Posted by Kevin on August 26, 2013 under Bankruptcy Blog | 
Bankruptcy stops a vehicle repo from happening. But what then?
Vehicle loan creditors can be very aggressive about repossessing their collateral—that vehicle which happens to be your crucial means of transportation. They are probably so impatient because this kind of collateral is so mobile and easy to hide. Plus the creditors’ decades of experience probably tell them the longer they wait the less likely they’ll be able to find the vehicle, and have it still be in decent condition.
So, most vehicle loan contracts give the creditors the right to repossess as soon as you’re in default on your agreement, which means as soon as you miss a single monthly payment. But for a variety of practical reasons, they don’t tend to pop cars that fast, usually letting you get 30 or maybe 60 or even more days late, depending on a bunch of factors such as your payment history, whether and what you’re communicating with them, and the value and condition of the vehicle.
In your own circumstances you probably have a decent feel for when you should be getting worried about a possible car or truck repo. If you are concerned, you may feel better that one of the most powerful tools of bankruptcy—the “automatic stay”—can stop the repo man in his tracks. That’s the law that automatically goes into effect the moment your bankruptcy case is filed at court to stay—or stop—all collection activity against you or your property, including the repossession of collateral.
But assuming you file a bankruptcy and stop a repo before it happens, what happens next? The two different consumer bankruptcy options each help in different ways. The rest of today’s blog is about how Chapter 7 helps in this situation, and the next blog will be how Chapter 13 does.
Right after filing a Chapter 7 case you have to decide whether you want to and can afford to keep the vehicle, or instead will surrender it. (This is part of what we would discuss with you before your case is filed.)
If you want to keep your car or truck you will likely need to catch up on any late payments very quickly–within a month or two after your Chapter 7 was filed. The vast majority of vehicle loan creditors will only give you that much time. (The exceptions tend to be local lenders, perhaps with less expensive vehicles for which the debt is much higher than the value of the vehicle, so they have more reason to be flexible.)
Part of the reason the creditors are in a hurry to get you current is that this reduces their financial exposure compared to the value of the vehicle.
There is also a very practical bit of timing involved. To keep the vehicle, you will be required to sign a “reaffirmation agreement,” which is filed at the bankruptcy court. That agreement formally excludes the vehicle loan from the discharge of your debts. So understandably bankruptcy law requires the “reaffirmation agreement” to be filed at court before your debts are discharged. And the court order discharging all your debts is entered most of the time about three months after your case is filed. So you can see why your creditor wants you to be current on your loan before that “reaffirmation agreement” is prepared and filed at court.
If you don’t anticipate being able to bring the vehicle loan current that quickly—either with the Chapter 7 filing gaining you enough additional cash flow or from some other source—but you still need to keep the vehicle, Chapter 13 is often an excellent solution, as will be discussed in the next blog.
Assuming for the moment that Chapter 13 is not a viable option, and that you can’t pay the back payment(s) in time, you need to consider surrendering the vehicle. There are certain advantages to surrender—especially in the midst of your Chapter 7 case—that you should fully understand even if at first it doesn’t sound like a good idea.
Surrendering the vehicle:
- gets you out of the monthly payments (and also the cost of the insurance premiums)
- avoids needing to find the money to pay the accrued late payments and related late fees and other possible charges
- discharges any “deficiency balance,” the amount that you would owe if you had surrendered the vehicle without bankruptcy—after the creditor sold it, credited the sale proceeds to the balance, and came after you for the remaining balance.
Please return here in a couple days to read how Chapter 13 can help you keep your vehicle.
Posted by Kevin on August 14, 2013 under Bankruptcy Blog |
The Federalist Papers are a key source for understanding the intentions of the drafters of the Constitution. What do these essays say about the Bankruptcy Clause?
The Bankruptcy Clause of Article 1, Section 8, Clause 4 of the U. S. Constitution gave to the Congress, and thus to the federal government, the power to make laws about bankruptcy. But this Clause gives no clue why that power is so given or how that power should be exercised.
The Federalist Papers would be a sensible place to look for such clues.
These were 85 essays published anonymously in New York newspapers during 1787-88 while the states were debating whether to ratify the proposed Constitution. These widely circulated essays unabashedly lobby for ratifying the proposed Constitution in the place of the existing Articles of Confederation. This is made clear from the first words of the first essay:
AFTER an unequivocal experience of the inefficiency of the subsisting federal government, you are called upon to deliberate on a new Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire in many respects the most interesting in the world. …Yes, my countrymen, I own to you that, after having given [the new Constitution] an attentive consideration, I am clearly of opinion it is your interest to adopt it. I am convinced that this is the safest course for your liberty, your dignity, and your happiness.
In other words: government by the Articles of Confederation has not worked, and this grand experiment in government by “reflection and choice” instead of by “accident and force” is hanging in the balance. And the new Constitution is the way forward.
The Federalist Papers can be a crucial window into what the drafters of the Constitution intended. These essays explain many provisions of the Constitution in great detail, and were written within weeks or months after The Constitutional Convention. Most of them were authored by Alexander Hamilton and James Madison who were themselves members of that Constitutional Convention.
So what do these detailed persuasive essays tell us about the framer’s intentions about bankruptcy?
Precious little. Just one sentence. In essay no. 42, written by James Madison and first published on January 22, 1788, after a long discussion on “a uniform rule of naturalization” (immigration)—the other power referred to in the same Clause—comes the following sentence:
The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.
This sentence makes two main points.
1. Madison, at least, focused on how a uniform national bankruptcy law would help creditors by preventing debtors from hiding themselves or their assets in other states. This simply reflects the pro-creditor attitude of bankruptcy law during this period.
2. Bankruptcy law is a natural part of the general regulation of commerce, so a federal government which has powers to regulate interstate commerce would just naturally have the power to create a uniform set of bankruptcy laws.
So, the U.S Constitution contains one brief but very important partial sentence about bankruptcy, making it the responsibility of the federal government. And The Federalist Papers contains only a single sentence on the topic saying, yes, of course we need a uniform bankruptcy law among all the states since commerce (and fraud) spills over the states’ borders.
Posted by Kevin on August 11, 2013 under Bankruptcy Blog |
The Constitutional Convention adopted the U.S. Constitution. Its Bankruptcy Clause was a quiet but crucial component of a much stronger national government.
Most people know that the U.S. Constitution refers explicitly to bankruptcy. The provision is short and sweet. Included among a long list of legislative powers given to Congress in Article 1 of the Constitution is the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.” (Article 1, Section 8, Clause 4.) Here’s some of the exciting (if you are at all historically inclined) backstory.
The Bankruptcy Clause Goes Right to the Heart of the Constitution’s Purpose
Back when we were kids we learned in school that before we had the Constitution, our new country floundered during its first few years under the loose Articles of Confederation. Each state acted pretty much as a sovereign country, with its own money, independent militia, and laws regulating trade with other states and even with other countries. There was no national court system and no executive branch to enforce the acts of Congress. The national government had no power to pass laws on interstate commerce, including on bankruptcy.
At the heart of the issue at the Constitutional Convention of 1787 and during the following year and a half of its ratification by the states was how strong of a national government to create. During colonial times and under the Articles of Confederation each colony or state could have its own laws of bankruptcy and insolvency, creating intense confusion and conflict among them. A national government with power over interstate commerce would sensibly avoid these problems by providing a bankruptcy law uniform among all the states.
Bankruptcy Almost Left Out of the Constitution
And yet the initial draft of the U. S. Constitution did not contain any reference to bankruptcy. Then towards the end of the Convention the issue went to a committee, which recommended the addition. The clause was adopted by the Convention by a vote of 9 states against one. “The only vote against was by Connecticut, with… concern that bankruptcies could be punished by death [!!], as was still the law in England. Connecticut also had a comprehensive bankruptcy law of its own, which it wanted to preserve free of federal control.” (From “A Brief History of Bankruptcy Law,” by Prof. Charles J. Tabb.)
In the next blog: what The Federalist Papers, 85 essays written by Alexander Hamilton, James Madison, and John Jay to convince readers to ratify the Constitution, say about the Bankruptcy Clause.
Posted by Kevin on August 7, 2013 under Bankruptcy Blog |
More answers about how Chapter 13 gives you up to 5 years to catch up on your past-due mortgage.
The last blog, and this one, answer questions about how Chapter 13 gives you time to “cure the arrearage.” Check out the last blog for answers to these questions:
- Can you give a simple example how this “curing the arrearage” works?
- If my Chapter 13 plan proposes to catch up my mortgage in 5 years, does my mortgage lender have to go along with this?
- What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?
Now on to today’s questions:
How are back property taxes handled?
If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen significantly behind on those mortgage payments, the lender may well have paid the current year’s property taxes with its own money. If so, the lender will add the amount it advanced for your taxes into the total amount that you are behind. So through your Chapter 13 plan payments you will simply pay to your lender the amount that it paid for your taxes, as you pay the rest of your back mortgage payments.
If you are paying the property taxes directly (not as part of your regular mortgage payments) and have fallen behind on those taxes, your Chapter 13 plan will include payments to the county or other appropriate taxing authority.
What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?
Chapter 13 has a relatively efficient mechanism for determining the accurate amount of arrearage. Your creditors, including your mortgage lender, are required to file a document in bankruptcy court—a “proof of claim”—stating the total amount owned, the amount of arrearage and how it is calculated, as well as the amount of any additional fees. You as the debtor then have the opportunity to object to that proof of claim. The bankruptcy judge is a convenient and experienced decision-maker in these kinds of disputes.
This area has been a controversial one in the past 5-10 years, mostly because lenders have often been inaccurate and unclear in their accounting, and been simply unable to justify the amounts on their proofs of claim. This particularly became a problem when lenders added fees to the balance without telling the homeowners, so that the homeowners would think that they were current only to learn, often after the completion of their Chapter 13 case, that supposedly they were still behind. Bankruptcy Rule 3002.1 was put into place to solve this problem. This rule requires lenders to give timely notice of the amount owed and any changes to the amount, and provides for serious consequences if they fail to follow these rules.
What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?
One of the great features of Chapter 13 is its flexibility. So you CAN change your mind and surrender your house part-way through your case. Or you can sell it. And at that point you can either stay in the Chapter 13 case or get out of it.
You could stay in it if there were still worthwhile reasons to do so, reasons not related to your house. For example, you could continue the case if you had debts that were best handled in a Chapter 13 case—such as taxes, support obligations, or possibly student loans. Your attorney would work with you to amend your plan to stop payments going to the house and redirect them elsewhere.
But if you filed a Chapter 13 case solely because of your house and now no longer needed or wanted to catch up on the arrearage, your attorney could either “convert” your case into a Chapter 7 one or simply end the Chapter 13 case by “dismissing” it. More likely your case would be converted into a Chapter 7 one to finish taking care of your debts, including possibly debts related to your house.
A big caution comes with all this flexibility. Although it’s good to know when you start your Chapter 13 case that it does not HAVE to be completed as it was originally put together, it seldom makes practical sense to start a case that you don’t intend to finish. You need to have a reasonable chance to complete it. Consider very carefully whether you will be able to make the necessary payments over the whole 3-to-5-year length of your case. If you had trouble making your regular mortgage payment before filing bankruptcy, look at whether Chapter 13, with all of its benefits, will help your cash flow enough so that you will be able to do what the plan requires of you.
Posted by Kevin on July 22, 2013 under Bankruptcy Blog |
Filing bankruptcy can buy you a little time or a lot of time, enough time either to transition to a new home or else to save your present home.
The same bankruptcy power that stops a lawsuit or garnishment of your wages or bank account, also stops a home foreclosure. The practical question is: what happens to your home after the foreclosure is stopped?
Chapter 7: the Option that Buys You a Little Time
A Chapter 7 “straight bankruptcy,” is by far the most common type. It gives you protection against foreclosure for three months or so, or potentially for even less time if the mortgage lender is aggressive.
With such a short period of protection, a Chapter 7 would help you in two quite different situations:
1. if you have decided to surrender your home but need just a few weeks to move; or
2. if you want to keep the home, and can afford to catch up on the late payments within about a year of extra payments.
Filing a Chapter 7 is like hitting a pause button. If you’re letting your house go, it lets you catch your breath before you have to leave. If you’re hanging on to the house, a Chapter 7 gives us time to do a deal with the mortgage lender.
Chapter 13: the Option that Can Buy You Years of Time
Filing under Chapter 13 can potentially give you five years to pay off your back payments, and does so in a more flexible and powerful package.
Instead of negotiating with the mortgage lender and hoping that it will give you terms that you can live with, Chapter 13 generally gives you a set of rules to follow for catching up with that lender. It also gives you time to catch up on any back property taxes, can often get rid of a second mortgage or a judgment lien, and usually provides a practical way of dealing with other liens on your home, such as an income tax or child support lien.
A Chapter 13 case is flexible, so that if you have changes in your circumstances during your case your plan can be adjusted to account for the changes. That makes holding on to your real estate more feasible. It also means you can change your mind and decide to surrender it, months or even years after your case was filed.
The mortgage lender can always ask the bankruptcy court for permission to begin or restart a foreclosure. These kinds of creditors tend to do so either at the beginning of your case if they don’t like the Chapter 13 payment plan that you and your attorney are proposing, or later in the case if you’ve not made the payments that you said in your plan that you would make. The court balances your rights against those of the lender in deciding whether to give you the extra time you need.
Posted by Kevin on July 16, 2013 under Bankruptcy Blog |
Getting sued by a creditor is a wake-up call to consider filing bankruptcy. If it is the right thing to do, there are advantages to filing before your deadline to respond to the lawsuit.
If you get sued by a creditor, as discussed in my last blog it’s dangerous both short-term and long-term not to consult with an attorney. Today’s blog is about the immediate effect on that lawsuit if you do file bankruptcy.
The Basic Automatic Stay
The filing of your bankruptcy stops that lawsuit instantaneously. It doesn’t take a separate court order or any action by the bankruptcy court or judge to stop it. It’s the mere act of filing the bankruptcy case of itself that stops the lawsuit against you. The word “stay” in that statute means “stop.”
The Immediate Effect of the Automatic Stay
Timing is important with a lawsuit. A judgment will be entered against you if you don’t formally respond to the lawsuit by the stated deadline, and that judgment would give the creditor more ways to get money out of you. The entry of a judgment can also create a lien against your real estate, and filing bankruptcy afterwards will create complications in trying to clear that lien off your title.
So stopping the judgment from being entered in the first place can be very important. The safe way to do that is to file bankruptcy plenty of time before your deadline to respond to the lawsuit. But if you are cutting it close, it helps that the automatic stay is effective instantaneously. If the creditor’s attorney is about to file documents to enter a judgment at court, but your bankruptcy is filed before that happens, that attorney can’t try to get a judgment quickly before the bankruptcy court acts, because the bankruptcy court doesn’t need to act. As its name says, the stay is automatic.
Telling the Suing Creditor about the Bankruptcy Filing
All your creditors will receive a formal notice of your bankruptcy filing, by mail and in some situations perhaps electronically. But that mailed notice is of course not instantaneous. It is mailed out a few days after the filing of your bankruptcy case, so that all of your creditors should know about it within about a week after you file. But that may well not be fast enough to stop the judgment documents from being filed by the creditor’s attorney and entered by that court. So in urgent situations either you or your attorney need to directly inform that attorney about the bankruptcy filing.
Creditors’ Violations of the Automatic Stay
But what if that attorney just goes ahead and submits the judgment papers, either from not finding out in time about your bankruptcy filing or in spite of knowing about it?
The judgment will not be effective, and the attorney will be required to undo the paperwork. If the entry of the judgment results in any damage to you (such as a garnishment of your bank account), the creditor would likely have to compensate you for the damage it (or its attorney) caused. These damages can include your attorney’s fees for enforcing the automatic stay. In circumstances where the bankruptcy court is persuaded that the creditor needs to be taught a lesson, the court may order the creditor to pay you punitive damages. Because of these potential penalties, most creditors are cooperative about stopping their lawsuits immediately when they are informed about a bankruptcy filing.
The Bottom Line
As soon as you are sued by a creditor, the clock is ticking for a judgment to be entered against you. So use this lawsuit as an incentive to see an attorney right away to find out the short-term and long-term ways the judgment could hurt you. Find out whether bankruptcy is or is not a sensible option, and whether it is in your best interest to file a bankruptcy case before a judgment can be entered against you in the lawsuit.
Posted by Kevin on July 10, 2013 under Bankruptcy Blog |
Bankruptcy quashes a garnishment, but only if it’s filed in time.
It’s all about federalism. OK. Take a deep breath. This is a little technical, but we can get through it.
Under our federalist system of government, first, federal law trumps state law in those areas of law—such as bankruptcy—in which the U.S. Constitution gives Congress the power to write laws. But second, federal law respects state law in areas of law where the states have the right to make laws—about the collection of debts, for instance.
So, state garnishment law and federal bankruptcy law butt up against each other when a garnishment and bankruptcy filing happen at about the same time.
Bankruptcy stops virtually all garnishments once the bankruptcy case is filed. But this power of bankruptcy—called the automatic stay—only kicks in at the moment of filing, not before that. So if a garnishment order is entered by the state court and your employer delivers money over to the garnishing creditor the minute before the bankruptcy case is filed, the garnishment is not prevented by the automatic stay. But the automatic stay stops all future garnishments, because now the federal law is trumping state court in the area of law where it reigns supreme.
So it’s a race between a creditor completing a garnishment in the state court, and you filing a bankruptcy in bankruptcy court.
Close Calls Depend on the Details of State Garnishment Procedures
More about the automatic stay.
Bankruptcy law simply says that a bankruptcy filing “operates as a stay” (a “freezing”) of “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case.” A garnishment is an “enforcement… of a judgment obtained before” the bankruptcy case was filed. “Property of the estate” consists of everything that you own at the time your bankruptcy is filed, including a paycheck that’s been earned but not yet paid to you.
So the creditor is stopped from garnishing from that paycheck, UNLESS according to that state’s laws at the moment of the bankruptcy filing the garnished money no longer belongs to you, and thus, not to your new “bankruptcy estate.” Exactly when that happens depends on that state’s exact garnishment procedure and on its property law. For example, who does the money being garnished belong to—you or the creditor—if the employer has cut the check for the creditor but not yet delivered it to the creditor at the moment the bankruptcy is filed. You get the idea how complicated this can get.
The Main Idea
Regardless how these hair-splitting issues would be resolved in your state, the main lesson here is to avoid this problem by having your bankruptcy case be filed well before a creditor has the right to garnish your wages. Yes, in the real world that may be harder said than done, but you can see why it makes sense.
In the next blog, we will re-visit this issue
Posted by Kevin on June 29, 2013 under Bankruptcy Blog |
This $36 billion is owed by 2 million older Americans. Garnishment of their Social Security benefits to pay these student loans has skyrocketed.
Here are the facts:
- You’ve likely heard that the total amount of student loan debt has surged beyond the amount of credit card and auto loan debt. The actual numbers as of a few months ago are:
- Credit cards: $693 billion
- Auto loans: $730 billion
- Student loans: $870 billion
- In addition to the student loan debt owed by 60+ year olds, nearly $100 billion is owed by 4.4 million 50 to 59 year olds, and $143 billion by 5.5 million 40-49 year olds. That’s nearly 12 million Americans 40 or older who still owe on student loans.
- Among all Americans who owe student loans nearly one-third of them are 40 or older. More than one-sixth are 50 or older.
- Through the Debt Collection Improvement Act of 1996, Congress centralized delinquent debt collection functions at the Department of Treasury, and authorized it to garnish borrowers’ Social Security payments to collect on federally insured student loans. (See p. 4 of this PDF of the Act, or 11 United States Code Section 3716(c)(3)(A)).
- At the heart of this Act is the following language:
“Notwithstanding any other provision of law… all payments due to an individual under… the Social Security Act… shall be subject to an offset under this section.”
- In 2000 six student loan borrowers had their Social Security payments garnished, in 2007 that number had shot up to 60,000 borrowers, and by last year 115,000 borrowers had their Social Security payments garnished.
- The garnishments cannot exceed 15% of the Social Security payment, and must leave the borrower with at least $750 per monthly check.
Note: much of this information is from a recent report by the Federal Reserve Bank of New York, and the U.S. Treasury Department’s latest annual Report to the Congress on U.S. Government Receivables and Debt Collection Activities of Federal Agencies.
Posted by Kevin on June 25, 2013 under Bankruptcy Blog |
The Simple Surrender
If you’ve decided to surrender your home, vehicle, or any other collateral that you no longer need or want to pay for, filing a Chapter 7 “straight bankruptcy” is usually the cleanest way to go. The remaining debt on the home is mostly either discharged (legally written off)—including 2nd mortgages, judgments, utilities—or is paid off by the mortgage holder after taking back the real estate—such as property taxes and homeowner association dues. On your vehicle loan, the often large “deficiency balance”—the amount you would owe after the creditor sells the vehicle and applies the sale proceeds to the loan balance—is discharged. You give up the collateral but you are quickly free of the debt.
The Possible Delayed Surrender
If you wanted to keep the property, Chapter 13 allows for that. But what if you know that your job may not last for more than another year, so you’re sensibly facing the reality that at that point you would likely not be able to continue making payments on the home or vehicle? Once again, Chapter 13 is the way to go. It allows you to make usually reduced payments while you have your job so you can keep the home or vehicle. Then, if you lose your job, you can convert to Chapter 7, surrender the property and have the debt discharged. Clearly, Chapter 13 gives you a lot a flexibility under these scenarios.
Flexibility at a Price
But, as with most things in life, there is a cost factor for this flexibility. Chapter 13 costs more in fees than Chapter 7, easily twice the cost, or more. The attorney fees are much higher because it is more work over a longer period of time. Plus the Chapter 13 trustee receives a percentage of what you pay to the creditors. Yes, you may save some money to retain the property in Chapter 13 as opposed to what the regular payment would be; however, those savings you may be partially or even fully offset by these higher fees.
Posted by Kevin on June 17, 2013 under Bankruptcy Blog |
If you want to hold onto your home, Chapter 13 gives you many extraordinary advantages.
A. If you are current on your mortgage: In most situations you will be allowed to keep making payments directly to your mortgage holder. The bankruptcy system puts a high priority on home mortgages, so almost always your Chapter 13 plan will be structured to pay your mortgage ahead of most other creditors.
B. If you are behind on your mortgage: You will likely have the whole 3-to-5-year length of your Chapter 13 case to catch up on your missed payments. Although theoretically you want to finish your case sooner than later, from a practical perspective the longer you have to catch up the less it will cost each month to do so. In fact because of this, homeowners often intentionally stay in their cases longer than their income requires just to make it easier on their monthly budget.
C. If you have a second mortgage: We may be able to “strip” that mortgage off your house, so that you won’t have to pay it. This is possible only if the home is worth no more than the balance owed on the first mortgage. And this can only be done in Chapter 13, not Chapter 7. Note that when the second (or third) mortgage is stripped off your title, you will be that much closer to eventually building some equity in your home
D. If you are behind on homeowner association dues: These special creditors usually have very aggressive collection methods available to them. But Chapter 13 can stop them and keep them at bay while you get current through payments earmarked to them through your plan.
E. If you are behind on your property taxes: Same thing. The county or other property tax agency is put on hold with any tax foreclosure or other collection procedures while the back taxes are paid through your Chapter 13 plan. Your mortgage company also sees that you are taking care of this responsibility and can monitor your performance in doing so.
F. If you have a judgment lien on your home: In many circumstances, judgment liens attached to your home can be “voided”—the lien undone and the underlying debt written off. The debt itself is treated as an unsecured debt and is paid whatever percentage all your unsecured creditors receive through your Chapter 13 plan. Usually this does not increase how much you end up paying to the creditors, but rather just shifts how much each of your creditors gets paid (if anything at all).
G. If you have an income tax lien: Chapter 7 does not have an effective way of dealing with an income tax secured through a tax lien. Chapter 13 does. Whether the tax lien is on a tax which can or cannot be discharged, your Chapter 13 plan will arrange to pay only those taxes that must be paid during the life of your case. So at the end of your case all necessary taxes will have been paid in full and the tax lien will be released.
H. If you have a child or spousal support lien: Another situation where Chapter 7 cannot help, under Chapter 13 the ex-spouse or support enforcement agency would be stopped from enforcing the lien, you’d have the length of your case to pay the arrearage, so that by the end of the case you would be current and any lien would be released.
These are the main special powers that Chapter 13 provides to help you keep your home. Often these are used in combination, to fight back at each of the ways your home is being attacked. Whether you just need to use one or two or a bunch of them, these powers make keeping your home much more likely to actually happen.
Posted by Kevin on May 29, 2013 under Bankruptcy Blog |
If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman. It starts with a much more robust “automatic stay.”
The last blog explained how filing a Chapter 7 “straight bankruptcy” gives you certain leverage over secured creditors. In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.
Stopping Creditors from Taking the Collateral
The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:
1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.” (usually because the debtor fails to make make multiple payments to that creditor).
2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.
As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected.
3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”
Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid. As long as you abide by the Plan, the automatic stays continues in effect, and the taxing authority cannot foreclose.
Posted by Kevin on May 21, 2013 under Bankruptcy Blog |
Chapter 13 protects you while you catch up on your vehicle loan, or you may not need to catch up on that loan at all.
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Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. Chapter 13 gives you many months, or even a couple years, to catch up. And if you got your loan more than two years and a half years ago, and you owe on it more than the vehicle is worth, you probably won’t even have to catch up on any missed payments. And you will likely pay less per month, and pay less on the loan overall until you own it free and clear.
The Law of Vehicle Loans Arrears
A vehicle loan is in effect made up of two commitments you’ve made to your lender:
- a promise to pay a certain amount each month, plus interest, until the debt is paid off; and
- a lien on the vehicle, giving the lender a right to repossess your vehicle if you fail to keep your promise to pay.
If right before filing bankruptcy you were behind on your vehicle payments, your lender would have the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay” stops any repossession. This protection lasts as long as the bankruptcy case is open, unless the lender files a motion to get “relief from the automatic stay” and gets earlier permission to repossess.
Vehicle Loans in Arrears in Chapter 7
If you are not current on a vehicle loan and want to keep that vehicle, a Chapter 7 would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the likely practices of you lender when you discuss your vehicle loan options.
Vehicle Loans in Arrears in Chapter 13
If you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you. In most situations you would be allowed to catch up over a period of many months, potentially even a few years.
In some situations you may not even need to catch up at all. This happens if, and only if, 1) you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and 2) your vehicle is worth less than your debt against it. If so, you will not only NOT need to catch up on the loan, you will usually be able to pay a lower monthly payment, often a lower interest rate, and less on the loan overall, and then you will own the vehicle free and clear at the end of the case.
This is informally called a vehicle loan “cramdown,” and can ONLY be done under Chapter 13, not under Chapter 7.
Even if you are current on your vehicle loan, or could catch up within two months or so, and therefore would likely be able to keep your vehicle under Chapter 7, IF your vehicle is worth significantly less than what you owe on it you should talk with your attorney about how much money a Chapter 13 could save you through a “cramdown.” This might especially make sense if Chapter 13 also helps you in other ways.
Posted by Kevin on May 16, 2013 under Bankruptcy Blog |
Secured Debts
A secured debt is usually one in which your agreement to pay a debt is backed up with some collateral. If you don’t pay, the creditor can take possession and ownership of that collateral. So, a mortgage holder can foreclose on your home, a vehicle lender can repossess your vehicle, and the appliance store can haul away your washer and dryer.
But for the creditor to have rights to your collateral—for the debt to be truly “secured”—the creditor needs first to have gone through the appropriate legal steps to tie the collateral to the debt.
Besides secured debts in which you voluntarily gave the creditor rights to the collateral, there are many kinds of secured debts in which the creditor got those rights by operation of law. This happens without your consent, sometimes even without your knowledge, often as part of the debt collection process. An example is an IRS tax lien recorded against your real estate and/or personal property for non-payment of income taxes.
Power Provided by Chapter 7
A Chapter 7 case can help with both voluntary and involuntary secured debts. It will 1) temporarily or permanently prevent your creditor from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without economically hurting yourself.
Power # 1: Stop the Creditor from Taking the Collateral
The moment your Chapter 7 case is filed, all your secured creditors are immediately stopped from taking possession of your collateral. This is the same power that stops all collection activity by all your creditors again you and your property. You may hear this referred to as the “automatic stay.”
Very importantly, not only does the “automatic stay” stop secured creditors from chasing previously agreed to collateral, also stops unsecured creditors from becoming secured ones, such as by stopping the IRS from getting a tax lien. Since secured creditors have tremendously more leverage, inside and outside of bankruptcy, this is a very helpful power that bankruptcy gains for you.
Power # 2: Keep the Collateral
Whether the collateral on a secured debt is your home, vehicle, appliances, or everything you own (as with an IRS tax lien), if you want to keep the collateral or whatever is included in a lien, bankruptcy can help in a variety of ways, including:
- If you are current on a secured debt and want to keep the collateral—such as with a vehicle loan—you can virtually always do so. . This is also a good way for you to get a head start on rebuilding your credit.
- If you are not current on your payments, you will generally be given a limited amount of time to bring the account current.
- In some situations, the loan terms can be changed to waive payment of any missed payments, to lower the interest rate, and perhaps even lower the balance.
- Select kinds of secured debts—for example, judgment liens on your home—can be “avoided”—stripped off your home title.
Power # 3: Dump the Collateral
Outside of bankruptcy, simply surrendering collateral to the creditor because you do not need or want it any longer, or just can’t afford to pay for it, is often not an economically sensible option. That is because you can end up still owing much of the debt after the creditor sells the collateral for substantially less than the amount of the debt, adds all of its sale costs to the debt, and then sues you for the remaining “deficiency balance.”
And if instead the creditor just forgives that balance, in some situations you can be hit with a serious income tax obligation. The amount forgiven may be considered “cancelation of debt income” upon which you may be required to pay income taxes.
Chapter 7 solves both of these problems. Except in very unusual situations, it would discharge (permanently write off) any “deficiency balance” after the surrender of any collateral. And the discharge of debts in bankruptcy is not considered “cancellation of debt income,” so you don’t have the risk of it is being taxed. As a result, you can freely surrender collateral in a Chapter 7 case if you want to, without worrying about owing the creditor or owing taxes for doing so.
Posted by Kevin on May 14, 2013 under Bankruptcy Blog |
If your family income is more than the “median family income,” you may still be able to file under Chapter 7.
The “median family income” within a particular state is the dollar amount at which half of the families in that state make less, and half make more than that amount. “Median family income” amounts are calculated for different size families within each state. This information, which originates from the U.S. Census, is available on a table downloadable at the U.S. Trustee’s website. Make sure you’re looking at the most recent table.
Let’s be clear: if your income is at or less than the “median family income” for your size family, in your state, then you are eligible to file under Chapter 7. (Other separate hurdles may need to be addressed but those go beyond today’s blog.)
It only gets complicated if your income is more than the applicable “median family income.” As stated in the very first sentence above, you still may be able to file a Chapter 7 case. Here what you need to know to help make sense of this:
A. Simply figuring out your own family income to find out if you are above or below the “median family income” is much harder than you’d think. It’s not last year’s gross taxable income, or anything commonsensical like that. It’s instead based on a much broader understanding of income—basically every dollar that comes to you from all sources, with some very limited exceptions. And it’s based only on the income received during the last 6 full calendar months before filing, and then converting that into an annual amount. And that’s the easy part!
B. If your family income is higher than the applicable “median family income,” then you still have a number of ways that you can file a Chapter 7 case:
1.Deduct your living expenses from your monthly income to see if your “monthly disposable income” is low enough. The problem is that figuring out what expenses are allowed to be deducted involves understanding a tremendously unclear and complicated set of rules. In any event, after your attorney applies those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then it is low enough so that you can still file Chapter 7.
2. If after deducting your allowed living expenses, your “monthly disposable income” is more than $195, then you can’t file under Chapter 7, except by showing “special circumstances.”
3. And what happens if your “monthly disposable income” is between $117 and $195? That’s where the real fun begins. Multiply your specific “monthly disposable income” by 60. 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.
So to go back to the question in the title of this blog, you can see that even if your income is higher than your state and family size’s “median family income,” you can still file Chapter 7 under a number of different financial conditions. You can also see that the law is convoluted. This is definitely an area where you need to get solid legal advice.
Posted by Kevin on May 5, 2013 under Bankruptcy Blog |
If your financial life is legally simple, your bankruptcy will likely be simple. What is it about your financial life that makes for a not so simple bankruptcy case?
Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.
To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.
1. No non-exempt assets vs. owning non-exempt assets: In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.
2. Under median income vs. over median income: If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.
3. Not behind on real estate mortgage vs. you are behind: If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.
4. No debts with collateral vs. have such debts: The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.
5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts: Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.
6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge: In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.
7. Never filed bankruptcy vs. filed prior bankruptcy: Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.
We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.
Posted by Kevin on April 22, 2013 under Bankruptcy Blog |
Most creditors don’t challenge your write-off of their debts in bankruptcy. But if one does, the system is poised to resolve that challenge relatively quickly.
The last blog, and this one, are about what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. As emphasized last time:
- Most potentially dischargeable debts DO in fact get discharged. To avoid any particular debt from being discharged, the creditor has the burden of establishing that the debt arose out of a very specific sort of bad behavior by you, one that is on a list that is in Section 523 of the Bankruptcy Code.
- Your creditors have a very firm deadline to raise such a challenge, or else lose the ability ever to do so.
- The challenge is raised by filing a complaint . This starts an “adversary proceeding,” a lawsuit focused only on this question.
Avoid Losing by Default
After a creditor files a complaint, the most important thing to realize is that the creditor will automatically win if you and your attorney do not file a formal answer at the court within the stated deadline. So contact your attorney immediately if you receive a complaint.
Most Discharge Challenges Don’t Go to Trial
The adversary proceeding can go through all the steps of a regular lawsuit. After filing the answer, there can be “discovery”—the process of requesting and exchanging any pertinent information and documents, and holding depositions (questioning witnesses under oath). And there could be various kinds of motions, pre-trial hearings, and a full trial. But these kinds of adversary proceedings rarely go through all these step and get to trial, because the amount of money at issue usually does not justify the cost involved for either side to pursue it that far. So after both sides get a clear picture of the facts, there is usually a settlement. Or the debtor does some quick math, and decides that it would be cheaper to buy off a creditor than to spend the money on additional legal fees with the possibility that you could lose at trial and be forced to pay the creditor the full amount due (note that representation in an adversary proceeding is never included in the base fee).
But if there is enough at stake, or else if one or both sides are unreasonable and insist on getting a decision from the judge, the dispute does go to trial. These trials usually last a half-day, or a day, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not. Extremely rarely, this decision can be appealed, in fact theoretically all the way up to the United States Supreme Court!
What’s So Quick and Efficient about All This?
Any litigation is very expensive, so you hope to avoid any discharge challenges. But bankruptcy court is a relatively fast and efficient forum for a number of reasons:
1) Because creditors have the opportunity to review your finances beforehand, much of the time they will not bother to raise challenges at all.
2) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts.
3) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings tend to be resolved in a matter of few months.
4) Because bankruptcy judges deal with these kinds of challenges all the time, they are extremely familiar with these legal issues. So they move these cases fast.
Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. Help this happen by informing your attorney about any threats made by creditors before your bankruptcy is filed, and then working closely with your attorney if a creditor follows through on its threat by filing a complaint.
Posted by Kevin on April 20, 2013 under Bankruptcy Blog |
Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.
One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.
This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.
Creditors Have to Put Up or Shut Up
Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing you. But for sure tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.
Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.
And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.
The “Adversary Proceeding”
The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a mini-law suit, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example, you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks, by coercing a relative to change their will on your behalf… behavior of this sort.
Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.
Posted by Kevin on April 14, 2013 under Bankruptcy Blog |
Three more very practical ways that bankruptcy works to let you take control of your debts, even those that can’t be written off.
A few blogs ago I gave six reasons why it’s worth looking into bankruptcy even when you can’t discharge (write off) one or more of your debts. Today here are the final three of those reasons, each one paired with a concrete example illustrating it.
Reason #4: Taking control over the amount of the monthly payments.
The taxing authorities, support enforcement agencies, and student loan creditors have extraordinary power to take your money and your assets if you fall behind in paying them. Because of that tremendous leverage, you normally have no choice but to play by their rules about how much to pay them each month. Chapter 13 largely throws their rules out the window.
Let’s say you owe $15,000 to the IRS—including interest and penalties—from the 2010 and 2011 tax years, resulting from a business that failed. You’ve now got a steady job but one that gives you very little to pay the IRS after taking care of your very basic living expenses. The IRS is requiring you to pay that debt, plus ongoing interest and penalties, within 3 years. And it calculates the amount you must pay it monthly without any regard for your other debts, or for your actual living expenses. Even if you did not have unexpected expenses during those 3 years, paying the required amount would be extremely difficult. But if your vehicle needed a major repair or you had a medical problem, keeping up those payments would become absolutely impossible. But the IRS gives you no choice.
In a Chapter 13 case, on the other hand, the repayment period would stretch out to as long as five years, which lowers the monthly payment amount. And instead of a rigid mandatory monthly payment going to the IRS, how it is paid in Chapter 13 is much more flexible. For example, if in your situation money was very tight now but would loosen up down the line—for example, after paying off a vehicle loan—you would likely be allowed to make very low or even no payments to the IRS at the beginning, as long as its debt was paid in full by the end. Also, you would be allowed to budget for vehicle maintenance and repairs, and medical costs, and other reasonable expenses, usually much more than the IRS would allow. And if you had unexpected vehicle, medical, or other necessary expenses beyond their budgeted amounts, Chapter 13 has a mechanism for adjusting the original payment schedule. Throughout all this, you’d be protected from the IRS.
Reason #5: Stopping the addition of interest, penalties, and other costs.
Under the above facts, if you were not in a Chapter 13 case, the IRS would be continuously adding interest and penalties. So that much less of your monthly payment goes to reduce the $15,000 owed, significantly increasing the amount you need to pay each month to take care of the whole debt in the required 3 years.
In Chapter 13, in contrast, unless the IRS has imposed a tax lien, no additional interest is added from the minute the case is filed. No additional penalties get added. So not only do you have more time to pay off the tax debt, and much more flexibility, you have also have significantly less to pay before you finish off that debt.
Reason #6: Focusing on paying off the debt that you can’t discharge by discharging those you can.
This may be obvious but can’t be overemphasized: often the most important and direct benefit of bankruptcy is its ability to clear away most of your debt burden so that you can put your financial energies into the one that remain.
Back to our example of the $15,000 IRS debt, let’s say the person also owes $20,000 in credit cards, $5,000 in medical bills, and a $6,000 deficiency balance on a repossessed vehicle. Discharging these other debts would both free up some of your money for the IRS and avoid the risk that those other creditors could jeopardize your payments to the IRS. Entering into a mandatory monthly payment arrangement with the IRS when at any moment you could be hit with another creditor’s lawsuit and garnishment is a recipe for failure.
Instead, a Chapter 7 case would very likely discharge all of the credit card, medical and old vehicle loan debts. With then gone you would have a more sensible chance getting through an IRS payment arrangement.
In a Chapter 13 case, you may be required to pay a portion of the credit card, medical and vehicle debts, but in return you get the benefits of getting long-term protection from the IRS, a freeze on interest and penalties, and more flexible payments.
So whether Chapter 7 or Chapter 13 is better for you depends on the facts of your case. Either way, you would pay less or nothing to your other creditors so that you could take care of the IRS. Either way, you would much more likely succeed in becoming tax free and debt free, and would get there much quicker.
Posted by Kevin on under Bankruptcy Blog |
The last blog gave 6 reasons why it’s worth looking into bankruptcy even if you know that you can’t discharge (write off) one or more of your most important debts. Today here are concrete examples how the first three of those could work for you.
The first two reasons we’ll cover together. First, sometime debts which you might think can’t be discharged actually can be, and second, some debts that can’t be discharged now may be able to be in the near future.
Let’s say you currently owe $10,000 in federal income tax for the 2008 tax year. You filed that tax return on October 15, 2009 after getting an extension. The IRS assessed the tax and you’ve been making monthly payments to the IRS on a payment plan, but because of that you did not make adequate tax withholdings or quarterly estimated payments for 2011. You know that once you file your 2011 tax returns (by October 15, 2012, because you got an extension) you’re going to be in trouble because you will owe a lot for that year as well. You know the IRS will cancel the payment plan for 2008 because of your failure to keep current on your ongoing tax obligations. You’re pedaling as fast as you can, but October 15 is less than two months away and you don’t know what to do. You are quite certain that the $10,000 tax debt cannot be discharged in bankruptcy.
You’d be right about that… but only for the moment. Because under these facts that 2008 tax debt could very likely be discharged through either a Chapter 7 or 13 bankruptcy case filed AFTER October 15, 2012. (Whether you’d file a Chapter 7 or 13 would depend on other factors, including how big your 2011 and anticipated 2012 tax debts will be.) Instead of being in a seemingly impossible situation, you would avoid paying all or most of that $10,000—plus lots of additional interest and penalties that you would have been required to pay. Instead you would be more than $10,000 ahead on paying off the 2011 and 2012 taxes!
Now here’s an example where bankruptcy can permanently solve an aggressive collection problem.
Change the facts above to make that $10,000 debt one owed for the 2009 tax year instead of 2008. Since that tax return was also filed with an extension to October 15, 2010, that $10,000 would not be dischargeable until after October 15, 2013. But in this example you’ve already defaulted on your monthly payment agreement. So you are appropriately expecting the IRS to file a tax lien on all of your personal property and on your home, and to start levying on (garnishing) your financial accounts, and on your paycheck if you’re employed or on your customers/clients if you’re self-employed.
With all that the IRS can do to you, you can’t wait until October of next year to discharge that $10,000. But if you filed a Chapter 13 case now the IRS would not be able to take any of the above aggressive collection actions against you. You would have to pay the $10,000 (and any taxes owed for 2010 and 2011) but you would have as long as 5 years to do so. And most importantly, throughout that time you’d be protected from any future IRS collection action on any of those taxes, as long as you complied with the Chapter 13 rules.
As for the 2012 tax year, you would likely be given the opportunity to pay extra withholdings or estimated payments during the rest of this year, which you would be able to afford because of temporarily paying that much less into your Chapter 13 plan.
So instead of being hopelessly behind and deathly scared about everything the IRS is about to do to you, within a few days you could be on a financially sensible path to being caught up with the IRS. And then within three to five years you’d be tax debt free, AND debt free.
Posted by Kevin on April 3, 2013 under Bankruptcy Blog |
You owe the IRS a substantial amount of money for income taxes. You have heard that bankruptcy doesn’t discharge (legally write off) income tax debts. So you’re not seriously considering bankruptcy much less consulting with a bankruptcy attorney.
You may or may not be right about whether or not that income tax debt can be discharged now. However, you may be able to discharge the income tax debt in the future . But you will not know for sure unless you get some advice. Here are six reasons why you should not be your own lawyer, and should consult with an experienced bankruptcy attorney:
1. Some debts, which you think can’t be discharged, actually can. Certain income taxes can be discharged in either a Chapter 7 or Chapter 13 case. For the most part, it depends on when the tax obligation was incurred. And even though alimony is not dischargeable, there are some payments to an ex-spouse which are not considered nondischargeable alimony under the Bankruptcy Code. It’s certainly worth finding out whether the debt you assume can’t be discharged actually can be discharged.
2. Some debts that can’t be discharged now may be able to be in the future. Almost all income taxes can be discharged after a series of conditions have been met. So your attorney can put together for you a game plan coordinating these tax timing rules with all the rest of what is going on in your financial life.
3. Even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem. In many situations your primary problem is the devastating way a debt is being collected. For example, you may want to pay an obligation for back child support but the state support enforcement agency is about to suspend your driver’s and/or occupational license. A Chapter 13 case will stop these threats to your livelihood, and protect you from them while you catch up on the back support.
4. You have more control over the amount of the monthly payments on debts that cannot be discharged. Debts which the law does not allow to be discharged in bankruptcy also tend to be ones that give the creditors a lot of leverage against you. Chapter 13 takes some of this leverage away from them by allowing you to pay what your budget allows, not what these creditors would otherwise like to carve out of you.
5. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts are so much more difficult to pay off because a part of each payment goes to the ongoing interest and penalties. Some tax penalties in particular can be huge. Most of these ongoing add-ons are stopped by a Chapter 13 filing, allowing you to become debt-free sooner.
6. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged and a bunch of debts that can be. Even if bankruptcy can’t solve your entire debt problem directly, discharging most of your debts would likely make that problem much more manageable. Under Chapter 7, you would be able to pay off those surviving debts much faster, which is especially important if they are accruing interest or other fees. And under Chapter 13 you would have the benefit of a predictable payment program, one that focuses your financial energies on those nondischargeable debts while protecting your assets and income from them.
So don’t let the fact that you believe that you have debts that can’t be discharged in bankruptcy stop you from getting legal advice. What you find out may surprise you.
