’s say you got an extra $1,500 as a bonus in December. If you file in December that extra doesn’t count. But if you wait until January to file, December money is counted because the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size.  Then, you may not qualify for Chapter 7.

Conclusion

It is a fact that most people wait way too long before their initial consultation with a bankruptcy lawyer.  Our advice is to consult early so you can know your options and  possibly formulate a strategy which can save you money over the long haul.

 

You Can Write Off Some Income Taxes with Bankruptcy

Posted by Andy Toth-Fejel on November 11, 2018 under Bankruptcy Blog | Be the First to Comment

Chapter 7 vs. 13 for Income Taxes

Thinking that the only way to handle your income tax debts in bankruptcy is through Chapter 13 is a misunderstanding of the law. It’s an offshoot on the broader error that you can’t write off taxes in a bankruptcy.

Both are understandable mistakes.

It is true that some taxes cannot be discharged (legally written off) in bankruptcy. But some can.

And it is true that Chapter 13 can be the best way to solve many income tax problems. But that does not necessarily mean it is the best for you. Chapter 7 might be better.

When Chapter 13 Is Better

Chapter 13 tends to be the better option if you owe a string of income tax debts, and especially if some are relatively recent ones. That’s because in these situations Chapter 13 solves two huge problems in one package.

First, if you owe recent income taxes which cannot be discharged, you are allowed to pay those taxes over the term of your Chapter 13 plan (up to 60 months) usually avoiding most penalties and interest that would have accrued during the term of the plan. That can be a huge savings.  Moreover, you can often hold off on paying anything towards the back taxes while you first pay even more important debts—such as back child support.

Second, if you have older back taxes, under Chapter 13, you pay these taxes as general unsecured debt under your plan.   If you complete all payments under your plan and otherwise satisfy the requirements of Chapter 13  any remaining older taxes are discharged; i.e., wiped out.

When Chapter 7 is Better

But you don’t need the Chapter 13 package if all or most of your income tax debts are dischargeable. In that situation, the generally much simpler Chapter 7 could be enough.

So, what makes an income tax debt dischargeable under Chapter 7?

The Conditions for Discharging Income Taxes

To discharge an income tax debt in a Chapter 7 case, it must meet these conditions:

1) 3 years since tax return due: The tax return for the pertinent tax must have been due more than three years before you file your Chapter 7 case. Also, if you requested any extensions for filing the applicable tax returns, add that extra time to this three-year period.

2) 2 years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since “assessment”: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot file a “fraudulent return” or “willfully attempt in any manner to evade or defeat such tax.”

These four conditions and the procedure for utilizing them are a bit complicated.  Therefore, we advise that you retain an experienced bankruptcy attorney to assist you.

Understanding Debts- Part 2

Posted by Kevin on November 7, 2018 under Bankruptcy Blog | Be the First to Comment

In the previous blog, we talked about debts in general, and secured debts in particular.  Today, we will talk about general unsecured debts and priority debts.

General Unsecured Debts

All debts that are not legally secured by collateral are called unsecured debts.  And “general” unsecured debts are simply those which are not one of special “priority” debts that the law has selected for special treatment. (See below.) So the category of “general unsecured debts” includes all debts with are both not secured and not “priority.”

General unsecured debts include every imaginable type of debt or claim. The most common ones include most credit cards, virtually all medical bills, personal loans without collateral, checking accounts with a negative balance, unpaid checks, payday loans without collateral, the amount left owing after a vehicle is repossessed and sold, and uninsured or under insured vehicle accident claims against you.

It helps to know that sometimes a debt which had been secured can turn into a general unsecured one. For example, a second mortgage that was fully secured by the value of the home at the time of the loan can become unsecured in a Chapter 13 bankruptcy if the home’s value falls significantly.  Or what was originally a general unsecured debt may, in certain circumstances, turn into a secured debt.

Priority Debts

As the word implies, “priority” debts are ones that Congress has decided should be treated better than general unsecured debts.

Also, there’s a strict order of priority among the priority debts. Certain “priority” debts get paid ahead of the others (and ahead of all the general unsecured debts). In bankruptcy getting paid first often means getting paid something instead of nothing at all.

This has the following practical consequences in the two main kind of consumer bankruptcy:

In most Chapter 7 cases there is no “liquidation” of your assets for distribution to your creditors. That’s because in the vast majority of cases, all the debtors’ assets are protected; they are “exempt.” But in those cases where there ARE non-exempt assets which the bankruptcy trustee gathers and sells, priority debts are paid in full by the trustee before the general unsecured ones receive anything. And among the priority debts those of higher priority are paid in full before the lower priority ones receive anything.

In a Chapter 13 case, your proposed payment plan must demonstrate how you will pay all priority debts in full within the 3 to 5 years of your case. Then after the bankruptcy judge approves your plan, you must in fact pay them before you can be discharged

Here are the most common priority debts for consumers are:

  • child and spousal support—the full amount owed as of the filing of the bankruptcy case
  • certain income taxes, and some other kinds of taxes.

 

 

If You File a Chapter 7 Bankruptcy with an Attorney, You Enhance Your Chances of Getting a Discharge

Posted by Kevin on September 20, 2018 under Bankruptcy Blog | Comments are off for this article

Over the years, I have received numerous phone calls from people who have tried to file a bankruptcy by themselves (known as “pro se” debtors) and have gotten into trouble.   I also see first hand what happens when people file without an attorney when I attend “meetings of creditors”, also known as 341a meetings.  A 341a meeting is the usually straightforward, usually short meeting with the bankruptcy trustee that everyone filing bankruptcy must attend.  Unfortunately, with many pro se debtors, the 341a meeting is not always straightforward or short.

But I wondered whether anybody has actually investigated this question. In searching the internet, I came across a book published a few years ago titled  Broke: How Debt Bankrupts the Middle Class.  This book is a series of articles about current issues in bankruptcy.  One such article is titled  “The Do-It-Yourself Mirage: Complexity in the Bankruptcy System” by Professor Angela K. Littwin of the University of Texas School of Law.  Professor Littwin  analyzed data from the Consumer Bankruptcy Project, “the leading [ongoing] national study of consumer bankruptcy for nearly 30 years.” Her finding: “pro se filers were significantly more likely to have their cases dismissed than their represented counterparts.”

Very interestingly, she also learned from the data that

consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process.  Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom.

She concluded that after bankruptcy law was significantly amended back in 2005 in an effort to discourage as many people from filing, “bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.”

Almost 10 Times More Likely to Get a Discharge of Your Debts

In another study, Prof. Littwin stated that “17.6 percent of unrepresented [Chapter 7 “straight bankruptcy”] debtors had their cases dismissed or converted” into 3-to-5-year Chapter 13 “adjustment of debts” cases.  “In contrast, only 1.9 percent of debtors with lawyers met this fate.”  Even after controlling for other factors such as “education, race and ethnicity, income, age, home ownership, prior bankruptcy, whether the debtor had any non-minimal unencumbered assets at the time of the filing,” “represented debtors were almost ten times more likely to receive a discharge than their pro se counterparts.”

The bottomline is that you are better off going to an experienced bankruptcy attorney.

 

 

Your Bankruptcy Options If You Owe Income Taxes After Closing Your Business

Posted by Kevin on May 14, 2018 under Bankruptcy Blog | Comments are off for this article

Most people who close down a failed small business owe income taxes. Chapter 7 and Chapter 13 provide two very different solutions.

 

Here are the two options:

Chapter 7 “Straight Bankruptcy”

File a Chapter 7 case to discharge (permanently write off) most of your debts.  This can include some or even all of your income taxes. If you cannot discharge all of your taxes, right after your Chapter 7 is completed, you (or your attorney or accountant) would arrange a payout plan (either lump sum or over time) with the IRS or other taxing authorities.

Chapter 13 “Adjustment of Debts”

File a Chapter 13 case to discharge all the other debts that you can, and sometimes some or even all the taxes. If you cannot discharge a significant amount of your taxes, you then pay the remaining taxes through your Chapter 13 plan, while under continuous protection of the automatic stay against the IRS’s or state’s collection efforts.

The Income Tax Factor in Deciding Between Chapter 7 and 13

In real life, especially after a complicated process like closing a business, often many factors come into play in deciding between Chapter 7 and Chapter 13. But focusing here only on the income taxes you owe, the choice could be summarize with this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case (if any) be small enough so that you could reliably make workable arrangements with the IRS/state to pay off or settle that obligation within a reasonable time?  If so, consider Chapter 7.  If not, then consider Chapter 13 which provides the automatic stay during the 5 year period allowed to pay taxes.

How Do You Know?

To find out whether you need Chapter 13 protection, you need to find out from your attorney the answers to two questions:

1) What tax debts will not be discharged in a Chapter 7 case?

2) What payment or settlement arrangements will you likely be able to make with the taxing authority to take care of those remaining taxes?

The IRS has some rather straightforward policies about how long an installment plan can last and how much has to be paid. In contrast, predicting whether or not the IRS/state will accept a particular “offer-in-compromise” to settle a debt can be much more difficult to predict.  Generally, it takes more attorney or accountant time to negotiate an offer in compromise, so the cost factor to the debtor should be considered.

When in doubt about whether you would be able to pay what the taxing authorities would require after a Chapter 7 case (either by installment plan or offer in compromise), or in doubt about some other way of resolving the tax debt, you may well be better off under the protections of Chapter 13.

 

 

What Happens to the Owner Whose Business Fails

Posted by Kevin on March 4, 2018 under Bankruptcy Blog | Be the First to Comment

In the prior blog, we learned that a corporation or LLC (business entity) can file bankruptcy under Chapter 7.  Are there any situations where the owner of the business would file bankruptcy when the business fails?  The answer is yes under the following circumstances:

– the business is being operated as a sole proprietorship; or

-the owner of the business has provided personal guarantees of the obligations of the business.

If the business entity is a sole proprietorship (for example, John Smith doing business as “The Hot Dog King”), the business and the owner are the same person for legal purposes.   All the assets and liabilities of the business are in the name of the owner.  If that business fails,  the creditors can bring a lawsuit against the owner.  Moreover, if the creditor obtains a judgment, that creditor can look to any of the assets of the owner to be made whole.  That includes both the business assets and personal assets of the owner.  To avoid this outcome and allow for an orderly liquidation of the assets of the sole proprietorship, the owner can file bankruptcy, and obtain a discharge of debt.

If the business is a corporation or LLC, the law considers the business to be an entity separate from its owners.  In many cases involving businesses, creditors (especially banks, inventory suppliers, and the like) will require the owner to guarantee business debt.  If the business defaults on the obligation, the creditor, which is the beneficiary of the guarantee, may sue the guarantor/owners, obtain a judgment, and attempt to levy on any assets of the owner including assets that have nothing to do with the business.  To avoid this outcome, the owner/guarantor can file bankruptcy, and obtain a discharge of debt.

Will the owner of the business, either as a sole proprietor or a guarantor of debt,  be able to file a Chapter 7 or will he or she be forced into a Chapter 13 where 3-5 years of payments to creditors are required.  While individuals are generally subject to the means test (which we spoke about a few blogs back) , the good news is that you do not have to pass the means test at all unless your “debts are primarily consumer debts.”  So if your debts are primarily business debts—more than 50%–you avoid the means test altogether.

Let’s be clear about the difference between these two types of debts.  A “consumer debt” is a “debt incurred by an individual primarily for a personal, family, or household purpose.”  So, business guarantees are not consumer debts.  It can be argued that cash advances on credit cards which are used by the business are not consumer debts.    If you had taken out a second mortgage on your home for the clear purpose of financing your business, that second mortgage would likely be considered a business debt.  It depends on the purpose for incurring the debt.

Certainly there are times when the line between a business and consumer debt is not clear. Given what may be riding on this—the ability to discharge all or most of your debts in about four month under Chapter 7 vs. paying on them for up to 5 years under Chapter 13—be sure to discuss this thoroughly with your attorney.

Can a Business File Under Chapter 7?

Posted by Kevin on March 3, 2018 under Bankruptcy Blog | Comments are off for this article

Under State law, a business entity, such as a corporation or an LLC, is considered a person and is separate from its shareholders (in the case of corporations) or members (in the case of LLC’s).   If  a corporation or LLC fails, it will probably have to deal with creditors who may sue the business, obtain judgments and levy on the business assets.  This can be a long, drawn out procedure.  As an alternative,  that failed business entity may file bankruptcy.  The entity will be the debtor.  If the plan is to shut down the business and walk away (as opposed to a restructuring and continuation of business), then Chapter 7 can be a useful vehicle.  Upon the filing, the automatic stay goes into effect as to the business entity.  A trustee is appointed who literally changes the locks on the door, deals with the landlord and other creditors, assembles and liquidates the assets, and pays off the creditors.

How does a business chapter differ from a personal Chapter 7?   In a personal Chapter 7, the debtor gets a discharge of many debts, and is allowed to keep a certain amount of property which is exempt.   The discharge and keeping a baseline of property is part of the concept of giving the debtor a fresh start.

However, there are no exemptions for the business in Chapter 7.  The trustee sells everything.  I could understand that concept because if you are going out of business, you do not need assets for a fresh start.   However, in Chapter 7, the business entity does not get a discharge.  I always thought that was strange and looked at the legislative history behind this rule.  The legislative history stated that discharges are not given to corporations (there were no LLC’s back then) so that people could not traffic in corporate shells???  My initial thought was, it only costs a few hundred dollars to set up a new corporation with no debt.  So, why traffic in corporate shells?  More history.  It was only about 100 years ago that state legislatures passed business corporation statutes like the one’s we have today.  Before that, if you wanted to incorporate, you would have to get your local State representative to sponsor a bill to establish your corporation.  The legislature actually voted on it.   It was an expensive and time consuming activity.  Not surprisingly, there were not that many corporations.  So, back in the day (as my kids would say) discharging debt within a corporation through bankruptcy could conceivably lead to a lucrative side deal if you were allowed to sell the debt free entity to a third party.

The bottom line is that business entities can file under Chapter 7.  However, business Chapter 7’s tend to be more complicated because assets are involved, and the Trustee is usually more involved than in personal Chapter 7’s.  If you are the owner of a failing business, it may be a good idea to consult with an experienced bankruptcy attorney.

 

The Expenses Step of the Chapter 7 “Means Test”

Posted by Kevin on February 18, 2018 under Bankruptcy Blog | Comments are off for this article

If your income is lower than the median income for your household size within your State, there is a “no presumption of abuse” and you can, almost always, file under Chapter 7.  If, however, your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the Means Test.

The concept behind the Means Test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so.  That means they must file under Chapter 13 where payments are made to creditors over a 3-5 year period.

But putting that concept into law resulted in an amazingly complicated set of rules.

One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national and some vary by state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).

Disposable Income

If after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:

  1. If the amount left over—the “monthly disposable income”—is no more than $128.33, then you still pass the means test and qualify for Chapter 7.
  2. If your “monthly disposable income” is between $128.33 and $214.17, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
  3. If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $214.17, then you do NOT pass the means test, UNLESS you can show “special circumstances”.

THAT’s Complicated! 

If you don’t pass the means test you, will likely end up in a 3-to-5-year Chapter 13 case. Not only will that mean you cannot discharge your debts until the end of the 3-5 year period, but you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test.

 

Get a New Financial Start with this New Year

Posted by Kevin on January 21, 2018 under Bankruptcy Blog | Comments are off for this article

The beginning of a year is a good time to take stock of yourself.  People routinely make New Year’s resolutions about diet, exercise, going back to school.

Are your debts getting out of control?  Worried about harassing telephone calls from debt collectors?  Getting sued?  Wages being garnished?  Now is the right time to do some financial assessment.  Bankruptcy may be the right tool for you to put your financial problems in the rear view mirror.

A New Start with Chapter 7

With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that, you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge under the Bankruptcy Code.. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.

A New Start with Chapter 13

With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.

Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. You finish your Chapter 13 payment plan in  3 to 5 years. Whatever debts you have not paid off get discharged. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts like home mortgages and car loans. Same thing with income taxes and child support arrearages that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.

 

Don’t kick the can down the road.  Take control.  We are available for consultation.

 

Satisfying the Debtor Education Requirement

Posted by Kevin on November 27, 2017 under Bankruptcy Blog | Comments are off for this article

In a prior blog, we talked about the credit counseling course that a debtor must take before he or she can file under Chapter 7 or 13.  After the petition is filed, the debtor must take the debtor education course.  This is sometimes called the personal financial management course.

The course is given by a non profit budget and credit counseling agency approved by the United States Trustee.  The course is usually taken online but, depending on the provider, can be done over the phone, or even in person.  The  purpose of the course is to provide the debtor with insight into his or her current financial situation which led to the bankruptcy, and how to budget income and expenses to avoid financial problems going forward.

The debtor education course requirement was part of the 2005 amendments to the Bankruptcy Code.  As I stated in the blog dealing with the credit counseling course, in my opinion, one of unspoken policies for the 2005 amendments to the Bankruptcy Code was to discourage bankruptcy filings by making them more time consuming and expensive.   The debtor education course requirement (just as the credit counseling course requirement) is an additional hoop through which a debtor is forced to jump.  Hate to sound cynical, but in the 12 years since the 2005 amendments, I have never had a debtor tell me how valuable either course was.

So, what happens if you decide to save a few bucks by not taking the debtor education course.  The punishment is draconian.  No course taken- no certificate of completion filed with the Clerk of the Bankruptcy Court, no discharge.  That means that your debts are not wiped out.

I remind my clients at the meeting of creditors that if they have not already taken the debtor education course, they should do so immediately.

Let’s say you mess up and don’t take the course.  Any recourse?  You may be able to re-open your case to take the course and file the certificate of completion.  However, you will incur additional legal and filing fees.  In the meanwhile, because your debts are not discharged, your creditors can take action to collect of their debts.  Finally, there is some risk that the judge will not let you reopen the case.  Don’t put yourself in that position.

 

Chapter 7 Basics

Posted by Kevin on October 15, 2017 under Bankruptcy Blog | Be the First to Comment

The Bankruptcy Code is divided into chapters.  Chapters 1, 3, and 5 deal with basic concepts that apply to all the various types of bankruptcies.  Chapter 7 deals with liquidations for individuals or businesses.  Chapter 9 deals with municipalities.  Chapter 11 deals with reorganizations and/or planned liquidations of mainly businesses.  Chapter 12 deals with family farms (do not get many of them in northern New Jersey).  Chapter 13 deals with repayment plans for individuals.  For the average consumer, Chapter 7 and Chapter 13 are the two alternatives methods of filing bankruptcy.  For individuals, the object of any bankruptcy is to get a discharge of your debts.  In other words, wiped out.

Let’s look at Chapter 7.  This is sometimes called a straight bankruptcy or a liquidation.  Chapter 7 is basically an asset driven analysis.  You do not make payments, but a trustee can sell your non-exempt property, and pay out your creditors.  The repayment scheme is set out in the Bankruptcy Code.  Upon the conclusion, many of your debts are discharged.  Certain enumerated debts are not wiped out such as domestic support obligations, debts incurred by fraud, certain taxes and most student loans.

After the Bankruptcy Code went into effect, creditor groups complained for the next 25 years that it was too easy for debtors to file under Chapter 7, which in a vast majority of cases, translated into no payments to creditors.  Creditors wanted more debtors to file under Chapter 13 where monthly payments must be made to a trustee and certain creditors need be paid in full.  The 2005 revisions to the Bankruptcy Code considers a debtor’s income in whether he or she can file under Chapter 7.  If the debtor’s income is below the median income for the State based on family size, it is presumed that the debtor can file under Chapter 7.  If the income is above median, a debtor has to pass the “means test” to qualify for Chapter 7.  The means test looks at the debtor’s income for the 6 months prior to filing to arrive arrive at what is called current monthly income.  It then subtracts categories of expenses- some based on national or regional averages, and others based on actually cost.  If the net income is above a certain amount, the debtor cannot file under Chapter 7.

Assuming that you qualify for Chapter 7, the next issue is what property is exempt.  In New Jersey, we can use either the exemptions set forth in the Bankruptcy Code or the exemptions listed in New Jersey statutes.  The New Jersey statutes are mostly about 100 years old and have not been adjusted for inflation, so we almost always use the federal exemptions.

You file a Chapter 7 by filing with the Bankruptcy Clerk a Petition, Schedules of assets, liabilities, income and expenses, and various ancillary documents (over 40 pages).  A trustee is appointed to oversee the case.  If the exemptions cover the value of all of your assets, the case is called a no-asset case.  That means no assets go to the Trustee-you get to keep them subject to any security interests (mortgages and the like).

About 4 weeks after filing, the debtor (and legal counsel) appear before the trustee.  The debtor is required to answer questions from the trustee and any creditors.  Creditors rarely appear at this hearing.  If the trustee believes that your filing is in order and no further action is necessary, a discharge order will be issued within about 6 weeks.  The whole process takes about 4 months.  You cannot file another Chapter 7 and obtain a discharge for 8 years from filing date of the first Chapter 7.

Clearly, Chapter 7 is a bit more complex, but as the title states, these are Chapter 7 basics.

 

Bankruptcy Basics

Posted by Kevin on October 3, 2017 under Bankruptcy Blog | Be the First to Comment

Over the last couple of years, this blog has dealt with many Chapter 7 and Chapter 13 issues.  Some simple, some complex.  Every once and awhile, however, it is good to go back to the basics.  So, in the next few blogs, that is what we will do.

We will begin with an overview.  Many people are skittish about filing bankruptcy.  Yes, they are in a bad financial situation.  Not enough money coming in, debts are mounting, creditor calls are becoming more than annoying, and maybe there are lawsuits.  In society, we are brought up to be responsible and honor our obligations.  It is part of being an adult.  For many, the thought of bankruptcy is equated with failure.   But I take a different point of view.  Bankruptcy should be looked as a vehicle for a new start, a fresh start.

Many people do not know this, but the right to file bankruptcy is in the Constitution.  Congress is given the right to establish uniform laws concerning bankruptcy.  The first bankruptcy law was adopted by Congress in 1800.  It was clearly pro-creditor.  There were subsequent bankruptcy acts in 1841, 1867, 1898 and 1938.

The next major revision was the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code.  The Bankruptcy Code marked a significant change in the point of view of bankruptcy laws.  It was decidedly more pro-debtor compared to prior law.   It allowed a vast majority of debtors to file Chapter 7  where debtors are not required to make cash payments to creditors and keep most, if not all, of their assets.

Creditor groups complained that the Bankruptcy Code was too pro-debtor and lobbied Congress for changes.  This led to minor revisions in the 1980’s and 1990’s.  The lobbying continued.  In 2005, Congress adopted the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA).  Although this was a major overhaul of  many areas of the Bankruptcy Code, from a consumer’s point of view, BAPCPA tries to force more debtors into Chapter 13 where monthly payments must be made by the debtor for periods ranging from 36 months to 60 months.  All in all, BAPCPA has made the bankruptcy process more complex and more costly to a prospective debtor.

If there is anything that you should take from this blog, it is that bankruptcy is a right that you have under the Constitution of the United States.  It gives you an opportunity to deal with your debts and get a fresh start.

 

 

Should I Put My Business in Chapter 7?

Posted by Kevin on September 9, 2017 under Bankruptcy Blog | Be the First to Comment

You wanted to follow the American dream and set up your own business.   Two years down the road, however, you realize that you are working 70 hours per week and the business is not making money.  You have exhausted all your savings and the business has incurred debt out the wazoo.  You just want out, and you have heard about Chapter 11 or Chapter 7.  What to do?

While you can liquidate your business in a Chapter 11 (liquidating plan), this is very expensive and time consuming.  Unless, the business is very large, this may not be the way to go.  But what about a Chapter 7?

The first question you have to answer is who (or what) is going into Chapter 7?  To a degree, it may depend on how your business was set up.  If you have a sole proprietorship (DBA), then under the law of New Jersey, you are the business.  So, if the business fails and you want out, you will have to file a Chapter 7.  A trustee will be appointed and will administer not only your business assets and liabilities, but also your personal assets and liabilities.

If the business is a corporation or LLC, then under the law, the business is considered an entity separate and apart from you.  So, now the issue is who files bankruptcy?  One of the primary reasons to file bankruptcy is to get a discharge of your debts.  However, the Bankruptcy Code states that a discharge in a Chapter 7 is limited to individuals.  The Code defines “individuals with regular income” but not “individuals”.  The Code also defines “persons” which includes people but also includes corporations and partnerships.  Well, without going into too much more detail, the bottomline is that people can get discharged in a Chapter 7 but corporations and partnerships and LLC’s cannot.  So, if you put your LLC into Chapter 7, it does not get a discharge.

But, the analysis does not end there.  Your LLC may be have sued by numerous creditors so you have lawsuits pending.  Also, these creditors have a penchant for not only suing the LLC but suing the principal and that is you.  You have other creditors who have not sued yet but are hounding you on phone.  You have inventory and accounts receivable.  You have the bank pressuring you on that line of credit which you guaranteed.

Even though the LLC does not get a discharge in Chapter 7, it may be worthwhile to file a Chapter 7 for the business.  First of all, because of the automatic stay, all pending lawsuits are put on hold, and your creditors cannot file any new actions unless they get the permission of the bankruptcy court (relief from automatic stay).  Also, the trustee takes over and chases the business’s creditors, deals with the landlord and liquidates the inventory.  You must cooperate, but the trustee does the heavy lifting.

If you cannot work a deal out with lenders on guarantees, or if the collection lawsuits naming you become too much of a hassle, then the owner should seriously consider an individual Chapter 7.

Bankruptcy issues involving a failing business are complicated.  You should seek experienced bankruptcy counsel work work you through the process.

Bankruptcy Is a Moral Choice

Posted by Kevin on August 26, 2017 under Bankruptcy Blog | Comments are off for this article

Is Filing Bankruptcy a Moral Choice?

As a bankruptcy practitioner, I take for granted that filing for bankruptcy is a practical, economic choice.  But for many of my clients, it is also a moral choice.  They took the money or used the credit with the good faith expectation that they would pay back the creditor, and now they cannot.  Does that make them a bad person?  How do you reconcile this apparent disconnect?

For many of my clients with misgivings about filing, I advise to meet the issue head on.  You’ll feel better (even good) about the decision only after you believe in your head and in your heart that it really is the right step to take.

How to Make a Good Moral Decision 

1. What got you to this point of your finances?

 You made legal commitments to pay your debts. What has changed so that you are having trouble now meeting those honest intentions to pay? What is making you seriously consider breaking those commitments permanently?  

2. Understand your present: what are the costs and benefits of now trying to meet those financial commitments?

The moral benefit  of not filing is that you would be keeping your promises to pay your debts. It’s easy to fixate on this and feel guilty about breaking these honest promises. But how about the real costs if you kept struggling to meet them? Consider your physical health, and your emotional health as you deal with the constant stress. Consider the debts’ effect on your marriage and family relationships.  What financial and emotional responsibilities do you have to spouse, children, parents, siblings, community that you just can’t handle?  You clearly have moral obligations to all these people in addition to obligations to your creditors.

3. You CAN make a good decision: you now have the opportunity to choose and act wisely.

Face your situation honestly. Don’t hide from the truth, even if it means accepting that you’ve made mistakes. Own them. But don’t beat yourself up about them. Focus on the future. Focus on what you have to do (or not do) to insure a better economic future.  Not just generalizations but concrete steps.  Resolve to make better economic (and other) decisions every day going forward.  And then walk the walk.

4. Get good advice: you can only make good decisions if you know your legal and practical options.

You can’t make good economic or moral choices about how to attack your debts without knowing your legal alternatives for doing so.  You can’t know whether the best way to deal with your creditors if you don’t know those legal options.  It may turn out that credit counseling will allow you to manage your debts within your budget and without filing bankruptcy.  It may turn out that a Chapter 13 payment plan fits your set of life obligation better than a Chapter 7 “straight bankruptcy”.  But you cannot make those decisions unless you have the facts and options.

5.  Weigh your legal options: consider effects on your creditors, yourself, your spouse, your family, and anyone else involved.

Get help from the right people and resources. Do whatever helps YOU make a good decision.  Although bankruptcy attorneys are legal advisors, experienced bankruptcy attorneys have dealt with many people in their careers who have focused not only on the economic issues but the moral issues in filing bankruptcy.  Discuss these concerns with your attorney.  It will help you make the best, well informed decision which is the first step to a much better future.

 

Dumping Your Chapter 13 Case Midstream

Posted by Kevin on August 20, 2017 under Bankruptcy Blog | Comments are off for this article

You can usually get out of an ongoing Chapter 13 “adjustments of debts” bankruptcy case by simply asking to do so.

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Unlike Chapter 7, if you file a Chapter 13 case you can end it—“dismiss” the case—at any time, and in just about any circumstance. But why the difference?

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Explicit Right to Dismiss

Why can a Chapter 13 case be dismissed by the debtor? Because unlike with Chapter 7, Section 1307(b) of the Bankruptcy Code says so. And quite strongly.

“On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].”

Notice that the debtor can ask for a dismissal “at any time.” This implies that the request could come any time during the life of a Chapter 13 case, including when it might be particularly inconvenient for a creditor. Or whenever. Also notice that the court does not seem to have any discretion about whether or not to dismiss–it “shall” dismiss the case. Not “may” or “might” dismiss it, but “shall” do so.

An Absolute Right to Dismiss?

Actually there has been debate among bankruptcy judges about whether a court can ever prevent a Chapter 13 case from being dismissed on request of a debtor. And a number of judges have decided that in situations of serious abuse or fraud by the debtor, there are other provisions in the law that trump this section and prevent a Chapter 13 case from being dismissed.  But still, in the vast majority of situations, a request by a debtor to dismiss a Chapter 13 case results in its near-immediate dismissal.

Why So Different Than Chapter 7?

But why does the Bankruptcy Code—the federal statute governing bankruptcy—provide for a right to dismiss a Chapter 13 case when it does not provide for Chapter 7 dismissal the same way?

Because (beyond the reasons given in the last blog related to Chapter 7) when Congress established the bankruptcy options, it wanted to encourage debtors to file Chapter 13 cases. This was in part so that they paid back at least some of their debts. Congress probably also recognized that filing a Chapter 13 case is generally riskier than filing Chapter 7. That’s mostly because it involves making payments diligently over the course of years, while not getting the reward of the discharge (legal write-off) of the debts unless successfully getting all the way to the end of it. To encourage taking on the risk of starting a Chapter 13 case, Congress made it easy to get out of it if things did not go as planned.