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Who Does What in Your Bankruptcy Case?

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

The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee. 

Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.

Debtor

The debtor is the person or business entity filing the bankruptcy case.

The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.

A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).

Creditors

The creditors are of course the businesses and individuals to which the debtor owes debts.

Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.

Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.”

Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures.

For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.

Creditors Getting Involved

Although creditors can be involved in the bankruptcy process in a lot of ways, they tend to be less involved than you expect. Most unsecured general creditors decide that getting involved is not worth their cost or effort.  Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”

Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts.  Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.

What Happens to Most of Your Debts in Chapter 7 “Straight Bankruptcy”?

Posted by Kevin on September 1, 2019 under Bankruptcy Blog | Comments are off for this article

First, let’s review the different types of debts in bankruptcy.

Secured debts are collateralized usually by your home, your car or your truck, maybe your furniture and appliances. Priority debts are ones that are usually not secured but are favored in various ways in the bankruptcy law. For most consumer debtors, they include child and spousal support, and certain taxes.

The remaining debts are called general unsecured debts.   Think credit cards and medical bills.   What do all these debts have in common-no collateral attached to these debts and not given a favored (priority) position under the law.

In most Chapter 7 bankruptcies, the vast majority of debts are general unsecured debts.  In Chapter 7 bankruptcy, most general unsecured debts are legally, permanently written off.  The legal term is “discharged”.  That means that once they are discharged—usually about 3-4 months after your case is filed—the creditors can take absolutely no steps to collect those debts.

The only way general unsecured debts can be paid anything is if either 1) the debt is NOT dischargeable or 2) it is paid (in part or in full) through an asset distribution in your Chapter 7 case.

 1) “Dischargeability”

A creditor can dispute your ability to get a discharge of your debt.  In the rare case that the discharge of one of your debts is challenged, you may have to pay that particular debt. That depends on whether the creditor is able to establish that the facts fit within the  narrow grounds for an exception to dischargeability.  This usually involving allegations of fraud, misrepresentation or other similar bad behavior on your part. If the creditor fails to establish the necessary grounds, the debt is discharged.

There are also some general unsecured debts that are not discharged unless you convince the court that they should be, such as student loans. The grounds for discharging student loans are quite difficult to establish.  Check /http://studentdebtnj.com/ for more detailed information relating to your student loans.

2) Asset Distribution

In order for a debtor to get a fresh start, the Bankruptcy Code allows a debtor to exempt certain property.  That means you keep that property.  If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of your assets from you. This is what usually happens—you’ll hear it referred to as a “no asset” case. But if the trustee DOES take possession of any of your assets for distribution to your creditors—an “asset case”— your “general unsecured creditors” may receive some of it. The trustee must first pay off any of your priority debts, as well as pay the trustee’s own fees and costs.  Whatever remains goes to the unsecured creditors on a pro rata basis.

Conclusion

In most Chapter 7 cases your general unsecured debts will all be discharged and, most of the time, general unsecured creditors will receive nothing from you.  Rarely, a creditor may challenge the discharge of its debt.  If the creditor is successful, you will still owe that debt after the close of the bankruptcy.  And if you have an “asset case,” the trustee may pay a part, or in extremely rare cases, all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.

The Benefits of Both “Asset” and “No Asset” Chapter 7 After Closing Down a Business

Posted by on July 14, 2019 under Bankruptcy Blog | Comments are off for this article

Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership.  You are liable for the debts of a sole proprietorship and a partnership.  You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.

 “Asset” and “No Asset” Chapter 7

Chapter 7 is sometimes called the liquidation form of bankruptcy.  That usually does NOT mean that if you file a Chapter 7 case,  all of your assets will be liquidated or sold.   One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start.  You get a fresh start by the discharge of most of your debts and keeping property that is exempt.

As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes.  Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions.  If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .

In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”

The Quick “No Asset” and the Drawn Out “Asset” Case

Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.

A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise).  An asset case can take a year or more.

The Potential Benefits of an “Asset” Case

If you have an asset case, that can be turned to your advantages.  Two situations come to mind.

First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors .  If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.

Second, in the Chapter 7 process, certain debts, called priority debts, are paid first.  General debts get paid afterwards to the extent there are available funds.  More importantly, certain priority debts are not discharged by the bankruptcy.  That means you still owe them after the bankruptcy is completed.  Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.

So, as a debtor, you want to pay off as much non-dischargeable debts as you can.  To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.

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.

 

 

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.

 

Chapter 13 Handles Tough Income Tax Debts

Posted by on March 30, 2017 under Bankruptcy Blog | Be the First to Comment

If you owe recent income taxes, or multiple years of taxes, Chapter 13 can provide huge advantages over Chapter 7, and over other options.

The Example

Consider a husband and wife with the following scenario:

  • Husband lost his job in 2008, so he started a business, which, after a few promising years in which it generated some income, failed in late 2012.
  • The wife was consistently employed throughout this time, with pay raises only enough to keep up with inflation.
  • They did not have the money to pay the quarterly estimated taxes while husband’s business was in operation, and also could not pay the amount due when they filed their joint tax returns for 2008, 2009, 2010, 2011 and 2012. To simplify the facts, for each of those five years they owe the IRS $4,000 in taxes, $750 in penalties, and $250 in interest. So their total IRS debt for those years is $25,000—including $20,000 in the tax itself, $3,750 in penalties, and $1,250 in interest.
  • Husband found a reliable job six months ago, although earning 20% less than he did at the one he lost before he started his business.
  • They filed every one of their joint tax returns in mid-April when they were due, and have been making modest payments on their tax balance when they have been able to.
  • They have no debts with collateral—no mortgage, no vehicle loans.
  • They owe $35,000 in medical bills and credit cards.
  • They can currently afford to pay about $500 a month to all of their creditors, which is not nearly enough to pay their regular creditors, and that’s before paying a dime to the IRS.
  • They are in big financial trouble.

Without Any Kind of Bankruptcy

  • If they tried to enter into an installment payment plan with the IRS, they would be required to pay the entire tax obligation, with interest and penalties continuing to accrue until all was paid in full.
  • The IRS monthly payment amount would be imposed likely without regard to the other debts they owe.
  • If the couple failed to make their payments, the IRS would try to collect through garnishments and tax liens.
  • Depending how long paying all these taxes would take, the couple could easily end up paying $30,000 to $35,000 with the additional interest and penalties.
  • This would be in addition to their $35,000 medical and credit card debts, which could easily increase to $45,000 or more when debts went to collections or lawsuits.
  • So the couple would eventually end up being forced to pay at least $75,000 to their creditors.

Under Chapter 13

  • The 2008 and 2009 taxes, interest and penalties would very likely be paid nothing and discharged at the end of the case. Same with the penalties for 2010, 2011, and 2012. That covers $11,500 of the $25,000 present tax debt.
  • The remaining $13,500 of taxes and interest for 2010, 2011, and 2012 would have to be paid as a “priority” debt, although without any additional interest or penalties once the Chapter 13 case is filed.
  • Assuming that their income qualified them for a three-year Chapter 13 plan, this couple would likely be allowed to pay about $500 per month for 36 months, or about $18,000, even though they owe many times that to all their creditors.
  • This would be enough to pay the $13,500 “priority” portion of the taxes and interest, plus the “administrative expenses” (the Chapter 13 trustee fees and your attorney fees).
  • Then after three years of payments, they’d be completely done. The “priority” portion of the IRS debt would have been paid in full, but the older IRS debt and all the penalties would be discharged (written off), likely without being paid anything. So would the credit card and medical debts.

After the three years, under Chapter 13 the couple would have paid a total of around $18,000, instead of eventually paying at least $75,000 without the Chapter 13 case. They’d be done—debt-free—instead of just barely starting to pay their mountain of debt. And they would have not spent the last three years worrying about IRS garnishments and tax liens, lawsuits and harassing phone calls, and the constant lack of money for necessary living expenses.

The next blog post will follow up on this theme.

 

The Persistent Myth About Taxes and Bankruptcy

Posted by Kevin on March 29, 2017 under Bankruptcy Blog | Be the First to Comment

Many people believe that bankruptcy can’t write off any income taxes. In fact, it is not uncommon for non-bankruptcy attorneys to lump taxes in with other priority debts like alimony and child support payments (which are not dischargeable) and student loans (which are dischargeable in bankruptcy upon a showing of undue hardship).

Through the next few blog posts, you’ll learn what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully in those blogs.

Besides the possibility that you may be able to discharge some or all of your taxes, bankruptcy can also:

1. Stop tax authorities from garnishing your wages and bank accounts, and levying on (seizing) your personal and business assets.

2. Prevent post petition accrual of interest and penalties in certain situations.

3. If paid through a plan, limits your payments to what is affordable as opposed to what the taxing authority demands.

4. Eliminate other debts so that money is available to pay the taxing authority.

Overall, bankruptcy gives you unique leverage against the IRS and/or your state or local tax authority. It gives you a lot more control over a very powerful class of creditors. Your tax problems are resolved not piecemeal but rather as part of your entire financial package. So you don’t find yourself focusing on your taxes while worrying about the rest of your creditors.

The laws relating to taxes and bankruptcy are somewhat complex and not easily handled by “do it your selfers”.  It is recommended that a prospective debtor seek out an attorney with experience in taxes and bankruptcy.

 

Note I mentioned students loans above.  If that is your issue, you can contact me on this website or on http://studentdebtnj.com

 

Paying Part or All of Your Income Tax Debt through an “Asset” Chapter 7 Case

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

Give gladly to your Chapter 7 trustee assets that you don’t need, if most of the proceeds from sale of those assets are going to pay your taxes.

 

We are in a midst of a series of blogs about bankruptcy and income taxes. Today we describe a procedure that doesn’t happen very often, but in the right circumstances can work very nicely.

Turning Two “Bad” Events into Your Favor

Most of the time when you file a Chapter 7 “straight bankruptcy,” one of your main goals is to keep everything that you own, and not surrender anything to the Chapter 7 trustee. To that end, your attorney will usually protect everything you own with appropriate property “exemptions.”

If instead something you own can’t be protected, and so must be surrendered to the Chapter 7 trustee, that’s often considered a “bad” thing because you’re losing something.

And that leads to a second “bad” thing—the trustee selling that “non-exempt” property and using the proceeds to pay your creditors.  That usually does you no good because those creditors which receive payment from the trustee usually are ones that are being written off (“discharged”) in your Chapter 7 case, so you’d have no legal obligation to pay anyway.

But it may well be worth giving up something you own—particularly if it is something not valuable to you in your present circumstances—if doing so would have the consequence of paying some or all of your income tax debt that isn’t being written off in your Chapter 7 case.

Circumstances in which the Trustee would Pay Your Income Taxes

Consider the combination of the following two circumstances:

1)      You own something not protected by the applicable property “exemptions,” which you either don’t need or is worth giving up considering the other alternatives.

2)      The proceeds from the trustee’s sale of your “non-exempt” asset are mostly going to be paid towards taxes which otherwise you would have to pay out of your own pocket.

Let’s look at these two a little more closely.

“Non-Exempt” Assets You Don’t Need or Are Worth Giving Up

Although most people filing bankruptcy do NOT own any “non-exempt”—unprotected—assets, there are many scenarios in which they do. In some of those scenarios, those assets are genuinely not needed or wanted, so giving them to the trustee is easy. For example, a person who used to run a now-closed business, and still owns some of its assets, may have absolutely no use for those business assets. Or a person may own a boat, or an off-road vehicle, or some other recreational vehicle, but because of health reasons can no longer use them.

More commonly, a person may own a “non-exempt” asset which he or she would prefer to keep, but surrendering it to the trustee is much better than the alternative. That alternative is often filing Chapter 13—the three-to-five year payment plan. In the above example of a boat owned by somebody who can no longer use it, he or she may have a son-in-law who would love to use that boat. But that would probably not be worth the huge extra time and likely expense of going through a Chapter 13 case.

Allowing Your Trustee to Pay Your Non-Discharged Income Taxes

Letting go of your unnecessary or non-vital assets makes sense if most of the proceeds of the trustee’s sale of those assets would go to pay your non-dischargeable income taxes. Under what circumstances would that happen?

The Chapter 7 trustee is required by law to pay out the proceeds of sale of the “non-exempt” assets to the creditors in a very specific order. If you don’t owe any debts which have a higher “priority” than your income taxes, then the taxes will be paid in full, or as much money as is available, ahead of other creditors lower in order on the list.

The kinds of debts which are AHEAD of income taxes on this priority list include:

  • Child and spousal support arrearage
  • Wages, salaries, commissions, and employee benefits earned by your employees (if any) during the 180 days before filing or before the end of the business, up to $10,000
  • Contributions to employee benefit plans, with certain limitations

If you know that you do not owe any of these higher “priority” debts, then the trustee will pay your taxes (after paying the trustee’s own fees), to the extent funds are available, assuming the tax creditor files a “proof of claim” on time specifying the tax debt.

As you can imagine, each step of this process must be carefully analyzed by your attorney to see if it is feasible, and if so then it must be planned and implemented by your attorney. Again, it will only work in very specific circumstances. But when the stars are aligned appropriately, this can be a great way to get your taxes paid.

Paying Your 2013 Income Taxes on the Backs of Your Other Creditors

Posted by Kevin on April 16, 2014 under Bankruptcy Blog | Comments are off for this article

An income tax debt that you owe for the 2013 tax year presents both some challenges and opportunities if you file bankruptcy in early 2013. The challenges are practical ones. You have a debt that you wish you didn’t have, it can’t be written off (discharged) in bankruptcy, and you may well not know how much it is because you haven’t prepared the tax return yet. So it can be a frustrating and scary uncertainty.

The interplay between taxes and bankruptcy can be complicated, however, under the right circumstances your 2013 income tax debt can be—believe it or not–paid in full essentially without costing you anything. That’s because under bankruptcy law in many circumstances recent tax debts are paid in place of your other creditors, leaving less or nothing for those other creditors. This can happen in both Chapter 7 and Chapter 13, much more likely under that latter. This blog shows how your taxes can be paid in an “asset” Chapter 7 case, and the next blog shows the more common Chapter 13 situation.

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Payment of 2013 Income Taxes in an “Asset” Chapter 7 Case

Most Chapter 7 cases are “no asset” ones. This means that the bankruptcy trustee takes nothing from you because everything you have is exempt or else not worth the trustee’s effort to collect. So none of your creditors—including the IRS—are paid anything through your Chapter 7 case itself.  In that situation, you would have to make arrangements to pay any 2013 income tax with the IRS (and/or any state tax agency, if applicable).

On the other hand, an “asset” Chapter 7 case is one in which you own something that is NOT exempt and IS worth for the trustee to collect, sell, and distribute its proceeds to the creditors.

The Example

Consider this. You own a boat that has become more expensive and more work to own than you’d expected.  In a Chapter 7 case, if you do not claim an exemption on the boat and your bankruptcy trustee believes the boat is worth collecting from you and selling, then the 2013 taxes are among the first debts that the trustee will pay out of the proceeds.   Why?  Because the taxes are what is called “priority debts”.  Although most of your creditors are paid pro rata—equally, based solely on the relative amount of their debts— “priority debts” are paid ahead of your other creditors. So, assuming you do not have any debts that are even higher on the priority list (see Section 507 of the Bankruptcy Code), your 2013 IRS/state income tax will be paid in full before the trustee pays anything to any of your other creditors. As a result you would no longer have this tax to pay after your Chapter 7 case is completed.

Caution

For this to work as described takes just the right conditions, with more twists and turns than can be fully explained here. So definitely discuss all this thoroughly with your bankruptcy attorney.

Spouse Needs to Join Bankruptcy to Discharge Income Taxes, But Reluctant Because Has No Other Debts and Has Separate Asset

Posted by Kevin on January 25, 2014 under Bankruptcy Blog | Comments are off for this article

Finding the best way out of this seeming Catch-22 depends on a full understanding of your unique situation and your goals.

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The last blog explained that filing a bankruptcy by yourself immediately protects YOU from IRS collection activity but does NOT protect your spouse. Similarly the legal write-off (“discharge”) of any tax applies to the person(s) filing the bankruptcy but not to your spouse if he or she does not either join you in your bankruptcy case or else files his or her own case.

That makes perfect sense—you don’t get the benefit of bankruptcy if you don’t file bankruptcy! So the simple solution is for spouses to file bankruptcy together. But there are many situations where that’s not so simple. The next few blogs discuss some of the practical problems that can arise, and how to resolve them.

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One Spouse Has Most of the Debts, the Other May Have Assets

Often one spouse is the only one individually liable on most of the debt. Or one spouse  is solely liable on all debt except they are jointly liable on the secured debts—their mortgage and/or vehicle loans–that the couple intend to keep paying on. These situations can happen when one spouse incurred all the debt from operating a business that failed, or that spouse was simply the primary income source, and/or the one with good credit.

In these situations only the spouse whose debts would be discharged would directly benefit from a bankruptcy filing, so the other is appropriately reluctant to be in a bankruptcy that appears to provide him or her no benefit.

But now add two more ingredients to this scenario: 1) a large personal income tax debt that is old enough and meets the other conditions so that it can be discharged in bankruptcy, which both spouses owe because they both signed the joint tax return; and 2) a significant asset not protected by the applicable exemption owned separately by the spouse with less debts. To make this clearer, let’s say the income tax debt is $25,000 for the 2008 tax year, and the one spouse’s separate asset is his or her share in the childhood vacation home, inherited before the marriage, with this spouse’s share being worth about $20,000.

Seeming Catch-22 for Spouse with Less Debt but Liable on Tax Debt

Without the joint income tax debt, the spouse with little or no other dischargeable debt would not want to join in a Chapter 7 bankruptcy case because his or her share of the old family vacation home could well be claimed by the bankruptcy trustee and sold to pay the couple’s creditors. But with the existence of the joint tax debt, a Chapter 7 filed by the other spouse alone would forever discharge that tax debt as to THAT spouse only, leaving the non-filing spouse owing all of the tax—and the continually accruing interest and penalties—by him- or herself. Clearly not a good result.

Indeed the situation on the surface looks like a Catch-22: the asset-owning spouse either joins in on the bankruptcy thus jeopardizes the asset, or else doesn’t join and is stuck with the tax.

Best Solution Depends on the Unique Facts of the Case

It’s in these tough situations that an experienced bankruptcy attorney becomes very valuable. Determining the best solution depends on thorough understanding of the law along with a careful analysis of all the facts of this case—such as whether the couple owed any other taxes and if so how much and for which years, whether they owed any other “priority” debts (including back child or spousal support payments from a prior marriage, or employee wages from the failed business), their current income and expenses, and lots of other potentially relevant facts.

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.

Attacking Your Debts with Chapter 7 vs. with Chapter 13

Posted by Kevin on November 19, 2012 under Bankruptcy Blog | Be the First to Comment

The type of debts that you have are a factor in deciding whether to file under Chapter 7 or Chapter 13.

The Overly-Simplistic But Still Helpful Rule of Thumb

Here’s a decent starting point: Chapter 7 handles your simple debts better than does Chapter 13, and Chapter 13 handles your more complicated debts better than does Chapter 7.

There are three kinds of debts:  “secured” for which there is collateral given, e.g., your house; “priority” debts which for most consumer creditors is child support, alimony or taxes; and “general unsecured” debts which include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many, many others.

Simple debts are generally general unsecured debts, and secured debts in cases where a) the debtor is current, their is no equity in the collateral and the debtor wants to keep the collateral or b) the debtor wants to give up or “surrender” the collateral.

Simple Debts- Better Off in Chapter 7

Chapter 7 treats “general unsecured” debts the best by usually simply discharging them (writing them off) forever in a procedure lasting barely three months.  You make no payments and you get to keep the property if it is exempt.

Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are slated to be paid 15% of the amount owed.  Moreover, if your income goes up during the term of the plan, your payments can increase.  So, unless you feel morally compelled to make restitution to your creditors, Chapter 7 is the preferred economic method of disposing of “general unsecured” debts.

As for simple secured debts, in Chapter 7, if you surrender, you give up the property, the debt is discharged and you make no further payments.  If you surrender the collateral in a Chapter 13, however, you may be subject to paying a portion of any deficiency through your plan.  Clearly, in that case, Chapter 7 is the better alternative.

If you want to keep the property which is current with no equity, in a Chapter 7 the trustee “abandons” the property.  That means that it drops out of the bankruptcy and you keep it subject to the secured claim.  As long as you keep paying the secured creditor, you get to keep (and someday own outright) the collateral.  Moreover, the underlying debt  to the bank is discharged, so the bank can never come after you for a deficiency if you default down the line.

Now, you get pretty much the same deal in Chapter 13 ( you keep the collateral and continue with your payments), but you are subject to court supervision for up to 60 months. That can be  a hassle.    Hence, Chapter 7 is a better alternative because it is quicker and cleaner.

The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.