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.

“Converting” Your Chapter 13 Case into a Chapter 7

Posted by Kevin on April 4, 2014 under Bankruptcy Blog | Comments are off for this article

To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months).  In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan.  Of course, life throws you curve balls.  You lose a job, or your hours are cut.  You or a member of your family gets sick and insurance does not cover the whole bill.  The car breaks down-more than once.  Your wife has to quit her job to take care of her sick mother.  Whatever.  The Code takes this into account.  How?   One way  is by allowing you to convert your Chapter 13 to a Chapter 7.

Here’s an example to illustrate this.  You own a home and have two mortgages.  You are  $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover.   The home is worth a  less than the first mortgage.  You had been laid off, but got a new job, and are starting to get significant overtime.  But now, almost miraculously the debt collectors are calling again.  You are making enough to take care of that first mortgage, your current expenses, and  if everyone tightens belts,  a little more, say $250 per month.

Chapter 13 may be the answer.  How, you say.  Even if everything goes right, what am I going to do about that second mortgage?  Chapter 13 gives you the power to “strip” the second mortgage; that  is, convert the second mortgage secured debt into unsecured debt.  Then, the second mortgage gets paid pro rata with the credit cards and medical bills.  How much?  What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee.  Could be very little.  Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value.  Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter.   You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.

15 months into the plan, your boss cuts back on most of your overtime.  You can’t even pay the first mortgage  much less the trustee.  If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished.  What to do?

The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.

Not a perfect solution, by any means.  However, better than being thrown to the wolves.  Let’s look at the scenario under the converted Chapter 7.  First, you do not have to make any more payments to the trustee.  That comes out to $3000 per year.  Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge.  That means that you have knocked out all your debts (mortgage, credit card and medical).

BUT, the Code differentiates between the debt and the security for the debt.  The debt is discharged but the security (mortgage) remains on the property.   Unless you can make a deal with the mortgagees, you will probably lose your home.  But you will not owe any deficiency on the first mortgage or anything on the second.  Moreover, you will knock out the credit card and medical debt.

Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot”  to save your home.  If it works, God bless.  If not, you switch into a 7, get your discharge and move on with your life.

So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.