Changing Your Mind After Filing Under Chapter 7 or Chapter 13

Posted by Kevin on February 20, 2014 under Bankruptcy Blog | Comments are off for this article

You have some wiggle room if you either want to get out of your bankruptcy case or change to the other Chapter.

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After starting your bankruptcy case, your circumstances could suddenly change or for some other reason you may no longer want to be in the bankruptcy case that you’re in. Getting out of the bankruptcy court altogether—dismissing your case—is not very easy in a Chapter 7 case, easier in a Chapter 13 one. Changing from one Chapter to the other—converting the case–is usually allowed. We start today with some reasons why you might want to dismiss or convert, and then in the next two blogs talk about dismissal and conversion first under Chapter 7 and then under Chapter 13.

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Why Dismiss or Convert?

To put this into context, what types of situations would lead to a person to want to get out of a bankruptcy case after presumably giving the decision a lot of thought beforehand?

Although some situations could apply to both Chapter 7 and 13, these two procedures are very different in two very practical ways so that the situations that would motivate you to get out of the case tend to be different. The two big differences are their length and likelihood of successful completion:

• most Chapter 7 cases usually lasts only about three months, compared to three to five years for a successful Chapter 13 case; and

• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant percentage of Chapter 13 cases are not.

Why Would You Want to Dismiss or Convert Under Chapter 7?

Under Chapter 7 “straight bankruptcy,” there’s a lot less that can go wrong and a lot less time for your circumstances to change. The focus is on your assets and debts at a fixed moment in time, at the point your case is filed. So if a careful analysis of your financial situation at that time indicates that your case meets the requirements of Chapter 7, not much should change that.

Here are some problems that can nevertheless arise making you wish you could get out of your Chapter 7 case:

• Although assets are fixed as of the date of filing, under Section 541(a)(5) of the Bankruptcy Code, if a relative dies within 180 days of the filing of your case  leaving you as the beneficiary of an inheritance or a life insurance policy, that inheritance or insurance proceed becomes available to pay your creditors.

• If shortly after filing your case you have an accident and incur significant new medical debts because of having insufficient medical insurance, the new debt cannot be included and discharged in your case because that debt did not exist when your case was filed.

• You may be unaware at the time your case is filed that you have a legal right to a valuable asset, for example you did not know that your parents’ vacation home had been secretly deeded to you and your siblings.

Why Would You Want to Dismiss or Convert Under Chapter 13?

Under Chapter 13 “adjustment of debts bankruptcy,” there’s a lot more going on and so a lot more that can go wrong than in a Chapter 7 case. A Chapter 13 plan lays out how much and when the various creditors will be paid (if at all), and creditors can object to the plan and sometimes force it to be changed before it’s approved by the bankruptcy judge. Then you have to comply with the terms of the plan, over the course of three to five years, which give a lot of time for your circumstances to change. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.

So all kinds of things can happen which could make you wish you could get out of your Chapter 13 case, but here are some representative examples:

• Your plan is designed around your desire to save your home, but a year or so later you find a job which requires you to move, taking away the primary purpose of your case.

• You filed a joint Chapter 13 case with your spouse, but two years later you go through a divorce, totally changing your financial life.

• Your income is significantly reduced permanently; so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.

• Your income is significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.

Again, the next two blogs will be about getting out of Chapter 7 and then Chapter 13, in situations like the examples given above.

Income Taxes and Self-Interest in a Marriage

Posted by Kevin on February 3, 2014 under Bankruptcy Blog | Comments are off for this article

Each spouse in a marriage with significant tax debts has his or her self-interest, which may need a different solution than the other spouse.

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Married couples can and often file bankruptcy together. Doing so when they both owe substantial income taxes may especially makes sense. But each spouse needs to understand his and her own rights and options before deciding whether to file bankruptcy or not, and if so whether to join in the other’s bankruptcy or file his or her own case.

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If a couple owes a lot of income taxes, often it is because of the actions of one of spouses—such as one spouse running a business into which that spouse puts his or her heart and soul but still eventually failed. The spouse who is “at fault” may well be feeling deep frustration and guilt, while the other spouse is experiencing feelings of anger, disappointment, and even betrayal. This extra source of conflict can not only make their situation more emotionally challenging but legally as well.

This blog suggests some principles to consider if you’re in a similar situation.

The Two Spouses Each Have Their Own Self Interest

To state what is probably obvious, just because two people are married does not mean that their financial situations are the same, or that their legal problems and the potential solutions are the same. While some spouses do have close to identical situations—if they are jointly liable on all the same debts and share ownership in all their assets—often that’s not the case. Each person can have his or her own separate debts and to some degree his or her own assets, making their financial situations very different. And beyond those tangible differences, each person can have different goals and different attitudes about how to deal with his or her individual problems and their ones in common.

Because income taxes are such an unusual debt, they can greatly complicate the self-interest of each spouse. Taxes are unusual in how they are incurred. For example, a tax debt can arise primarily out of the actions of one of the spouses, with the other spouse becoming completely liable by simply signing a joint tax return. That spouse might eventually be able to get out of that liability through the “innocent spouse” exception, another complication not available with any other kind of debt. Taxes are also quite unusual in how they are treated in bankruptcy.  There are relatively complicated rules about what taxes will and will not be discharged, and how each portion of each tax account can be handled under Chapter 13.

Each nuance of these rules can create different self-interests for each spouse.

The Two Spouses May Each Need Their Own Bankruptcy

The two spouses’ different self-interests may well lead to different solutions. Sometimes that may mean one person filing bankruptcy and the other not, or one person filing a Chapter 7 case and the other a Chapter 13 one.

The Two Spouses Could Need Separate Attorneys

Without getting deeply into delicate attorneys’ ethical rules about conflict of interest, attorneys need to be careful about simultaneously representing any two people who have different interests. This is true regardless if these two people are married and have some common interests. In the end the two may end up filing a joint bankruptcy because it is in their individual and mutual best interest to do so. But before getting there each person must be made fully aware of his or her individual rights and legal options, whether this happens through two separate attorneys or through a single one. One or both spouses may decide to sacrifice some of their individual interests for their common good, but can only do so when their rights and options have been clearly laid out for each of them.