Posted by on April 20, 2016 under Bankruptcy Blog | 
Very rarely, the filing of a bankruptcy will NOT stop the creditors from chasing the debtor. Here’s how to avoid this happening to you.
The Essential “Automatic Stay”
In just about every bankruptcy case, stopping creditors from pursuing you and your assets is a crucial part of what you get for filing the case—regardless whether it’s a Chapter 7 or Chapter 13 case. This benefit of filing bankruptcy—called the “automatic stay”—generally applies to every case, to every creditor, and to just about to everything that a creditor can do related to collecting a debt.
Exceptions to the automatic stay are there, however, and can put you in a very bad position. About 2 weeks ago, I had a frantic telephone call from a homeowner who stated his house was being sold in three weeks. He was confused because he filed Chapter 13 and then he got notice of sale. He called the lender who refused to cancel the sale. After some questions, I discovered that this Chapter 13 filing was the second such filing in the last three months. The first Chapter 13 was dismissed for failure to file the schedules and plan.
BAPCPA, THE 2005 REVISIONS TO THE BANKRUPTCY CODE, PUT RESTRICTIONS ON THE AUTOMATIC STAY
Before BAPCPA, a very small minority of people filing bankruptcy would file a series of separate cases, one after another, with the intention each time of using the new “automatic stay” of each new case to repeatedly delay a foreclosure or some other collection action. Congress decided that this was an inappropriate use of the bankruptcy laws, and put a stop to it by taking away the benefit of the “automatic stay” as follows.
The Two Rules
The First Rule: The “automatic stay” WOULD NOT go into effect at all when filing a new case if within the past year you had filed two or more other bankruptcy cases, and those earlier cases had been dismissed. If this were to happen, the “automatic stay” COULD potentially still be applied to your case after filing but only by convincing the bankruptcy judge that you meet certain conditions.
The Second Rule: The “automatic stay” WOULD go into effect filing a new case if within the past year you had filed one other bankruptcy case, which was dismissed, BUT the “automatic stay” would expire after 30 days. Its expiration COULD be avoided, but only by convincing the bankruptcy judge that you meet certain conditions.
The conditions referred to above that you’d have to meet for imposing or preserving the “automatic stay” involve justifying why the previous case(s) was (were) dismissed and why the present case is being filed. (The details of these conditions are complicated and beyond what can be covered in this blog.)
Watch Out to Make Sure of No Prior Recent Bankruptcy
Be careful because sometimes people can file a bankruptcy case and have it dismissed without realizing or remembering what happened. For example, if someone files a bankruptcy case without an attorney, and somehow does not complete it, the case would get dismissed. Or is someone does hire an attorney and the case gets filed, because of some miscommunication the case could get dismissed. Either way, months later when this person wants to file bankruptcy he or she could not understand or recall that in fact a case did get filed and dismissed.
So…
Avoid this problem by thinking carefully about whether there is any possibility that a bankruptcy case was filed in your name in the past 365 days. And if it possibly happened, tell your attorney about it right away.
Posted by Kevin on March 31, 2016 under Bankruptcy Blog |
Don’t react to getting lawsuit papers by avoiding them. React by helping yourself. Get some competent legal advice about what this lawsuit really means, whether and how it can hurt you, and what you likely can do about it.
Lawsuits by most creditors aren’t “personal.” They’re just a business decision. The lawsuit papers you have in your hands tell you that the creditor has decided that suing you is a good bet. It thinks that the lawsuit will help get the debt paid. The creditor likely even has in mind specifically how it expects to get paid. It may well be targeting your bank account, your paycheck, your home, or some other income or asset.
The creditor is also making another easy bet—that in fact you won’t do anything about the lawsuit papers after getting them. At least not in time to prevent the lawsuit from turning into a judgment against you. Most people don’t.
So the creditor is banking on you letting them get a “default judgment,” a court decision in favor of the creditor which happens automatically (or at least without a trial) if you do not formally reply to the lawsuit on time.
Once armed with a judgment, the creditor to start grabbing your money and your assets, through orders of the court, sometimes in ways you might not expect.
A Judgment against You is More than Just an Admission that You Owe the Debt
But even if the judgment does not result in giving a creditor a way to get money out of your right away, it has longer-term consequences. For one, judgments can be reported to credit agencies. Affects your FICO score and, therefore, your ability down the line to get credit. In addition, once the deadline to respond passes and a judgment is entered, you’ve give up on some important rights:
a) Your right to raise possible defenses. Creditors and collection agencies can be shockingly cavalier about whether the debts they are pursuing are legally valid. Think about it: since in the vast majority of the time consumers don’t respond to lawsuits and judgments are rubber stamped, there’s not much incentive for the creditors to get their paperwork right. You need to have an attorney review the lawsuit to find out if the statute of limitations on the debt has expired, or if you have any other defenses. After the judgment is entered against you, it is extremely difficult, and a lot more expensive, to raise any such defenses.
b) Your right to raise counterclaims. A counterclaim is your argument that the creditor did something wrong—in the way the debt was created or in how it was collected. Counterclaims say that you have been legally damaged, entitling you to compensation. A default judgment against you either waives your right to bring a counterclaim, or takes away the counterclaim’s leverage when it would do you the most good.
c) Your right to dispute facts. The debt could become more difficult to write off in bankruptcy after a judgment is entered, if certain facts are alleged in the lawsuit (and deemed admitted by your lack of a response). This could put you at a serious disadvantage if you ever need to file bankruptcy.
That is not to say that you cannot, within a set period of time, come into court to set aside the default judgment and then raise those defenses. But, in NJ at least, you must file a motion and appear in court, and a judge makes the call. It is difficult to do and expensive as opposed to filing your answer on time and putting forth your defenses as a matter of right.
If you do get sued, do not bury your head in the sand. Consult and attorney.
Posted by Kevin on March 27, 2016 under Bankruptcy Blog |
The policy behind bankruptcy is to give an honest debtor a fresh start. The fresh start begins with the filing of the bankruptcy petition. By just filing, almost all attempts at collection of a debt are stopped by the automatic stay. The fresh start is completed when the debtor receives a discharge. A discharge means that the debt is cancelled, wiped out.
Not all debts are discharged, however. And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery. For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt. Say, you borrower $500,000 from the bank. You sign a note which is a promise to pay back the $500,000 with interest. That is the debt. And you sign a mortgage which is the collateral for the debt. The mortgage says that if you do not pay back the $500,000, the bank can take your house. The bankruptcy discharge knocks out the note, the debt, but not the mortgage. So, the lender can foreclose on the house and get what it is owed from the house. What if the house is only worth $300,000? Then, that is what the bank gets. The bank cannot come after you for the deficiency because the debt is discharged.
What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.
The Bankruptcy Code, however, does not discharge all debts. Some are dischargeable sometimes. Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship. The burden is on the debtor to prove undue hardship which is not easy in New Jersey. Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge. The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.
Payroll and sales taxes are not dischargeable (called trust fund taxes). Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.
So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.
Posted by on March 26, 2016 under Bankruptcy Blog |
Not responding to a lawsuit by a creditor can harm you in more ways than you think.
Three Different Sets of Reasons
Judgments can harm you in three distinct ways:
1) Give the creditor powerful collection tools against you to collect the debt.
2) Force you into filing bankruptcy when it’s not to your best advantage.
3) Makes it harder sometimes to discharge (write off) the debt later in bankruptcy.
Today’s blog addresses the first one of these. The other two will be covered in my next blogs.
The Temptation to Let a Lawsuit Turn into a Default Judgment
Most lawsuits filed by creditors and collection agencies to collect debts result in judgments against the people being sued. That’s because the main allegations in most of these lawsuits simple argue that the debt at issue is legally owed. And that’s usually not in dispute. So the people being sued understandably figure that there’s no point in responding to allegations that appear to be true.
Practically speaking, most of the time the people being sued are at the end of their financial rope. So they believe that they can’t afford to hire an attorney to find out what their options are, or the consequences of doing nothing.
What ARE the Consequences of Doing Nothing?
You may know that a judgment gives a creditor the right to garnish your wages and bank accounts. You may believe that you can prevent such garnishments from happening to you by keeping your money out of bank accounts and by being paid other than a regular wage or salary (although even those are not practical options for most people). Perhaps, but the “judgment creditor” usually has other rights against you once it gets that judgment.
The laws differ state by state, but generally a judgment becomes a lien against any real estate you own, or will own in the future. Depending on the facts and applicable law, the creditor may then be able to foreclose on that real estate to get its debt paid. Think about not only property under only your own name, but also your rights to property held jointly with a spouse, parent, or through a trust or estate.
An aggressive creditor usually has other tools available. In most states it can get a judge to order you to go to court to answer questions under oath about what you own so that the creditor can find out what it can take from you. The creditor may be able to get a court order sending a sheriff’s deputy to your home or business to seize some of your possessions for payment of the debt. If someone owes you any money (or anything else), that person can be ordered to pay that debt to the creditor instead of to you.
Similarly, if you own a business, the creditor can force your customers to pay it instead of you. This can be devastating both to your cash flow and to your business reputation. Your business could even be subjected to a “till tap”: a sheriff’s deputy arriving at your place of business to take money directly out of the cash register to pay towards the judgment debt.
Will These Happen to You?
We don’t want to give the impression that these kinds of aggressive collection procedures are used in most cases, or will necessarily be used in yours. Some of these are unusual, taking a fair amount of extra work and fees for the creditor or its attorney, and so likely won’t happen in most simple collection cases. The point is that once creditors have a judgment against you, they have many powerful options against you. We meet all the time with distressed new clients who have been shocked at how creditors with judgments against them have been able to financially hurt them.
Why See an Attorney If You Have No Defense to the Debt?
Flying blind is scary and dangerous. Getting sued and not knowing the potential consequences of just letting the creditor win is like flying blind. Besides potentially finding out about possible defenses to the lawsuit, consulting an attorney gives you the opportunity to consider your broader financial situation, and your options for addressing it. A lawsuit by a creditor is usually a symptom of a broader problem. By consulting with a knowledgeable attorney, you may learn about potential solutions to both the lawsuit AND the rest of your financial problems.
Please visit our website again for the next two blogs about the other very important reasons why you should not allow a creditor to take a default judgment against you.
Posted by on August 15, 2015 under Bankruptcy Blog |
If you had struggled to keep a business open, but have decided to throw in the towel, there’s a good chance you owe taxes. Here’s how to deal with them.
The Basic Choice
Let’s assume that you are seriously considering filing bankruptcy, but want to know your options.
You have two choices within bankruptcy for addressing tax debts after closing down a small business:
1. File a Chapter 7 case to discharge (legally write-off) all the debt that you can, which may include some of your tax debt, and then deal directly with the IRS and any other tax authorities to either pay the rest of the taxes in monthly installment payments or to negotiate a settlement (called an Offer in Compromise in the case of the IRS).
2. File a Chapter 13 case to deal with all your debts, which again may include the discharge of some of your tax debt, while you pay the rest of the taxes through a court-approved Chapter 13 plan, and being protected throughout the process from collection actions by the IRS and any other tax authorities.
Putting aside the many factors distinct from taxes, choosing between Chapter 7 or 13 comes down to this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case be small enough so that you could reliably make reasonable payments to the Internal Revenue Service (or other tax authority) which would satisfy that obligation within a sensible time period?
Answering that Question
The idea is that Chapter 7 is likely the way to go if you don’t need the long-term protection that comes with Chapter 13. In a Chapter 7 case, once that case is completed—usually only about three to four months after it is filed—the IRS/state can resume collection activity on the taxes that were not discharged in bankruptcy. You clearly want to avoid that. So a Chapter 7 makes sense ONLY IF before any collection activity begins you have arranged with the IRS/state to make payments, and 1) those payments are reasonable in amount, 2) your circumstances are stable enough so that you are confident that you will be able to pay them consistently, and 3) the length of time you would be making payments does not stretch out so long that the interest and penalties get too high.
Your attorney will be able to tell you—usually with high reliability—which tax debts will and will not be discharged in a Chapter 7 case, and thus how much in taxes you still owe. Then the next step is determining what the IRS/state would require you to pay in monthly payments, or possibly would accept in settlement. Your bankruptcy attorney may be able to give you guidance about this, or may need to refer you to a tax specialist (usually an accountant). Once you know the likely monthly installment payment amount—assuming you go that route—then you need to seriously consider whether that would be an amount you could reliably, reasonably pay, without incurring too much in interest and penalties before you paid it off.
If so, Chapter 7 likely is more appropriate. If not, then Chapter 13 is likely better because it gives you much more protection.
Posted by on August 11, 2015 under Bankruptcy Blog |
The IRS is just another creditor that you can get immediate protection from by filing bankruptcy. With some exceptions.
The “Automatic Stay”
The filing of a bankruptcy case—either Chapter 7 or 13—triggers one of the most powerful tools of bankruptcy—the “automatic stay.” That’s the aggressively protective law that goes into effect 1) automatically the instant your bankruptcy case is filed at court 2) to stay—which means stop—all collection activity against you and against any of your assets.
The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Here are some of them (focusing on those readily applicable to the IRS):
- start or continue a lawsuit or administrative proceeding to recover a debt you owe
- take possession or exercise control over property you own as of the time your bankruptcy is filed
- create or enforce a lien against such property
- collect by any means any debt that existed before the bankruptcy filing
Applied to the IRS
The IRS and similar state agencies are certainly not treated like your conventional creditors when it comes to the discharge (legal write-off) of your debts. But in most respects they ARE treated the same for purposes of the “automatic stay.”
The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (11 U.S.C. Section 362 (a).) Is the IRS an “entity”? The Code explicitly defines that term to include “governmental unit.” (Section 101(15).) So the IRS and all tax collecting “governmental units” are governed by the “automatic stay.”
What If the IRS Still Tries to Collect
Just like any other creditor, the IRS can get slapped pretty hard if it violates the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions. If you are
“injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS. (Section 362(k).) Indeed on occasion the IRS HAS been slapped hard. It now tends to follow the law and respect the “automatic stay” quite faithfully.
Special Exceptions to the “Automatic Stay” for “Governmental Units”
The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (Section 362(b)(9).) But these are sensible exceptions that apply more to the determination of amount of a tax debt than to its actual collection. These tax agencies can demand that you file your tax returns, can make an assessment of the tax and tell you how much you owe, and can do an audit to figure out the amount you owe. They cannot create a tax lien or take any other collection action.
Posted by on July 21, 2015 under Bankruptcy Blog |
If you’re filing a Chapter 13 case, what choices do you have about your income tax refund?
Start with What Happens with Refunds in Chapter 7
To understand how tax refunds are treated under Chapter 13, it helps to compare how they are treated under Chapter 7. For more details about that, see my last blog. But to summarize, when you file a Chapter 7 bankruptcy usually you can keep your tax refund either by 1) smart timing of the bankruptcy filing, or 2) by the use of “exemptions.” If you wait to file your case until after you have received and appropriately spent the refund (carefully following the advice of your attorney on where to spend it), then this refund is not an “asset of your bankruptcy estate”—the bankruptcy trustee and your creditors have no claim on it. On the other hand, if the refund IS an “asset of your bankruptcy estate” but it is covered by an “exemption,” then the refund is protected and you get to keep it.
The Good News about Tax Refunds under Chapter 13
- As with Chapter 7, if you are flexible about when to file your case, wait until you have received and spent the refund appropriately.
- Better than Chapter 7, if you have to file your Chapter 13 case when your tax refund is still pending, you may be able to get permission to spend that refund—or part of it—for some urgent and necessary expense, instead of having it just go to pay creditors.
- Also better than Chapter 7, to the extent that you are required to pay all or part of the refund to the trustee, you would likely have some discretion about where that money would get paid, by including that in the terms of your Chapter 13 plan.
But This Comes with Some Not So Good News
- Chapter 7 focuses only on assets you own or have a right to when the case is filed. So it involves only the tax refunds that are pending at that point in time. Chapter 13 in contrast involves your income throughout the three to five years that your case is active. Since future tax refunds are considered part of your ongoing income, they need to be accounted for, and generally must be paid to the trustee to pay to your creditors.
Paying the Trustee Future Tax Refunds Is Usually Not So Bad
- Usually you can minimize the issue by reducing the payroll tax withholdings made by your employer, thereby reducing that tax year’s refund. As a result you are giving yourself more money each month for living expenses or for making your Chapter 13 plan payments.
- If you still do receive a relatively large refund during your case, and you have some out-of-the-ordinary urgent need for all or part of that money, you may be able to get trustee and/or court permission to use it for that purpose.
- Even to the extent that you still have refunds going to the Chapter 13 trustee during the years of your case, that money could well be doing some serious good work, such as:
- In many situations that additional money beyond your regular monthly plan payments allows you to complete your case faster, giving you an earlier fresh start.
- Important creditors would likely be paid more quickly—such as a child support arrearage or the payoff of a vehicle.
- The extra money from the refunds may be critical in allowing you to pay off the plan within the mandatory maximum 5-years, so that you can discharge all your remaining debts and have a successful Chapter 13 case.
Conclusion
As with Chapter 7, you can usually time the filing of your Chapter 13 case so that you can keep your current-year income tax refund(s). But if you can’t wait to file, then under Chapter 13 you tend to have more control over what happens with the pending tax refund(s). You do have the disadvantage of losing some control over the next few years of tax refunds, but that is less of a practical problem than it may seem for the reasons just outlined.
Posted by on June 23, 2015 under Bankruptcy Blog |
If you’re filing a “straight bankruptcy” case, how do you keep your income tax refund?
Keeping tax refunds is all about timing. You can generally keep your refund but absolutely have to play it right, following rules that at first may not make sense. It is all too easy to mess this up, so you truly should have your attorney guide you through it, applying your unique circumstances to your local laws and practices. But here are the general principles at play.
Let’s start with some background to make sense of this:
- From the bankruptcy system’s perspective, a Chapter 7 case focuses on assets—determining whether you get to keep everything you own or not. That’s why it’s called the “liquidation” chapter. Most of the time you do get to keep everything, but sometimes some of it gets “liquated”—taken from you and turned by your bankruptcy trustee into cash, which then gets paid to your creditors.
- So where does your tax refund fit into this—is it is an asset that your trustee can take from you? That mostly depends on your timing.
- Everything you own or have a right to at the moment your Chapter 7 bankruptcy case is filed becomes your “bankruptcy estate.”
- That “estate” includes both your tangible assets and also intangible ones. One kind of intangible asset is a debt owed to you. A tax refund can be such an intangible asset of your “bankruptcy estate.”
The timing of the filing of your Chapter 7 case determines whether a tax refund is part of your “bankruptcy estate” and therefore could potentially be taken from you:
- An income tax refund is considered your asset as of the time of the last payroll withholding of the year being considered (so for this calendar (2015), the last withholding would be from your last paycheck in December and your employer would forward that money to the taxing authority in the beginning of January, 2016). That’s because as of that time, the full amount of that refund has accrued. Even though until you prepare your tax returns nobody knows the amount of your refund—or even whether you will be receiving one at all—for bankruptcy purposes, the anticipated tax refund is legally all yours as of the very beginning of the next year. And what’s yours is part of your “bankruptcy estate.”
- So IF you file after the beginning of the year but before receiving and appropriately spending the refund, that refund is part of your “bankruptcy estate” and is at least at risk of being taken from you. Again, this is true even if you have no idea how much that refund will be, or even whether you are entitled to one.
- BUT, if you DO receive and appropriately spend the refund before your Chapter 7 case is filed, then the refund is gone and is no longer your asset, and so is no longer part of your “bankruptcy estate.” Your trustee has no claim to it.
Even if your tax refund IS part of your “bankruptcy estate,” it will not be taken from you if it is exempt:
- Although theoretically it’s safest to file your Chapter 7 case when your tax refund is not part of your “estate”—such as after you receive and appropriately spend it beforehand, sometimes you don’t have that much flexibility about when you file your bankruptcy. Then especially it’s critical to get good legal advice about whether that refund will be exempt based on the local law applicable to the case.
- Usually, you get to keep most or all of your “estate” because it’s “exempt”—protected. In the same way, tax refunds are often exempt, depending on the amount of the refund and the exemption that’s applicable to it.
- Some states have specific exemptions applicable to certain parts of the tax refund, or laws that exclude them from the bankruptcy estate altogether, particularly for the Child Tax Credit or the Earned Income Tax Credit.
Even if a tax refund, or some portion of it, is not exempt, sometimes the Chapter 7 trustee may still NOT want it:
- The trustee may decide that the amount the “estate” would get—the refund by itself or in conjunction with any other non-exempt asset(s)—is not enough in value to justify creating an “asset case.” The amount of refund to be collected may be too small to justify the administrative cost involved to collect and distribute it. You might hear the trustee say that the amount of the refund is “insufficient for a meaningful distribution to the creditors.”
- What that “insufficient” amount is differs from one court to another, and often even from one trustee to another, so this is another specific area where you need the guidance of an experienced attorney.
- Caution: if the trustee is already collecting any other assets as part of the “estate,” then most likely he or she will want every dollar of your tax refunds that are not exempt.
Posted by on June 11, 2015 under Bankruptcy Blog |
Did You Know…
- The first income tax was enacted during the Civil War, but it expired a few years after the war ended.
- The first peacetime income tax was passed in 1894, an effort of the Populists to get the wealthy to pay a greater share of the cost of the national government. It was a two percent tax on incomes over $4,000 (worth about $108,000 in today’s dollars), which at the time affected only about the top two percent of wage earners.
- The next year the U.S. Supreme Court overturned this law as unconstitutional, in a 5-4 decision. Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 161 (1895).
- A constitutional amendment to allow an income tax was proposed by the Republican President William Howard Taft, and the resolution for that amendment was passed by Congress with the Republicans in control of both the Senate and the House of Representatives.
- The entire Sixteenth Amendment states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”
- After the required 3/4ths of state legislatures (36 of the 48 then-existing states) ratified it, on February 25, 1913 the Sixteenth Amendment was proclaimed ratified and became part of the Constitution.
So February 25, 2013 was the 100 year anniversary of the income tax becoming constitutional. Funny, I don’t remember any anniversary celebrations!
The MOST Interesting Facts
As the blogs in this series on taxes have been describing, bankruptcy can help you with income tax debts in a variety of ways. If it’s true that in life the facts that are most interesting to you are those that are going to help your pocketbook, then check out the following facts:
- Some income taxes CAN be forever discharged (legally written off).
- Taxes can be discharged under either Chapter 7 or Chapter 13, depending on which is right for you based on your other circumstances.
- The protection from creditors you receive by filing bankruptcy—the “automatic stay”—protects you from the IRS (and other tax creditors) like any other creditor.
- In a Chapter 13 payment plan, that protection can last for 3 to 5 years, giving you that much time to pay taxes that can’t be discharged.
- Even if you owe a tax that can’t be discharged, a Chapter 7 bankruptcy can put you in a much better position afterwards either to enter into a payment plan or negotiate a settlement.
- Chapter 13 usually stops accruing interest and penalties on tax debts that can’t be discharged, reducing the overall amount you have to pay.
- If you owe a number of years of income taxes, Chapter 13 is often an excellent tool because all your taxes—as well as all your other debts—are handled in one tidy package.
Taxes and bankruptcy DO mix, often greatly in your favor.
Posted by on May 30, 2015 under Bankruptcy Blog |
If you can’t discharge your income tax debt through Chapter 7, or make workable payment arrangements on the remaining tax debt, then Chapter 13 can be a good solution.
The Previous Chapter 7 Options
A consistent theme through these past blogs has been that in many situations you do not need to incur the extra expense and time of going through a three-to-five-year Chapter 13 case when other solutions will work. But Chapter 13 IS often an excellent mechanism for resolving all your income tax debts (and usually all your other debts, too).
Chapter 13 Can Be the Easiest Way to Address Your Income Tax Debts
A Chapter 13 payment plan is often a significantly easier way to deal with income tax debts than the other alternatives because:
1. The payment amount going to the taxes are often more reasonable than the IRS/state would require. That’s because they are based on what you can actually afford, by allowing you more reasonable amounts for your expenses.
2. Your Chapter 13 case incorporates ALL your debts in one package, so that you are not forced to satisfy the IRS/state to the exclusion of other important creditors (such as your mortgage, vehicle payments, and child/spousal support). The taxes may have to wait their turn to be paid after debts that are a higher priority for you, instead of just getting paid first.
3. Putting all your debts into one Chapter 13 package also includes all categories of your income taxes—particularly those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state for the taxes that were not discharged.
4. The payments going to the IRS/state can be adjusted during the course of the Chapter 13 if your circumstances change, usually without much room for their objection.
Chapter 13 Can Be a Cheaper Way to Pay Non-Discharged Taxes
It can be cheaper because:
1. In contrast to the other scenarios, under Chapter 13 usually no more interest and penalties can be added after the case is filed.
2. Often you don’t have to pay even the previously accrued penalties.
3. If you have a tax lien attached to any of your tax debts, the lien can sometimes be paid off more cheaply by paying the secured value of the lien instead of the full tax.
If your tax debt is high, and you are paying into your plan for the full five years, these savings can amount to many thousands of dollars.
Chapter 13 Is a Safer Way to Pay Non-Discharged Taxes
It’s safer because:
1. Instead of being at the mercy of the IRS/state if you are not able to make a payment, under Chapter 13 your “automatic stay” protection from all your creditors—including tax creditors—persists throughout your case. So you are not a hair-trigger away from being hit with tax liens, or levies on your wage and bank accounts.
2. You CAN lose this protection, but if you and your attorney deal with your situation proactively you can usually preserve it.
3. This protection is particularly important when your circumstances change—instead of being at the mercy of the IRS/state, your attorney can make adjustments to your Chapter 13 plan. Or if necessary, even more aggressive or creative steps may be appropriate, such as changing to a new bankruptcy case. The point is that you usually have much more control over the situation.
Posted by on May 24, 2015 under Bankruptcy Blog |
Give gladly to your Chapter 7 trustee assets that you don’t need, if most of the proceeds from sale of those assets are going to pay your taxes.
We are in a midst of a series of blogs about bankruptcy and income taxes. Today we describe a procedure that doesn’t happen very often, but in the right circumstances can work very nicely.
Turning Two “Bad” Events into Your Favor
Most of the time when you file a Chapter 7 “straight bankruptcy,” one of your main goals is to keep everything that you own, and not surrender anything to the Chapter 7 trustee. To that end, your attorney will usually protect everything you own with appropriate property “exemptions.”
If instead something you own can’t be protected, and so must be surrendered to the Chapter 7 trustee, that’s often considered a “bad” thing because you’re losing something.
And that leads to a second “bad” thing—the trustee selling that “non-exempt” property and using the proceeds to pay your creditors. That usually does you no good because those creditors which receive payment from the trustee usually are ones that are being written off (“discharged”) in your Chapter 7 case, so you’d have no legal obligation to pay anyway.
But it may well be worth giving up something you own—particularly if it is something not valuable to you in your present circumstances—if doing so would have the consequence of paying some or all of your income tax debt that isn’t being written off in your Chapter 7 case.
Circumstances in which the Trustee would Pay Your Income Taxes
Consider the combination of the following two circumstances:
1) You own something not protected by the applicable property “exemptions,” which you either don’t need or is worth giving up considering the other alternatives.
2) The proceeds from the trustee’s sale of your “non-exempt” asset are mostly going to be paid towards taxes which otherwise you would have to pay out of your own pocket.
Let’s look at these two a little more closely.
“Non-Exempt” Assets You Don’t Need or Are Worth Giving Up
Although most people filing bankruptcy do NOT own any “non-exempt”—unprotected—assets, there are many scenarios in which they do. In some of those scenarios, those assets are genuinely not needed or wanted, so giving them to the trustee is easy. For example, a person who used to run a now-closed business, and still owns some of its assets, may have absolutely no use for those business assets. Or a person may own a boat, or an off-road vehicle, or some other recreational vehicle, but because of health reasons can no longer use them.
More commonly, a person may own a “non-exempt” asset which he or she would prefer to keep, but surrendering it to the trustee is much better than the alternative. That alternative is often filing Chapter 13—the three-to-five year payment plan. In the above example of a boat owned by somebody who can no longer use it, he or she may have a son-in-law who would love to use that boat. But that would probably not be worth the huge extra time and likely expense of going through a Chapter 13 case.
Allowing Your Trustee to Pay Your Non-Discharged Income Taxes
Letting go of your unnecessary or non-vital assets makes sense if most of the proceeds of the trustee’s sale of those assets would go to pay your non-dischargeable income taxes. Under what circumstances would that happen?
The Chapter 7 trustee is required by law to pay out the proceeds of sale of the “non-exempt” assets to the creditors in a very specific order. If you don’t owe any debts which have a higher “priority” than your income taxes, then the taxes will be paid in full, or as much money as is available, ahead of other creditors lower in order on the list.
The kinds of debts which are AHEAD of income taxes on this priority list include:
- Child and spousal support arrearage
- Wages, salaries, commissions, and employee benefits earned by your employees (if any) during the 180 days before filing or before the end of the business, up to $10,000
- Contributions to employee benefit plans, with certain limitations
If you know that you do not owe any of these higher “priority” debts, then the trustee will pay your taxes (after paying the trustee’s own fees), to the extent funds are available, assuming the tax creditor files a “proof of claim” on time specifying the tax debt.
As you can imagine, each step of this process must be carefully analyzed by your attorney to see if it is feasible, and if so then it must be planned and implemented by your attorney. Again, it will only work in very specific circumstances. But when the stars are aligned appropriately, this can be a great way to get your taxes paid.
Posted by Kevin on May 12, 2015 under Bankruptcy Blog |
Just when you think, as a debtor’s attorney, you have Chapter 7 and Chapter 7 trustees figured out, the system and creative trustees throw you a curve ball.
A majority of my middle class to upper middle class debtors file because at least one spouse lost a high paying job. Unfortunately, just because you lost your job does not excuse you from paying your financial obligations. One of those obligations, at least in the mind of most husband and wife debtors, is the college tuition that they paid on behalf of their children. When I ask my clients to put together a budget, many still list the college tuition payment that they could afford a year or two ago but not now. Of course, that leaves nothing for creditors, but, as my clients protest, they have an obligation to their children.
I have had many a discussion with parents who think they belong in Chapter 7 because they are budgeting $1000 or more per month for tuition, when the reality is that the trustee will never allow such a payment, and will probably force that debtor into a Chapter 13. What the debtor /parent cannot understand is that in the eyes of the bankruptcy trustee, the obligation to pay college tuition belongs to the son or daughter and not the parent. While the parent looks at their child as a child, the trustee looks at them as a full grown adult because they are 18- capable of paying their own way.
Well, for those parents/debtors, some trustees around the country are adding insult to injury. Not only are they prohibiting college tuition as an expense on the means test or Schedule J, they are threatening colleges and universities with actions to claw back tuition paid up to four years before the filing on the grounds that it is a fraudulent conveyance. Now, we usually think of a fraudulent conveyance in terms of the debtor tries to screw his creditors by conveying his second home to his brother prior to filing.
As I stated above, many parents believe that it is their obligation to pay their children’s tuition. But, trustees have been pointing out that it is the student, and not the parents, who gets the benefit of college. The quid pro quo for that benefit is payment of tuition. Therefore, tuition is the obligation of the student and not the parent. By paying the child’s tuition, the argument goes, it is just the same as deeding your home to a relative- your creditors do not get the benefit of that payment, and you, the debtor, are paying the obligation owed by a third party.
So, trustees are going after the colleges who, in more cases than not, are making deals and paying back some or all of the tuition to the trustee. The colleges, in turn, are trying to squeeze the student to recoup the money. Part of the squeeze on the student is to withhold diplomas or transcripts. Of course, if the student is out of school for a few years, that type of leverage cannot work.
We are talking tuition here and not student loans. Parents can be on the hook for Plus loans. Most student loans are not dischargeable in bankruptcy.
The Wall Street Journal had a big article on this topic last week. I have seen other articles on this issue over the last 6 months. So do not be surprised if this issue comes up more and more in consumer bankruptcies.
Posted by on April 30, 2015 under Bankruptcy Blog |
The last blog was about using Chapter 7 to discharge all or most of your debts other than taxes, so that afterwards you could afford to pay off the taxes through monthly payments to the IRS and/or the state. Or if you needed more payment flexibility, the usual alternative would be a Chapter 13 payment plan.
But there’s another possibility.
What if Neither Chapter 7 + Tax Payment Plan, Nor a Chapter 13 Will Work?
You may need a bankruptcy no matter what, to deal with debts other than taxes. But a Chapter 7 case may leave you owing too much income tax to be able to afford the minimum monthly payments that the IRS or the state would require. And a Chapter 13, as helpful as it can be for dealing with tough tax problems, may not be helpful enough. Chapter 13 requires payment in full of all “priority” debts—which includes non-dischargeable taxes—during the life of the case. That means a maximum of 5 years. You may just not have enough money available to pay into a Chapter 13 plan to do that.
So your best option may be to file a bankruptcy and then try to settle with the IRS and/or the state for less than you owe them.
Chapter 7 + Tax Settlement
A tax settlement would often be done in conjunction with and after a Chapter 7 bankruptcy filing, for three reasons:
1. If you owe a bunch of taxes, you are extremely likely to also owe lots of other debts, which need to be dealt with through bankruptcy.
2. Some of your older tax debts may be dischargeable. Trimming that debt away with a Chapter 7 bankruptcy would reduce the amount of remaining tax debt to be settled.
3. With an IRS Offer in Compromise or similar state procedure, you would need to show that you are pretty much focusing all your available financial resources on the settlement. It usually helps to get rid of your other debts to be able to do that.
Clean Your Slate of Other Debts So You Can Settle Your Taxes
You may owe too much in nondischargeable taxes to be able to make either the minimum permitted tax installment payments after the Chapter 7 case, or the necessary Chapter 13 plan payments. Then you may not have much choice except to attempt a tax settlement after completing a Chapter 7 case. (You generally cannot attempt an Offer in Compromise while in a Chapter 13 case.)
But even if you don’t seem to have much choice, before filing your Chapter 7 case you should still have a good idea what the IRS/state might accept once you make the offer a few months later. The basic settlement standard with the IRS is, as stated on its website, that “the amount offered represents the most we can expect to collect within a reasonable period of time.” Determining what that means in your situation, and so whether a particular settlement offer will fly, are delicate judgment calls, which is why you need to work with an experienced professional. Talk with your bankruptcy attorney about whether he or she regularly negotiates IRS Offers in Compromise and/or tax settlements with the state. If not, get a referral to a tax attorney or accountant who does.
Posted by Kevin on April 10, 2015 under Bankruptcy Blog |
The appropriately criticized Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) tried to prevent perceived abuses of the bankruptcy laws in a number of ways. One of them you’ve probably not heard about and can give you a bad surprise if you stumble into it.
The Bad Surprise
Beside the legal write-off (“discharge”) of your debts, the other big benefit you usually get from filing bankruptcy is protection from your creditors. That legal protection is called the “automatic stay,” and prohibits creditors from pursuing you or your money or your other assets. It goes into effect the moment your bankruptcy case is filed, and lasts throughout the life of your case—the few months of a Chapter 7 case and the few years of a Chapter 13 case (unless a creditor files a motion and gets special court permission, the so-called creditor’s “relief from stay”).
But imagine filing a bankruptcy and getting no protection at all from your creditors. Being in a bankruptcy case with the creditors still being able to call you, sue you, garnish your wages. Imagine this happening when you totally don’t expect it. That WOULD indeed be a bad surprise.
Having this happen is very rare, but considering the extreme consequences you want to make absolutely sure that it does not happen to you.
The Abuse Being Addressed
The problem arises in certain circumstances if you filed a prior bankruptcy case which got dismissed—closed without being completed. Before Congress put this law into effect, a very, very small minority of people filing bankruptcy–usually people without attorneys representing them—would file a series of bankruptcies, one after another, for the purpose of continuously delaying a foreclosure or some other action by a creditor. After their first bankruptcy case would get dismissed, they would file another one just in time to again impose the “automatic stay” and stop the foreclosure or other creditor action, and then repeat the cycle. You can see how this could be seen as an abuse of bankruptcy in general and abuse of the “automatic stay” protection in particular.
The Rules
So this is the law that Congress passed to counter this. It has two main parts.
First, if you are filing a bankruptcy case now, AND you filed ONE previous bankruptcy case during the one year before filing this new one, AND that previous case was dismissed, the “automatic stay” goes into effect when you case is filed BUT AUTOMATICALLY EXPIRES after 30 days UNLESS before that time we convince your bankruptcy judge that you meet certain conditions so that the “automatic stay” continues. See Section 362(c)(3) of the Bankruptcy Code.
Second, if you are filing a bankruptcy case now, AND you filed TWO OR MORE previous bankruptcy cases during the one year before filing this new one, AND those two cases were dismissed, then the “automatic stay” does NOT GO INTO EFFECT AT ALL with the filing of the new case. The “automatic stay” CAN go into effect AFTER the case is filed if within 30 days of the date of filing we convince your bankruptcy judge that you meet certain conditions so that the “automatic stay” gets imposed. See Section 362(c)(4).
The details of the conditions that must be met to continue or impose the “automatic stay” in these two circumstances are beyond the scope of this blog, but they require you to establish your “good faith” about why the previous case(s) was (were) dismissed and why you filed the new one.
Some Important Practicalities
If you have never filed a bankruptcy case, or have definitely not done so in the last year, then you don’t need to worry about any of this. And even if you have, these rules don’t apply to you unless your prior case(s) was (were) dismissed. Usually you would know if you’ve had a case dismissed.
Nevertheless, keep in mind that people get unexpectedly tripped up on these rules more often than you might think. It tends to happen one of three ways:
1) A person files a bankruptcy without an attorney, gets overwhelmed by the process and doesn’t follow through, so the case gets dismissed. The person may think he or she didn’t “really” file a bankruptcy case, or may simply forget about it under the stress of the time months later when filing another case.
2) A person sees an attorney, signs some papers, and the case gets filed at court, maybe without the person fully realizing it, and then gets dismissed because he or she doesn’t follow through and doesn’t stay in touch with the attorney. Months later, while seeing another attorney or trying to file a new case without one, the person isn’t aware that he or she had filed that previous case, and/or has forgotten all about it.
3) A person’s Chapter 13 case is dismissed because changed circumstances make it impossible to make the court-approved plan payments. Months later, when creditors are causing problems again he or she files a Chapter 7 without an attorney. Not realizing that the previous Chapter 13 case ended by being dismissed, in the new case the “automatic stay” expires after 30 days, letting all his or her creditors resume all collection activity.
To Be Safe…
Prevent any of this happening to you by 1) carefully considering whether you might have somehow filed a bankruptcy case within the last year, and 2) if there’s ANY chance that you did, telling your attorney in your new case right away. If you did file a case that got dismissed, there is a good chance that your attorney will be able to persuade the bankruptcy court to impose or retain the automatic stay. But that will only happen if your attorney knows about the issue in advance and determines whether your case will meet the necessary conditions.
Posted by Kevin on March 24, 2015 under Bankruptcy Blog |
You can file a new bankruptcy immediately after finishing another one, but why would you?
The last blog was about how long you have to wait to file a new bankruptcy case if you already filed one in the past. Those timing rules talk about both the earlier case and the subsequent case resulting in the discharge of your debts. As the last blog emphasized, if the earlier case did not result in a discharge, then you can file a second case at any time. The waiting periods do not apply.
Similarly, even after successfully completing one bankruptcy case and getting a discharge of your debts, you could file a second one at any time. You just would not be getting another discharge of your debts.
At first glance, this situation doesn’t seem to make practical sense.
Why Would You Ever Even Need a New Bankruptcy?
There are two reasons for a quick second bankruptcy.
First: you could unexpectedly incur one or more significant new debts during your bankruptcy case. Those debts could not be incorporated into that initial bankruptcy case because only debts in existence at the time of its filing can be. And you may need protection from those new debts. Since Chapter 7 cases usually last only about 3 to 4 months while Chapter 13 cases last 3 to 5 years, these interim debts are more likely to arise during the course of a Chapter 13 case. These would usually not be conventional consumer debts, because you would not likely be getting consumer credit while you’re in the middle of a bankruptcy case. Instead the new debts would tend to be unusual kinds like income taxes, perhaps student loans, obligations from a new divorce, and/or a claim against you from a vehicle accident or some other kind of liability.
Second reason for the second bankruptcy: the existence of debts that the earlier case did not write off. A Chapter 7 case could well leave still owing some income tax debt, child support arrearage, and/or student loans, for example. In some circumstances you may need the extended protection of a Chapter 13 case while you either pay or strategically avoid paying those debts, depending on which kind they are.
But What Good Is the Second Bankruptcy Without a Discharge?
Although a discharge of debts would seem to be the primary benefit of bankruptcy, it is by no means the only benefit. Instead, the “automatic stay,” protection from the collection efforts of your creditors, is sometimes benefit enough.
That’s primarily true under Chapter 13. First, the protection often extends for years instead of just the few months that it does under Chapter 7. And second, Chapter 13 provides a mechanism—the court-approved payment plan—to satisfy many of these kinds of new or non-discharged debts while under that protection.
For example, imagine that you owe a large income tax debt, plus some back child support, which were either incurred after the filing of your original bankruptcy case or were not discharged in that case. A new Chapter 13 case would essentially give you up to five years to pay those debts, usually without paying any further interest or penalties on the taxes, all the while being protected from the otherwise very aggressive collection methods of those two kinds of creditors.
But Why Not Just File a Chapter 13 Case and Avoid Filing Two Cases?
That’s a very sensible question, and usually that’s exactly what is done. Chapter 13 is quite flexible, and so a single Chapter 13 filing can usually both take care of all of your debts—the conventional one and the unusual ones like taxes and support—in one package.
But there are a variety of situations in which a single filing would not work. Sometimes you have more debt than is allowed for Chapter 13. So you first need to discharge some of the debt through Chapter 7, thereby enabling you to use Chapter 13 to take care of the taxes and such.
Or you may be contemplating or be in a divorce in which you and your spouse agree to file a Chapter 7 case together to clean up many of your debts, then leaving one of you to file the follow-up Chapter 13 case for the taxes, to cure the arrearage on a home, and any other loose ends.
Or as mentioned above, unexpected new debt could hit you during your first case, making you consider a follow-up case to buy you some continued protection.
This discussion should make very obvious that this kind of strategic planning and execution of not just one bankruptcy but two coordinated ones requires the services of a highly qualified and experienced bankruptcy attorney.
Posted by Kevin on March 11, 2015 under Bankruptcy Blog |
You can file a new case 8 years after filing before (so, now or very soon), or possibly only 6 or 4 or 2 years after, or maybe even with no delay.
The Bankruptcy Code underwent major amendments effective October 17, 2005. Nearly two and a half million bankruptcies were filed in the year before that date, by far the most in any year-long period in history.
Today, we focus on the rules relating to the length of time required from a previous bankruptcy filing until a new one.
More precisely the timing rule refers to the amount of time from the filing of a previous bankruptcy case which resulted in the discharge of debts until the filing of another case also resulting in the discharge of debts.
“Discharge” is the legal write-off of debts provided by the bankruptcy law. It’s the main reason—but often not the only reason—for filing bankruptcy.
If you filed a previous personal bankruptcy—whether it was a Chapter 7 “straight” bankruptcy or a Chapter 13 “adjustment of debts” payment plan—and your understanding is that you finished it successfully, almost certainly you received a discharge of your debts. Near the end of your case you should have received a copy of an order from the bankruptcy court granting you a discharge. If you do have your old bankruptcy documents, bring them to your present attorney. If you don’t, he or she should still be able to determine whether or not you received a discharge.
Finding this out is important because, in the unlikely event that you did not get a discharge, then you do not have to wait any period of time before you can file a new bankruptcy case. (The rare exception is if the bankruptcy court entered an order not allowing you to file a bankruptcy for a certain length of time, which only happens after serious abuse of the bankruptcy laws.)
The Timing Rules
Here is how long you must wait in between bankruptcy filings to receive a discharge of debts in a new bankruptcy case.
IF you want to now file a Chapter 7 case:
–and received a discharge in a previous Chapter 7 or Chapter 11 case, you must wait 8 years from the filing date of the previous case to the filing date of the new case;
–and received a discharge in a previous Chapter 13 case, you must wait 6 years from the filing date of the previous case to the filing date of the new case, BUT you don’t have to wait at all if in that Chapter 13 case you paid 100% of the allowed debts, or paid at least 70% and met some other conditions.
IF you want to now file a Chapter 13 case:
–and received a discharge in a previous Chapter 7 or Chapter 11 or Chapter 12 case, you must wait 4 years from the filing date of the previous case to the filing date of the new case;
–and received a discharge in a previous Chapter 13 case, you must wait 2 years from the filing date of the previous case to the filing date of the new case.
IF you want to file a Chapter 11 case, the timing rules are the same as for Chapter 7 above.
(Note that Chapter 11 is usually for a business, or for a huge amount of debt; Chapter 12 is for farmers and fishermen.)
It’s important to understand that the date the discharge was entered in the previous case does not matter. It’s the filing date that starts the clock running here.
So You Can File Soon, or Possibly Now
So, under any combination—7 to 7, 7 to 13, 13 to 7, 13 to 13, 7 to 11 etc., you can file now.
Posted by Kevin on February 23, 2015 under Bankruptcy Blog |
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues. If your business doesn’t have any assets you don’t need to worry about how to protect them, or how to distribute them to the business’ creditors
BUT, what if your business DOES have some assets?
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such. That’s because the assets of your business are legally treated as your assets, and are thus protected by your bankruptcy.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral. Unless the collateral is worth more than what is owed on it—not likely—your Chapter 7 trustee would have no interest in the collateral.
Instead, the trustee will be interested in your “free and clear” business assets (not subject to a lien). However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. In NJ, you can choose; however, since the NJ exempts are so puny, about 98% of debtors pick the federal exemptions.
The federal tool of trade is as follows:
The debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.
(the $2,175 amount is for cases filed through March 31, 2013). This amount is doubled for married couples filing jointly, as long as the asset is jointly owned. Admittedly, that does not sound like a lot of money. However, you do not value the property as if it were new. It is valued in its “as is, where is” condition. In some cases, the value can be pennies on the dollar. If the trustee differs with your valuation, he or she will have to bring in an appraiser to challenge your valuation. If the trustee loses this battle in court, then there is no money in he estate to pay the appraiser. A trustee does not want to get into that position, so he or she will either abandon the property to the debtor or engage in some “horse trading”. The bottomline is that the debtor stands a good chance of getting the bulk of his business property for free or at a nominal cost.
Posted by Kevin on February 12, 2015 under Bankruptcy Blog |
After filing bankruptcy, you hope you never have to do that again. But it’s good to know you can if you need to.
These next two blogs are, first today, an important recent bankruptcy history lesson, and then in the second blog, why this lesson may be quite important to you.
Filing Bankruptcy in Good Economic Times
Eight years ago, in the late winter of 2005, the U.S. economy was relatively robust. The Gross Domestic Product (GDP) had increased in 2004 the most since before 9/11. In fact it would turn out that the GDP increases for 2004 and 2005, at 3.5% and 3.1% respectively, were the best from 2000 through the present.
And yet, more people filed bankruptcy in 2005 than any year in history.
The Bulge in Bankruptcy Filings 8 Years Ago
Here is a table of the total number of bankruptcy filings in the United States for the last 10 years:
| YEAR |
# OF FILINGS |
| 2003 |
1,660,245 |
| 2004 |
1,597,462 |
| 2005 |
2,078,415 |
| 2006 |
617,660 |
| 2007 |
850,912 |
| 2008 |
1,117,771 |
| 2009 |
1,473,675 |
| 2010 |
1,593,081 |
| 2011 |
1,410,653 |
| 2012 |
1,221,091 |
Notice that by far the most bankruptcies were filed in 2005. Not even in the depths of the Great Recession in 2009, 2010, and 2011 were more bankruptcies filed.
The BAPCPA Filing Bulge
The misnamed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is the reason for this otherwise oddly timed spike in filings. Other “Bankruptcy Reform” Acts had been kicking around Congress since 1997, and one even passed Congress in 2000 but President Clinton refused to sign that one into law. Then every year after that a similar bill was introduced but never passed, until after the 2004 Congressional elections. President Bush was re-elected to his second term and Republicans had won larger majorities in both Houses of Congress. On February 1, 2005 BAPCPA was introduced in Congress, in March the House of Representatives passed it, in April the Senate passed it, and President Bush signed it into law on April 20, 2005, with an effective date of October 17, 2005.
By the time of the results of the November 2004 election, the odds were high that some major “reform” would become law in the upcoming Congress. That became even clearer a few months later in February when the bill was introduced, so the word started going out that people who were considering filing bankruptcy should seriously consider filing before the new law went into effect. Then when the law did pass, with 6 months until its October, 2005 effective date, lots more people got the word and the rush was on to file before that date.
This filing frenzy is shown by the quarterly bankruptcy numbers during this period, with big quarterly increases from the November 2004 election until the October 2005 new law effective date, and the plummeting of filings right after:
| QUARTERS |
# OF FILINGS |
| 4th Q 2004 |
371,668 |
| 1st Q 2005 |
401,149 |
| 2nd Q 2005 |
467,333 |
| 3rd Q 2005 |
542,002 |
| 4th Q 2005 |
667,431 |
| 1st Q 2006 |
116,771 |
Notice how more bankruptcies were filed in just the 4th Quarter of 2005 than in the entire year of 2006. (See the earlier table). In fact, according to the Administrative Office of the U.S. Courts, of the 667,431 bankruptcies filed in that 4th Quarter (October through December), 630,402 were filed in just the month of October. And more than 600,000 of those were filed in just the first 16 days of that October! That means that during those 16 days, the number of bankruptcy cases filed was about the same as during the entire year of 2006!
Why This Recent Bankruptcy History Matters
This history matters if you, or somebody you know, were one of those millions of people who filed bankruptcy in the run-up to BAPCPA, and because of the economic violence of the Great Recession you again need relief.
If you are one of these people, then you need to be aware of two things:
- The BAPCPA “reform” was both as bad and not as bad as feared. It is probably one of the most badly written pieces of Congressional legislation to have made it into law. It is filled with internal inconsistencies, logical conundrums, and unintended consequences. It has created infinite unnecessary headaches for millions of bankruptcy filers during its 7 and half years, as well as at every level of the federal bankruptcy court system all the way up to the U.S. Supreme Court. But partly because of its dreadfully bad drafting, most of the law’s changes have NOT changed the end result for most people needing bankruptcy relief. Most people filing Chapter 7 “straight bankruptcy” can do so, and most of the tools of Chapter 13 “adjustment of debts” are still available for those who need them.
- If you need bankruptcy help again, you very likely either qualify now or will in the next few months. That’s the subject of the next blog.
Posted by Kevin on January 28, 2015 under Bankruptcy Blog |
Took a little break from blogging. But, now I am back. Eventually, I will be setting up a student loan website and blog. In the interim, I will be making comments about students loans in this bankruptcy blog.
I guess I am dating myself by the next comments. It is unbelievable what people are paying for college and grad school in the US. I went to Dartmouth College from 1969-1973. The first year was about $3000. The last year was about $3500. I had a 50% merit scholarship from my father’s union. He paid the rest out of his salary of about $18,000 (median income in US was $10,512). Mom, like most mom’s in those days, stayed at home. I provided my own spending money by loading trucks during summers and holidays. Forget about the scholarship. The basic nut at Dartmouth was about 17-19% of my father’s gross salary, and 31% of the median income. State colleges would have been less, say 15-20% of median income.
My youngest graduated college in January, 2013. His school, which was a private school, ran about $45,000 on the average. Not anywhere near the most expensive, but pricier than a State school. Median income for 2012 according to the US Census Bureau was $51,371. In other words, where my son went to school, the cost would be 88% of the median income in the US. If he went to a Rutgers, the estimated cost in 2012 was $26,627 or 52% of the median income.
See where we are going here. College costs are out of whack. What you get or don’t get for the money is another question.
Now, I am not an expert on FAFSA. I have read the material, and heard numerous lectures about how it supposed to work. Then, I had to fill it out for my kids. Then you get another picture.
It seems to me that if you earn under say $85,000, a good portion of your kid’s education will be covered by grants and school work programs. If you are over $100,000, however, you are pushed into the realm of student loans.
This is not a fun place to be. In future blogs, we will be going into the law and the practicalities of student loans. Today, I want to give a head’s up not the the parents and students who are already strapped with loans, but the parents and students who are facing the prospect of student loans.
The head’s up is to be pro-active in the process. At the minimum, read everything you can get your hands on. The past few days, I was reading about the dreaded NJ Class loans. These come from the State of New Jersey. Their reputation is that if you are in collection, it is not a walk in the park.
That being said, the website was helpful. Not only did they tell you what could be borrowed and the interest rate, there was a section called the Student Loan Game Plan. The game plan is to make sure that your loan payment is no more than 8-12% of the student’s starting salary. It gave good advice how to prepare for employment during your time at college. Moreover, it provided an extensive listing of occupations together with the average annual starting salary and the amount of student loan principal that could be supported by such an annual salary within the 8-12% guidelines. Finally, the Game Plan warns the parent and student to not over-borrow.
I advise parents to review this website. I am sure that other States have similar websites. Then, take the information to heart. If the State of NJ is telling you not to borrow more than 12% of your student’s intended income, then you better make sure that your kid’s financial aid package does not contain 35% of annual income in loans. Make the tough decisions upfront and avoid a world of pain down the line.
Posted by Kevin on December 27, 2014 under Bankruptcy Blog |
It’s human nature to hold off filing bankruptcy until after the holidays. Here’s what you need to know once you think again about filing.
The Quietest Time of the Year
For most bankruptcy attorneys December is the quietest time of the year. Because:
- people understandably want to focus on family and friends, instead of on their financial troubles;
- the materialism of the season discourages people from taking a realistic view of their finances;
- many mortgage companies ease off on foreclosures, and other creditors and collection agencies back off their collections, during this season, to avoid looking like Scrooges;
- people don’t have time to see an attorney—especially about bankruptcy–with everything they have to get done for the holidays; and
- no one has the emotional space to go talk with an attorney about messy personal finances during this already emotionally taxing time of the year.
Things to Keep in Mind Starting December 26
After getting through the holidays, and with the time for New Year’s resolutions approaching, one of your likely resolutions is to defeat your debts once and for all. If you are considering bankruptcy as one possible way to meet that resolution, be aware of the following after-Christmas, turn-of-the-year issues:
- Some debts ( cash advances on your credit card or purchase of luxury items) you rang up during the few months before filing bankruptcy—to buy holiday gifts or pay for holiday expenses, for example–might not be discharged (legally erased). That depends on some nitty-gritty details of your use of credit, as well as your intentions at the time.
- If you are going to owe income taxes for the 2014 tax year and expect to be filing your bankruptcy case soon after the turn of the year, that 2014 tax debt presents both some challenges and opportunities. Oddly, sometimes that debt can be paid in effect without costing you anything.
- A holiday bonus from your employer or a cash gift from a well-meaning relative can increase your “income” for purposes of the “means test,” either making qualifying for Chapter 7 more difficult or potentially turning your 3-year Chapter 13 case into a 5-year one. These major financial disadvantages can often be avoided through smart timing.
If you understand how bankruptcy works, these potentially troublesome issues can be turned to your advantage. The next blogs will show you how.
