Posted by Kevin on January 6, 2014 under Bankruptcy Blog | 
Filing bankruptcy with or without your spouse affects the discharge of debts you each receive, and also affects whether you file under Chapter 7 or 13.
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Continuing from the last blog:
- There are consequences to filing separately or together, consequences affecting:
- the discharge of your debts.
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The last blog was about what happens to a spouse who doesn’t file bankruptcy when the other spouse does, specifically as to the “automatic stay,” the immediate protection from creditor collection activity. In a nutshell, there is NO protection from joint creditors for the non-filing spouse in Chapter 7, while there IS some important but limited protection in Chapter 13 through the “co-debtor stay.”
The “automatic stay” is temporary protection that goes into effect at the beginning of and can last the length of the case. The “discharge”—the permanent legal write-off of a debt which is the topic of today’s blog—happens at the end of either a Chapter 7 or Chapter 13 case.
Debts Are Individual
A debt is an individual liability. Discharging a debt in bankruptcy is not so much a destruction of that debt as a legal pronouncement that an individual is no longer liable on that debt.
Each person owes a debt individually—we are not automatically liable for our spouse’s debts. So if ALL of a couple’s debts are owed by one spouse and only that spouse, then a bankruptcy by that spouse will leave the couple with no debts (assuming the debts are of the kind that can be discharged).
Chapter 7 Discharges Debts Only of the Filing Spouse(s)
Much more common is the situation in which two spouses each have some individual debts and some joint debts.
If they file a JOINT Chapter 7 straight bankruptcy, at the completion of the case their debts will be discharged (legally written off). That includes debts that each spouse owes individually, as well as those for which they are both legally liable.
If only ONE of two spouses files a Chapter 7 case, only that spouse’s debts will be discharged. That includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse. But the non-filing spouse’s debts will not be discharged. And that includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse.
Distinguishing Individual and Joint Debts
What this means is that one spouse should not file without the other unless they know exactly how much debt the non-filing spouse is legally liable for—both his or her separate debt and their joint debt.
This is not always obvious. A seemingly non-liable spouse can in fact be legally liable on a debt in numerous possible ways. A creditor’s monthly bill that is addressed to only one spouse does not necessarily mean that the other spouse did not sign and become obligated under the original loan agreement. Under certain states’ laws a spouse is obligated for the other spouse’s debts under certain circumstances. Also, specific creditors—such as the IRS—are favored with special laws creating liability for the other spouse. So both spouses’ debts need to be reviewed carefully to see who is liable on each contractually and as a matter of law.
There’s No “Co-Debtor Discharge” in Chapter 13
There is no discharge of a non-filing spouse’s liability analogous to the special “co-debtor stay” of Chapter 13. The filing spouse has the opportunity to protect the non-filing spouse during the course of the 3-to-5-year Chapter 13 case through the “co-debtor stay,” but if the debt is not paid in full during the case then the creditor can pursue the non-filing spouse once the case is over. That’s true even though the filing spouse’s liability for the same debt is discharged at the end of that Chapter 13 case.
Take as an example a husband and wife owing $5,000 on a credit card that they both thought only the husband was liable on because they understood it was tied to his business that failed. They’d forgotten that long ago they had both signed the credit card application. If only the husband files a Chapter 13 case, the “co-debtor stay” would immediately prevent the credit card creditor from pursuing the wife. That creditor may not bother to object to the “co-debtor stay.” Then at the end of the husband’s Chapter 13 case, any of his remaining liability on that credit card debt (beyond whatever portion was paid through his plan, if any) would be discharged, and his case completed and closed. That would terminate the “co-debtor stay,” allowing the creditor to pursue the wife for the full $5,000 debt (less any payments made in the Chapter 13 plan), plus years of interest and late charges.
The Bottom Line
Be very cautious about filing a separate bankruptcy case—Chapter 7 or 13—without your spouse. Discuss your debts thoroughly with your attorney, getting strong verification that the non-filing spouse is liable neither contractually nor by operation of law on debts. Use the “co-debtor stay” to protect the non-filing spouse on a limited joint debt(s), but only to give the filing spouse time to pay off the debt(s) in full so that there is no surviving liability at the end of the Chapter 13 case for which the non-filing spouse would continue to be liable.
Posted by Kevin on December 27, 2013 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse affects the protection from creditors each of you receives, and also affects whether you file under Chapter 7 or 13.
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Continuing from the last month’s blog:
- There are consequences to filing separately or together, consequences affecting:
- protection from your creditors’ collection activity.
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Bankruptcy Only Protects Bankruptcy Filers, Right?
Start with the sensible proposition that if you want bankruptcy protection from your creditors, you need to file bankruptcy to get it. Sounds obvious and sensible, but it’s only partly true.
It’s True in Chapter 7
If you file a Chapter 7 straight bankruptcy case by yourself—without your spouse—and one of your debts is owed by both you and your spouse, the creditor will be able to continue pursuing your spouse to pay that debt. That’s because the “automatic stay” which stops creditors from collecting debts immediately upon the filing of a Chapter 7 bankruptcy only protects the person who files. The section of the federal Bankruptcy Code which provides for the “automatic stay” says that it stops “any act to collect… a claim against the debtor.” And a “debtor” is a person who has filed a bankruptcy case.
So if your spouse did not join in your bankruptcy case (and didn’t file his or her separate case), nothing stops this spouse’s creditors from pursuing the debts owed by him or her. And that includes debts that the two of you owe jointly. That’s the simple reason that usually married folks file joint bankruptcies—besides any individual debts each may have, most spouses have joint debts which both spouses need protection from.
But Chapter 13 Could Protect a Non-Filing Spouse
Bankruptcy CAN protect a co-obligor, such as a spouse, in a limited but potentially crucial way, ONLY under Chapter 13. The “co-debtor stay” of Chapter 13 extends the “automatic stay” immediately upon the filing of the case not just to the filing “debtor” but to also to co-debtors—any individual that is liable on a consumer debt with the debtor. A spouse who does not join the other spouse’s bankruptcy filing is a protected by this “co-debtor stay” as to any of their joint consumer debts.
But this protection comes with conditions. If the creditor challenges the co-debtor stay as to the non-filing spouse, the bankruptcy court will allow the creditor to pursue him or her EXCEPT to the extent the filing spouse is paying that debt through the Chapter 13 case. So the filing spouse can fully protect the non-filing spouse by arranging through the Chapter 13 plan to pay that debt in full. That way the debt is slowly paid off during the 3-to-5-year plan while both are protected from collections—the filing spouse by the “automatic stay” and the non-filing spouse by the “co-debtor stay.” Chapter 13 debtors are generally allowed to favor such consumer joint debts in their plans over other non-joint debts in order to protect co-debtor. So if the amount of such joint debt is relatively modest, this can be a way for only one spouse to file bankruptcy and still protect the other spouse from a joint creditor or two.
Since the “co-debtor stay” is available only under Chapter 13, if there are good reasons for only one spouse to file bankruptcy, and both spouses are liable on a limited amount of consumer debt, then Chapter 13 could well be the better option.
Posted by Kevin on December 23, 2013 under Bankruptcy Blog |
Your abundant love for your children, spouse, and others is not defined by an (over)abundance of holiday gifts.
If your everyday life is one of constant financial pressure, then the holidays are especially tough on you. If you still have any room on your credit cards or any other kind of credit, it is
so difficult to not use that credit for gifts and holiday celebrations.
That’s especially true if you have children. Every ounce of your parenthood is pushing you to create a happy and memorable Christmas for them. You know you can’t afford to add to your debt and you hate to do it, but there just isn’t nearly enough in the regular paycheck to pay for it. After all, you sure can’t do without a Christmas tree, or without the family feast that’s been the tradition forever. And of course the kids need at least a few decent gifts—they don’t deserve a miserable holiday. Nor does your spouse or other special person.
All true. It is necessary and appropriate to celebrate. To enjoy our precious times of togetherness.
It’s easy for others to tell you not to use your credit cards, but they’re not in your shoes.
Sure, real love is not dependent on the monetary value of gifts, and yet love yearns to be expressed through the giving of gifts.
Everybody knows that they should live within their means, buy non-necessities like gifts only out of their spare income, and save up over the rest of the year for holiday gifts. But sometimes this is all virtually impossible.
We know that we should not judge our own worth—as a parent, spouse, or friend—by the price tag of the gifts we give to our loved ones. And yet we DO feel inadequate if we can’t give them “enough.”
So what’s a financially stressed person to do?
We grudgingly admit that we should have age-appropriate conversations with our children about the true meaning of the holidays, and about the appropriate role of gifts. We know that we should have similar honest conversations with our spouses and other adults we share a home with. At least a part of us accepts that more than anything we need to be honest—again in an age-appropriate way—with both the adults and the children in our lives about our financial limitations. We need to communicate clearly that our abundant love for them is not bound up in abundant gifts. And certainly not in overabundant gifts.
It takes serious bravery to have these conversations. And it all starts with what might be the bravest step of all: a good honest conversation with yourself about all this. You know you are in a vicious cycle of debt, and don’t see any way out. The last thing you need to do is add to your financial pressure. Instead, face your situation. Be completely honest with yourself about where you stand. Be honest about your fears. About how you don’t see a way out. Recognize that that there IS a way out. Then think about what concrete steps you can take to find the best way. Think about where you can find out some answers (such as the phone number on this website).
As you get honest with yourself, get honest with the people you love. Celebrate your love and friendship in a less material but more meaningful way. Celebrate true to the season.
Posted by on December 16, 2013 under Bankruptcy Blog |
A Chapter 13 case is often the preferred way to keep a sole proprietorship business alive. But can a regular Chapter 7 one ever do the same?
In my last blog I said that “if you own an ongoing business as a DBA… which you intend to keep operating, Chapter 7 may be a risky option.” Why? Because Chapter 7 is a “liquidating bankruptcy,” so the bankruptcy trustee could make you surrender any valuable components of your business, thereby jeopardizing the viability of the business. But this deserves further exploration.
Your Assets in a Chapter 7 Bankruptcy
When a Chapter 7 bankruptcy is filed, everything the debtor owns is considered to be part of the bankruptcy “estate.” A bankruptcy trustee oversees this estate. One of his or her primary tasks is to determine whether this estate has any assets worth collecting and distributing to creditors. Often there are no estate assets to collect and distribute because the debtor can protect, or “exempt,” certain categories and amounts of assets. The exempt assets continue to belong to the debtor and can’t be taken by the trustee for distribution to the creditors. The purpose of these “exemptions” is to let people filing bankruptcy keep a minimum amount of assets to get a “fresh start”.
Business Assets in a Chapter 7 Case
If you own a sole proprietorship, are all the assets of that business exempt and protected? In other words, is the entire value of the business covered by exemptions, whether approaching the business as a “going concern” or broken up into its distinct assets.
Many very small businesses cannot be sold as an ongoing business because they are operated by and completely reliant for their survival on the services of its one or two owners. In most such situations the business only has value when broken into its distinct assets. So the Chapter 7 trustee must consider whether the debtor has exempted all of these business assets to put them out of the trustee’s reach.
The assets of a very small business may include tools and equipment, receivables (money owed by customers for goods or services previously provided), supplies, inventory, and cash on hand or in an account. Sometimes the business may also have some value in a brand name or trademark, a below-market lease, or perhaps in some other unusual asset.
Whether a business’ assets are exempt depends on the nature and value of those assets, and on the particular exemptions that the law provides for them. For example, a very small business may truly own nothing more than a modest amount of office equipment and supplies, and/or receivables. In these situations the applicable state or federal “tool of trade” or “wildcard” exemptions may protect all the business assets. You need to work conscientiously with your attorney to make certain that all the assets are covered.
So it is possible for a business-owning debtor to have a no-asset Chapter 7 case, potentially allowing the business to pass through the case unscathed.
The Potential Liability Risks of the Business
However, there is an additional issue: will the trustee allow the business to continue to operate during the (usually) three-four months that a no-asset case is open or instead try to force the business to be shut down because of its potential liability risks for the trustee?
How could the Chapter 7 trustee be able to shut down the business? Recall that everything that a debtor owns, including his or her business, becomes part of the bankruptcy estate. As the technical owner—even if only temporarily—of the business, the trustee becomes potentially liable for damages caused by the business while the Chapter 7 case is open. For example, if a debtor who is a roofing subcontractor drops a load of shingles on someone during the Chapter 7 case, the estate, and thus the trustee, may be liable for the injuries.
The main factors that come into play are whether the business has sufficient liability insurance, and the extent to which the business is of the type prone to generating liabilities. There’s a lot of room for the trustees’ discretion in such matters, so knowing the particular trustee’s inclinations can be very important. That’s one of many reasons why a debtor needs to be represented by an experienced and conscientious attorney who knows all of the trustees on the local Chapter 7 trustee panel and how they deal with this issue.
Conclusion
In many situations it IS risky to file a Chapter 7 case when you want to continue operating a business. You need to be confident that the business assets are exempt from the bankruptcy estate, and that in your situation the trustee will not require the closing of the business to avoid any potential business liability.
Posted by Kevin on November 25, 2013 under Bankruptcy Blog |
Bankruptcy law allows married couples to file bankruptcy separately or together. That option comes with consequences, which can also affect whether you file under Chapter 7 or 13.
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If you’re considering filing bankruptcy with or without your spouse, consider the following:
- Each spouse has the legal right to join the other spouse’s bankruptcy or not.
- There are consequences to filing separately or together. Consequences affecting:
- the preservation of your assets;
- protection from creditors’ collection activity;
- the discharge of your debts; and
- dealing with the IRS and any other income tax authorities.
Today’s blog covers the first couple of these points, and the next ones cover the rest.
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1. Each spouse has the legal right to join the other spouse’s bankruptcy or not.
Married spouses often ask if they CAN file together, or if they MUST file together. By law, each person can file his or her own case alone, can file jointly with his or her spouse, or can decide not to file at all. But the fact that all the options are on the table doesn’t necessarily make the choice easier. In many situations it is in both spouses’ best interest to file either a Chapter 7 or 13 case together, but sometimes there are good reasons for one of them not to be part of that filing.
It can be a delicate choice, legally and personally. One spouse may owe most of the debt, because of a failed business or a prior divorce. One spouse may have run up some debt irresponsibly, perhaps without telling the other. The marriage itself may well be at risk because of financial stress. We’ve all heard that financial problems are one of the top reasons for divorce. The survival of the marriage may hinge on making wise choices about whether to file bankruptcy, who should file, and what kind of case to file.
Another delicate question is whether your marriage will outlast a 3-to-5-year Chapter 13 case. The realities are that:
1) many Chapter 13s do not get finished successfully;
2) when one isn’t finished, dealing with the fallout can be awkward;
3) as much as a Chapter 13 can help your finances, it is a long process requiring some stability and consistency;
4) Chapter 13s can handle changes in circumstances, sometimes even a divorce, but it’s generally not wise to file one if the odds are that the marriage isn’t going to outlast it.
So, if realistically the marriage is not stable enough to survive beyond the completion of a Chapter 13 case, then think about the Chapter 7 option instead.
2. There are consequences to filing separately or together. Consequences affecting—
a. the preservation of your assets:
One spouse filing alone versus both filing jointly can have an effect on how well your possessions are protected by your applicable property exemption scheme.
In some states you must use that state’s property exemptions, in others you have a choice of that state’s and a federal set of exemptions. NJ gives you the option. 99% opt for the federal exemptions because the NJ exemptions are so puny. Under the federal exemptions, if a husband and wife file jointly, the exemptions are doubled. Say, for example, you have $50,000 equity in your home. Using the federal exemptions, you can protect around $43-44,000 from creditors. That together with costs of sale may preclude any trustee action on your home.
Beyond this, sometimes one spouse—one who has much less debt, for example—owns an asset that the spouse who owes most of the debt has no legal right to. For example, consider a relatively new marriage in which the spouse without much debt inherited some property before the marriage. That spouse may understandably not want to risk having that inherited property go to a bankruptcy trustee to pay the other spouse’s debts. So that spouse would understandably not want to file bankruptcy with her spouse.
This kind of situation has to be analyzed very carefully. Both spouses need to understand how well the separate property of the non-filing spouse can be insulated from the other spouse’s bankruptcy case. In Chapter 13 it is harder to avoid having the non-filing spouse’s income and assets affect the other spouse’s case. The two spouses need to be very clear about all the consequences of only one person filing either a Chapter 7 or Chapter 13 case.
Please visit us for our next blog for part 2 of this topic.
Posted by Kevin on November 21, 2013 under Bankruptcy Blog |
Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.
1. Is your vehicle protected by the applicable exemption?
The first thing to find out if whether there is any risk that a bankruptcy trustee could take your car or truck from you if you filed a Chapter 7 case. In NJ, the exemption is only $3675 plus whatever you do not use on your homestead exemption. So, if your car is reasonably new (and not leased), chances are it is not completely protected by exemption. So, you have three possible options:
1) File a Chapter 13 case to protect the vehicle. This way you pay enough to your creditors through a court-approved plan so that your creditors receive over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.
2) File a Chapter 7 case and pay the trustee—usually through a short series of monthly payments—for the right to keep the vehicle. This prevents the trustee from selling your vehicle by paying him or her about as much as would have gone to the creditors had the vehicle been sold.
3) Surrender the vehicle in a Chapter 7 case—assuming you don’t absolutely need it—and allow the proceeds to go to your creditors, an especially sensible option if the debt to be paid first is one you need to be paid anyway, such as income tax or back child support.
2. Are you current or almost current on your vehicle payments but really struggling to keep current?
Either Chapter 7 or 13 can enable you to keep up your vehicle payments by reducing or eliminating your other debts. Bankruptcy is a reprioritization. It empowers you to focus on what’s most important in your financial life. That often is your vehicle, which gets you to work and enables you to take care of your other personal and family responsibilities. Bankruptcy allows you to be wisely proactive, protecting your ability to pay your car payments—and for its necessary maintenance and repairs—before it’s too late.
3. Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?
If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7 or Chapter 13.
And if you are not current but can catch up very quickly after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle. However, if you can’t catch up that quickly, you will likely need the extra power of Chapter 13 to buy more time with your creditor.
4. Is your vehicle worth less than what you owe on it, AND did you buy your vehicle at least two and a half years ago?
If you say yes to both of these questions, you would likely be able to do a “cram down” on your vehicle loan in a Chapter 13 case. This means that through your court-approved plan you would in effect be able to reduce the balance of your vehicle loan down to the value of your vehicle, often also reducing the interest rate and extending the payments over a longer period, usually resulting in a greatly reduced monthly payment. So if you qualify for a vehicle cram down that may be a good reason to file under Chapter 13, because it is not available under Chapter 7.
5. Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?
Although bankruptcy can help you keep your vehicle in many ways, it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances. Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction. Bankruptcy gives you the opportunity to get rid of that deficiency balance. Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances pointed you towards filing Chapter 13.
Posted by Kevin on November 6, 2013 under Bankruptcy Blog |
The Cast of Characters
You—the Debtor
A Chapter 7 debtor is looked at quite differently from a Chapter 13 debtor. Focusing here on one main difference, Chapter 7 fixates on who you are financially at the moment your case is filed. Chapter 13 focuses not only on that moment, but also who you are financially for the next the three to five years (the length of your payment plan).
For example, if you started earning a higher income a year after your case is filed, that would have no effect if you had filed a Chapter 7 case. But in a Chapter 13 case, that income increase would likely increase what you’d have to pay your creditors. On the other hand, because Chapter 7 pretty much doesn’t get involved in your future, it also doesn’t protect your future income from certain potentially dangerous debts which are not written off, such as certain taxes and child and spousal support arrearage. Chapter 13 does protect such future income. It allows you to pay these kinds of special debts based on your budget instead of leaving you at the mercy of those creditors’ aggressive collection powers.
Your Primary Challenger—the Trustee
In both Chapters 7 and 13, most likely the person you would have the most contact with would be the trustee. They are carefully selected and supervised individuals who are assigned to your case to take care of certain tasks. I called them your “challengers” because that’s their primary job, but most of the time your attorney and you will work cooperatively with them.
The Chapter 7 trustee’s most important task is to determine whether or not he or she has the right to take anything from you—in other word whether everything that you own is “exempt,” meaning that you can keep it all, as is usually the case. The Chapter 13 trustee’s two primary tasks are to raise any appropriate challenges to your proposed payment plan, and then, once a plan is approved by the bankruptcy judge, to distribute to creditors payments that you make under that plan.
Your Adversaries—the Creditors
Under both Chapter 7 and 13, your creditors can play a major role but often don’t. They can challenge your ability to discharge (write-off) their debts, and can raise a variety of objections. Often, we don’t hear from them at all, but if we do it’s usually a secured creditor (one who has a right to collateral such as your home or vehicle) or a special “priority” creditor—a taxing authority or support enforcement agency. How the various kinds of creditors are handled in Chapter 7 vs. 13 will be discussed in future blogs.
The Enforcer—the U.S. Trustee
This is an office under the U.S. Department of Justice which administers and, to a large degree, oversees the whole system, including the Chapter 7 and Chapter 13 trustees. You will usually not hear directly from them, and if you do it’s usually not good news, indicating that you or your paperwork are not following the rules.
The Paper-Pusher—the Bankruptcy Clerk
This is the office where we file the bankruptcy documents (which is virtually all done electronically, not by paper being physically delivered anywhere). They send out the official bankruptcy court notices.
The Deciders—the Bankruptcy Judges
A bankruptcy judge is assigned to every Chapter 7 and Chapter 13 case, but mostly they work behind the scenes. You will almost never actually go to the judge’s courtroom in a Chapter 7 case, and seldom in a Chapter 13 case.
In most Chapter 7 cases, a judge is hardly involved, except in signing the discharge order releasing you from your debts at the completion of your case, assuming that it proceeded appropriately. In the relatively unusual situation of a creditor objecting to the discharge of its debt, the bankruptcy judge will decide whether the objection meets the relatively limited grounds for a debt not to be discharged.
In contrast, a judge is always involved in a Chapter 13 case, at the very least in the approval of your payment plan at what is called the confirmation hearing. But again, you almost never need to attend this hearing, which is taken care of by your attorney. Because of the length of a Chapter 13 case, it’s more likely than in a Chapter 7 case that issues will arise that need the judge’s attention—changes in your plan if your circumstances change, challenges by creditors or the trustee if you are not meeting the terms of your plan, and such. Chapter 13 is a 3-5 year journey that you take with the court, the trustee, your creditors and most importantly, your attorney. So a word to the wise, make your payments in a timely manner and stay in close communication with your attorney throughout your case so that you know whether issues are being put before your judge and how he or she is deciding them.
Posted by Kevin on November 3, 2013 under Bankruptcy Blog |
In deciding between Chapter 7 and 13, get this question out of the way right away: “Can I keep everything I own if I file a Chapter 7 case?”
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Most people do not lose anything that they own when they file bankruptcy. That’s because the law protects (“exempts”) certain kinds of your assets and usually a certain dollar value of them. If everything you own fits within those kinds and those amounts, then you can file a Chapter 7 “straight bankruptcy” and protect everything. Even if you DO own and want to keep things beyond those limits, filing a Chapter 13 case will likely protect those additional things. So, a way to put the question is whether 1) all your possessions are protected under Chapter 7 or instead 2) you need the extra protection provided by Chapter 13.
(This blog is about things you own free and clear. Those that are collateral on debts, such as your home with its mortgage, are a whole separate discussion for later.)
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This is a good first question once you start seriously considering bankruptcy because usually your attorney will be able to answer it quite quickly and assure your possessions are protected in a Chapter 7 case. And if some are not protected, that’s an issue that should be addressed by your attorney and you from the very beginning.
Just because your attorney can usually make this determination quite quickly does not mean that it is not an important question, or that it’s an easy one for someone who isn’t highly experienced in this area of law.
It’s an important question because:
1) If you’re filing bankruptcy you likely can’t spare to lose what you own, so you don’t want to put any of it at risk.
2) You especially don’t want to lose something unnecessarily, since there usually are ways to prevent that from happening.
It’s not an easy question for the inexperienced because:
1) In some states the state law determines what you can keep, while in some other states federal law does, and in others either state or federal law can apply.
2) After knowing which law applies, the asset categories are often not clearly stated in the statutes, and their meaning can turn on court interpretations or even on the informal practices of the local bankruptcy trustees or judges.
3) The laws change—the statutes, the formal court interpretations, and the informal practices, and it is very difficult to keep up with all this without working with it full time.
4) If you moved from another state, the statutes and court interpretations applicable to your former state may or may not apply.
And if everything you own is NOT protected, then Chapter 13 MAY be a great tool for keeping everything. But here are some good questions to ask your attorney in this situation:
1) Are the substantial extra time and cost of a Chapter 13 case worth this benefit?
2) Can those unprotected assets be more efficiently protected by some appropriate pre-bankruptcy planning?
3) Can those assets be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee—in reasonable monthly payments—while avoiding the extra hassles of a Chapter 13 payment plan?
4) If you would pay such money to the trustee, where would that money go, and might at least some of it go where it would benefit you—such as to pay taxes or some other debt that you would not be written off by the Chapter 7 case so you would have to pay anyway?
5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets, so that overall it would be worthwhile?
Posted by Kevin on October 30, 2013 under Bankruptcy Blog |
Chapter 13 costs much more than Chapter 7, takes about 10 times as long, so you do a Chapter 7 if possible, right?
No. These two options each have advantages and disadvantages that need to be carefully matched to your immediate and long-term goals. The greater cost of Chapter 13 sometimes is far outweighed by what you may save through that procedure—possibly even by tens of thousands of dollars. The length of Chapter 13 can itself be an advantage when you’re trying to buy time or stretch payments out over a longer period to lower their monthly amount. But in other situations, Chapter 7 may be just what you need.
Be Informed, But Be Open-Minded
It’s good to inform yourself in advance about these options. But it’s also wise to have an open mind when you first go to see an attorney for legal advice. You may simply not know about a crucial advantage or disadvantage that could swing your decision one way or the other. And you don’t want to be too emotionally invested in going in one direction when the other may be a better choice.
Easy Choice, Hard Choice
Sometimes your circumstances and/or your goals push your decision strongly in one direction or the other. Sometimes you may even only qualify for one, and that one provides what you need. Or you may qualify for both, but still everything points towards either Chapter 7 or 13. In either situation, it could be a very easy choice.
But often you could go through either a Chapter 7 or Chapter 13 case AND BOTH may have attractive features. So it can come down to a deeply personal choice.
For Example…
A couple of simple examples will make this clearer.
If you are behind on your home mortgage and want to hang onto the home, a Chapter 7 case would likely write off all or most of your other debts. Then you’d likely have a few months to catch up on the mortgage. In contrast, a Chapter 13 case would give you up to 5 years to catch up. And it may allow you to avoid paying a second mortgage. This choice turns to some degree on factual issue like whether you have a second mortgage that could be “avoided,” and how much you’re behind on the mortgage payments. But on a personal level it comes down on how important it is to you to keep the house, and how much you’d be willing to bet that you’d be able to do that though Chapter 7 by negotiating a relatively quick catch-up of payments instead of getting much more time and far greater protection through Chapter 13.
Similarly, if you owed some recent income taxes that would not be written off under either Chapter, you could file a Chapter 7 case and write off all or most of your other debts so that you could focus your financial resources on the IRS. You’d arrange with the IRS to make monthly payments to pay off that tax debt, plus ongoing interest and penalties. Or you could file a Chapter 13 case and pay those taxes through a formal plan based on your own budget, usually avoiding additional interest and penalties, all the while being protected from the IRS. But you would pay extra fees for these advantages. This choice also depends on the facts, such as how much tax you owe and how much you would be able afford to pay each month once your Chapter 7 case were completed. But then it comes down to the more personal question of how confident you’d be that your present income and expenses would stay stable throughout the repayment period, so that you could make those payments no matter what.
It’s Good to Have a Choice, Even If It’s Not an Easy One
To be honest, it is not unusual for people to have some factors pointing towards Chapter 7 with others pointing towards Chapter 13. But instead of wringing your hands about having tough choices, realize it is usually a good thing to have more than one choice, even if neither is perfect. An experienced, conscientious attorney will walk you through this, help you prioritize your goals, weigh any risks, and give you what you need so that you can confidently make a smart choice.
Coming Right Up…
Because being informed is a good thing, and because this decision between Chapter 7 and Chapter 13 is so important, the next few blogs will look at both the basic and some more subtle differences between them.
Posted by Kevin on October 28, 2013 under Bankruptcy Blog |
Why Does Chapter 13 Have Debt Limits?
Chapter 7 has no debt limit. But the Bankruptcy Code does impose a limit on the amount of debt that person can owe when filing a Chapter 13 case. Why? Although in conventional consumer situations an average Chapter 7 case is much quicker and easier than an average Chapter 13 case, in fact Chapter 7 can be used with a wide variety of business and consumer arenas, including for corporations and partnerships, including those with many millions of dollars of debt. Chapter 13 is a tremendously flexible procedure, but it is still a relatively streamlined one—especially compared to Chapter 11 reorganization. It was specifically designed for individuals and married couples with relatively straightforward debts.
The primary way that the law tries to limit Chapter 13 to simpler cases is with debt limits. Currently the individual filing one, or the married couple filing together, must have less than $383,175 in total unsecured debts and ALSO less than $1,149,525 in secured debts.
What’s with the Odd Amounts?
These dollar limits do sound arbitrary, and to some extent they are, simply reflecting a Congressional compromise going back 34 years to the original passage of the Bankruptcy Code in 1978. The limits back then were only $100,000 unsecured debt and $350,000 secured debt. These didn’t change until more than doubling in 1994 to $250,000 and $750,000, respectively, with inflationary increases every three years thereafter. The current amounts have been in effect since April 1, 2013.
What Are “Noncontingent, Liquidated Debts”?
The statute specifically says that you “may be a debtor under Chapter 13” only if you owe, “on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525” (with the appropriate current amounts inserted).
To be a bit over simplistic, these two descriptive words are intended to make clear that only real debts count for these limits. “Noncontingent” means that you are presently liable on the debt, not liable only if some event does or does not occur. “Liquidated” means that you owe a specific and determinable amount. A contingent debt would include one that you would only owe if somebody else did not pay it. A noncontingent debt would be one which you owe jointly with someone else but the creditor has no obligation to first pursue the other debtor. An unliquidated debt would include a lawsuit against you for unspecified damages; a liquidated debt could be a lawsuit where the alleged debt amount can be determined, even if it might be disputed.
Conclusion
In most cases, you will either be clearly under both secured and unsecured debt limits or clearly over one of them. But if you are at all close, be aware that these “noncontingent, unliquidated” distinctions are not always clear. And even if you are over the limits, there may be other solutions if you really need the benefits of a Chapter 13. One possibility is filing a so-called “Chapter 20”—filing a Chapter 7 case to discharge much of your debts, followed immediately by filing a Chapter 13 (7 + 13 = 20). The Chapter 7 discharge should get you under the Chapter 13 debt limits, and then although the Chapter 13 cannot discharge any more debts, it could well protect you from your remaining creditors as you pay their debts—such as mortgage arrearage, back child support, or taxes—at your own schedule.
Posted by Kevin on October 24, 2013 under Bankruptcy Blog |
The amount of your income alone may not disqualify you from Chapter 7.
The last blog said that:
• You can avoid the “means test” altogether if more than half of your debts are business debts—they were NOT incurred “primarily for a personal, family, or household purpose.”
• When comparing your “income” for the “means test” against the applicable “median family income,” your “income” is based on virtually all the money you receive during the previous six-full-calendar-month period. Which six months make up that period depends when you file, meaning that you may have some control over your “income” and whether or not is it above the “median family income” amount.
• But even if your “income” is indeed higher than your applicable “median family income,” that’s just the beginning of the “means test.”
So here are the remaining steps of the “means test,” each step giving you another opportunity to pass it and qualify for Chapter 7. Be forewarned: these additional steps are not the easiest to understand:
• You can deduct certain living expenses from your monthly “income” to see if your “monthly disposable income” is low enough. Unfortunately, the rules for determining what expenses you may deduct and how much for each are almost unbelievably complicated. It would take pages and pages to explain. For just a taste of this, the allowed amounts for some types of expenses are based on what you actually spend, some are based on tables of local standards amounts, others on national standards. For our present purposes, what counts is that after applying those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then you can still file Chapter 7.
• If your “monthly disposable income” after deducting expenses is between $117 and $195, then the following formula is applied. Multiply your “monthly disposable income” by 60. Then compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is not enough to pay at least 25% of those debts, then you can file Chapter 7.
• If after applying the above formula you CAN pay at least 25% of those debts, OR if after deducting your allowed living expenses the resulting “monthly disposable income” is more than $195, then you can still file under Chapter 7 by showing “special circumstances.” Examples of appropriate “special circumstances” in the Bankruptcy Code are “a serious medical condition or a call or order to active duty in the Armed Forces.” So, be forewarned. Special circumstances is very limited in scope.
The previous blog showed that even the relatively simple first step of the “means test”—comparing your “income” to the “median family income”—has its unexpected twists and turns. Today we’ve seen that if your “income” is indeed too high for that first step, there are other steps to the “means test” which—although admittedly complex—which may get you successfully through Chapter 7.
On a practical level, the amendments to the Bankruptcy Code make filing bankruptcy more expensive for the debtor. Not only are there additional monies required for filing fees, courses and due diligence, there is substantial additional attorney time associated with filing even Chapter 7. Completing the means test and justifying the result to a trust is one of those areas.
Posted by Kevin on October 19, 2013 under Bankruptcy Blog |
If you don’t qualify for either Chapter 7 or 13, do you have to do a very expensive Chapter 11 reorganization?
Chapter 11 is dreadfully expensive. That’s part of the reason why consumers seldom file them compared to Chapter 7 and 13. The court filing fee alone is $1,233 . The attorney fees can be tens of thousands of dollars. Why so expensive? Because Chapter 11 was designed for large corporate reorganizations, and, in spite of efforts to streamline it for smaller businesses and for individuals, it’s a cumbersome, attorney-intensive procedure. So it is usually sensible to avoid Chapter 11 if either Chapter 7 or 13 will serve your needs.
But what if you’re disqualified from those other two? If you really ARE disqualified, then you may have to file under Chapter 11. But you may not be disqualified even if at first you think you are. So let’s look more closely at the qualification rules, especially as they apply to situations where at first it may look like you don’t qualify. Today we’ll give a broad overview about this as to both Chapter 7 and 13, and then in the next two blogs we’ll look more closely at each one.
Chapter 7 and the “Means Test”
The point of the quite complicated means test is to make people pay a meaningful amount of their debts if they have the “means” to do so. So those who do not pass the means test cannot file a Chapter 7 “straight bankruptcy,” or they can be forced out if. Instead they would usually have to proceed through Chapter 13, and be required to pay what they could afford to pay to their creditors over the following five years.
But the means test is often misunderstood. That’s not surprising given its multiple steps and odd combination of rigid formulas and discretionary enforcement. The following may help you understand it and potentially get around it:
- The means test may not even apply to you. It only applies to individuals with “primarily consumer debts,” meaning that you skip the means test altogether if half or more of your debts were incurred for business purposes instead of “primarily for a personal, family, or household purpose.”
- There’s a fixation on the first step of the means test—whether your income is above or below the “median family income” amount for your state and household size. Indeed a large majority of people who file Chapter 7 DO have lower income than the applicable median income. So they can skip the rest of the means test.
- The means test uses an odd and very specific definition of your income, one which focuses on the six-full-calendar-month prior to whatever date your Chapter 7 case is filed. This means that for many people their “income” shifts with each passing month, depending on the changes to their income of the past 6 or so months. So some careful tactical planning may enable you to fit under the median income amount by filing at the right time.
- Even if your income, as appropriately defined, is in fact over the applicable median income, that’s just the beginning of the analysis. There are a number of other steps to the means test, each with potential ways to pass the means test and qualify for Chapter 7. We’ll go through these additional steps in the next blog.
The Chapter 13 Debt Limits
At the time of filing a Chapter 13 case, your total unsecured debts must be less than $383,175, and your total secured debts must be less than $1,149,525.
As you can probably guess, there’s more to this than immediately meets the eye. For a start, the terms actually used by the statute for these limits are “noncontingent, liquidated secured debts” and “noncontingent, liquidated unsecured debts.”
Debtors with relatively high debt are often present or former business owners who signed personal guarantees for corporate debt. When are those guaranteed debts considered contingent and therefore would not count towards the debt limits, and when are they noncontingent so that they would count? And when is an unresolved claim against the debtor considered unliquidated so that they would not count towards the debt limits, and when are they liquidated so that they would count?
What these Chapter 13 debt limits really mean will be the topic two blogs from now.
Posted by on October 13, 2013 under Bankruptcy Blog |
Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.
Timing Does Not Always Matter Much, But It CAN Be Huge
Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.
It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.
Today’s blog post covers the first one of those potential timing advantages.
Being Able to Choose between Chapter 7 and Chapter 13
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.
To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.
The “Means Test” Income Calculation
What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.
So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.
Conclusion
Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.
The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided.
Posted by Kevin on October 1, 2013 under Bankruptcy Blog |
“Straight” Chapter 7 bankruptcy can give some relief for dealing with your back and current taxes, but Chapter 13 can help so much more.
The last blog showed how Chapter 7 can help you with your income tax debt, mostly indirectly, by writing off your other debts so you can financially concentrate on getting the IRS happy. It may also help by discharging (writing off forever) some tax debts, but only if at least three years have passed since that tax’s returns were due, AND you meet some other conditions. But if you owe a lot, and especially if you owe a number of years of taxes, Chapter 7 will often not be enough. So what more is it that Chapter 13 can do?
Chapter 13 and Income Taxes
There are many situations in which you ought to look closely at the Chapter 13 option. Focusing on income taxes, the rule of thumb about when to do so is pretty simple:
File a Chapter 13 case if Chapter 7 does not gain you enough cash flow to allow you to get caught up on your back and current taxes through manageable monthly payments, made over a reasonable period of time. In other words, file a Chapter 13 if you need the extra protection provided by Chapter 13.
What extra protection? In a Chapter 7 case you are NOT protected from the IRS beginning about three months after that case is filed-when the discharge is entered and the “automatic stay” terminates. So that means you’re arranging and then making the catch-up tax payments without any protection from the IRS’ collection procedures. That’s generally not a problem if 1) you deal with the situation very proactively, 2) the payment amount that you can comfortably handle is acceptable to the IRS, 3) it’s an amount you can pay it consistently, and 4) you do pay it perfectly until you pay it off.
In contrast, under Chapter 13 your protection from the IRS’ collection efforts continues throughout the whole 3-to-5-year length of the case. That’s protection you’ll need if you can only afford payment smaller than what the IRS wants, and/or you need more flexibly than the IRS would allow.
Under Chapter 13 you are generally allowed to pay other even more important creditors ahead of the IRS—such as mortgage arrearage, vehicle payments, and back child support. Plus you will generally not pay additional penalties and interest on the taxes, and may not have to pay all or most of the previous penalties. If the IRS has recorded a tax lien, you will have the opportunity to pay off that lien without the IRS being able to enforce that lien, resulting in the lien being released at the completion of your case.
Chapter 13 often allows you to adjust your monthly plan payments in advance based on anticipated seasonal adjustments in your income and expenses, and change those payments mid-stream as your circumstances change. You do need to deal responsibly throughout the process, or else you will lose your protection from the IRS and from your other creditors. And if you are not in fact able to do what your plan states and what the Chapter 13 rules require, so that you don’t finish your Chapter 13 case successfully, you will not get a discharge of ANY of your debts. But if your plan was put together sensibly and you follow it carefully, you should end your Chapter 13 case being current on all your past and present taxes.
Posted by Kevin on September 28, 2013 under Bankruptcy Blog |
If you were already on the financial edge and just found out you owe a bunch of income taxes, here is how bankruptcy can help.
If you owed nobody but the IRS for last year’s income taxes, you wouldn’t likely need to think about filing any kind of bankruptcy. In many circumstances, the IRS is actually reasonably decent to work with, such as in setting up a monthly payment plan for catching up on a single year’s tax shortfall. Sure, you’ll pay some penalties and interest, but if you can pay it all off in reasonable monthly payments in the next year or so, that wouldn’t be such a bad thing.
But if you owe for more than one year, or are just filing for the 2012 tax year on extension, and still owe for 2013, then it looks like you’re getting into a vicious cycle. And if on top of that, you have a whole bunch of other debts, you owe it to yourself to check out Chapter 7 and Chapter 13 as possible ways out of that vicious cycle. Today we’ll briefly explore how Chapter 7 helps, and then how Chapter 13 does in the next blog.
Chapter 7 and Income Taxes
You may well have other reasons for choosing to file a Chapter 7 instead of a Chapter 13, but the rule of thumb as far as taxes is pretty simple, especially if the only taxes you owe are from the last year or two:
File a Chapter 7 case if after doing so you will be able to get caught up on your back and current taxes through manageable monthly payments made over a reasonable period of time. In other words, file a Chapter 7 if you don’t need the extra protection and benefits provided by Chapter 13.
Both Chapter 7 and 13 can legally write off (“discharge”) income taxes, but can never do so until at least three years from the time the tax returns for those years were due to be filed (including extensions, if any). So as of now you could discharge 2008 income taxes, and 2009 taxes that were filed on April 15. but not later ones. That’s because 2008 taxes were due either April 15, 2009 or October 15, 2009 depending on whether you got an extension, and you could discharge a 2008 tax debt starting three years later, after April 15, 2012 or after October 15, 2012. You could discharge the 2009 tax debt if you filed on April 15, 2010. If you filed your tax return on October 15, 2010, you could not discharge the tax obligation if you filed Chapter 7 today (but you may be able to discharge if you held off your bankrutpcy filing to after October 15, 2013). You’d have to meet some additional conditions as well, but this three-year condition is a good starting point.
So unless you currently owe income taxes going back further than 2009, Chapter 7 is not going to discharge any of them. That does not mean that Chapter 7 is without benefit, though. The benefit it will give you is discharging all or most of your other debts. So the analysis we will go through with you when you meet with us involves two questions:
1) How much will filing Chapter 7 improve your monthly cash flow? In other words, how much will you be able to pay to the IRS realistically on a monthly basis, both to catch up on the back taxes and to make any necessary adjustments to the current withholdings or estimated quarterly payments?
2) How much do you owe in back taxes? Will the amount that you can realistically afford to pay each month enable you to get current in a reasonable time (so you’re doing so within the length of time the IRS will allow, and without incurring a crippling amount in additional penalties and interest)?
Unless we confidently believe that Chapter 7 will solve your tax problem, we’ll look at whether Chapter 13 would do better. It’s wise to consider Chapter 13 regardless, so you’ll know the advantages and disadvantages of both options. See the next blog for that.
Posted by Kevin on September 22, 2013 under Bankruptcy Blog |
If you need bankruptcy protection but already filed a bankruptcy case within the last few years, you may still be able to file a new one now.
There are some strict rules about when you can file a bankruptcy case after having filed a previous one. But as with so many other areas of law, there are opportunities when we look more closely.
Previous Bankruptcy Filing vs. Discharge
It’s not necessarily previously FILED bankruptcy cases that count, but only ones in which you received a DISCHARGE of your debts. All the timing rules in the Bankruptcy Code dealing with when you can file a new case refer to the length of time since “the debtor has been granted a discharge” or “has received a discharge” in the previous bankruptcy case.
In other words, if your previous case was not successfully completed—it was dismissed before you finished it—that case would not prevent you from filing a case now, no matter how long or short of a time since that previous case was filed.
So make sure—absolutely sure—that you got a discharge in your earlier bankruptcy case. If you distinctly remember that your case finished the way it was supposed to, you very likely DID get a discharge. But you definitely want to make sure. Find out from your former attorney. Or dig up the discharge order issued by the Bankruptcy Court from your old paperwork, or we can likely find out for you when you come in for your initial consultation.
The Timing Rules
If you’ve heard that you have to wait 8 years between bankruptcy filings, be aware that only applies to one of a number of possible scenarios: the length of time from the previous discharged Chapter 7 case to the filing of a new Chapter 7 case.
If your previous case was a Chapter 7 one and you now want to file a Chapter 13 case, the applicable length of time is only 4 years.
If your previous case was a Chapter 13 one and you now want to file a Chapter 7 case, the length of time is only 6 years. And in fact if that previous Chapter 13 case was one in which your unsecured creditors were paid at least 70% of their debts, then there is NO limitation on filing a Chapter 7 case afterwards.
And if your previous case was a Chapter 13 one and you now want to file a Chapter 13 case, the applicable length of time is only 2 years.
And very important: on all of these the clock starts running NOT at the time of discharge—generally at the end of a case—but rather earlier, at the date of filing at the very beginning of the prior case. So what count is the date of filing of the prior case to the date of filing the new case. For example, if your previous case was a Chapter 13 one that was filed on October 1, 2006, and it took five years to complete so that the discharge was entered on October 1, 2011, you would be able to file a Chapter 7 case starting October 1, 2012.
Why File a Bankruptcy Case If You Can’t Get a Discharge?
So if you need bankruptcy protection but not enough time has passed, you can still file the case but you just won’t receive a discharge of your debts. Why would you ever want to do that?
Probably never for a Chapter 7 case, since almost always the main benefit of a Chapter 7 case is the discharge of your debts.
But Chapter 13 provides a number of other benefits distinct from the discharge of debts. For example, it stops a foreclosure and gives you years to catch up on your mortgage arrears. It also stops extremely aggressive collection of unpaid support payments, including the suspension of professional/occupational/driver’s licenses, again giving you years to bring it current. It may be able to significantly reduce what you pay for your vehicle through a “cram down.” For these and other reasons it can make a lot of sense to file a Chapter 13 case while knowing that you’ll not get a discharge of any of your debts. You may not even have any debts to discharge, but just need one or more of those other powerful benefits.
In fact that’s usually the situation with the so-called “Chapter 20.” This usually involves, first, the filing of a Chapter 7 case, which results in the discharge of most of the debtor’s debts. Then, second, immediately after that’s done, a Chapter 13 is filed to use one or more of its benefits. (Chapter 7 + 13 = 20.) Since most of the debts were discharged in the prior Chapter 7, the debtor doesn’t need a discharge in the Chapter 13 case.
This blog should make it clear that a simple rule—8 years from one bankruptcy to the next one—is often woefully incomplete and misleading. In addition, there are complicated rules concerning whether the automatic stay will apply in case involving multiple filings. This is another good argument that you truly need to talk with an attorney who focuses on bankruptcy instead of making misassumptions that could cause you lots of unnecessary grief.
Posted by Kevin on under Bankruptcy Blog |
If you and someone else jointly owe a debt, bankruptcy can protect you against the debt and against your co-signer. Or if you want, bankruptcy can instead protect your co-signer.
Let’s look at two essentially opposite scenarios involving you and your co-signer getting sued on a debt you both owe:
1) You’ve had a falling out with the co-signer, and all you care about is escaping the debt; or
2) You believe you have a moral duty to protect the co-signer, so that is your highest priority.
We’re going to address the first scenario today, and then the second one in the next blog.
Protecting Yourself…
If you and your co-signer are being pursued by your creditor, and you cannot and will not pay the debt, you have two distinct obligations to worry about—a definite one to the creditor and a likely one to the co-signer.
… from the Creditor Itself
The obligation to the creditor is based on your promise to pay the debt. Most likely that obligation can be discharged (legally written off) by filing bankruptcy.
Like any other creditor, this one could object to the discharge on grounds of your fraud or misrepresentation, but those objections are rare.
You could discharge this debt through either Chapter 7 or Chapter 13, depending on whichever is in your best interest otherwise. Chapter 13 happens to come with the “co-debtor stay,” some extra protection for your co-signer which will be discussed in the next blog, because here we are assuming you don’t care about protecting the co-signer.
… from the Co-Signer
You very likely have a closely related but still distinct obligation to your co-signer, one that is likely less clear than the one you owe directly to the creditor. This obligation to the co-signer is indirect, likely only to arise if your co-signer pays all or part of your debt to the creditor. Even then you may or may not have a legal obligation to the co-signer. There is a good chance that you and the co-signer did not write out the terms of your obligation. So your obligation to the co-signer could be merely inferred, based on an unspoken assumption that you would make the co-signer whole if you ever failed to pay the debt and the co-signer paid the creditor all or part of it. But there could also be a sensible inference—depending on the facts of the case—that the co-signer did not expect you to pay it in that situation. So you could possibly defend against that liability.
But practically speaking, the creditor is going to pursue both you and your co-signer. If you can’t pay the creditor who you clearly owe, there may well not be much point in putting a lot of time and expense into defending against a legal obligation to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.
If you do file bankruptcy, be sure to list among your creditors not just the direct creditor but also your co-signer. Otherwise you could remain liable to the co-signer after your bankruptcy case is finished.
As with your direct creditor, your co-signer could object to the discharge of his or her claim against you, based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. Although these objections are rare, they ARE more often raised by former friends, ex-spouses, ex-business partners. Why? Because 1) they have a personal axe to grind, 2) misunderstanding tend to arise more in informal arrangements, and 3) these kind of folks may know more damaging information about you than would a conventional creditor.
The best way to protect yourself from such challenges is to explain the situation thoroughly to your attorney when you first meet. That way your bankruptcy documents can be prepared in a proactive way, and you’ll avoid being blindsided.
Posted by Kevin on September 12, 2013 under Bankruptcy Blog |
If you owe income taxes, and are at the point that the IRS is about to seize your assets, you need to consider bankruptcy. It can help in surprising ways.
Here are FIFTEEN ways that filing either a straight Chapter 7 bankruptcy or a Chapter 13 payment plan could relieve a major income tax headache. And even this long list is only a partial one!
1. Both Chapter 7 and 13 stop the IRS’ collection activities against you, including levies on your paycheck, bank account, and vehicles, and tax liens on your home and other real estate.
2. Both Chapter 7 and 13 can completely discharge (legally write off) some income taxes.
3. A Chapter 7 case would likely discharge all or most of your non-tax debts, more likely giving you the financial means to enter into a manageable installment payment plan afterwards with the IRS, to pay off whichever taxes not discharged in that bankruptcy case.
4. If you have an “asset” Chapter 7 case—the relatively unusual kind in which the bankruptcy trustee claims one or more of your assets to sell and distribute to creditors—non-dischargeable tax debts will generally be paid in that distribution ahead of other dischargeable debts, either paying off or at least paying down those tax debts.
5. Even if you cannot discharge a tax debt right now, you will likely be able to do so at some point in the future. There are strategies for buying time until that point.
6. Chapter 13 allows you to pay off non-dischargeable income taxes through payments based not on the IRS’ demands but rather on your own realistic budget.
7. If you have other conventional debt—credit cards, medical bills and such—along with back income taxes that can’t be discharged, Chapter 13 generally allows you to favor the tax debt ahead of these other creditors. So you would be allowed to pay the taxes in full before anything would trickle down to the conventional debts.
8. Once the Chapter 13 case is filed, that generally stops any further interest and penalties from being added to the nondischargeable tax debts, which reduces the amount that you need to pay.
9. During the time that payments are being distributed to creditors through the Chapter 13 case, the IRS has to wait its turn in line, often waiting behind debts that are even more important to you, such as back payments on your home mortgage, your child or spousal support arrearage, or even vehicle and furniture payments.
10. Even if you only have tax debts that would otherwise be discharged in Chapter 7, but you need to file Chapter 13 to deal with other debts that are important to you—such as on your home and vehicle and support arrearage—these other obligations can legitimately reduce how much you pay on your tax debts. Sometimes you pay nothing on the taxes. So Chapter 13 can be the best of all worlds: protection from all your creditors including the IRS while you take care of other debts, along with paying little or nothing on your tax debts.
11. If you have multiple years of income tax debts—some of which are dischargeable and some not—in most Chapter 13 cases your plan can arrange to pay the taxes that would not be discharged in full before paying a dime to the rest of the taxes. You may even avoid paying anything on those dischargeable taxes before they are discharged forever at the completion of your case.
12. Throughout all this time during a Chapter 13 case—three to five years—the IRS cannot take any collection action against you or any of your assets, unless it gets specific court permission, which would usually only happen if you failed to comply with your own plan commitments.
13. Even if the IRS recorded a tax lien against your home before your Chapter 13 case was filed, the IRS would be prevented from executing on that lien until you had the opportunity to pay off the debt behind that lien, and get a release of that lien.
14. If you are behind in estimated or withheld income taxes during the current tax year, you can file a partial-year tax return, and pay the taxes for that partial tax year through your Chapter 13 plan—with no additional interest and penalties. Then you can put together your budget from that point forward with appropriate estimated tax payments or withholdings so you have no tax owing from that remaining part of the tax year.
15. When your Chapter 13 case is successfully completed you can be tax-free and debt-free.
Posted by Kevin on September 11, 2013 under Bankruptcy Blog |
If you’re behind on child or spousal support, the support enforcement agency can be extremely aggressive. Chapter 7 doesn’t help much. Chapter 13 CAN.
In most states an ex-spouse—or the state’s support enforcement agency acting on his or her behalf—has extraordinary ways to collect on current and back support obligations. These include not just ways of getting directly at your money, but also ways to hurt you with the intent of forcing you to pay.
So we’re not just talking about garnishing your wages and bank accounts, taking away income tax refunds, or putting liens on your real estate. We’re talking coercive action. Your driver’s license can be suspended. This includes your commercial driver’s license, so that you can’t work if you’re a truck driver or have any other job requiring that license. Your professional or occupational license could also be suspended, preventing you from legally working in your profession or business as a nurse, doctor, realtor, insurance agent, mortgage broker, lawyer, or even in some places athletic trainer or funeral director!
There’s more. Your hunting, fishing, boating and other recreational licenses could be revoked. You can even be denied a U.S. passport.
Chapter 7 Gives Very Limited Help
“Straight bankruptcy” under Chapter 7 unfortunately does not stop any of these collection methods. The “automatic stay” that stops just about all other collection efforts has an exception for child and spousal support. (See Section 362(b)(2)(B) of the Bankruptcy Code.) The only way that Chapter 7 can help is that it can often legally write off (“discharge”) all or most of your other debt so that you would have the money to pay your support. But that does not help deal with your financial emergency if you’re in the support enforcement’s crosshairs.
Chapter 13 CAN Help Where it Counts the Most
The filing of a Chapter 13—the three-to-five-year “adjustment of debts” kind of bankruptcy—DOES stop all these aggressive ways of collecting on support obligations. The “automatic stay” does apply in most respects to Chapter 13, as long as it affects the collection of your assets that did not exist at the time your case is filed, such as future income. But to make this protection last more than just a few days or weeks, you must rigorously meet a number of conditions:
- Your Chapter 13 plan must show that you are going to catch up on all the back support during the life of the plan. And then you must make your monthly plan payments on time to show that your plan is feasible and that the back support will in fact be paid in full.
- Your budget must show that you will be able to start (or continue) making the regular monthly divorce court ordered support payments, AND then you must actually pay those on time. And that starts with the first one that is legally due on whichever day it’s due immediately after your Chapter 13 is filed, and then every month thereafter.
- At the end of your Chapter 13 case you must certify that you are current on your ongoing support payments, or else you cannot complete your case and get a discharge of your remaining debts.
On the positive side, Chapter 13 neutralizes most of the extremely dangerous firepower of your ex-spouse or the support enforcement agency, and gives you the opportunity to solve an otherwise very difficult problem. Chapter 13 is often a great tool for catching up on your back support, because you are allowed to favor that debt over just about every other one. You could end up paying very little if anything else to your other creditors, except those other ones that matter to you, such as your mortgage, vehicle loan, taxes and such.
But you must be financially able to meet the above conditions, and then strictly abide by them. If during the Chapter 13 case you miss one of your regular monthly support payments, or one of your plan payments, you can expect your ex-spouse or support enforcement to ask the bankruptcy judge for “relief from the automatic stay,” that is, for permission to resume or even intensify their earlier collection efforts. At that point the judges will tend not to be very sympathetic to you, since you are not complying with the conditions that you had agreed to at the beginning of your case.
Posted by Kevin on August 28, 2013 under Bankruptcy Blog |
Straight Chapter 7 bankruptcy gives very limited help if you’re behind on your vehicle and need to keep it. And Chapter 13? Provides much more help.
The last blog was about what happens after preventing your vehicle from getting repossessed by filing a Chapter 7 case. Today’s blog is about what happens if instead you file a Chapter 13 case, the payment plan type of bankruptcy.
Back Payments
If you are worried about a vehicle repossession, you are likely a month or two behind on your loan payments. Assuming you need to keep the vehicle, if you were to file a straight Chapter 7 case you would very likely be required to catch up on your back payments within a month or two after filing the bankruptcy case. Since you also need to resume making the regular monthly payments and keep current on them, catching up on the back payments at the same time and this quickly is impossible for many people.
With Chapter 13, in contrast, you either don’t have to catch up on the back payments at all or at least would likely have many months to do so.
“Cramdown”
If your loan is more than two and a half years old, and you owe more on the loan than the value of your vehicle, you can do a “cram down”—re-write the loan to reduce the portion of the loan that must be paid in full down to the value of the vehicle. The remaining amount of the loan—the unsecured portion above the value of your vehicle—is then paid the same as the rest of your unsecured creditors, often at a steep discount in your favor. In some jurisdictions, you may pay little or nothing on this unsecured portion.
As part of the re-writing of the loan in a “cram down,” you can often also lower the interest rate and/or stretch out the payments for a longer term, all of this usually resulting in a significantly reduced monthly payment.
Option to Surrender, Now or Later
Under Chapter 7, you must pretty much know at the time your case is filed whether you want to keep or surrender the vehicle. You sign a document called “statement of intent” which is filed at court usually at the start of your case. And then very quickly after that you need to put that intention into action. If you are surrendering the vehicle, you would need to do so within about a month after filing the case.
In Chapter 13 as well, your court-filed documents indicate your intentions, most directly in your formal plan. The plan states how much you intend to pay, and which creditors are to receive how much, including the vehicle loan creditor(s). It is prepared by your attorney, approved and signed by you, and presented to the court for the judge’s “confirmation.”
If you decide through the advice of your attorney that it’s in your best interest to surrender the vehicle, then your Chapter 13 plan will not propose to pay anything to the secured portion of the debt. Instead after you surrender the vehicle, the creditor will sell it, credit the sale proceeds to the balance, and report to the bankruptcy court how much it is still owed. Just as stated above, that unsecured amount will be added to the rest of your unsecured debt, and paid whatever percentage the rest are being paid. But in most cases the dollar amount being paid by the debtor towards the pool of unsecured debt does not increase. Instead that amount is just divided differently among all the unsecured creditors. For example, if your monthly payment to the trustee is $110 and you have 9 unsecured creditors with $10 going to the trustee, then each unsecured creditor would get a little over $11 per month. If you add a creditor, the payment is still $100. So, after trustee fee, each unsecured creditor now gets $10 per month.
Unlike Chapter 7, Chapter 13 gives you some flexibility if you decide later that you can’t or chose not to maintain the payments on the vehicle. You can change your mind a year or two into the Chapter 13 case, deciding to surrender your vehicle after all.
