Posted by Kevin on October 30, 2013 under Bankruptcy Blog | 
Chapter 13 costs much more than Chapter 7, takes about 10 times as long, so you do a Chapter 7 if possible, right?
No. These two options each have advantages and disadvantages that need to be carefully matched to your immediate and long-term goals. The greater cost of Chapter 13 sometimes is far outweighed by what you may save through that procedure—possibly even by tens of thousands of dollars. The length of Chapter 13 can itself be an advantage when you’re trying to buy time or stretch payments out over a longer period to lower their monthly amount. But in other situations, Chapter 7 may be just what you need.
Be Informed, But Be Open-Minded
It’s good to inform yourself in advance about these options. But it’s also wise to have an open mind when you first go to see an attorney for legal advice. You may simply not know about a crucial advantage or disadvantage that could swing your decision one way or the other. And you don’t want to be too emotionally invested in going in one direction when the other may be a better choice.
Easy Choice, Hard Choice
Sometimes your circumstances and/or your goals push your decision strongly in one direction or the other. Sometimes you may even only qualify for one, and that one provides what you need. Or you may qualify for both, but still everything points towards either Chapter 7 or 13. In either situation, it could be a very easy choice.
But often you could go through either a Chapter 7 or Chapter 13 case AND BOTH may have attractive features. So it can come down to a deeply personal choice.
For Example…
A couple of simple examples will make this clearer.
If you are behind on your home mortgage and want to hang onto the home, a Chapter 7 case would likely write off all or most of your other debts. Then you’d likely have a few months to catch up on the mortgage. In contrast, a Chapter 13 case would give you up to 5 years to catch up. And it may allow you to avoid paying a second mortgage. This choice turns to some degree on factual issue like whether you have a second mortgage that could be “avoided,” and how much you’re behind on the mortgage payments. But on a personal level it comes down on how important it is to you to keep the house, and how much you’d be willing to bet that you’d be able to do that though Chapter 7 by negotiating a relatively quick catch-up of payments instead of getting much more time and far greater protection through Chapter 13.
Similarly, if you owed some recent income taxes that would not be written off under either Chapter, you could file a Chapter 7 case and write off all or most of your other debts so that you could focus your financial resources on the IRS. You’d arrange with the IRS to make monthly payments to pay off that tax debt, plus ongoing interest and penalties. Or you could file a Chapter 13 case and pay those taxes through a formal plan based on your own budget, usually avoiding additional interest and penalties, all the while being protected from the IRS. But you would pay extra fees for these advantages. This choice also depends on the facts, such as how much tax you owe and how much you would be able afford to pay each month once your Chapter 7 case were completed. But then it comes down to the more personal question of how confident you’d be that your present income and expenses would stay stable throughout the repayment period, so that you could make those payments no matter what.
It’s Good to Have a Choice, Even If It’s Not an Easy One
To be honest, it is not unusual for people to have some factors pointing towards Chapter 7 with others pointing towards Chapter 13. But instead of wringing your hands about having tough choices, realize it is usually a good thing to have more than one choice, even if neither is perfect. An experienced, conscientious attorney will walk you through this, help you prioritize your goals, weigh any risks, and give you what you need so that you can confidently make a smart choice.
Coming Right Up…
Because being informed is a good thing, and because this decision between Chapter 7 and Chapter 13 is so important, the next few blogs will look at both the basic and some more subtle differences between them.
Posted by Kevin on October 28, 2013 under Bankruptcy Blog |
Why Does Chapter 13 Have Debt Limits?
Chapter 7 has no debt limit. But the Bankruptcy Code does impose a limit on the amount of debt that person can owe when filing a Chapter 13 case. Why? Although in conventional consumer situations an average Chapter 7 case is much quicker and easier than an average Chapter 13 case, in fact Chapter 7 can be used with a wide variety of business and consumer arenas, including for corporations and partnerships, including those with many millions of dollars of debt. Chapter 13 is a tremendously flexible procedure, but it is still a relatively streamlined one—especially compared to Chapter 11 reorganization. It was specifically designed for individuals and married couples with relatively straightforward debts.
The primary way that the law tries to limit Chapter 13 to simpler cases is with debt limits. Currently the individual filing one, or the married couple filing together, must have less than $383,175 in total unsecured debts and ALSO less than $1,149,525 in secured debts.
What’s with the Odd Amounts?
These dollar limits do sound arbitrary, and to some extent they are, simply reflecting a Congressional compromise going back 34 years to the original passage of the Bankruptcy Code in 1978. The limits back then were only $100,000 unsecured debt and $350,000 secured debt. These didn’t change until more than doubling in 1994 to $250,000 and $750,000, respectively, with inflationary increases every three years thereafter. The current amounts have been in effect since April 1, 2013.
What Are “Noncontingent, Liquidated Debts”?
The statute specifically says that you “may be a debtor under Chapter 13” only if you owe, “on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525” (with the appropriate current amounts inserted).
To be a bit over simplistic, these two descriptive words are intended to make clear that only real debts count for these limits. “Noncontingent” means that you are presently liable on the debt, not liable only if some event does or does not occur. “Liquidated” means that you owe a specific and determinable amount. A contingent debt would include one that you would only owe if somebody else did not pay it. A noncontingent debt would be one which you owe jointly with someone else but the creditor has no obligation to first pursue the other debtor. An unliquidated debt would include a lawsuit against you for unspecified damages; a liquidated debt could be a lawsuit where the alleged debt amount can be determined, even if it might be disputed.
Conclusion
In most cases, you will either be clearly under both secured and unsecured debt limits or clearly over one of them. But if you are at all close, be aware that these “noncontingent, unliquidated” distinctions are not always clear. And even if you are over the limits, there may be other solutions if you really need the benefits of a Chapter 13. One possibility is filing a so-called “Chapter 20”—filing a Chapter 7 case to discharge much of your debts, followed immediately by filing a Chapter 13 (7 + 13 = 20). The Chapter 7 discharge should get you under the Chapter 13 debt limits, and then although the Chapter 13 cannot discharge any more debts, it could well protect you from your remaining creditors as you pay their debts—such as mortgage arrearage, back child support, or taxes—at your own schedule.
Posted by Kevin on October 24, 2013 under Bankruptcy Blog |
The amount of your income alone may not disqualify you from Chapter 7.
The last blog said that:
• You can avoid the “means test” altogether if more than half of your debts are business debts—they were NOT incurred “primarily for a personal, family, or household purpose.”
• When comparing your “income” for the “means test” against the applicable “median family income,” your “income” is based on virtually all the money you receive during the previous six-full-calendar-month period. Which six months make up that period depends when you file, meaning that you may have some control over your “income” and whether or not is it above the “median family income” amount.
• But even if your “income” is indeed higher than your applicable “median family income,” that’s just the beginning of the “means test.”
So here are the remaining steps of the “means test,” each step giving you another opportunity to pass it and qualify for Chapter 7. Be forewarned: these additional steps are not the easiest to understand:
• You can deduct certain living expenses from your monthly “income” to see if your “monthly disposable income” is low enough. Unfortunately, the rules for determining what expenses you may deduct and how much for each are almost unbelievably complicated. It would take pages and pages to explain. For just a taste of this, the allowed amounts for some types of expenses are based on what you actually spend, some are based on tables of local standards amounts, others on national standards. For our present purposes, what counts is that after applying those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then you can still file Chapter 7.
• If your “monthly disposable income” after deducting expenses is between $117 and $195, then the following formula is applied. Multiply your “monthly disposable income” by 60. Then compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is not enough to pay at least 25% of those debts, then you can file Chapter 7.
• If after applying the above formula you CAN pay at least 25% of those debts, OR if after deducting your allowed living expenses the resulting “monthly disposable income” is more than $195, then you can still file under Chapter 7 by showing “special circumstances.” Examples of appropriate “special circumstances” in the Bankruptcy Code are “a serious medical condition or a call or order to active duty in the Armed Forces.” So, be forewarned. Special circumstances is very limited in scope.
The previous blog showed that even the relatively simple first step of the “means test”—comparing your “income” to the “median family income”—has its unexpected twists and turns. Today we’ve seen that if your “income” is indeed too high for that first step, there are other steps to the “means test” which—although admittedly complex—which may get you successfully through Chapter 7.
On a practical level, the amendments to the Bankruptcy Code make filing bankruptcy more expensive for the debtor. Not only are there additional monies required for filing fees, courses and due diligence, there is substantial additional attorney time associated with filing even Chapter 7. Completing the means test and justifying the result to a trust is one of those areas.
Posted by Kevin on October 19, 2013 under Bankruptcy Blog |
If you don’t qualify for either Chapter 7 or 13, do you have to do a very expensive Chapter 11 reorganization?
Chapter 11 is dreadfully expensive. That’s part of the reason why consumers seldom file them compared to Chapter 7 and 13. The court filing fee alone is $1,233 . The attorney fees can be tens of thousands of dollars. Why so expensive? Because Chapter 11 was designed for large corporate reorganizations, and, in spite of efforts to streamline it for smaller businesses and for individuals, it’s a cumbersome, attorney-intensive procedure. So it is usually sensible to avoid Chapter 11 if either Chapter 7 or 13 will serve your needs.
But what if you’re disqualified from those other two? If you really ARE disqualified, then you may have to file under Chapter 11. But you may not be disqualified even if at first you think you are. So let’s look more closely at the qualification rules, especially as they apply to situations where at first it may look like you don’t qualify. Today we’ll give a broad overview about this as to both Chapter 7 and 13, and then in the next two blogs we’ll look more closely at each one.
Chapter 7 and the “Means Test”
The point of the quite complicated means test is to make people pay a meaningful amount of their debts if they have the “means” to do so. So those who do not pass the means test cannot file a Chapter 7 “straight bankruptcy,” or they can be forced out if. Instead they would usually have to proceed through Chapter 13, and be required to pay what they could afford to pay to their creditors over the following five years.
But the means test is often misunderstood. That’s not surprising given its multiple steps and odd combination of rigid formulas and discretionary enforcement. The following may help you understand it and potentially get around it:
- The means test may not even apply to you. It only applies to individuals with “primarily consumer debts,” meaning that you skip the means test altogether if half or more of your debts were incurred for business purposes instead of “primarily for a personal, family, or household purpose.”
- There’s a fixation on the first step of the means test—whether your income is above or below the “median family income” amount for your state and household size. Indeed a large majority of people who file Chapter 7 DO have lower income than the applicable median income. So they can skip the rest of the means test.
- The means test uses an odd and very specific definition of your income, one which focuses on the six-full-calendar-month prior to whatever date your Chapter 7 case is filed. This means that for many people their “income” shifts with each passing month, depending on the changes to their income of the past 6 or so months. So some careful tactical planning may enable you to fit under the median income amount by filing at the right time.
- Even if your income, as appropriately defined, is in fact over the applicable median income, that’s just the beginning of the analysis. There are a number of other steps to the means test, each with potential ways to pass the means test and qualify for Chapter 7. We’ll go through these additional steps in the next blog.
The Chapter 13 Debt Limits
At the time of filing a Chapter 13 case, your total unsecured debts must be less than $383,175, and your total secured debts must be less than $1,149,525.
As you can probably guess, there’s more to this than immediately meets the eye. For a start, the terms actually used by the statute for these limits are “noncontingent, liquidated secured debts” and “noncontingent, liquidated unsecured debts.”
Debtors with relatively high debt are often present or former business owners who signed personal guarantees for corporate debt. When are those guaranteed debts considered contingent and therefore would not count towards the debt limits, and when are they noncontingent so that they would count? And when is an unresolved claim against the debtor considered unliquidated so that they would not count towards the debt limits, and when are they liquidated so that they would count?
What these Chapter 13 debt limits really mean will be the topic two blogs from now.
Posted by on October 13, 2013 under Bankruptcy Blog |
Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.
Timing Does Not Always Matter Much, But It CAN Be Huge
Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.
It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.
Today’s blog post covers the first one of those potential timing advantages.
Being Able to Choose between Chapter 7 and Chapter 13
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.
To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.
The “Means Test” Income Calculation
What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.
So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.
Conclusion
Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.
The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided.
Posted by Kevin on October 1, 2013 under Bankruptcy Blog |
“Straight” Chapter 7 bankruptcy can give some relief for dealing with your back and current taxes, but Chapter 13 can help so much more.
The last blog showed how Chapter 7 can help you with your income tax debt, mostly indirectly, by writing off your other debts so you can financially concentrate on getting the IRS happy. It may also help by discharging (writing off forever) some tax debts, but only if at least three years have passed since that tax’s returns were due, AND you meet some other conditions. But if you owe a lot, and especially if you owe a number of years of taxes, Chapter 7 will often not be enough. So what more is it that Chapter 13 can do?
Chapter 13 and Income Taxes
There are many situations in which you ought to look closely at the Chapter 13 option. Focusing on income taxes, the rule of thumb about when to do so is pretty simple:
File a Chapter 13 case if Chapter 7 does not gain you enough cash flow to allow you to get caught up on your back and current taxes through manageable monthly payments, made over a reasonable period of time. In other words, file a Chapter 13 if you need the extra protection provided by Chapter 13.
What extra protection? In a Chapter 7 case you are NOT protected from the IRS beginning about three months after that case is filed-when the discharge is entered and the “automatic stay” terminates. So that means you’re arranging and then making the catch-up tax payments without any protection from the IRS’ collection procedures. That’s generally not a problem if 1) you deal with the situation very proactively, 2) the payment amount that you can comfortably handle is acceptable to the IRS, 3) it’s an amount you can pay it consistently, and 4) you do pay it perfectly until you pay it off.
In contrast, under Chapter 13 your protection from the IRS’ collection efforts continues throughout the whole 3-to-5-year length of the case. That’s protection you’ll need if you can only afford payment smaller than what the IRS wants, and/or you need more flexibly than the IRS would allow.
Under Chapter 13 you are generally allowed to pay other even more important creditors ahead of the IRS—such as mortgage arrearage, vehicle payments, and back child support. Plus you will generally not pay additional penalties and interest on the taxes, and may not have to pay all or most of the previous penalties. If the IRS has recorded a tax lien, you will have the opportunity to pay off that lien without the IRS being able to enforce that lien, resulting in the lien being released at the completion of your case.
Chapter 13 often allows you to adjust your monthly plan payments in advance based on anticipated seasonal adjustments in your income and expenses, and change those payments mid-stream as your circumstances change. You do need to deal responsibly throughout the process, or else you will lose your protection from the IRS and from your other creditors. And if you are not in fact able to do what your plan states and what the Chapter 13 rules require, so that you don’t finish your Chapter 13 case successfully, you will not get a discharge of ANY of your debts. But if your plan was put together sensibly and you follow it carefully, you should end your Chapter 13 case being current on all your past and present taxes.
