Posted by Kevin on December 22, 2020 under Bankruptcy Blog | 
In virtually every Chapter 7 “straight bankruptcy” case, you never go to court. But you DO go to a formal meeting, usually lasting 5 to 10 minutes, one that you must attend. If you don’t, your case can be dismissed.
This meeting is with your Chapter 7 trustee, but it is misleadingly called the “meeting of creditors.” It is sometimes referred to as the “341 hearing,” named after the Section 341 of the Bankruptcy Code which addresses it.
This meeting is not one in which all your creditors attack the debtor for filing bankruptcy. What usually happens is that the trustee will question the debtor about his or her petition, or documents that were submitted after the filing. The questioning is usually not intensive. Although creditors are given the opportunity to be there, most of the time they do not attend. Why not? Because usually there is no reason for them to attend. The grounds for objecting to bankruptcy are very limited so most creditors can’t object. So they don’t waste their time.
The creditors that tend to be at the 341 hearing are those which have collateral in personal property such as your motor vehicle or furniture, or creditors with an axe to grind. In the past in New Jersey, certain collateral creditors sent representatives to the 341 hearings. They routinely questioned debtors usually about their intention about the collateral (retain or surrender). But now, most of these creditors forego the 341 hearings in favor of making arrangements with the debtor’s attorney either over the phone or by email.
The axe to grind creditors are usually ex-business partners or ex-spouses. For them, its just not just the money, it’s personal. My experience has been, however, that trustees are very adept at controlling these types of creditors, and they make sure that the 341 meeting is not used as a vehicle for making ad hominem attacks on the debtor. That does not mean that the trustee will not give such creditors some leeway in questioning the debtor. The one area of concern is that these creditors tend to know the debtor pretty well as opposed to credit card companies or mortgage lenders. They may know if the debtor had been engaged in cutting corners or engaging in questionable behavior. Be sure to talk with your lawyer well in advance if you have any concerns in this area. He or she will warn you if your circumstances raise any red flags, and will prepare you for the meeting.
Rarely, if there isn’t enough time for legitimate questions, a second meeting of creditors can be scheduled. Or the conversation with a creditor might continue informally outside the hearing.
There is one person who is NOT allowed to be at the meeting: the bankruptcy judge. As the Bankruptcy Code says: “The court may not preside at, and may not attend, any meeting under this [341] section… .” So the meeting is definitely not a court hearing.
Conclusion
At most Chapter 7 meetings of creditors there are no creditors, or, at most, one or two. It’s rare that a creditor will ask tough questions, but it can happen. Your attorney will prepare you for the types of questions that will be asked at the meeting. Be sure to share any concerns with your lawyer so you won’t worry unnecessarily.
Posted by Kevin on December 19, 2020 under Bankruptcy Blog |
Bankruptcy protects you from your co-signed creditor and also from your co-signer.
Protecting Only Yourself
Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.
Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the co-signer.
Your Obligation to the Creditor
The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or other exceptions to discharge listed in the Bankruptcy Code. But those objections or exceptions don’t apply to most debts.
Your Probable Obligation to Your Co-Signor
Usually, you have a distinct legal obligation to the other person legally liable on the debt. What exactly that obligation is depends on the circumstances.
Assume the other person co-signed to enable you to get credit. You may have entered into an oral or written agreement with the co-signer that if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. Or it could have been something not specifically said or written down, but understood. In addition, you could have agreed that if the co-signer were sued, you would be responsible for any costs, like legal fees, incurred by the co-signer in a lawsuit brought by the creditor.
Being Practical
There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the co- signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.
So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished if he or she paid off your debt.
Can Your Co-Signer Object?
Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.
If you suspect that a co-signer may object to your discharge (for valid or invalid reasons), explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and, in some cases, can take any appropriate action to minimize your risks.
Posted by Kevin on July 29, 2020 under Bankruptcy Blog |
In the last blog, we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.
Recent Income Taxes Can’t Be Discharged
The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.
There are two major conditions determining whether a tax debt can be discharged. (There are other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:
1. if the tax return for that tax debt was legally due less than 3 years before you file your bankruptcy case (after adding the time for any tax return-filing extensions) U.S. Bankruptcy Code Section 507(a)(8)(A)(i).
OR
2. if you actually submitted the tax return to the IRS/state less than 2 years before you file the bankruptcy case. Bankruptcy Code Section 523(a)(1)(B)(ii).
Two Examples
Assume you filed a bankruptcy case on December 10, 2019. You owe income taxes for the 2017 tax year. The tax return for that tax was due on April 17, 2018 (because of a weekend and holiday). (This assumes no tax return filing extension.) That’s much less than 3 years before the December 1, 2019 bankruptcy filing date. So, no discharge of the 2017 tax debt, because of the first 3-year condition above.
As for the second condition above, assume again that you filed your bankruptcy case on December 10, 2019. This time change the facts so that you submitted the tax return late for the 2015 taxes, on October 1, 2018. That’s less than two years before the December 10, 2019 bankruptcy filing date. So because of the second condition above, taxes due for 2015 would not get discharged in bankruptcy
Meeting either of the two conditions makes the tax debt not dischargeable. In the second example immediately above, more than 3 years had passed since the deadline to submit the tax return. (The 2015 tax return was due on or about April 15, 2016.) But less than two years had passed since the actual submission of the tax return. So, no discharge of the tax debt.
With no discharge, you would have to pay that income tax debt after finishing a Chapter 7 case. But there are advantages of paying this priority debt in a Chapter 13 case.
Advantages of Paying Priority Income Tax Debts in Chapter 13
Under Chapter 13:
- You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
- This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
- The amount you pay monthly to all your creditors, including the priority tax, is based on your actual budget. It’s not based on often arbitrary requirements of the IRS/state.
- The amount your priority tax gets paid each month (if any) among your other debts is flexible. You do have to pay all of the priority tax debt(s) by the time you finish your Chapter 13 case. That’s up to a maximum 5 years. But other more urgent debts (such as catching up on a home mortgage) can often get paid ahead of the taxes.
- Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. That takes away the need to pay it quickly. Plus the lack of additional interest and penalties significantly reduces the amount needed to pay off the tax debt.
- If the IRS/state recorded a tax lien against your home or other assets before you filed bankruptcy, Chapter 13 provides a very efficient and favorable forum to value and pay off that secured portion of the priority debt.
Posted by Kevin on July 26, 2020 under Bankruptcy Blog |
Chapter 13 gives you some advantages over Chapter 7 for paying your priority debts.
Priority Debts under No-Asset and Asset Chapter 7
Our last two blog posts dealt with priority debts in a No-Asset Chapter 7 case and in an Asset Chapter 7 case. While there are certain Chapter 7 strategies which may be somewhat helpful in dealing with priority debts, it is far from a panacea. Here are some of its shortcomings.
- You get only brief protection, or none at all, from your priority creditor(s). With income taxes, the IRS/state can resume collections when your Chapter 7 case is over. That’s only 3-4 months after you and you file the case. With child/spousal support, there is no protection at all: collection continues even during your Chapter 7 case.
- Because of this lack of legal protection, you have little or no leverage about the dollar amount of payments you pay on your priority debts. You are largely at the mercy of the IRS/state or the support enforcement agencies.
- In an asset Chapter 7 case, you have no control over the trustee’s sale of your asset(s). Plus you have to pay a significant amount for the trustee’s costs and fee. That reduces what goes to your priority debt(s).
The Benefits of Chapter 13
In contrast, Chapter 13, although not perfect, is better-designed for you to deal favorably with your priority debts. Here are its main benefits and advantages.
1. Ongoing Protection, for Years
The protection from creditors, called the automatic stay, lasts not 3-4 months but rather 3-to-5 years in Chapter 13. You can lose this protection under Chapter 13 if you don’t follow the requirements including making required payments in a timely fashion. But usually this sustained protection can be a powerful tool. It forces otherwise very aggressive creditors like the IRS/state and support enforcement to cooperate, or at least to back off during the course of the bankruptcy. Instead of these tough creditors having the law and the leverage on their side, Chapter 13 puts you much more in charge to formulate a plan that works for you.
2. Pay Monthly What You Can Afford to Pay
The practical leverage Chapter 13 gives you helps where it counts. It enables you to pay your priority debts under sensible and manageable payment terms. Priority debts are ones you have to pay regardless of bankruptcy. You mostly just wish that there was a way that you can spread these payments out. Chapter 13 can, under the right circumstances, provide that opportunity.
Here’s how it works. You and your bankruptcy lawyer propose, and the bankruptcy judge approves a payment plan. (This approval comes after permitted input from the Chapter 13 trustee and your creditors.) This payment plan is mostly based on how much you can actually afford to pay the pool of your creditors. You have to pay all your priority debts in full, but you have 3 to 5 years to do so.
You generally pay nothing on your other unsecured debts until you pay your priority debts in full. Under certain circumstances you may not be required to pay anything to general unsecured creditors. At the end of your case, if all payments are made and you otherwise comply with all the other requirements of Chapter 13, whatever you haven’t paid is discharged or wiped out. At that point you will have paid off your priority debts in full, and usually owe nothing to anybody.
3. Avoid Interest and Penalties
You can also avoid paying any interest or penalties on your priority debt(s) under Chapter 13.
For example, with recent income taxes, interest and penalties continue to accrue after you file your case. But as long as there no prior-recorded tax lien, and you successfully finish your case, you don’t pay these additional interest and penalties. You only pay the initial priority tax debt.
Furthermore, in most situations the penalties that accrued before your Chapter 13 filing are not a priority debt. This portion of your tax due at the time of filing is treated as general unsecured debt. This means it’s treated just like your unsecured credit cards or medical bills. You only pay it to the extent you have money available after paying the priority debts, if at all.
This combination—no accruing interest and penalties, and no penalties treated as priority—can significantly reduce how much you must pay. The less you have to pay as priority means the less you pay in your Chapter 13 payment plan. In bankruptcy speak, that means you need less money to propose a plan which is feasible. Among other things, you need a feasible plan to be considered for confirmation.
4. Pay Priority (and Secured) Debts Ahead of (and Instead of) Other Debts
If you have secured debts —a vehicle loan or home mortgage arrearage, for example—you often can pay these ahead of the priority debts. Your priority debts generally just have to wait, as long as you are appropriately following the payment plan and pay the priority debts in full by the end of the plan. Once again, in certain circumstances, the payment of secured and priority claims can lead to a discharge even if the general unsecured claims get nothing.
Posted by Kevin on July 22, 2020 under Bankruptcy Blog |
Your Chapter 7 trustee may pay your priority debts—in full or in part—through the proceeds of the sale of your unprotected, non- exempt assets.
Our last blog post was about what happens to priority debts in a no-asset Chapter 7 case. Most consumer “straight bankruptcy” Chapter 7 cases are no-asset cases. This means that the bankruptcy trustee does not take anything from the debtor because everything is protected and “no assets” are distributed to creditors. Hence, the name.
No-Asset Case Even If Some Assets May Not Be Exempt
To understand how this actually works, sometimes from a practical point of view, a Chapter 7 case is a no-asset one even when not all assets are exempt. That’s because the bankruptcy trustee has some discretion about whether to collect and liquidate an otherwise unprotected asset. Here are three reasons why he or she may not pursue an asset:
- The value of the asset, or the amount beyond the exemption, is too small to justify the trustee’s collection efforts. Example: A vehicle worth only a couple hundred dollars more than the vehicle exemption.
- Finding and/or selling the asset may be too expensive compared to its anticipated value. Example: A debt owed to the debtor by somebody who can’t be located and likely has no reliable income.
- The asset could be more of a detriment than a benefit to the trustee. Example: real estate with hazardous waste contamination.
Usually your bankruptcy lawyer will be able to reliably predict whether your Chapter 7 case will be an asset or no-asset case. But not always. Trustees have wide discretion about this. Moreover, before filing, your lawyer doesn’t know which trustee will be assigned to your case. And some trustees are more aggressive than others.
Paying Priority Debt through a Chapter 7 Asset Case
If you know that you will have an asset case, you may be able to pay a priory debt through your case.
In our last blog post our main point was that in a no-asset Chapter 7 case you have to pay any priority debts yourself directly to your creditors after completing the case. But in an asset case, the trustee is required to pay any of your priority debts before any other debts. The trustee collects and liquidates your non-exempt assets (any not protected by exemptions). From the proceeds he or she then pays you your exempt amount, and then pays his or her fee, and then pays debts only to the extent there’s money available. Priority debts get paid before general unsecured debts.
For Example
Assume you owe $4,000 to the IRS for last year’s income tax. That tax is a priority debt. You also owe $75,000 in medical bills and unsecured credit cards. Those are general unsecured debts. If you filed a Chapter 7 case in which everything you owned was protected, that would be a no-asset case. The IRS debt can’t be discharged (legally write off). So you would have to make arrangements to pay it after your Chapter 7 case was over. Most likely the case would discharge the $75,000 in other debts.
But now assume that you have a boat that you no longer want because it costs too much to maintain. There’s usually no exemption for a boat. So the Chapter 7 trustee takes and sells your boat for $5,000. The proceeds of that sale go first to pay the administrative fee of the trustee (since there is no exemption for the boat, the debtor gets nothing). A trustee gets a fee of 25% on the first $5000 of assets that are distributed. So, the trustee gets $1250, the IRS gets $3750 and general, unsecured creditor get nothing. You would be required to pay the IRS $250.
Conclusion
In some circumstances paying a priority debt in a Chapter 7 case is not a bad deal. This is especially true if you have an asset not protected by an exemption that you don’t mind surrendering.
Posted by Kevin on July 19, 2020 under Bankruptcy Blog |
Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.
Most Chapter 7 Cases Are No-Asset Cases
Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge the underlying debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.
A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. A large majority of Chapter 7 cases are no-asset ones.
What Happens to Your Priority Debts in a No-Asset Chapter 7 Case?
Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes.
Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets. In fact, the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!
But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.
Dealing with Priority Debts During and After a Chapter 7 Case
However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).
The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support.
So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer should make arrangements to begin paying that debt. With debts not covered by the automatic stay, you need to be prepared to deal with them immediately.
If neither of these make sense in your situation, consider filing a Chapter 13 case instead. TChapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt, it can help.
Posted by Kevin on under Bankruptcy Blog |
One of the most important aspects of bankruptcy is that all debts are not equal. “Priority” debts are treated special in a number of ways.
Debts Are Different So the Law Recognizes Some Differences
The law does not treat all debts the same. That’s because you have different kinds of creditors that you owe for very different reasons. The law tries to be practical and so to some extent it respects these differences.
Your debts all fall into three categories:
- Secured
- General unsecured
- Priority
Today we will start with priority debts.
Priority Debts
Priority debts are specific categories of debts that the law has decided should be treated as more important. Bankruptcy gives them higher priority, especially over “general unsecured” debts. Priority debts have power over you and over other debts in various ways.
Secured debts are debts with liens on something you own. Secured debts are special in that the creditor usually has a stronger position because of its lien. The lien gives the creditor power over you if you want to keep whatever secures the debt.
Most priority debts are unsecured, but some may have a lien and so are secured. Secured priority debts have that much more power over you and over other creditors.
Reasons for Priority
Each of the priority debt categories have their own different reason to be treated as special.
For example, the two most common categories of priority debts in consumer bankruptcy cases are:
- Child and spousal support
- Income taxes—certain income taxes that meet certain conditions. See Section 507(a)(8).
Support payments are special essentially because society very strongly believes that children and ex-spouses should receive the financial support ordered by divorce courts. Federal bankruptcy law incorporates this social attitude. So support debt has the highest priority in the list of priority debts.
Income tax debts are special because taxes are a debt to the public at large. It’s not a debt to a private person or business. In effect it’s a debt to us all. So it deserves a higher priority than regular private debt. However, unlike support debt which is always a priority debt, an income tax is a priority debt only if it meets certain conditions. Those conditions mostly relate to how old the taxes are. The newer the tax is the more likely it is to be priority. Income taxes that do not meet the required legal conditions are mere general unsecured debts.
Priority Debts in Bankruptcy
In most bankruptcy cases there isn’t enough money to pay all debts. So the laws that determine the order that creditors get paid often determine which debts receive full or partial payment and which receive nothing. Priority debts often receive full payment while general unsecured debts receive less or, often, nothing.
This works very differently under Chapter 7 “straight bankruptcy” vs. Chapter 13 “adjustment of debts.” Our next blog posts will show how.
Posted by Kevin on July 4, 2020 under Bankruptcy Blog |
Most are aware that the average America received $1,200 in pandemic relief payments. The CARES Act explicitly protected these payments from seizure for certain governmental debts. Generally, the payments can’t be reduced or taken to pay past-due federal taxes and student loans. They can be for past-due child support obligations.
But the CARES Act made no mention of protection from debts owed to non-governmental creditors. So the relief payments are generally subject to possible seizure by your creditors. Today we address this concern about private creditors’ access to these payments.
There are two classes of creditors at play:
1) Setoffs by your own bank or credit union for a debt you owe to it
2) Garnishment by other creditors which have a judgment against you
In our next blog, we address setoffs by for fees or other debts owed to your own financial institution. Today is about protecting your relief payment from other creditors.
Judgments and Garnishment Orders
Generally a non-governmental creditor can’t take money from your bank account without a court’s garnishment order. And to get a garnishment order a creditor virtually always must first sue you and get a judgment.
Do You have a Garnishment Order on Your Bank/Credit Union Account?
This question is not necessarily so easy to answer, for a number of reasons.
First, although most of the time you’d know that you received lawsuit papers, not necessarily. You may have not noticed it in the mail. It may not have looked much different from other collections paperwork. If you’ve moved a lot, it’s possible you didn’t even get the lawsuit papers.
Second, you may not know that the lawsuit resulted in a judgment. If you didn’t respond within a very short time to the lawsuit papers, you probably lost the lawsuit by default. That almost always immediately turns into a judgment—a court decision that you owe the debt. The judgment gives the creditor power to—among other things—garnish your bank account.
Third, you may not know about the garnishment order, or the pertinent details about it. For example, you may think it only applies to your paycheck, not your bank account. You are wrong.
Fourth, the laws about lawsuits, judgments, and garnishments are detailed, complicated, and different in every state. So what you may have heard in one situation may not apply at all to you regarding these relief payments.
Finding Out If You Have a Bank Garnishment Order
Some common sense questions you should ask yourself. Have you:
- ever received lawsuit papers and then did not fully resolve the debt?
- had any kind of creditor garnishment or seizure, even if unrelated to your bank/credit union account?
- had anything repossessed, especially a vehicle, where you may still owe a balance?
- gone through a real estate foreclosure in which you may still owe a money to junior mortgage or other lienholder?
- moved from another state and thought you left unresolved debts behind?
In these and similar situations you may have a judgment against you and a garnishment on your bank/credit union account. So your relief money would likely go to pay the judgment before you’d get any of it.
Is there any more direct way of finding out if there’s a garnishment order? Yes, you could contact your bank/credit union and ask. The problem is that in the midst of the pandemic you may well have trouble getting anyone to answer. More to the point, you’d likely have trouble getting through to somebody who could accurately and reliably answer this question.
A debtors’ rights or bankruptcy lawyer could help. He or she likely knows the right people to call at your financial institution, including that institution’s lawyers.
What To Do If You Do Have a Garnishment Order
First, every state has exemptions that you may be able to claim to protect the relief money from garnishment. Each state has different procedures for claiming those exemptions. An extra challenge during the pandemic is getting access the courts to assert your exemption rights. Many courts are physically closed, you may be subject to a stay-at-home order, and contacting a lawyer may be harder. But if you don’t want to lose your relief money, you’ll likely need to assert your exemption protections.
Second, you may want to consider some other tactical steps:
- If a garnishment order has expired and the creditor needs to renew it, you may have time to take the money out of the account immediately after it arrives.
- Has the IRS has not yet direct-deposited your payment? Then you may be able to redirect it to an account at a different (non-garnished) financial institution. Go to the Get My Payment webpage to provide new bank account routing information (if it’s not too late).
- Are you currently waiting to receive the relief payment in paper checks? Consider NOT providing the IRS direct deposit information even though that may delay the payment. (Here’s an article with the dates that the IRS is mailing out paper checks, based on income.)
Third, a number of states are issuing orders to prevent garnishments of bank accounts including California, Illinois, Indiana, Massachusetts, Nebraska, New York, Oregon, Texas, Virginia and Washington. I do not see NJ on that list.
This IS Complicated
Garnishment law is detailed and not at all straightforward. And that was before all the legal and serious practical complications caused by the pandemic. So if at all possible, get through to a debtor’s rights or bankruptcy lawyer. We have spent our professional lives helping people deal with garnishments and protect their assets from creditors. This is just another twist on what we do all day every day.
Posted by Kevin on July 2, 2020 under Bankruptcy Blog |
The 880-page Coronavirus Aid, Relief, and Economic Security Act (“CARES”) has 4 pages of help for certain student loan borrowers. Section 3513 of CARES. It provides meaningful but temporary help for those who qualify by having the right kind of student loan.
The Kinds of Student Loans Covered
First, the relief applies only to federal student loans, not to private student loans.
Second, not all federal student loans are included. Direct Loans—those made directly by the federal government’s Department of Education—are covered. Federal Family Education Loans—FFELs—are covered if they’re currently owned by the federal Department of Education. FFEL loans held by commercial lenders and campus-based Perkins loans are not covered. These non-covered loans amount to only about 12 percent of federal student loan dollars, so most federal student loans are covered.
The Key Benefits
For the applicable federal student loans, CARES accomplishes the following:
- Suspends all loan payments through September 30, 2020.
- Waives interest during this suspension period.
- For credit reporting purposes, the lender must treat each suspended payment as if the borrower actually paid the payment.
- Student loan creditors must suspend involuntary collection during the suspension period.
- The payment suspension time counts for purpose of loan forgiveness and loan rehabilitation.
1. Payment Suspension
The new law suspends “all payments due for [applicable student] loans… through September 30, 2020.” Section 3513(a), CARES Act. The law did not specify when this non-payment period started. But since then the U.S. Department of Education has specified that the “administrative forbearance will last from March 13, 2020 through September 30, 2020.”
If you’ve already made a payment during the same March 13 through September 30, 2020, your student loan servicer should refund it to you (don’t hold your breath). This includes auto-debit payments, which are supposed to stop automatically during this same period.
2. Interest Waiver
No interest will accrue during the March 13 through September 30, 2020 period. Section 3513(b). This should happen automatically.
3. Credit Reporting
“During [this same] period… , for the purpose of reporting information about the loan to a consumer reporting agency, any payment that has been suspended is treated as if it were a regularly scheduled payment made by a borrower.” Section 3513(d), CARES Act. The suspended payments should show as actually made payments on your credit reports.
4. Collection Freeze
“During the [same ]period [the loan servicers] shall suspend all involuntary collection related to the loan.” Section 3513(e), CARES Act. The law lists three specific types of collection that are explicitly included: wage garnishment, tax refund offset, and administrative offset by “a reduction of any other Federal benefit payment.” But it also broadly adds “any other involuntary collection activity.” Section 3513(e)(1-4), CARES Act. So during the March 13 through September 30 period, no collection activity of any kind should happen on the applicable student loans.
5. Non-Payments Count
“[E]ach month for which a loan payment was suspended [counts] as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program or loan rehabilitation program… for which the borrower would have otherwise qualified. Section 3513(c), CARES Act.
This means that you get credit for payment towards Public Service Loan Forgiveness (PSLF). Also, you get credit for payment on loan rehabilitation. you
Posted by Kevin on July 1, 2020 under Bankruptcy Blog |
The massive $2.2 trillion coronavirus relief law includes some legal relief for both Chapter 7 and Chapter 13 consumer debtors.
$1,200 Relief Checks Excluded as Income for the Means Test
To qualify to file a consumer Chapter 7 case, you have to pass the “means test.” Part of that test is a rather complicated calculation of your “current monthly income.” That’s essentially the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $1,200 coronavirus relief payment—could pump up your “current monthly income” and make you fail the “means test.” Then you could be forced to file a multi-year Chapter 13 case instead of a 3-4 month Chapter 7 one.
The new CARES law solves that problem neatly. It simply excludes any coronavirus relief money from the definition of “current monthly income.” To be precise, the following is excluded:
Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).
Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).
What Payments Are Included?
This statutory language is broad. It doesn’t refer only to the one-time $1,200 (or so) relief payment. It’s clearly broad enough that it could include other “Payments made under Federal law” related to the coronavirus national emergency. That is, other such payments may be excluded from “current monthly income” for purposes of the means test.
For example, CARES provides unemployment benefits of $600 per week extra beyond the usual state-calculated weekly amounts. These $600 weekly extra benefits sure sound like they’re “Payments made under Federal law” related to [this] national emergency.” Since these $600 payments can last up to 39 weeks, they can amount to way more money than the one-time $1,200 payments. So if these $600 payments are also excluded in applying the means test, that would be quite significant.
But this is a new law, and there certainly is no case law that has developed on this issue. Moreover, any “law” on this issue may well be applied somewhat differently in different parts of the country. Contact your local bankruptcy lawyer for current information as it applies to you.
$1,200 Relief Checks Also Excluded in Confirmation of Chapter 13 Plan
Chapter 13 generally requires you to pay all of your “projected disposable income” into your 3-to-5-year payment plan. This monthly amount goes through the Chapter 13 trustee to your creditors under the terms of your plan. Then at the end of the plan you are usually debt-free (except sometimes for certain agreed long-term debts).
Your “projected disposable income” is based on virtually all your income, minus certain legally allowed expenses. The income side of this is your “current monthly income” as discussed above—based on your last 6 months of income. If that income would include a one-time coronavirus relief payment, it would greatly increase your “disposable income” and thus your required Chapter 13 plan payment.
The new CARES law solves that problem in a way similar to the above section about the Chapter 7 means test. Using the exact same language, it excludes any coronavirus relief money from the Chapter 13 definition of “current monthly income.” To again be precise, the following is excluded:
… payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).
CARES, Section 1113(b)(1)(B).
As in the section above on Chapter 7, it’s not yet clear what federal payments are excludable. Besides the $600 weekly unemployment payments mentioned above, there may be other future coronavirus stimulus payments approved by Congress. Again, talk with your bankruptcy lawyer to get current information and advice.
Changes to Ongoing Chapter 13 Plans
During the course of a Chapter 13 you can change, or “modify” your approved payment plan under certain circumstances. CARES added a new circumstance: if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C).
The bankruptcy judge still has to approve the modified plan, after the usual notice to creditors and opportunity for objection. The modified plan must comply with the usual requirements. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).)
It’s unclear what this all adds to the plan modification rights you already have, except for one huge change. The law has been clear for a long time: Chapter 13 plans cannot last longer than 5 years. CARES extended this to a new maximum of 7 years for applicable modified plans.
Although you’d think you would want to finish your plan as fast as possible, longer plans often allow you to reduce your monthly plan payments. It can give you more opportunities to preserve certain assets or collateral—keep a vehicle, save a home. Given the financial challenges so many of us are facing, this greater flexibility can make the difference between completing your case case successfully or not.
Important: Applicability to Cases
First, the Chapter 7 means test change and the Chapter 13 plan confirmation change “apply to any case commenced before, on, or after the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(i). But those changes have a sunset provision—they are deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).
CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021. Be careful about this deadline.
Second, the Chapter 13 plan modification change applies “apply to any case for which a plan has been confirmed… before the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(ii). But, same as above, this change has a sunset provision—it is deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).
So this change applies to Chapter 13 cases which had a confirmed plan before March 27, 2020, and then successfully modified its plans by March 26, 2021. Be careful about this deadline as well.
Notice that by this language this change does not apply to cases either not filed, or already filed but not yet confirmed, as of March 27, 2020. This means that people in these situations appear unable to take advantage of the 7-year provision.
Bottom line all these changes to the Bankruptcy Code are temporary, currently lasting only this one year. Then they will be deleted and the Bankruptcy Code will revert to its prior language.
Posted by Kevin on June 23, 2020 under Bankruptcy Blog |
The federal April 15, 2020 tax filing and payment deadlines have been postponed to July 15, 2020. Also, no interest or penalties accrue.
Federal Income Tax Return Deadline Postponed
As you are probably aware, responding to the COVID-19 pandemic, the IRS has postponed the deadline to file federal income tax returns by 3 months. That date is fast approaching.
This tax return postponement applies to all individuals, but also more broadly. It includes every legal “person”: “an individual, a trust, estate, partnership, association, company or corporation.” IRS Notice 2020-18. So it covers all individuals and businesses.
Federal Income Tax Payment Due Date Postponed
Just as important, the date that tax payments are due is also postponed from April 15 to July 15, 2020. IRS Notice 2020-17.)
This applies more broadly than just taxes due for the 2019 tax year. For those paying estimated income taxes quarterly, the payment that was due April 15 is now instead due on July 15, 2020.
There’s no limit to the amount of tax amount postponed. There was a prior maximum amount postponed (in IRS Notice 2020-17) but that maximum has been eliminated. IRS Notice 2020-18, Section III, paragraph 2.
No Interim Interest and Penalties
Since taxes previously due on April 15 are now due on July 15, 2020, no interest or penalties will accrue during those 3 months. As the official Notice states:
the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax… will begin to accrue on July 16, 2020.
IRS Notice 2020-18, Section III, paragraph 5.
No Extension Needed
This postponement of tax returns and tax payments is automatic. You don’t need to file any extension forms.
If you’ll need more time past July 15, the IRS says:
Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.
IR-2020-58.
Tax Refunds Not Affected?
If you were expecting a tax refund, you should have filed as soon as possible. The IRS is encouraging you to do so:
The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds are still being issued within 21 days.
IR-2020-58. If you need your refund, the pandemic makes it all the more important to file as soon as possible.
ONLY April 15, 2020 Deadlines Affected
Things are changing fast, but at the moment this postponement does not apply to any other deadlines. For example, there’s no current extension for the March 16, 2020 deadline for corporate tax returns for tax year 2019 or the May 15, 2020 deadline for tax-exempt organizations. Also, the regular filing/payment date of July 15, 2020 still applies for quarterly filers. Again, these may also change.
State Income Tax Deadlines
On April 14, 2020, Governor Murphy issued an order extending the time for filing of individual returns and the payment of taxes thereon to July 15, 2020.
