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Five Tremendous Tools to Save Your Home through Chapter 13

Posted by Kevin on October 3, 2019 under Bankruptcy Blog | Comments are off for this article

Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles. 

 

The Limits of Chapter 7 “Straight Bankruptcy”

In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home., or, at least, delay a foreclosure for a limited time.

The Extraordinary Tools of Chapter 13

Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.

Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).

Under Chapter 13 case you can:

1.  stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home.

2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.

3.  permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.

4.  have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.

5.  discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid of in bankruptcy.  If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens attach to your home.

See my next blog post for the other five house-saving tools of Chapter 13.

Understanding Debts- Part 1

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

 Debts in Bankruptcy

If you are thinking about bankruptcy there’s no more basic question than what it will do to each of your debts. Will it wipe away all your debts or will you still owe anybody? What about debts you would like to keep like your car or truck loan or your home mortgage? What help does bankruptcy give for unusual debts like taxes, or child and spousal support?

The Three Categories of Debts

At the heart of bankruptcy is the basic rule of treating all creditors within the same legal category the same. So we need to understand the three main categories of debts. You may not have debts in all three of these categories, but lots of people do. A basic understanding of these three categories will help make sense of bankruptcy, and make sense of how it treats each of your creditors.

The three categories of debts are “secured,” “general unsecured,” and “priority.”

Secured Debts

Every single debt is either “secured” by something you own or it is not. A secured debt is secured by a lien—a legal right against that property.

Most of the time you know whether or not a debt is secured because you voluntarily gave collateral to secure the debt. When you buy a car, you know that you are signing on to a vehicle loan in which the lender is put onto your car’s title as its lienholder. That lien on the title gives that lender certain rights, such as to repossess it if you don’t make the agreed payments.

But debts can also be secured as a matter of law without you voluntarily agreeing to it. For example, if you own a home and an unsecured creditor sues you and gets a judgment against you that usually creates a judgment lien against the title of your home. Or if you don’t pay federal income taxes you owe, the IRS may put a tax lien on all your personal property.

For a debt to become effectively secured, for purposes of bankruptcy, certain steps have to be taken to accomplish that. Otherwise the debt is not secured, and the creditor does not have rights against the property or possession that was supposed to secure the debt.

In the case of a vehicle loan, the lender and you have to go through certain paperwork for the lender to become a lienholder on the vehicle’s title. If those aren’t done right, the vehicle will not attach as collateral to the loan. That could totally change how that debt is treated in bankruptcy.

Finally, it’s important to see that debts can be fully secured or only partly secured. This depends on the amount of the debt compared to the value of the collateral securing it. If you owe $15,000 on a vehicle worth only $10,000, the debt is only partly secured—secured as to $10,000, and unsecured as to the remaining $5,000 of the debt. A partly secured debt may be treated differently in bankruptcy than a fully secured one.

In the next blog we will be reviewing general unsecured debts and priority debts.

 

Reasons to File a Second Bankruptcy Even If Too Early to Get a Discharge of Your Debts

Posted by Kevin on March 24, 2015 under Bankruptcy Blog | Comments are off for this article

You can file a new bankruptcy immediately after finishing another one, but why would you?

 The last blog was about how long you have to wait to file a new bankruptcy case if you already filed one in the past. Those timing rules talk about both the earlier case and the subsequent case resulting in the discharge of your debts. As the last blog emphasized, if the earlier case did not result in a discharge, then you can file a second case at any time. The waiting periods do not apply.

Similarly, even after successfully completing one bankruptcy case and getting a discharge of your debts, you could file a second one at any time. You just would not be getting another discharge of your debts.

At first glance, this situation doesn’t seem to make practical sense.

Why Would You Ever Even Need a New Bankruptcy?

There are two reasons for a quick second bankruptcy.

First: you could unexpectedly incur one or more significant new debts during your bankruptcy case. Those debts could not be incorporated into that initial bankruptcy case because only debts in existence at the time of its filing can be. And you may need protection from those new debts. Since Chapter 7 cases usually last only about 3 to 4 months while Chapter 13 cases last 3 to 5 years, these interim debts are more likely to arise during the course of a Chapter 13 case. These would usually not be conventional consumer debts, because you would not likely be getting consumer credit while you’re in the middle of a bankruptcy case. Instead the new debts would tend to be unusual kinds like income taxes, perhaps student loans, obligations from a new divorce, and/or a claim against you from a vehicle accident or some other kind of liability.

Second reason for the second bankruptcy: the existence of debts that the earlier case did not write off. A Chapter 7 case could well leave still owing some income tax debt, child support arrearage, and/or student loans, for example. In some circumstances you may need the extended protection of a Chapter 13 case while you either pay or strategically avoid paying those debts, depending on which kind they are.

But What Good Is the Second Bankruptcy Without a Discharge?

Although a discharge of debts would seem to be the primary benefit of bankruptcy, it is by no means the only benefit. Instead, the “automatic stay,” protection from the collection efforts of your creditors, is sometimes benefit enough.

That’s primarily true under Chapter 13. First, the protection often extends for years instead of just the few months that it does under Chapter 7. And second, Chapter 13 provides a mechanism—the court-approved payment plan—to satisfy many of these kinds of new or non-discharged debts while under that protection.

For example, imagine that you owe a large income tax debt, plus some back child support, which were either incurred after the filing of your original bankruptcy case or were not discharged in that case.  A new Chapter 13 case would essentially give you up to five years to pay those debts, usually without paying any further interest or penalties on the taxes, all the while being protected from the otherwise very aggressive collection methods of those two kinds of creditors.

But Why Not Just File a Chapter 13 Case and Avoid Filing Two Cases?

That’s a very sensible question, and usually that’s exactly what is done. Chapter 13 is quite flexible, and so a single Chapter 13 filing can usually both take care of all of your debts—the conventional one and the unusual ones like taxes and support—in one package.

But there are a variety of situations in which a single filing would not work. Sometimes you have more debt than is allowed for Chapter 13. So you first need to discharge some of the debt through Chapter 7, thereby enabling you to use Chapter 13 to take care of the taxes and such.

Or you may be contemplating or be in a divorce in which you and your spouse agree to file a Chapter 7 case together to clean up many of your debts, then leaving one of you to file the follow-up Chapter 13 case for the taxes, to cure the arrearage on a home, and any other loose ends.

Or as mentioned above, unexpected new debt could hit you during your first case, making you consider a follow-up case to buy you some continued protection.

 

This discussion should make very obvious that this kind of strategic planning and execution of not just one bankruptcy but two coordinated ones requires the services of a highly qualified and experienced bankruptcy attorney.

Even Simple Chapter 7 Bankruptcy Can Do Much More Than Just Wipe Out Your Debts–Such As?

Posted by Kevin on July 5, 2014 under Bankruptcy Blog | Comments are off for this article

Chapter 7 bankruptcy can often also wipe judgment liens off the title to your home.

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Liens against your property—such as the lienholder’s lien on your car or truck title, or your home lender’s trust deed on your home’s title—generally are not wiped out with a bankruptcy filing. The bankruptcy discharge (write-off) of debts ends your personal liability on that debt but does not end a creditor’s rights in any collateral. Accordingly, a judgment lien—the lien that attaches to your home if a creditor gets a judgment against you—gives the judgment creditor certain rights to your home, including often the right to foreclose on it. But under some circumstances judgment liens CAN be wiped away, or voided, during bankruptcy, so that the creditor would have no such further rights against your home.

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If you still want to make good on your promise  to take charge of your financial life, this and the next few blogs may help. They are about less familiar benefits of filing bankruptcy, starting with some less familiar benefits of Chapter 7.

The Chapter 7 version of bankruptcy usually achieves two main goals—it stops all or most of your creditors from collecting against you and your assets, and it “discharges,” meaning it legally forever wipes out, all or most of your debts. In most cases, that’s pretty much what it does for you, and that’s often just what you need. In contrast, Chapter 13—the “adjustment of debts” payment plan—is the creative, lots-of-tools-in-the-toolbox version of bankruptcy, often significantly better for dealing with complicated situations.  But Chapter 13 takes at least 3 years compared to as short as 3 months for Chapter 7, it costs at least 3 or 4 times more, and is less likely to be completed successfully.

So here’s a tool which is available under Chapter 7—getting rid of certain judgment liens on your home. Here are the conditions for this to happen:

  • You must qualify for and claim a homestead exemption on the real estate upon which you have the judgment lien.
  • That lien must be a “judicial lien,” which usually means one gotten through a court judgment, but is specifically defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • The debt underlying this judgment lien cannot be for child or spousal support, or for a mortgage foreclosure.
  • The judgment lien at issue must “impair” the homestead exemption, which the law defines to mean:
    • the value of all the liens on the house, including the judgment lien
    • PLUS
    • the amount of homestead exemption that you could claim if there were no liens on the house
    • MUST BE MORE THAN
    • the value of the house (assuming you are its sole owner).

So for example, if:

  • the judgment lien is $20,000 and your mortgage is $150,000
  • PLUS
  • your available homestead exemption is $30,000
  • that $20,000 judgment lien would be impairing the homestead exemption and could be voided in bankruptcy
  • as long as your house was worth less than $200,000.

Lastly, please understand that merely filing the Chapter 7 bankruptcy will discharge the underlying debt that caused the judgment and its lien. But voiding the judgment lien itself takes an extra step. In NJ that means filing a motion and obtaining an order or else the judgment lien will continue to exist against your home.   Also, that motion to void the judgment lien needs to be filed while your Chapter 7 case is still open and active, which usually means within about 90 days after your case is filed.   Finally,  lawyers usually charge a bit more than the ordinary flat fee for providing this service since it entails additional work.

So, if you own a home, find out if you have a judgment lien against the title. If you do, talk to a bankruptcy attorney about whether that lien could be voided in a Chapter 7 bankruptcy case. If so, gaining this very important extra protection for your home could make filing bankruptcy that much more beneficial for you.

Chapter 13 Bankruptcy Helps You with Special Debts When Chapter 7 Can’t

Posted by Kevin on April 11, 2014 under Bankruptcy Blog | Be the First to Comment

Chapter 7 sometimes doesn’t help you enough with certain debts. Included are some income taxes, child and spouse support you’re behind on, home mortgage arrearage, and vehicle loans, among others.

There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the practical means to take care of the remaining special debt(s). It frees up money.   But other times you need the extra protection that a Chapter 13 payment plan gives you.

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Here are the ways Chapter 7 could help with the first three of the special kinds of debts mentioned above, and ways that Chapter 13 can help more if necessary. The fourth kind—vehicle loans—are in some respects more complicated, so they’ll be addressed separately in an upcoming blog.

Income Taxes

Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7, but some can’t, generally more recent ones. If you have a tax debt that will not be discharged, but is the only debt that will not be and is small enough, you can file a Chapter 7 case and make payment arrangements directly with the IRS (or applicable state tax agency). If the monthly payment amount is manageable, this could well be the sensible way to go.

But if the tax amount is too large for what you can afford to pay, or you have a number of debts that would not be discharged under Chapter 7, then Chapter 13 would help in the following ways:

  • You would likely get more time to pay off the tax.
  • The IRS or state agency would be prevented from taking collection action without permission of the bankruptcy court.
  • Generally you would not need to pay interest and penalties from the time your case is filed, allowing you to pay off the tax debt with less money.

Child and Spousal Support Arrearage

State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods.  Sometimes you can work out a deal with these enforcement agencies, sometimes not.  If you can make a deal, then Chapter 7 may make sense for you.

But otherwise you need the extraordinary power of Chapter 13. It gives you three to five years to pay the support current, as long as you rigorously keep up with your ongoing monthly payments in the meantime. And throughout this time all of the very tough collection tools usually available to your ex-spouse or support agency are put on hold for your benefit.

Home Mortgage Arrearage

If you are behind on your home mortgage but want to keep the home, and you file a Chapter 7 case, you are at the mercy of your mortgage company about how much time you will have to catch up on the mortgage.

In contrast, similarly to what is stated above, Chapter 13 will give you three to five years to cure that arrearage. So, if you are too far behind to be able to catch up within the time you would be given under Chapter 7, then you need to file under Chapter 13.

Help! I Need to File Bankruptcy But Already Did One a Few Years Ago

Posted by Kevin on September 22, 2013 under Bankruptcy Blog | Be the First to Comment

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.

Help! Support Enforcement Just Garnished My Paycheck, and is Threatening to Do Worse

Posted by Kevin on September 11, 2013 under Bankruptcy Blog | Be the First to Comment

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.

Power to Protect Your Home Against Your Mortgage Lender and Lienholders

Posted by Kevin on June 17, 2013 under Bankruptcy Blog | Be the First to Comment

If you want to hold onto your home, Chapter 13 gives you many extraordinary advantages.

A. If you are current on your mortgage: In most situations you will be allowed to keep making payments directly to your mortgage holder. The bankruptcy system puts a high priority on home mortgages, so almost always your Chapter 13 plan will be structured to pay your mortgage ahead of most other creditors.

B. If you are behind on your mortgage: You will likely have the whole 3-to-5-year length of your Chapter 13 case to catch up on your missed payments. Although theoretically you want to finish your case sooner than later, from a practical perspective the longer you have to catch up the less it will cost each month to do so. In fact because of this, homeowners often intentionally stay in their cases longer than their income requires just to make it easier on their monthly budget.

C. If you have a second mortgage: We may be able to “strip” that mortgage off your house, so that you won’t have to pay it. This is possible only if the home is worth no more than the balance owed on the first mortgage. And this can only be done in Chapter 13, not Chapter 7. Note that when the second (or third) mortgage is stripped off your title, you will be that much closer to eventually building some equity in your home

D. If you are behind on homeowner association dues: These special creditors usually have very aggressive collection methods available to them. But Chapter 13 can stop them and keep them at bay while you get current through payments earmarked to them through your plan.

E. If you are behind on your property taxes: Same thing. The county or other property tax agency is put on hold with any tax foreclosure or other collection procedures while the back taxes are paid through your Chapter 13 plan. Your mortgage company also sees that you are taking care of this responsibility and can monitor your performance in doing so.

F. If you have a judgment lien on your home: In many circumstances, judgment liens attached to your home can be “voided”—the lien undone and the underlying debt written off.  The debt itself is treated as an unsecured debt and is paid whatever percentage all your unsecured creditors receive through your Chapter 13 plan. Usually this does not increase how much you end up paying to the creditors, but rather just shifts how much each of your creditors gets paid (if anything at all).

G. If you have an income tax lien: Chapter 7 does not have an effective way of dealing with an income tax secured through a tax lien. Chapter 13 does. Whether the tax lien is on a tax which can or cannot be discharged, your Chapter 13 plan will arrange to pay only those taxes that must be paid during the life of your case. So at the end of your case all necessary taxes will have been paid in full and the tax lien will be released.

H. If you have a child or spousal support lien: Another situation where Chapter 7 cannot help, under Chapter 13  the ex-spouse or support enforcement agency would be stopped from enforcing the lien, you’d have the length of your case to pay the arrearage, so that by the end of the case you would be current and any lien would be released.

These are the main special powers that Chapter 13 provides to help you keep your home. Often these are used in combination, to fight back at each of the ways your home is being attacked. Whether you just need to use one or two or a bunch of them, these powers make keeping your home much more likely to actually happen.

Bankruptcy Can Solve Your Debt Problems Even If You Can’t Write Off Every Debt

Posted by Kevin on April 3, 2013 under Bankruptcy Blog | Be the First to Comment

You owe the IRS a substantial amount of money for income taxes.   You have heard that bankruptcy doesn’t discharge (legally write off) income tax debts.   So you’re not seriously considering bankruptcy much less consulting with a bankruptcy attorney.

You may or may not be right about whether or not that income tax debt can be discharged now.  However, you may be able to discharge the income tax debt in the future .  But you will not know for sure unless you get some advice.  Here are six reasons why you should not be your own lawyer, and should consult with an experienced bankruptcy attorney:

1. Some debts, which you think can’t be discharged, actually can. Certain income taxes can be discharged in either a Chapter 7 or Chapter 13 case.  For the most part, it depends on when the tax obligation was incurred.   And even though alimony is not dischargeable,  there are some payments to an ex-spouse which are not considered nondischargeable alimony under the Bankruptcy Code.  It’s certainly worth finding out whether the debt you assume can’t be discharged actually can be discharged.

2. Some debts that can’t be discharged now may be able to be in the future. Almost all income taxes can be discharged after a series of conditions have been met. So your attorney can put together for you a game plan coordinating these tax timing rules with all the rest of what is going on in your financial life.

3. Even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem. In many situations your primary problem is the devastating way a debt is being collected. For example, you may want to pay an obligation for back child support but the state support enforcement agency is about to suspend your driver’s and/or occupational license. A Chapter 13 case will stop these threats to your livelihood, and protect you from them while you catch up on the back support.

4. You have more control over the amount of the monthly payments on debts that cannot be discharged. Debts which the law does not allow to be discharged in bankruptcy also tend to be ones that give the creditors a lot of leverage against you. Chapter 13 takes some of this leverage away from them by allowing you to pay what your budget allows, not what these creditors would otherwise like to carve out of you.

5. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts are so much more difficult to pay off because a part of each payment goes to the ongoing interest and penalties. Some tax penalties in particular can be huge. Most of these ongoing add-ons are stopped by a Chapter 13 filing, allowing you to become debt-free sooner.

6. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged and a bunch of debts that can be. Even if bankruptcy can’t solve your entire debt problem directly, discharging most of your debts would likely make that problem much more manageable. Under Chapter 7, you would be able to pay off those surviving debts much faster, which is especially important if they are accruing interest or other fees. And under Chapter 13 you would have the benefit of a predictable payment program, one that focuses your financial energies on those nondischargeable debts while protecting your assets and income from them.

So don’t let the fact that you believe that you have debts that can’t be discharged in bankruptcy stop you from getting legal advice.  What you find out may surprise you.

Home Sweet Home in Chapter 7 and Chapter 13

Posted by Kevin on November 23, 2012 under Bankruptcy Blog | Be the First to Comment

Bankruptcy protects your home. Both Chapter 7 and 13 do so, but which is better for you?

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When you are dealing with your home, you are usually dealing with a mortgage.  So, if you are comtemplating bankruptcy, you need to consider both  the  bankruptcy trustee and your mortgage lender.  Here are 5 key questions to ask to find out whether a Chapter 7 straight bankruptcy or a Chapter 13 payment plan is what you need.

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1.  Is your home worth more or less than the amount of your mortgage?

In other words, do you have equity in your home?  Many people who purchased their homes after 2000 do not have equity in their home. In that case, a Chapter 7 trustee will abandon his or her interest in your home.  That means, the trustee is not going to sell your home to pay off your unsecured creditors.  But, remember, you still have to deal with your mortgage lender.

But, if you have owned your home for a long time, and have significant equity (that means more than the mortgage $43,250 for a married couple), a Chapter 7 trustee will sell your house.  To avoid this, you should look into Chapter 13 to protect that value.

2.  Are you current on your mortgage and property tax payments, and if not will you be able to get current within a short time after filing a Chapter 7 bankruptcy?

If you are not behind on your home obligations (and there is not equity in the home), in a vast majority of cases, you can continue making  payments and keep the home after you file bankruptcy, regardless whether your other circumstances point you to a Chapter 7 case or a Chapter 13 one.

And if you are not so far behind, so that you could both consistently pay the regular monthly payments and catch up on your mortgage and any property tax arrearage within a few months, your mortgage lender may enter into a forbearance agreement with you to allow you to catch up.  In those circumstances, you may want to consider filing under Chapter 7 and keep your home. However, if you would not be able to catch up within a short of period of time, you will likely need the extra power of Chapter 13 to buy more time.

3.  Do you have a second (or third) mortgage which is not covered by equity in the home?

IF you have a second mortgage and you owe more on your first mortgage than your home is worth, Chapter 13 allows you to “strip” that second mortgage from your home. This means that you would pay very little or perhaps even nothing on it during your 3-to-5-year case, and then the entire balance would be forever written off. This cannot be done in Chapter 7. So of course if you have a significant second mortgage, this is a huge reason to file under Chapter 13.

This also applies if you have a third mortgage, and you owe more on the combination of your first two mortgages than the home is worth, allowing you to “strip” the third mortgage.

4.  Do you have any current liens against your home which are not going to be resolved by filing Chapter 7?

Some debts result in liens against your home. Some of those liens can be taken care of with a Chapter 7 filing, some cannot.

For example, if in the past you were sued by a credit card company, medical provider, or collection agency, that creditor likely has a judgment lien against your home. As long as your home has no more equity than allowed by your homestead exemption (without even considering that judgment lien), you will likely be able to have that judgment lien released in a Chapter 7 case.

But, to use another example, if instead you have a lien against your home for owing back child support, a Chapter 7 is not going help you with that lien. After you file and finish a Chapter 7 case, your ex-spouse or local/state support enforcement agency may be able to foreclose on your home to enforce that lien. In contrast, a Chapter 13 case would protect you from any such foreclosure threat, while providing you a mechanism for paying off that debt while under this protection.

5.  Do you have any special debts which could threaten your home later after filing a Chapter 7 bankruptcy case?

Even if you do not currently have any known liens or similar threats against your home, you may have future problems if you have one or more special debts which will survive a straight bankruptcy. The prime examples are income taxes, child and spousal support obligations, construction and home repair debts, and homeowner association dues and assessments. In most states, these kinds of debts either are automatic liens against a home or can easily turn into liens. And most liens can eventually be foreclosed to pay the debt underlying the lien. Chapter 13 can either help avoid a lien from attaching to your home or can enable you to pay the underlying debt and get the lien released without it threatening your home.

The Kinds of Debts Better Handled through Chapter 13

Posted by Kevin on November 21, 2012 under Bankruptcy Blog | Be the First to Comment

As we said in the prior blog, more complicated debts are usually handled better in the Chapter 13 context.

More complicated debts include those that 1) are not discharged (written-off) in bankruptcy or in a Chapter 7, 2) are in arrears but are secured by collateral you need to keep, and/or where the debtor has significant equity, or 3) are special situations under the Code.

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Debts Not Discharged in Bankruptcy

If you owe a not-so-large recent income tax debt, or are just a little behind on your support payments, you can file a Chapter 7 case and often be able to take care of the tax or support obligation by arranging for monthly installment or catch-up payments. Using Chapter 13 in that situation would likely be unnecessary.

But if the amount you owe or are behind on is too large, or if the creditor refuses to deal, then Chapter 13 would be better. Why? Because it forces the creditor to be lots more patient. It generally gives you up to five years to pay off or catch up on these kinds of debts.

Secured Debt, Lots of Equity

This is truly tricky.  Remember, if the property has significant equity, the trustee may sell the property.  If you want to keep the property, you will have a problem in Chapter 7.  In fact, your only recourse is to make a deal by buying out the trustee’s interest.  If this turns out to be too expensive, you may be SOL.

What about Chapter 13?  Assuming you meet the debt ceiling, Chapter 13 can theoretically help.  What does that mean?  To get your Chapter 13 plan approved by the court, it has to pay out to unsecured creditors as much or more than they would have received in a Chapter 7.  So, if you have $50,000 equity in the property after the liquidation analysis, that means that your creditors in a Chapter 13 will have to get at least $50,000.  Over 3 years that is $16K+ per year, over 5 years-$10K per year.  That’s a big nut to meet every month.  So, Chapter 13, in theory, may help you, but , in reality, may be too expensive.

Secured Debts Where You Are Behind

If you want to hang onto your vehicle and/or home but you’re not current on the loan, Chapter 13 allows you to spread out the arrearages for up to the term of the plan.   If an aggressive creditor objects, so what.  You only need the Judge to confirm the plan.

Special Debts Handled Better in Chapter 13

Chapter 13 has some other features which simply are not provided in Chapter 7, much less provided outside bankruptcy.

Under certain circumstances you can “strip” your second mortgage from your home’s title, so that you pay little or nothing on that second mortgage. This can save a homeowner tens of thousands of dollars, and greatly reduce the monthly cost of the home. In New Jersey, stripping a second mortgage is only potentially available in Chapter 13, not in Chapter 7.

A vehicle “cram down”—in which the amount you owe on your vehicle is essentially reduced to the value of vehicle—is also potentially available only in Chapter 13, not Chapter 7.

If you owe any co-signed debts, they can be favored under Chapter 13 while your co-signer is protected. In contrast, in a Chapter 7 case the creditor would likely be able to pursue your co-signer.

The Limits of a Rule of Thumb

Once again, there’s so much more to deciding between Chapter 7 and 13 than looking at what kind of debts you have and whether those debts are “simple” or “complicated.” There are many other factors, and people so often have unusual combinations of circumstances. This rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—is simply a sensible starting point for your own thinking, and for your conversation with an experienced bankruptcy attorney.

Bankruptcy Stops Wage Garnishments Before They Can Hit You

Posted by Kevin on September 10, 2012 under Bankruptcy Blog | Be the First to Comment

Bankruptcy protects your paycheck because it’s more powerful than a creditor’s garnishment court order

A garnishment is effectively a court order which tells your employer to pay a portion of your paycheck to the creditor instead of to you. Except in rare circumstances, a creditor can’t get that garnishment order without first suing you and getting a judgment saying that you owe the debt. A judgment is the court’s decision that you do indeed owe the debt, how much you owe, and the amount of any additional costs. A judgment authorizes a creditor to use a variety of powerful ways to get money or property out of you to pay the debt, often (but not always) including through wage garnishment.

Bankruptcy stops wage garnishments at four stages of the process:

  • before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place
  • very shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment
  • after a judgment is entered, by not allowing the creditor to get a garnishment order
  • after a garnishment order is signed by the court where the judgment was entered, by trumping the garnishment court order with a more powerful bankruptcy “automatic stay”

So your bankruptcy prevents most garnishments from happening. It stops future hits on your paycheck from a “continuous garnishment,” in which there is one garnishment order requiring money to be taken out of your paycheck until the debt is paid. And it also stops new garnishments on an old judgment, for example, when a creditor finds out about your new employer.

Bankruptcy Stops Some Wage Garnishments Only Temporarily

In preventing upcoming wage garnishments, bankruptcy USUALLY does so permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including garnishment. So in those situations the bankruptcy filing stops the garnishment, forever.

So when are garnishments NOT stopped permanently? Garnishments are just temporarily stopped by your bankruptcy filing if the debt is NOT being discharged in the Chapter 7 case—such as certain taxes, most student loans, and a few other kinds of debts. The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge about three months later.  So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS can resume doing so after the discharge is entered (unless in the meantime arrangements are made with the IRS to make monthly payments on that debt, which hopefully you would be able to do after the discharge of your other debts).

Bankruptcy Does Not at All Stop A Few Rare Kinds of Wage Garnishments

If you are filing a Chapter 7 case, the automatic stay does not protect you from wage garnishment to pay child and spousal support obligations, for either current or back support. This means that an ongoing garnishment for support will not be stopped by a bankruptcy filing. And if there had been no garnishment earlier, those garnishments could actually start during your bankruptcy case.

Fortunately, Chapter 13 DOES stop garnishments for support, and provides a way to catch up on back support while under the protection of the bankruptcy court.

Present and Past Wage Garnishments

We’ve covered the effect of bankruptcy on future garnishments, including those that would have gone into effect right after the bankruptcy filing. But what about garnishment orders that go into effect just before filing bankruptcy? For example, what if you’re racing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? The next two blogs will get into these questions about present and past garnishments.