Posted by Kevin on January 28, 2019 under Bankruptcy Blog | 
In a Chapter 7 bankruptcy, the debtor makes no payments and gets to keep her exempt assets. For a vast majority of debtors, this means they get to keep all their assets. The average Chapter 7 is completed in about 4 months
Creditors did not like this and lobbied for 20 years for a major overhaul of consumer bankruptcies. The result was the 2005 revisions to the Bankruptcy Code which was supposed to force more debtors to file under Chapter 13 where monthly payments of 36-60 months are required. This was accomplished by imposition of the “means test” -supposedly an objective way to decide who qualifies to file a Chapter 7 bankruptcy.
The “Objective” Rule
If you make under the median income for your State based on household size, you pretty much qualify for Chapter 7. If your income is above median, you must deduct from your income a combination of actual expenses and average local, State and national expenses to come up with your monthly disposable income.
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- If your monthly disposable income is less than $128.33, then you pass the means test and qualify for Chapter 7.
- If your monthly disposable income is between $128.33 and $214.17, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
- If EITHER you can pay 25% or more of those debts, OR if your monthly disposable income is $214.17 or more, then you do NOT pass the means test. With rare exceptions, that means that you cannot file under Chapter 7.
There is not much difference between $128.33 per month and $214.17 per month- about $86 per month. Just enough for dinner for 2 at a decent restaurant. But at the low end, you can get through bankruptcy in 4 months and make no payments. At the high end, you make monthly payments for 3 to 5 years.
So where do these hugely important numbers come from? The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,700 and $12,850. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.
So where did those original $6,000 and $10,000 amounts come from?
They are basically arbitrary. Maybe creditor lobbyists or congressional staffers floated the idea. Who knows? But, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts.
The Bottom Line
Sensible or not, if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7. But if you are over the median income amount, then the amount of your monthly disposable income largely determines whether you are able to file a Chapter 7 case.
Posted by Kevin on January 21, 2019 under Bankruptcy Blog |
Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt. If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.
Chapter 13 can help.
Payment of 2018 Income Taxes in Chapter 13 Case
Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018. In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.
Basic Benefits
No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.
1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.
2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).
3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.
Paying Off Your 2018 Tax For Free
Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?
The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them. However, priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).
An Example
Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000. You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.
But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors. Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.
Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors. And you not only discharge your credit card debt but you paid your taxes in full. Not bad.
Posted by on January 13, 2019 under Bankruptcy Blog |
Because of how precisely the amount of your “income” is calculated, filing bankruptcy just a day or two later can make all the difference.
Passing the “Means Test”
“Income” for purposes of the Means Test includes income from any source except monies received under the Social Security Act. It includes income from irregular sources such as child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits. Also, the Means Test is time-sensitive in that it is based on the amount of money received during precisely the 6 FULL CALENDAR months before the date of filing. This means that your “income” can shift by waiting just a month or two.
Why is the Definition of “Income” for the “Means Test” So Rigid?
One of the much-touted goals of the last major amendments to the bankruptcy law in 2005 was to prevent people from filing Chapter 7 who were considered not deserving. The most direct means to that end was to try to force more people to pay a portion of their debts through Chapter 13 “adjustment of debts” instead of writing them off Chapter 7 “straight bankruptcy.”
The primary tool intended to accomplish this is the “means test,” Its rationale was that instead of allowing judges to decide who was abusing the bankruptcy system, a rigid financial test would determine who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case, and therefore could not file a Chapter 7 case.
The Unintended Consequences of the “Means Test”
If your income is at or under the applicable median income, then you generally get to file a Chapter 7 case. If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. Having income below the median income amount makes qualifying for Chapter 7 much simpler and less risky.
Filing your case a day earlier or later can matter because of the means test’s fixation on the six prior full calendar months.
So if you receive some irregular chunk of money, it can push you over your applicable median income amount, and jeopardize your ability to qualify for Chapter 7.
An Example
It does not necessarily take a large irregular chunk of money to make this difference, especially if your income without that is already close to the median income amount. An income tax refund, some catch-up child support payments, or an insurance settlement or reimbursement could be enough.
Imagine having received $3,000 catch up support payment on July 15 of last year. Your only other income is from your job, where you make a $42,000 salary, or $3,500 gross per month. Let’s assume the median annual income for your state and family size is $45,000.
So imagine that now in January, 2019, your Chapter 7 bankruptcy paperwork is ready to file, and you would like to get it filed to get protection from your aggressive creditors. If your case is filed on or before January 31, then the last six full calendar month period would be July 1, 2018 through December 31, 2018. That period includes that $3,000 extra money you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus the extra $3,000 received, totals $24,000 received during that 6-month period. Multiply that by 2 for the annual amount—$48,000. Since that’s larger than the applicable $45,000 median income, you would have failed the income portion of the “means test.”
But if you just wait to file until February 1, then the applicable 6-month period jumps forward by one full month to the period from August 1 of last year through January 31 of this year. That new period no longer includes the $3,000 you received in mid-July. So your income during the 6-month period is $21,000, multiplied by 2 is $42,000. This results in your income being less than the $45,000 median income amount. You’ve now passed the “means test,” and qualified for Chapter 7.
Posted by Kevin on December 10, 2018 under Bankruptcy Blog |
The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.
The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.
Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This can create potential timing advantages and disadvantages.
The Means Test Definition of Income
When considering income for purposes of the means test, don’t think of income as you normally would. Instead:
1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).
2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year.
The Effect of this Unusual Definition of Income
This timing rule means that your means test income can change depending on what month you file your case.
So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31. Think year end bonus. Remember, if you file bankruptcy in December, only money received June through November gets counted.
So let’s say you got an extra $1,500 as a bonus in December. If you file in December that extra doesn’t count. But if you wait until January to file, December money is counted because the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size. Then, you may not qualify for Chapter 7.
Conclusion
It is a fact that most people wait way too long before their initial consultation with a bankruptcy lawyer. Our advice is to consult early so you can know your options and possibly formulate a strategy which can save you money over the long haul.
Posted by Andy Toth-Fejel on November 11, 2018 under Bankruptcy Blog |
Chapter 7 vs. 13 for Income Taxes
Thinking that the only way to handle your income tax debts in bankruptcy is through Chapter 13 is a misunderstanding of the law. It’s an offshoot on the broader error that you can’t write off taxes in a bankruptcy.
Both are understandable mistakes.
It is true that some taxes cannot be discharged (legally written off) in bankruptcy. But some can.
And it is true that Chapter 13 can be the best way to solve many income tax problems. But that does not necessarily mean it is the best for you. Chapter 7 might be better.
When Chapter 13 Is Better
Chapter 13 tends to be the better option if you owe a string of income tax debts, and especially if some are relatively recent ones. That’s because in these situations Chapter 13 solves two huge problems in one package.
First, if you owe recent income taxes which cannot be discharged, you are allowed to pay those taxes over the term of your Chapter 13 plan (up to 60 months) usually avoiding most penalties and interest that would have accrued during the term of the plan. That can be a huge savings. Moreover, you can often hold off on paying anything towards the back taxes while you first pay even more important debts—such as back child support.
Second, if you have older back taxes, under Chapter 13, you pay these taxes as general unsecured debt under your plan. If you complete all payments under your plan and otherwise satisfy the requirements of Chapter 13 any remaining older taxes are discharged; i.e., wiped out.
When Chapter 7 is Better
But you don’t need the Chapter 13 package if all or most of your income tax debts are dischargeable. In that situation, the generally much simpler Chapter 7 could be enough.
So, what makes an income tax debt dischargeable under Chapter 7?
The Conditions for Discharging Income Taxes
To discharge an income tax debt in a Chapter 7 case, it must meet these conditions:
1) 3 years since tax return due: The tax return for the pertinent tax must have been due more than three years before you file your Chapter 7 case. Also, if you requested any extensions for filing the applicable tax returns, add that extra time to this three-year period.
2) 2 years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.
3) 240 days since “assessment”: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.
4) Fraudulent tax returns and tax evasion: You cannot file a “fraudulent return” or “willfully attempt in any manner to evade or defeat such tax.”
These four conditions and the procedure for utilizing them are a bit complicated. Therefore, we advise that you retain an experienced bankruptcy attorney to assist you.
Posted by Kevin on November 7, 2018 under Bankruptcy Blog |
In the previous blog, we talked about debts in general, and secured debts in particular. Today, we will talk about general unsecured debts and priority debts.
General Unsecured Debts
All debts that are not legally secured by collateral are called unsecured debts. And “general” unsecured debts are simply those which are not one of special “priority” debts that the law has selected for special treatment. (See below.) So the category of “general unsecured debts” includes all debts with are both not secured and not “priority.”
General unsecured debts include every imaginable type of debt or claim. The most common ones include most credit cards, virtually all medical bills, personal loans without collateral, checking accounts with a negative balance, unpaid checks, payday loans without collateral, the amount left owing after a vehicle is repossessed and sold, and uninsured or under insured vehicle accident claims against you.
It helps to know that sometimes a debt which had been secured can turn into a general unsecured one. For example, a second mortgage that was fully secured by the value of the home at the time of the loan can become unsecured in a Chapter 13 bankruptcy if the home’s value falls significantly. Or what was originally a general unsecured debt may, in certain circumstances, turn into a secured debt.
Priority Debts
As the word implies, “priority” debts are ones that Congress has decided should be treated better than general unsecured debts.
Also, there’s a strict order of priority among the priority debts. Certain “priority” debts get paid ahead of the others (and ahead of all the general unsecured debts). In bankruptcy getting paid first often means getting paid something instead of nothing at all.
This has the following practical consequences in the two main kind of consumer bankruptcy:
In most Chapter 7 cases there is no “liquidation” of your assets for distribution to your creditors. That’s because in the vast majority of cases, all the debtors’ assets are protected; they are “exempt.” But in those cases where there ARE non-exempt assets which the bankruptcy trustee gathers and sells, priority debts are paid in full by the trustee before the general unsecured ones receive anything. And among the priority debts those of higher priority are paid in full before the lower priority ones receive anything.
In a Chapter 13 case, your proposed payment plan must demonstrate how you will pay all priority debts in full within the 3 to 5 years of your case. Then after the bankruptcy judge approves your plan, you must in fact pay them before you can be discharged
Here are the most common priority debts for consumers are:
- child and spousal support—the full amount owed as of the filing of the bankruptcy case
- certain income taxes, and some other kinds of taxes.
Posted by Kevin on October 21, 2018 under Bankruptcy Blog |
Debts in Bankruptcy
If you are thinking about bankruptcy there’s no more basic question than what it will do to each of your debts. Will it wipe away all your debts or will you still owe anybody? What about debts you would like to keep like your car or truck loan or your home mortgage? What help does bankruptcy give for unusual debts like taxes, or child and spousal support?
The Three Categories of Debts
At the heart of bankruptcy is the basic rule of treating all creditors within the same legal category the same. So we need to understand the three main categories of debts. You may not have debts in all three of these categories, but lots of people do. A basic understanding of these three categories will help make sense of bankruptcy, and make sense of how it treats each of your creditors.
The three categories of debts are “secured,” “general unsecured,” and “priority.”
Secured Debts
Every single debt is either “secured” by something you own or it is not. A secured debt is secured by a lien—a legal right against that property.
Most of the time you know whether or not a debt is secured because you voluntarily gave collateral to secure the debt. When you buy a car, you know that you are signing on to a vehicle loan in which the lender is put onto your car’s title as its lienholder. That lien on the title gives that lender certain rights, such as to repossess it if you don’t make the agreed payments.
But debts can also be secured as a matter of law without you voluntarily agreeing to it. For example, if you own a home and an unsecured creditor sues you and gets a judgment against you that usually creates a judgment lien against the title of your home. Or if you don’t pay federal income taxes you owe, the IRS may put a tax lien on all your personal property.
For a debt to become effectively secured, for purposes of bankruptcy, certain steps have to be taken to accomplish that. Otherwise the debt is not secured, and the creditor does not have rights against the property or possession that was supposed to secure the debt.
In the case of a vehicle loan, the lender and you have to go through certain paperwork for the lender to become a lienholder on the vehicle’s title. If those aren’t done right, the vehicle will not attach as collateral to the loan. That could totally change how that debt is treated in bankruptcy.
Finally, it’s important to see that debts can be fully secured or only partly secured. This depends on the amount of the debt compared to the value of the collateral securing it. If you owe $15,000 on a vehicle worth only $10,000, the debt is only partly secured—secured as to $10,000, and unsecured as to the remaining $5,000 of the debt. A partly secured debt may be treated differently in bankruptcy than a fully secured one.
In the next blog we will be reviewing general unsecured debts and priority debts.
Posted by Kevin on September 20, 2018 under Bankruptcy Blog |
Over the years, I have received numerous phone calls from people who have tried to file a bankruptcy by themselves (known as “pro se” debtors) and have gotten into trouble. I also see first hand what happens when people file without an attorney when I attend “meetings of creditors”, also known as 341a meetings. A 341a meeting is the usually straightforward, usually short meeting with the bankruptcy trustee that everyone filing bankruptcy must attend. Unfortunately, with many pro se debtors, the 341a meeting is not always straightforward or short.
But I wondered whether anybody has actually investigated this question. In searching the internet, I came across a book published a few years ago titled Broke: How Debt Bankrupts the Middle Class. This book is a series of articles about current issues in bankruptcy. One such article is titled “The Do-It-Yourself Mirage: Complexity in the Bankruptcy System” by Professor Angela K. Littwin of the University of Texas School of Law. Professor Littwin analyzed data from the Consumer Bankruptcy Project, “the leading [ongoing] national study of consumer bankruptcy for nearly 30 years.” Her finding: “pro se filers were significantly more likely to have their cases dismissed than their represented counterparts.”
Very interestingly, she also learned from the data that
consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process. Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom.
She concluded that after bankruptcy law was significantly amended back in 2005 in an effort to discourage as many people from filing, “bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.”
Almost 10 Times More Likely to Get a Discharge of Your Debts
In another study, Prof. Littwin stated that “17.6 percent of unrepresented [Chapter 7 “straight bankruptcy”] debtors had their cases dismissed or converted” into 3-to-5-year Chapter 13 “adjustment of debts” cases. “In contrast, only 1.9 percent of debtors with lawyers met this fate.” Even after controlling for other factors such as “education, race and ethnicity, income, age, home ownership, prior bankruptcy, whether the debtor had any non-minimal unencumbered assets at the time of the filing,” “represented debtors were almost ten times more likely to receive a discharge than their pro se counterparts.”
The bottomline is that you are better off going to an experienced bankruptcy attorney.
Posted by Kevin on September 7, 2018 under Bankruptcy Blog |
A creditor can challenge the discharge of its debt in bankruptcy.
Why Creditor Challenges Are More Common in Closed-Business Bankruptcies
For the following reasons, creditors tend to object more to the discharge of their debts in bankruptcy cases that are filed after the debtor has operated and closed a business:
- The amount of debt owed in business bankruptcies tends to be larger than in a consumer case, making objection more tempting to the creditor.
- In the business context some debtor-creditor relationships can be very personal. Consider debts between former business-partners who are blaming each other for the failure of the business, or between a business owner and the business’ primary investor who believes the owner drove the business into the ground, or between the contract buyer of a business and its seller in which the buyer feels that the seller misrepresented the profitability of the business. In these situations the aggrieved creditor is more personally motivated to fight the discharge of its debt.
- The owners of businesses in trouble find themselves desperate to keep their businesses afloat. So they may make questionable decisions which then expose them to objections to discharge.
- In the kinds of close creditor-debtor relationships mentioned above, the creditor often has hints about the business owner’s questionable behavior, and so is more likely to believe it has the legally necessary grounds to object.
But Objections to Discharge Are Still Not Very Common
When former business owners hear that any creditor can raise objections to the discharge of its debt, they figure an objection would very likely be raised in their case. But in reality these objections occur much less frequently than might be expected, for the following reasons:
- The legal grounds under which challenges to discharge must be raised are quite narrow. To be successful a creditor has to prove that the debtor engaged in rather egregious behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to property. These are not easy to prove.
- In his or her bankruptcy case the debtor files, under oath, papers containing quite extensive information about his or her finances. The debtor is also subject to questioning by the creditors about that information and about anything else relevant to the discharge of his or her debts. If the information on the sworn documents or gleaned from any questioning reveals that the debtor truly has no assets worth pursuing, a rational creditor will often decide not to throw “good money after bad” by raising an objection.
Conclusion
In a closed-business bankruptcy case there are these two opposing tendencies. Challenges to discharge are more likely, especially by certain kinds of closely related creditors. But these challenges are still relatively rare because of the narrow legal grounds for them and the financial practicalities involved. A good bankruptcy attorney will advise you about this, will prepare your bankruptcy paperwork to discourage such challenges, and will help derail any such challenges if any are raised.
Posted by Kevin on June 7, 2018 under Bankruptcy Blog |
Eligibility depends on 1) the kind of debtor, 2) the kinds and amounts of debts, 3) the amount of income and 4) of expenses.
1) The Kind of Debtor
If you are a human person, you may be eligible for either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” case. You and your spouse may also be eligible to file one or the other of these together in a joint case.
However, if you are the owner or part-owner of a business partnership, corporation, limited liability company or other similar business entity, that business entity could not file its own Chapter 13 case. But it could file under Chapter 7.
2) The Kinds and Amounts of Debts
If your debts are “primarily consumer debts” (more than 50% by dollar amount), then to be able to file a successful Chapter 7 case you have to pass the “means test.” That’s a test related to your income and expenses (discussed more below.) If 50% or more of your debts are not consumer debts, than you can skip the “means test.”
Chapter 7 does not limit the amount of debt you can have to be eligible to file a case. However, you cannot file a Chapter 13 case if your debts exceed the maximums of $394,725 in unsecured debts and $1,184,200 in secured debts (or if you do file a case it will very likely be “dismissed” (thrown out)).
3) Amount of Income
You can quickly and easily satisfy the “means test” and be eligible for a Chapter 7 case if your income is no more than the regularly adjusted and published “median income” for your family size and state.
To be eligible for Chapter 13 you must have “regular income.” That is defined not very helpfully as income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.”
Also for Chapter 13, if your income is less than the “median income” for your family size and state of residence, then the plan generally must last a minimum of three years (but in many situations it can last longer, especially if you need it to, but for no longer than five years). If your income is at or above the applicable “median income” amount, the plan must almost always last five years.
4) The Amount of Expenses
In Chapter 7, if your income is NOT less than “median income” for your family size and state of residence, then you may still pass the “means test” and be eligible for filing a Chapter 7 case IF, after accounting for all your allowed expenses, you don’t have enough money left over to pay a meaningful amount to your creditors.
In Chapter 13, a similar accounting of your allowed expenses determines the amount of your “disposable income,” the amount you must pay into your plan each month.
Summary
Once you recognize that you need relief from your creditors, choosing between Chapter 7 and 13 is often not difficult. But because there are many, many differences between them, the choice can sometimes turn into a delicate balancing act between the advantages and disadvantages of those two options. That’s why when you have your initial meeting with your bankruptcy attorney, it’s smart to be aware of and communicate your goals, but also be open-minded about how best to accomplish them.
Posted by Kevin on May 14, 2018 under Bankruptcy Blog |
Most people who close down a failed small business owe income taxes. Chapter 7 and Chapter 13 provide two very different solutions.
Here are the two options:
Chapter 7 “Straight Bankruptcy”
File a Chapter 7 case to discharge (permanently write off) most of your debts. This can include some or even all of your income taxes. If you cannot discharge all of your taxes, right after your Chapter 7 is completed, you (or your attorney or accountant) would arrange a payout plan (either lump sum or over time) with the IRS or other taxing authorities.
Chapter 13 “Adjustment of Debts”
File a Chapter 13 case to discharge all the other debts that you can, and sometimes some or even all the taxes. If you cannot discharge a significant amount of your taxes, you then pay the remaining taxes through your Chapter 13 plan, while under continuous protection of the automatic stay against the IRS’s or state’s collection efforts.
The Income Tax Factor in Deciding Between Chapter 7 and 13
In real life, especially after a complicated process like closing a business, often many factors come into play in deciding between Chapter 7 and Chapter 13. But focusing here only on the income taxes you owe, the choice could be summarize with this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case (if any) be small enough so that you could reliably make workable arrangements with the IRS/state to pay off or settle that obligation within a reasonable time? If so, consider Chapter 7. If not, then consider Chapter 13 which provides the automatic stay during the 5 year period allowed to pay taxes.
How Do You Know?
To find out whether you need Chapter 13 protection, you need to find out from your attorney the answers to two questions:
1) What tax debts will not be discharged in a Chapter 7 case?
2) What payment or settlement arrangements will you likely be able to make with the taxing authority to take care of those remaining taxes?
The IRS has some rather straightforward policies about how long an installment plan can last and how much has to be paid. In contrast, predicting whether or not the IRS/state will accept a particular “offer-in-compromise” to settle a debt can be much more difficult to predict. Generally, it takes more attorney or accountant time to negotiate an offer in compromise, so the cost factor to the debtor should be considered.
When in doubt about whether you would be able to pay what the taxing authorities would require after a Chapter 7 case (either by installment plan or offer in compromise), or in doubt about some other way of resolving the tax debt, you may well be better off under the protections of Chapter 13.
Posted by Kevin on May 1, 2018 under Bankruptcy Blog |
The Regular “Automatic Stay”
The automatic stay—your protection against just about all collection efforts by your creditors—kicks in just as soon as your bankruptcy case is filed. It applies to all bankruptcy cases, including those filed under Chapter 7 and Chapter 13. It is one of the most powerful and important benefits of filing a bankruptcy case.
But it protects only you—the person filing bankruptcy—and your assets. It does not protect anybody else who may also be legally liable on one of your debts.
The Very Special “Co-Debtor Stay”
Chapter 13 adds another layer of automatic stay protection—applicable to your “co-debtors, or co-signers.
Section 1301 states that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.”
A creditor on a consumer debt is already prevented by the regular automatic stay from doing anything to collect a debt directly from the debtor. Now, under Chapter 13 only, and only on consumer debts, that creditor is also prevented from collecting on the same debt from anybody else who has co-signed or is otherwise also obligated to pay that debt. The co-signer may not even know that you are protecting them from the creditor.
Conditions and Limits of the Co-Debtor Stay
Besides being limited to consumer (not business) debts, the “co-debtor” protection:
1. Does not protect spouses from joint liability on income taxes. That’s because income tax debts are not considered “consumer debts” for this purpose.
2. This protection does not extend to those who “became liable on… such debt in the ordinary course of such individual’s business.”
3. Creditors can ask for and get permission to pursue your co-debtor to the extent that:
(a) the co-debtor had received the benefit of the loan or whatever “consideration” was provided by the creditor (instead of the person filing the bankruptcy); or
(b) the Chapter 13 plan “proposes not to pay such claim.”
4. Even if a creditor does not seek or get the above permission, this co-debtor stay expires as soon as the Chapter 13 case is completed, or if it’s dismissed (for failure to make the plan payments, for example), or converted into a Chapter 7 case.
Conclusion
Choosing between Chapter 7 and 13 often involves weighing a series of considerations. If you want to protect a co-signer or someone liable on a debt with you from being pursued for that debt, seriously consider Chapter 13 because of the co-debtor stay.
Posted by Kevin on March 28, 2018 under Bankruptcy Blog |
Whether to file under Chapter 7 or Chapter 13 depends largely on your business assets, taxes, and other nondischargeable debts.
You have closed down your business and are considering bankruptcy. What are your options?
If you operated as a sole proprietor (DBA), then all the debts of the business are your personal debts. If you operated as a corporation or LLC, then the business was a separate entity. So, the business entity is liable for its debts, then, absent fraud, you are liable only for those debts which you personally guaranteed. In addition, you personally may be liable to taxing authorities for certain taxes.
Then, you have to consider remaining assets of the business. If a DBA, then you own the assets which become part of your bankruptcy estate upon filing. If it a corporation or LLC, then the entity owns the assets. But if you are the 100% owner of the business, then the stock or other ownership interest is an asset of the bankruptcy estate. So, the trustee can get to the assets through your ownership interest.
Your options would be to file under Chapter 7 or Chapter 13. A Chapter 7 is generally over in 4-5 months and requires no payments. A Chapter 13 lasts from 36-60 months and requires payments each month. It would be understandable if you preferred to file under Chapter 7.
Likely Can File Under Chapter 7 Under the “Means Test”
The “means test” determines whether, with your income and expenses, you can file a Chapter 7 case. The “means test” will still not likely be a problem if you closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income. So, there is a very good chance that your income for “means test” purposes is less than the published median income amount for your family size, in your state. If your prior 6-month income is less than the median amount, by that fact alone you’ve passed the means test and qualified for Chapter 7.
Three Factors about Filing Chapter 7 vs. 13—Business Assets, Taxes, and Other Non-Discharged Debt
The following three factors seem to come up all the time when deciding between filing Chapter 7 or 13:
1. Business assets: A Chapter 7 case is either “asset” or “no asset.” In a “no asset” case, the Chapter 7 trustee decides—usually quite quickly—that all of your assets are exempt (protected by exemptions) and so cannot be taken from you to pay creditors.
If you had a recently closed business, there more likely are assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, discuss with your attorney where the money from the proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that result is in your best interest compared to what would happen to those assets in a Chapter 13 case.
2. Taxes: It seems like every person who has recently closed a business and is considering bankruptcy has tax debts. Although some taxes can be discharged in a Chapter 7 case, many cannot. Especially in situations in which a lot of taxes would not be discharged, Chapter 13 is often a better way to deal with them.
3. Other nondischargeable debts: Bankruptcies involving former businesses get more than the usual amount of challenges by creditors. These challenges are usually by creditors trying to avoid the discharge (legal write-off) of its debts based on allegations of fraud or misrepresentation. The business owner may be accused of acting in some fraudulent fashion against a former business partner, his or her business landlord, or some other major creditor. These kinds of disputes can greatly complicate a bankruptcy case, regardless whether occurring under Chapter 7 or 13. But in some situations Chapter 13 could give you certain legal and tactical advantages over Chapter 7.
Posted by Kevin on March 4, 2018 under Bankruptcy Blog |
In the prior blog, we learned that a corporation or LLC (business entity) can file bankruptcy under Chapter 7. Are there any situations where the owner of the business would file bankruptcy when the business fails? The answer is yes under the following circumstances:
– the business is being operated as a sole proprietorship; or
-the owner of the business has provided personal guarantees of the obligations of the business.
If the business entity is a sole proprietorship (for example, John Smith doing business as “The Hot Dog King”), the business and the owner are the same person for legal purposes. All the assets and liabilities of the business are in the name of the owner. If that business fails, the creditors can bring a lawsuit against the owner. Moreover, if the creditor obtains a judgment, that creditor can look to any of the assets of the owner to be made whole. That includes both the business assets and personal assets of the owner. To avoid this outcome and allow for an orderly liquidation of the assets of the sole proprietorship, the owner can file bankruptcy, and obtain a discharge of debt.
If the business is a corporation or LLC, the law considers the business to be an entity separate from its owners. In many cases involving businesses, creditors (especially banks, inventory suppliers, and the like) will require the owner to guarantee business debt. If the business defaults on the obligation, the creditor, which is the beneficiary of the guarantee, may sue the guarantor/owners, obtain a judgment, and attempt to levy on any assets of the owner including assets that have nothing to do with the business. To avoid this outcome, the owner/guarantor can file bankruptcy, and obtain a discharge of debt.
Will the owner of the business, either as a sole proprietor or a guarantor of debt, be able to file a Chapter 7 or will he or she be forced into a Chapter 13 where 3-5 years of payments to creditors are required. While individuals are generally subject to the means test (which we spoke about a few blogs back) , the good news is that you do not have to pass the means test at all unless your “debts are primarily consumer debts.” So if your debts are primarily business debts—more than 50%–you avoid the means test altogether.
Let’s be clear about the difference between these two types of debts. A “consumer debt” is a “debt incurred by an individual primarily for a personal, family, or household purpose.” So, business guarantees are not consumer debts. It can be argued that cash advances on credit cards which are used by the business are not consumer debts. If you had taken out a second mortgage on your home for the clear purpose of financing your business, that second mortgage would likely be considered a business debt. It depends on the purpose for incurring the debt.
Certainly there are times when the line between a business and consumer debt is not clear. Given what may be riding on this—the ability to discharge all or most of your debts in about four month under Chapter 7 vs. paying on them for up to 5 years under Chapter 13—be sure to discuss this thoroughly with your attorney.
Posted by Kevin on March 3, 2018 under Bankruptcy Blog |
Under State law, a business entity, such as a corporation or an LLC, is considered a person and is separate from its shareholders (in the case of corporations) or members (in the case of LLC’s). If a corporation or LLC fails, it will probably have to deal with creditors who may sue the business, obtain judgments and levy on the business assets. This can be a long, drawn out procedure. As an alternative, that failed business entity may file bankruptcy. The entity will be the debtor. If the plan is to shut down the business and walk away (as opposed to a restructuring and continuation of business), then Chapter 7 can be a useful vehicle. Upon the filing, the automatic stay goes into effect as to the business entity. A trustee is appointed who literally changes the locks on the door, deals with the landlord and other creditors, assembles and liquidates the assets, and pays off the creditors.
How does a business chapter differ from a personal Chapter 7? In a personal Chapter 7, the debtor gets a discharge of many debts, and is allowed to keep a certain amount of property which is exempt. The discharge and keeping a baseline of property is part of the concept of giving the debtor a fresh start.
However, there are no exemptions for the business in Chapter 7. The trustee sells everything. I could understand that concept because if you are going out of business, you do not need assets for a fresh start. However, in Chapter 7, the business entity does not get a discharge. I always thought that was strange and looked at the legislative history behind this rule. The legislative history stated that discharges are not given to corporations (there were no LLC’s back then) so that people could not traffic in corporate shells??? My initial thought was, it only costs a few hundred dollars to set up a new corporation with no debt. So, why traffic in corporate shells? More history. It was only about 100 years ago that state legislatures passed business corporation statutes like the one’s we have today. Before that, if you wanted to incorporate, you would have to get your local State representative to sponsor a bill to establish your corporation. The legislature actually voted on it. It was an expensive and time consuming activity. Not surprisingly, there were not that many corporations. So, back in the day (as my kids would say) discharging debt within a corporation through bankruptcy could conceivably lead to a lucrative side deal if you were allowed to sell the debt free entity to a third party.
The bottom line is that business entities can file under Chapter 7. However, business Chapter 7’s tend to be more complicated because assets are involved, and the Trustee is usually more involved than in personal Chapter 7’s. If you are the owner of a failing business, it may be a good idea to consult with an experienced bankruptcy attorney.
Posted by Kevin on February 18, 2018 under Bankruptcy Blog |
If your income is lower than the median income for your household size within your State, there is a “no presumption of abuse” and you can, almost always, file under Chapter 7. If, however, your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the Means Test.
The concept behind the Means Test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so. That means they must file under Chapter 13 where payments are made to creditors over a 3-5 year period.
But putting that concept into law resulted in an amazingly complicated set of rules.
One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national and some vary by state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).
Disposable Income
If after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:
- If the amount left over—the “monthly disposable income”—is no more than $128.33, then you still pass the means test and qualify for Chapter 7.
- If your “monthly disposable income” is between $128.33 and $214.17, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
- If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $214.17, then you do NOT pass the means test, UNLESS you can show “special circumstances”.
THAT’s Complicated!
If you don’t pass the means test you, will likely end up in a 3-to-5-year Chapter 13 case. Not only will that mean you cannot discharge your debts until the end of the 3-5 year period, but you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test.
Posted by Kevin on January 30, 2018 under Bankruptcy Blog |
The Constitution empowered Congress to “pass uniform laws on the subject of bankruptcies,” which then took more than 100 years to do so.
- The United States started its existence without a national bankruptcy law. The Second Continental Congress established the United States with its founding constitution consisting of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777. The Articles of Confederation were not ratified by the original 13 states until 1781. The Articles did not provide for a nationwide bankruptcy system.
- The American Revolutionary War formally ended in 1783 with the signing of the Treaty of Paris. The Articles of Confederation proved inadequate, so in 1787, a constitutional convention was called to draft a new constitution. The U.S. Constitution was ratified by the states in 1789. It did allow for, yet did not create, a national bankruptcy law. It merely empowered Congress to “pass uniform laws on the subject of bankruptcies”.
- Three different times during the 1800s, a federal bankruptcy law was passed in direct reaction to a financial “panic.” But these federal laws were each repealed after the financial crises were over. The first act was passed in 1800 but repealed in 1803. The second was passed in 1841 but repealed in 1847. The third bankruptcy act was passed in 1867 but repealed in 1878.
- During the long periods when there was no nationwide law in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws. But these local laws became more and more cumbersome as commerce became ever more interstate.
- Finally, Congress got it right when it passed the Bankruptcy Act of 1898. The 1898 Act lasted 80 years. This law was inspired by commercial creditors to help in the collection of debts. However, it included the following very important debtor-friendly provisions: most debts became dischargeable, and creditors no longer had to be paid a certain minimum percentage of their debts.
- This Bankruptcy Act of 1898 was amended many times, significantly in 1938 in reaction to the Great Depression. Among other things, the 1938 amendment added the “chapter XIII” wage earners’ plans, the predecessor to today’s Chapter 13s.
- The 1978 Bankruptcy Reform Act, the result of a decade of study and debate, gave us the Bankruptcy Code. It has been amended every few years since then, most significantly in 2005 with BAPCPA, the so–called Bankruptcy Abuse Prevention and Consumer Protection Act.
Posted by Kevin on January 28, 2018 under Bankruptcy Blog |
A constant theme in consumer bankruptcies is that a fundamental purpose of bankruptcy is to give the honest but unfortunate debtor a fresh financial start.
The fresh start is effectuated, in part, by allowing a debtor to get a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.
Exceptions to Getting a Discharge
There are two types of exceptions to the discharge of your debts. The first excepts discharge as to specific debts (while the remainder of the debts are discharged). The second excepts discharge as to all of your debts.
1. Specific Debts Not Discharged
Many of my clients have a general understanding that certain debts may not be dischargeable. They are surprised , however, when they find out how many different debts are or may not be dischargeable. The Rules indicate that the debtor or any creditor may file an action relating to the dischargeablilty of a debt. However, in practical terms, these debts fall into 3 groups based on how the debtor and her attorney may decide to deal with with the issue of dischargeability during the course of the bankruptcy.
- debts such as unpaid child support are never dischargeable and, for the most part, no special action need be taken by either the creditor or debtor;
- debts including income taxes and student loans are dischargeable but only under certain conditions. Since the taxing authority and student loan holder will usually begin collection efforts upon the conclusion of the bankruptcy, the onus usually falls on the debtor to apply to the court for a determination relating to dischargeability; or
- debts incurred through misrepresentation or fraud are deemed dischargeable unless a creditor objects AND successfully proves the misrepresentation to the satisfaction of the court.
2. NO Debts Discharged
The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever in a Chapter 7 case.
The following kinds of dishonesty could result in not being able to discharge your debts in a Chapter 7 case:
- Hiding or destroying assets during the year before filing bankruptcy
- Hiding or destroying assets after the bankruptcy case is filed
- Hiding, destroying, falsifying, or failing to keep records about your financial condition
- Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
- Making a false oath.
Actions to deny discharge of all debts can be brought by a creditor, the trustee assigned to the case, or the United States Trustee’s office. A negative result is devastating to a debtor. At a seminar, I recall a judge referring to this type of denial of a general discharge as a death sentence for a debtor.
Conclusion
Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.
Posted by Kevin on January 21, 2018 under Bankruptcy Blog |
The beginning of a year is a good time to take stock of yourself. People routinely make New Year’s resolutions about diet, exercise, going back to school.
Are your debts getting out of control? Worried about harassing telephone calls from debt collectors? Getting sued? Wages being garnished? Now is the right time to do some financial assessment. Bankruptcy may be the right tool for you to put your financial problems in the rear view mirror.
A New Start with Chapter 7
With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that, you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge under the Bankruptcy Code.. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.
A New Start with Chapter 13
With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.
Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. You finish your Chapter 13 payment plan in 3 to 5 years. Whatever debts you have not paid off get discharged. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts like home mortgages and car loans. Same thing with income taxes and child support arrearages that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.
Don’t kick the can down the road. Take control. We are available for consultation.
Posted by Kevin on November 27, 2017 under Bankruptcy Blog |
In a prior blog, we talked about the credit counseling course that a debtor must take before he or she can file under Chapter 7 or 13. After the petition is filed, the debtor must take the debtor education course. This is sometimes called the personal financial management course.
The course is given by a non profit budget and credit counseling agency approved by the United States Trustee. The course is usually taken online but, depending on the provider, can be done over the phone, or even in person. The purpose of the course is to provide the debtor with insight into his or her current financial situation which led to the bankruptcy, and how to budget income and expenses to avoid financial problems going forward.
The debtor education course requirement was part of the 2005 amendments to the Bankruptcy Code. As I stated in the blog dealing with the credit counseling course, in my opinion, one of unspoken policies for the 2005 amendments to the Bankruptcy Code was to discourage bankruptcy filings by making them more time consuming and expensive. The debtor education course requirement (just as the credit counseling course requirement) is an additional hoop through which a debtor is forced to jump. Hate to sound cynical, but in the 12 years since the 2005 amendments, I have never had a debtor tell me how valuable either course was.
So, what happens if you decide to save a few bucks by not taking the debtor education course. The punishment is draconian. No course taken- no certificate of completion filed with the Clerk of the Bankruptcy Court, no discharge. That means that your debts are not wiped out.
I remind my clients at the meeting of creditors that if they have not already taken the debtor education course, they should do so immediately.
Let’s say you mess up and don’t take the course. Any recourse? You may be able to re-open your case to take the course and file the certificate of completion. However, you will incur additional legal and filing fees. In the meanwhile, because your debts are not discharged, your creditors can take action to collect of their debts. Finally, there is some risk that the judge will not let you reopen the case. Don’t put yourself in that position.
