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Priority Income Tax Debts under Chapter 13

Posted by Kevin on July 29, 2020 under Bankruptcy Blog | Comments are off for this article

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:

  1. You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
  2. This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Priority Debts in a Chapter 13 Case

Posted by Kevin on July 26, 2020 under Bankruptcy Blog | Comments are off for this article

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.

Priority Debts in an Asset Chapter 7 Case

Posted by Kevin on July 22, 2020 under Bankruptcy Blog | Comments are off for this article

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.

Priority Debts in a No-Asset Chapter 7 Case

Posted by Kevin on July 19, 2020 under Bankruptcy Blog | Comments are off for this article

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.

Priority Debts

Posted by Kevin on under Bankruptcy Blog | Comments are off for this article

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.

Protecting Your Pandemic Relief Payment from Creditors

Posted by Kevin on July 4, 2020 under Bankruptcy Blog | Comments are off for this article

 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.

Student Loan Changes in the CARES Act

Posted by Kevin on July 2, 2020 under Bankruptcy Blog | Comments are off for this article

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:

  1. Suspends all loan payments through September 30, 2020.
  2. Waives interest during this suspension period.
  3. For credit reporting purposes, the lender must treat each suspended payment as if the borrower actually paid the payment.
  4. Student loan creditors must suspend involuntary collection during the suspension period.
  5. 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

Consumer Bankruptcy Changes in the CARES Act

Posted by Kevin on July 1, 2020 under Bankruptcy Blog | Comments are off for this article

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.

Tax Filing and Payment Extended to July 15

Posted by Kevin on June 23, 2020 under Bankruptcy Blog | Comments are off for this article

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.

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.

Your Vehicle Loan Options in a Chapter 7 “Straight Bankruptcy” Case

Posted by Kevin on November 12, 2019 under Bankruptcy Blog | Comments are off for this article

Whether you want to keep your vehicle or get rid of it, and whether you are current or behind on your payments, Chapter 7 bankruptcy can address the issue.

The “Automatic Stay” Gives You the Chance to Decide to Keep or Surrender

As long as you file your Chapter 7 case before your vehicle gets repossessed, your lender can’t repossess it once you do file. The same “automatic stay” law that stops all your creditors from calling you, suing you, and garnishing your wages also stop your vehicle lender from repossessing your vehicle—at least for a month or so while you decide whether to keep your car or not.

Surrendering Your Vehicle

If you decide to surrender your vehicle, Chapter 7 bankruptcy is often the best way to do so. The reason is because with most vehicle loans even after surrendering the vehicle, you would still owe money to your lender after the surrender. This “deficiency balance” is the amount you owe after the lender repossesses the vehicle, sells it—usually at auction, pays itself its costs of repossession and sale out of the proceeds of sale, and then pays the rest of the proceeds towards your loan’s interest, late fees, and principal balance.  Based on how vehicles depreciate and how much is owed on the loan, this scenario almost always creates a deficiency.

Surrendering your vehicle during your Chapter 7 case allows you to legally and permanently write off (“discharge”) that entire remaining debt, including any potential deficiency.

Keep Your Vehicle

If you want to keep your car or truck, whether you are current on your loan, and if not how quickly you can catch up, are crucial.

If You Are Current

If you want to keep your vehicle and are current at the time your Chapter 7 case is filed, and can keep making the payments on time, it’s simple.  The Code provides that you can reaffirm the debt.  You sign a “reaffirmation agreement” stating that you intend to keep your vehicle and give your consent that the obligation to the vehicle lender will not be discharged.  The Court must approve the reaffirmation agreement after a hearing.   The downside is that if you default going forward, the lender will repossess, sell the vehicle and come after you for any deficiency because the underlying debt was never discharged.

The Court must approve the reaffirmation agreement after a hearing.  The Court can withhold approval of a reaffirmation agreement if it is not in the best interests of the debtor.

Prior to the 2005 revisions to the Bankruptcy Code, a debtor could retain and pay without reaffirming the debt.  Although not specifically written into the Code, it was allowed by the courts and pretty much accepted practice.   In that case, any potential deficiency was discharged and you just continued paying.  So, if you defaulted in the future, the lender could repossess but not come after you for a deficiency.

That very pro debtor situation was pretty much written out of the 2005 amendments to the Code.  Now, that option is usually available only if the lender consents.  Or, if the Court refuses to approve the reaffirmation agreement because it is not in the best interests of the debtor.   Although the Code does not specifically state what happens in such a situation, NJ bankruptcy judges do not allow a repossession if payments are kept current.  Moreover, if you default down the road, the underlying debt is discharged so all the lender can do is repossess the collateral.

If You Are Not Current

If you want to keep your vehicle and aren’t current on the vehicle loan at the time your Chapter 7 case is filed, your options are more limited. You would usually need to get current very quickly to be able to keep the vehicle—usually within a month or two.  Moreover, you would need to reaffirm the debt going forward.

Much greater Flexibility through Chapter 13

But that is for a later blog.

Qualify for a Vehicle Loan “Cramdown” by Filing Your Chapter 13 Case at the Right Time

Posted by Kevin on November 2, 2019 under Bankruptcy Blog | Be the First to Comment

Potentially save thousands of dollars on your vehicle loan by filing bankruptcy when it qualifies for cramdown.

Chapter 13 Vehicle Loan Cramdown

What’s a “cramdown”? It’s an informal term—not found in the federal Bankruptcy Code—for a procedure provided under Chapter 13 law for legally rewriting the loan to reduce, usually, both the monthly payment and the total you pay for the vehicle. A cramdown, essentially reduces the amount you must pay to the fair market value of your vehicle, often also reducing the interest rate, and also often stretching out the payments over a longer period. These combine to result often in a significantly reduced monthly payment, and an overall savings of thousands of dollars.

Qualifying for Cramdown

First, this only works if your vehicle is worth less than the balance on the loan.

Second, emphasizing again, it is ONLY available in a Chapter 13 case, not Chapter 7.

And third, your vehicle loan must have been entered into more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed.

Vehicle Cramdown

It’s of course that last condition that creates the timing opportunity. When you first go in to see your attorney, bring your loan vehicle paperwork (or as much information you have) to see if and when you qualify for cramdown, and whether and how much difference it can make for you.

Here’s an example of the dollar difference that a difference in timing can make.

How Good Timing Can Work for You

Let’s say you bought and financed your car 890 days ago—that’s almost two and a half years. The new car cost $21,500. You did not get a very good deal; your previous car had died and cost way too much to repair, and you had to quickly get another car to commute to work. You put down $500 (from a credit card cash advance), then financed the vehicle for $21,000 at 8% over a term of 5 years, with monthly payments of $425.

Now almost two and a half years later you owe about $11,500. If you wanted to keep the car, and filed either a Chapter 7 or Chapter 13 case before the 910-day mark, you would have to pay the regular monthly payments for the rest of the contract term. With interest, that would cost a total of about $12,650 more.

Consider if instead you waited until just past that 910-day mark and filed a Chapter 13 case then, and could “cram down” the car loan. Assume that your car is now worth $7,500, and again you owe $11,500. The loan is said to be secured to the extent of $7,500. The remaining $4,000 of the loan is not secured by anything. So the $7,500 secured portion would be paid through monthly payments in your Chapter 13 plan. The $4,000 unsecured portion is treated as general unsecured debt and paid prorata with the rest of those creditors.  It does not constitute extra money paid into the plan.

Under cramdown, you pay the $7,500 secured portion at an interest rate which is often lower than your contract rate. Paying a reduced amount—$7,500 instead of $11,500—at a lower interest rate results in a lower monthly payment. That payment is often reduced substantially further by extending the repayment term further out than what the contract had provided, up to a maximum of five years (from the date of filing the Chapter 13 case).

In this example, assuming an interest rate of 5% and a repayment term of five years, the payment on the $7,500 would be less than $142 per month. The total remaining payments on the loan, with interest, would be about $8,492, in contrast to paying $12,650 under the contract. That is a savings of $4,158.

Note that under cramdown, even though the repayment term stretches the payments about two and a half years longer than under the contract, the amount of interest to be paid is often less. That’s both because the interest rate is often lower, and it’s being applied to a lower principal amount (here 5% interest instead of 8%, and $7,500 instead of $11,500).

So, by tactically holding off from filing a Chapter 13 case until after the 910-day period expires, in this example you would reduce the monthly payment from $425 to $141.50, and save more than $4,000 before owning the vehicle free and clear.

Putting a Stop, at Least Temporarily, to Your Home’s Foreclosure

Posted by Kevin on October 29, 2019 under Bankruptcy Blog | Be the First to Comment

Both Chapter 7 and Chapter 13 will stop a foreclosure.

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

Five Tremendous Tools to Save Your Home through Chapter 13

Posted by Kevin on October 3, 2019 under Bankruptcy Blog | Comments are off for this article

Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles. 

 

The Limits of Chapter 7 “Straight Bankruptcy”

In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home., or, at least, delay a foreclosure for a limited time.

The Extraordinary Tools of Chapter 13

Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.

Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).

Under Chapter 13 case you can:

1.  stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home.

2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.

3.  permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.

4.  have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.

5.  discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid of in bankruptcy.  If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens attach to your home.

See my next blog post for the other five house-saving tools of Chapter 13.

Prevent Future Judgment Liens

Posted by Kevin on September 19, 2019 under Bankruptcy Blog | Comments are off for this article

Bankruptcy can prevent future judgment liens. It usually stops a lawsuit from turning into a judgment, and then a judgment lien on your home. 

 

Judgment Liens Are Dangerous

Our last blog post was about how filing bankruptcy can sometimes remove, or “avoid,” a judgment lien from your home. This is a great potential benefit of bankruptcy if a judgment lien has already been recorded.

But it is often much better to file a bankruptcy case before a judgment lien hits your home’s title. Here are a few of the practical reasons why:

  • You have to meet certain strict conditions to be able to avoid the judgment lien. If you don’t meet them, even bankruptcy won’t get rid of that lien on your home. You may have to pay all or part of the debt in spite of filing bankruptcy.
  • Even if you succeed in avoiding the lien in your bankruptcy case, it is an extra step that can cost you more. And the cost can go up substantially if the creditor fights your lawyer’s efforts to avoid the lien. Besides higher lawyer fees, you may have to pay for a home appraisal and for the court testimony of the appraiser.
  • The existence of a judgment lien adds uncertainty, and thus some extra anxiety, to your bankruptcy process. The goal of bankruptcy is relief. So it’s better to prevent a judgment lien from hitting your home than messing with it after it has hit.

Judgment Liens Are Preventable

Filing bankruptcy usually stops an ongoing lawsuit against you from turning into a judgment. Bankruptcy’s “automatic stay” immediately stops “the… continuation… of a judicial, administrative, or other action or proceeding against the debtor…  .”

Filing bankruptcy also usually prevents future lawsuits against you from being filed much less turning into judgments. The automatic stay” immediately stops “the commencement… of a judicial, administrative, or other action or proceeding against the debtor…  .” Section 362(a)(1) of the U.S. Bankruptcy Code.

The exceptions are debts that cannot be written off (“discharged”) in bankruptcy, such as certain ones based on fraud, income taxes, child or spousal support, most student loan debt and criminal behavior. But bankruptcy does discharge most debts. So filing bankruptcy will stop ongoing and future lawsuits on most of your debts. And it will prevent those debts from turning into dangerous judgment liens on your home.

The Timing Can Be Crucial

You know when things are going south financially.  You are making no more than minimum payments on your credit cards.  You miss payments here and there but convince yourself that you will make it up next month.  But you don’t make it up.  Debt collectors are calling daily.  And the dunning letters are also coming in.  You could bury your head in the sand and that will lead to lawsuits, judgments, and judgment liens on your home.

Most times, it is best to be proactive.  At the very least, you should be seeking out an experienced bankruptcy attorney to analyze your situation and let you know whether bankruptcy can be an effective tool to deal with your creditors.

Bankruptcy Helps with Debt Problems Even without Writing off Every Debt

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

Neglecting Bankruptcy as an Option

If you have a debt that you have heard cannot be discharged (legally written off), you may not be seriously considering bankruptcy as an option. You probably have not seen a bankruptcy attorney. That could well be a mistake.

Getting the Law Right

But whether or not a specific debt can be discharged, you would be wise to get legal advice about it, for the following 4 reasons:

1. Some debts that can’t be discharged now perhaps can be in the future. Almost all income taxes can be discharged after a series of conditions have been met, which mostly just involve the passage of enough time. So your attorney can create a game plan for you using the tax timing rules to discharge as much tax debt as possible. Timing can also be important with student loans, especially if you have a worsening medical condition or are getting close to retirement age, making for a better argument of “undue hardship.”

2. Even if you can’t discharge a particular debt, bankruptcy can permanently solve an aggressive collection problem.  Often your biggest problem is how aggressively a debt is being collected. For example, you may want to pay your back child support (which is not dischargeable) but the state support enforcement agency is threatening to suspend your driver’s and/or occupational license.  The filing of a bankruptcy triggers the automatic stay which will stop collection efforts during the term of the bankruptcy or until the Court vacates the stay for just cause.  A Chapter 13 case then will allow you the time (3 to 5 years) to catch up on the back support payments based on your budget.

3. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts take more time to pay off because a part of each payment goes to the ongoing interest and penalties. Certain tax penalties in particular can be large. Most of these additions to the debt are stopped by a Chapter 13 filing, allowing you to become debt-free sooner and by paying less money.

4. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged, but you likely also owe a set of debts that can be. Even if bankruptcy can’t solve your entire debt problem by simply discharging all you debts, as long as you can discharge most of your debts that would likely make your remaining debt problem much more manageable.

Conclusion

So don’t let the fact that you’ve heard that you have a debt or two that can’t be discharged in bankruptcy stop you from getting legal advice about it. Your financial life could well still be greatly improved through one of the bankruptcy options.

 

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.

Bankruptcy Can Remove a Judgment Lien

Posted by Kevin on August 19, 2019 under Bankruptcy Blog | Comments are off for this article

Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home.

A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home.  A judgment lien holder on your home can, under some circumstances, foreclose on your home. At the least, it can force you to pay the debt when you sell or refinance your home.

Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt.  The problem is that in many situations bankruptcy does not curtail creditors’ lien rights which pass through the bankruptcy.  Even though you discharge that debt, the lien still survives. It can and does come back to haunt you even after a successful bankruptcy.

However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien.  This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.” 

The Conditions for Judgment Lien Avoidance

Here’s how the process works.

When you file bankruptcy, to “avoid” a judgment lien you must file what is called a motion with the Court and meet certain conditions:

  • The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”  Mostly, this refers to judgment liens.
  • The judgment lien can attach to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.”
  • The judgment lien can’t be for child or spousal support or for a mortgage.
  • The judgment lien “impairs” the homestead exemption.  In earlier versions of the Bankruptcy Code, the concept of impairment was, at times, confusing.  However, under the current Code, it is pretty much a straightforward analysis.

Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.

For Example

Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:

  • It’s a judicial lien—one “obtained by judgment.”
  • The lien attaches to your homestead—the place you “use as a residence.”
  • The lien was not for child or spousal support or related to a mortgage.
  • All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.

In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.

Business Litigation that Continues After You File Bankruptcy

Posted by Kevin on August 6, 2019 under Bankruptcy Blog | Comments are off for this article

Lawsuits against You that Bankruptcy Ends

Many legal claims against you or your closed or closing business are resolved by the filing of your bankruptcy case. They are resolved either legally or practically, or both.

Claims that are legally resolved by your filing of bankruptcy are those intended to make you pay money.  The discharge (the legal write-off) in bankruptcy of whatever debt you owe will usually result in you not needing to pay anything on the claim under Chapter 7 “straight bankruptcy.” There’s not much point to a lawsuit to determine whether you owe money or about how much you owe if any such debt will just get discharged in bankruptcy.

Lawsuits that Bankruptcy Does NOT End

However, there are certain types of debts that would still need to be resolved by a court. In these situations the creditor would likely get permission from the bankruptcy judge to start a lawsuit or to continue one already started. Here are three types that need court resolution.

1) Determining the Amount of a Debt

If a debt is being discharged in a no-asset Chapter 7 case—one in which all assets of the debtor are “exempt” and protected—then, as indicated above, the amount of that debt makes no practical difference. Whatever the amount of the debt, it is getting discharged without payment of anything towards that debt.

But in an asset Chapter 7 case, in which the bankruptcy trustee is anticipating a pro rata distribution of the proceeds of the sale of assets, the amounts legally owed on all the debts need to be known for that distribution to be fair to all the creditors.  That’s because the established amount of any single debt affects the amounts received by all the creditors. So litigation to determine the validity or amount of a debt needs to be completed, even if by a relatively quick settlement.

2) Possible Insurance Coverage of the Debt

If a claim against a debtor may be covered by insurance, then the affected parties likely want the dispute to be resolved legally.

That’s because a court needs to determine 1) whether the debtor is liable for damages, 2) whether those damages are covered by the insurance, and 3) whether the policy dollar limits are enough to cover all the damages or instead leave the debtor personally liable for a portion. The following types of business litigation tend to involve insurance coverage issues:

  • vehicle accidents involving the business’ employees or owners, especially those with the complication of multiple drivers (and thus, multiple possible insurance coverages)
  • claims on business equipment damaged by fire or flood, or stolen

In these situations the bankruptcy court will likely give permission for the litigation to continue outside of bankruptcy court, while not allowing the creditor to pursue the debtor as to any amount not covered by the insurance policy limits.

3) Nondischargeable Debts

Some of the biggest fights about business-related debts occur when a creditor argues that its debt should not be discharged in the bankruptcy case.  The grounds for objecting to discharge are quite narrow—in general the debtor must have defrauded the creditor, embezzled or stolen from the creditor, or intentionally and maliciously hurt the creditor or its property.

Also, and much more prevalent in the last few years, are student loan debts.  Since the average student loan debt for an undergraduate is zeroing in on $40,000, litigation over whether the student loan debt is dischargeable, is become much more commonplace.

The Truly Amazing History of Bankruptcy Law

Posted by Kevin on August 4, 2019 under Bankruptcy Blog | Be the First to Comment

Debtors’ prisons? There’s that and a lot more to the very colorful history of bankruptcy law.

 

American bankruptcy law naturally grew out of the law of England during our colonial history. Pre-Revolutionary War bankruptcy laws were extremely different from current law.

  • The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry VIII. Debtors were called “offenders” under this first law, in effect seen as perpetrators of a property crime against their creditors. The purpose of this law, and as expanded during the following hundred and fifty years, was not to give relief to debtors. Rather it was to provide to creditors a more effective way to collect against their debtors.
  • Given this purpose, it is not surprising that this first law did not give debtors a discharge—a legal write-off—of their debts. In a bankruptcy the assets of the “offender” were seized, sold, and the proceeds distributed to creditors. And then the creditors could still continue pursuing the “offender” for any remaining balance owed.
  • A bankruptcy proceeding could only be started by creditors, not by debtors.  Creditors accused a debtor of an “act of bankruptcy,” such as physically hiding from creditors, or hiding assets by transferring them to someone else.  The current extremely seldom used “involuntary bankruptcy” is a remnant of this.
  • Strangely, only merchants could file bankruptcy. Why? Credit was seen as immoral, with only merchants being allowed to use credit, for whom it was seen as a necessary evil. As the only ones who had access to credit, only merchants had the capacity to become bankrupt.
  • For the following century and a half through the late 1600s, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” to seize their assets, put them into pillories (structures with holes for head and hands used for public shaming), and even cut off their ears.
  • Finally in the early 1700s the discharge of debts was permitted for cooperative debtors, but only if the creditors consented!
  • Yet the law still provided for the death penalty for fraudulent debtors (although it was very seldom used).
  • Cooperative debtors received an allowance from their own assets, the very early beginnings of the current Chapter 13 “adjustment of debts.”

So this was the English bankruptcy law that was largely in effect at the time that the U.S. Constitution was adopted. That gives some perspective on what the framers may have had in mind with the Bankruptcy Clause of the U. S. Constitution. That Clause gave Congress power to “pass uniform laws on the subject of bankruptcies.” Fortunately the language is so open-ended that it gave bankruptcy laws the opportunity to evolve during the last two hundred fifty years into one infinitely both more compassionate and beneficial for the economy.

But this evolution during our national history was extremely rocky, until surprisingly recently. That is the topic of the next blog.