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Newly Reinstated Federal Unemployment Benefits

Posted by Kevin on January 18, 2021 under Bankruptcy Blog | Comments are off for this article

The $900 billion pandemic relief law enacted on December 27 extended federal unemployment benefits, plus added a new “mixed earner” benefit.

 

The Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA), was enacted on December 27. It extended unemployment benefits that were in the CARES Act of last spring, although with changes. One of the most impactful of those benefits had expired. Others were about to expire at the end of 2020. For these, the law came in the nick of time. The new law also created a new “mixed earner” benefit for workers with prior income from both wages and self-employment.

The Reinstated but Reduced Extra Federal Benefit

Under the CARES Act, the Federal Pandemic Unemployment Compensation (FPUC) benefit provided an extra $600 benefit per week. This was in addition to the regular state benefit. It expired way back on July 31, 2020.

The new law reinstates this extra federal unemployment benefit, but reduces it to $300 per week. These benefits are now set to last until March 14, 2021.

To be clear, it applies to

supplemental benefits for weeks of unemployment beginning after December 26, 2020, and ending on or before March 14, 2021. FPUC is not payable with respect to any week during the gap in applicability, that is, weeks of unemployment ending after July 31, 2020, through weeks of unemployment ending on or before December 26, 2020.

U.S. Dept. of Labor Press Release of December 30, 2020.

The Extended Benefit for Formerly Self-Employed and Regular W-2 Employees

The CARES Act’s Pandemic Unemployment Assistance (PUA) expanded benefits in two main ways. First, it extended eligibility to the self-employed, gig workers.  Second, it applied to those otherwise ineligible for unemployment benefits, providing benefits for up to 39 weeks.  This program had specific pandemic-related eligibility requirements. It was to expire on December 31, 2020.

The new law extends this benefit’s expiration from that date to March 14, 2021. Also:

For individuals on PUA who have not exhausted their benefit eligibility of up to 50 weeks, the program also provides for continuing benefits for eligible individuals for weeks of unemployment through April 5, 2021.

U.S. Dept. of Labor Press Release of December 30, 2020.

The Extended Benefit for Those Who’ve Exhausted Benefits

The CARES Act’s Pandemic Emergency Unemployment Compensation (PEUC) program gave people an extra 13 weeks of unemployment benefits. Individuals usually get up to 26 weeks of unemployment benefits under state law. Some states provide fewer weeks—sometimes much fewer. CARES added up to 13 more weeks for eligible workers, for up to a total of 39 weeks of benefits. Section 2102(c)(2) of CARES.

The new law of December 27, 2020 added 11 weeks of benefits. This raises the total benefit maximum from 39 weeks to 50 weeks.

The New Mixed Earner Unemployment Compensation

In the new law Congress has tried to fix an unanticipated problem under the CARES Act. People who had prior income from both traditional employment and also self-employment had a tough choice. They had to either apply for traditional unemployment or for the new Pandemic Unemployment Assistance (PUA) for their self-employment income. They could not receive both. This tended to reduce their benefit because some of their income would not count towards the amount of their benefit.

The new law addressed this in a simple but not very precise way. The Mixed Earner Unemployment Compensation (MEUC) benefit gives an extra $100 per week of Pandemic Unemployment Assistance to those who qualify.   To qualify the worker must have earned at least $5,000 in self-employment income in the most recent tax year. One other condition: each state gets to decide whether to sign on to MEUC. So check with your state employment department.

Status of the $600 Pandemic Relief Payments

Posted by Kevin on January 5, 2021 under Bankruptcy Blog | Comments are off for this article

Congress passed and Trump signed the new pandemic relief law, the increase to $2,000 isn’t happening, so when are the $600 payments coming?  

 

On December 27, President Trump signed the pandemic relief law that Congress had passed 6 days earlier.

The new law includes pandemic relief checks of $600 (instead of the $1,200 amount in last spring’s CARES Act). This past week there were a series of events related to possibly increasing the $600 pandemic relief checks to $2,000. But after all that, now it’s clear that that’s not happening. At least not for a while.

The present Congress ended on Sunday, January 3, 2021, and any laws not passed died with it. “When one Congress expires, all the pending legislation goes with it.” (Congressional Institute). That included any laws in either the House of Representatives or the Senate dealing with the increase to $2,000. The new Congress started on the same day, January 3, and may or may not try to pass additional pandemic relief payments in the future.

But in the meantime what’s going on with the now-approved $600 “Economic Impact Payments”?

Who Gets the $600 Payments?

Many of the rules for distributing the payments are the same as for the $1,200 CARES Act payments of last spring.

The $600 payments are going to all U.S. citizens and resident aliens. Sensibly, married couples who filed income taxes jointly are receiving $1,200 (2 times $600).

In addition, that same $600 amount is going to all dependent children 16 years old or less. (This is an increase from the $500 per child under CARES.) As stated in a December 29, 2020 IRS news release:

Generally, U.S. citizens and resident aliens who are not eligible to be claimed as a dependent on someone else’s income tax return are eligible for this second payment.

However, dependents 17 years or older aren’t eligible to receive anything.

As with the CARES Act, the payments are reduced for individuals with 2019 adjusted gross income of more than $75,000. For married couples who filed joint returns, that income amount is $150,000. The payments phase out completely for individuals with income of $87, 000 and for couples at $174,000. These phase-out amounts are lower than under the CARES Act (which were $99,000 and $198,000, respectively).

Another change expanded eligibility for this time. The IRS news release puts it this way:

Under the earlier CARES Act, joint returns of couples where only one member of the couple had a Social Security number were generally ineligible for a payment – unless they were a member of the military. But this month’s new law changes and expands that provision, and more people are now eligible. In this situation, these families will now be eligible to receive payments for the taxpayers and qualifying children of the family who have work-eligible SSNs.

The Timing

The U.S. Treasury Department’s recent press release announced the timing of the payments as follows:

On December 29, the Treasury Department and the Internal Revenue Service began delivering a second round of Economic Impact Payments to millions of Americans as part of the implementation of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.  The initial direct deposit payments may begin arriving as early as tonight for some and will continue into next week.  Paper checks began to be mailed on December 30.

What to Do to Get Your Payment

The same Treasury press release states that “[t]his second round of payments will be distributed automatically, with no action required for eligible individuals.” The more detailed IRS news release of the same date adds the following details:

Some Americans may see the direct deposit payments as pending or as provisional payments in their accounts before the official payment date of January 4, 2021. The IRS reminded taxpayers that the payments were automatic, and they should not contact their financial institutions or the IRS with payment timing questions.

As with the first round of payments under the CARES Act, most recipients will receive these payments by direct deposit. For Social Security and other beneficiaries who received the first round of payments via Direct Express, they will receive this second payment the same way.

Anyone who received the first round of payments earlier this year but doesn’t receive a payment via direct deposit will generally receive a check or, in some instances, a debit card. For those in this category, the payments will conclude in January.

Also, from the same IRS source:

Payments are automatic for eligible taxpayers who filed a 2019 tax return, those who receive Social Security retirement, survivor or disability benefits (SSDI), Railroad Retirement benefits as well as Supplemental Security Income (SSI) and Veterans Affairs beneficiaries who didn’t file a tax return. Payments are also automatic for anyone who successfully registered for the first payment online at IRS.gov using the agency’s Non-Filers tool by November 21, 2020 or who submitted a simplified tax return that has been processed by the IRS.

If You’re Eligible But You Don’t Get the Payment…

The following applies both to the prior CARES payments and the new $600 ones. Both sets of payments are actually special income tax credits that the U.S. Treasury is paying in advance. Usually we receive tax credits after we file our income tax returns. But not these. These Economic Impact Payments are advance payments of the “Recovery Rebate Credit” on our upcoming tax returns.

So if you’re eligible for but for any reason do not receive either the CARES or the new $600 payments, claim it as a tax credit on your next income tax returns and receive payment that way.

To Get More Information about Your Payment…

Go to IRS.gov/GetMyPayment.  The site is up and running.

The “Meeting of Creditors” in a Chapter 7 Case

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

In virtually every Chapter 7 “straight bankruptcy” case, you never go to court. But you DO go to a formal meeting, usually lasting 5 to 10 minutes, one that you must attend. If you don’t, your case can be dismissed.

This meeting is with your Chapter 7 trustee, but it is misleadingly called the “meeting of creditors.” It is sometimes referred to as the “341 hearing,” named after the Section 341 of the Bankruptcy Code which addresses it. 

This meeting is not one in which all your creditors attack the debtor for filing bankruptcy.  What usually happens is that the trustee will question the debtor about his or her petition, or documents that were submitted after the filing.  The questioning is usually not intensive.  Although creditors are given the opportunity to be there, most of the time they do not attend.  Why not? Because usually there is no reason for them to attend. The grounds for objecting to bankruptcy are very limited so most creditors can’t object. So they don’t waste their time.

The creditors that tend to be at the 341 hearing are those which have collateral in personal property such as your motor vehicle or furniture, or creditors with an axe to grind.  In the past in New Jersey, certain collateral creditors sent representatives to the 341 hearings.  They routinely questioned debtors usually about their intention about the collateral (retain or surrender). But now, most of these creditors forego the 341 hearings in favor of making arrangements with the debtor’s attorney either over the phone or by email.    

The axe to grind creditors are usually ex-business partners or ex-spouses.  For them, its just not just the money, it’s  personal.  My experience has been, however, that trustees are very adept at controlling these types of creditors, and they make sure that the 341 meeting is not used as a vehicle for making ad hominem attacks on the debtor.  That does not mean that the trustee will not give such creditors some leeway in questioning the debtor.  The one area of concern is that these creditors tend to know the debtor pretty well as opposed to credit card companies or mortgage lenders.  They may know if the debtor had been engaged in cutting corners or engaging in questionable behavior.  Be sure to talk with your lawyer well in advance if you have any concerns in this area. He or she will warn you if your circumstances raise any red flags, and will prepare you for the meeting.

Rarely, if there isn’t enough time for legitimate questions, a second meeting of creditors can be scheduled. Or the conversation with a creditor might continue informally outside the hearing.

There is one person who is NOT allowed to be at the meeting: the bankruptcy judge. As the Bankruptcy Code says: “The court may not preside at, and may not attend, any meeting under this [341] section… .” So the meeting is definitely not a court hearing.

Conclusion

At most Chapter 7 meetings of creditors there are no creditors, or, at most, one or two. It’s rare that a creditor will ask tough questions, but it can happen. Your attorney will prepare you for the types of questions that will be asked at the meeting.   Be sure to share any concerns with your lawyer so you won’t worry unnecessarily.

Crucial Facts about Co-Signed Debts in Bankruptcy

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

Bankruptcy protects you from your co-signed creditor and also from your co-signer.  

Protecting Only Yourself

Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.

Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the co-signer.

Your Obligation to the Creditor

The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or other exceptions to discharge listed in the Bankruptcy Code. But those objections or exceptions don’t apply to most debts.

Your Probable Obligation to Your Co-Signor

Usually, you have a distinct legal obligation to the other person legally liable on the debt.  What exactly that obligation is depends on the circumstances.

Assume the other person co-signed to enable you to get credit.  You may have entered into an oral or written agreement with the co-signer that if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. Or it could have been something not specifically said or written down, but understood.  In addition,  you could have agreed that if the co-signer were sued, you would be responsible for any costs, like legal fees, incurred by the co-signer in a lawsuit brought by the creditor.

Being Practical

There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the co- signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished if he or she paid off your debt.

Can Your Co-Signer Object?

Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.

If you suspect that a co-signer may object to your discharge (for valid or invalid reasons), explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and, in some cases, can take any appropriate action to minimize your risks.

Priority Income Tax Debts under Chapter 13

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

In the last blog, we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.

Recent Income Taxes Can’t Be Discharged

The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.

There are two major conditions determining whether a tax debt can be discharged. (There are other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:

1. if the tax return for that tax debt was legally due less than 3 years before you file your bankruptcy case (after adding the time for any tax return-filing extensions) U.S. Bankruptcy Code Section 507(a)(8)(A)(i).

OR

2. if you actually submitted the tax return to the IRS/state less than 2 years before you file the bankruptcy case. Bankruptcy Code Section 523(a)(1)(B)(ii).

Two Examples

Assume you filed a bankruptcy case on December 10, 2019. You owe income taxes for the 2017 tax year. The tax return for that tax was due on April 17, 2018 (because of a weekend and holiday). (This assumes no tax return filing extension.) That’s much less than 3 years before the December 1, 2019 bankruptcy filing date. So, no discharge of the 2017 tax debt, because of the first 3-year condition above.

As for the second condition above, assume again that you filed your bankruptcy case on December 10, 2019.  This time change the facts so that you submitted the tax return late for the 2015 taxes, on October 1, 2018. That’s less than two years before the December 10, 2019 bankruptcy filing date. So because of the second condition above, taxes due for 2015 would not get discharged in bankruptcy

Meeting either of the two conditions makes the tax debt not dischargeable. In the second example immediately above, more than 3 years had passed since the deadline to submit the tax return. (The 2015 tax return was due on or about April 15, 2016.) But less than two years had passed since the actual submission of the tax return. So, no discharge of the tax debt.

With no discharge, you would have to pay that income tax debt after finishing a Chapter 7 case. But there are advantages of paying this priority debt in a Chapter 13 case.

Advantages of Paying Priority Income Tax Debts in Chapter 13

Under Chapter 13:

  1. You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
  2. This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
  3. The amount you pay monthly to all your creditors, including the priority tax, is based on your actual budget. It’s not based on often arbitrary requirements of the IRS/state.
  4. The amount your priority tax gets paid each month (if any) among your other debts is flexible. You do have to pay all of the priority tax debt(s) by the time you finish your Chapter 13 case. That’s up to a maximum 5 years. But other more urgent debts (such as catching up on a home mortgage) can often get paid ahead of the taxes.
  5. Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. That takes away the need to pay it quickly. Plus the lack of additional interest and penalties significantly reduces the amount needed to pay off the tax debt.
  6. If the IRS/state recorded a tax lien against your home or other assets before you filed bankruptcy, Chapter 13 provides a very efficient and favorable forum to value and pay off that secured portion of the priority debt.

Priority Debts in a Chapter 13 Case

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

Chapter 13 gives you some advantages over Chapter 7 for paying your priority debts. 

 Priority Debts under No-Asset and Asset Chapter 7

Our last two blog posts dealt with priority debts in a No-Asset Chapter 7 case and in an Asset Chapter 7 case.  While there are certain Chapter 7 strategies which may be somewhat helpful in dealing with priority debts, it is far from a panacea.  Here are some of its shortcomings.

  • You get only brief protection, or none at all, from your priority creditor(s). With income taxes, the IRS/state can resume collections when your Chapter 7 case is over. That’s only 3-4 months after you and you file the case. With child/spousal support, there is no protection at all: collection continues even during your Chapter 7 case.
  • Because of this lack of legal protection, you have little or no leverage about the dollar amount of payments you pay on your priority debts. You are largely at the mercy of the IRS/state or the support enforcement agencies.
  • In an asset Chapter 7 case, you have no control over the trustee’s sale of your asset(s). Plus you have to pay a significant amount for the trustee’s costs and fee. That reduces what goes to your priority debt(s).

The Benefits of Chapter 13

In contrast, Chapter 13, although not perfect, is better-designed for you to deal favorably with your priority debts. Here are its main benefits and advantages.

1. Ongoing Protection, for Years

The protection from creditors, called the automatic stay, lasts not 3-4 months but rather 3-to-5 years in Chapter 13. You can lose this protection under Chapter 13 if you don’t follow the requirements including making required payments in a timely fashion. But usually this sustained protection can be a powerful tool.  It forces otherwise very aggressive creditors like the IRS/state and support enforcement to cooperate, or at least to back off during the course of the bankruptcy.  Instead of these tough creditors having the law and the leverage on their side, Chapter 13 puts you much more in charge to formulate a plan that works for you.

2. Pay Monthly What You Can Afford to Pay

The practical leverage Chapter 13 gives you helps where it counts. It enables you to pay your priority debts under sensible and manageable payment terms. Priority debts are ones you have to pay regardless of bankruptcy. You mostly just wish that there was a way that you can spread these payments out. Chapter 13 can, under the right circumstances, provide that opportunity.

Here’s how it works.  You and your bankruptcy lawyer propose, and the bankruptcy judge approves a payment plan. (This approval comes after permitted input from the Chapter 13 trustee and your creditors.) This payment plan is mostly based on how much you can actually afford to pay the pool of your creditors. You have to pay all your priority debts in full, but you have 3 to 5 years to do so.

You generally pay nothing on your other unsecured debts until you pay your priority debts in full.  Under certain circumstances you may not be required to pay anything to general unsecured creditors. At the end of your case, if all payments are made and you otherwise comply with all the other requirements of Chapter 13, whatever you haven’t paid is discharged or wiped out. At that point you will have paid off your priority debts in full, and usually owe nothing to anybody.

3. Avoid Interest and Penalties

You can also avoid paying any interest or penalties on your priority debt(s) under Chapter 13.

For example, with recent income taxes, interest and penalties continue to accrue after you file your case.  But as long as there no prior-recorded tax lien, and you successfully finish your case, you don’t pay these additional interest and penalties. You only pay the initial priority tax debt.

Furthermore, in most situations the penalties that accrued before your Chapter 13 filing are not a priority debt. This portion of your tax due at the time of filing is treated as general unsecured debt.  This means it’s treated just like your unsecured credit cards or medical bills. You only pay it to the extent you have money available after paying the priority debts, if at all.

This combination—no accruing interest and penalties, and no penalties treated as priority—can significantly reduce how much you must pay. The less you have to pay as priority means the less you pay in your Chapter 13 payment plan. In bankruptcy speak, that means you need less money to propose a plan which is feasible.  Among other things, you need a feasible plan to be considered for confirmation.

4. Pay Priority (and Secured) Debts Ahead of (and Instead of) Other Debts

If you have secured debts —a vehicle loan or home mortgage arrearage, for example—you often can pay these ahead of the priority debts. Your priority debts generally just have to wait, as long as you are appropriately following the payment plan and pay the priority debts in full by the end of the plan.  Once again, in certain circumstances, the payment of secured and priority claims can lead to a discharge even if the general unsecured claims get nothing.

Priority Debts in an Asset Chapter 7 Case

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

Your Chapter 7 trustee may pay your priority debts—in full or in part—through the proceeds of the sale of your unprotected, non- exempt assets.  

Our last blog post was about what happens to priority debts in a no-asset Chapter 7 case. Most consumer “straight bankruptcy” Chapter 7 cases are no-asset cases. This means that the bankruptcy trustee does not take anything from the debtor because everything is protected and “no assets” are distributed to creditors.  Hence, the name.

No-Asset Case Even If Some Assets May Not Be Exempt

To understand how this actually works, sometimes from a practical point  of view, a Chapter 7 case is a no-asset one even when not all assets are exempt. That’s because the bankruptcy trustee has some discretion about whether to collect and liquidate an otherwise unprotected asset. Here are three reasons why he or she may not pursue an asset:

  • The value of the asset, or the amount beyond the exemption, is too small to justify the trustee’s collection efforts. Example: A vehicle worth only a couple hundred dollars more than the vehicle exemption.
  • Finding and/or selling the asset may be too expensive compared to its anticipated value. Example: A debt owed to the debtor by somebody who can’t be located and likely has no reliable income.
  • The asset could be more of a detriment than a benefit to the trustee. Example: real estate with hazardous waste contamination.

Usually your bankruptcy lawyer will be able to reliably predict whether your Chapter 7 case will be an asset or no-asset case. But not always. Trustees have wide discretion about this. Moreover,  before filing, your lawyer doesn’t know which trustee will be assigned to your case.  And some trustees are more aggressive than others.

Paying Priority Debt through a Chapter 7 Asset Case

If you know that you will have an asset case, you may be able to pay a priory debt through your case.

In our last blog post our main point was that in a no-asset Chapter 7 case you have to pay any priority debts yourself directly to your creditors after completing the case. But in an asset case, the trustee is required to pay any of your priority debts before any other debts. The trustee collects and liquidates your non-exempt assets (any not protected by exemptions). From the proceeds he or she then pays you your exempt amount,  and then pays his or her fee, and then pays debts only to the extent there’s money available.  Priority debts get paid before general unsecured debts.

For Example

Assume you owe $4,000 to the IRS for last year’s income tax.  That tax is a priority debt.  You also owe $75,000 in medical bills and unsecured credit cards.  Those are general unsecured debts.  If you filed a Chapter 7 case in which everything you owned was protected, that would be a no-asset case. The IRS debt can’t be discharged (legally write off). So you would have to make arrangements to pay it after your Chapter 7 case was over. Most likely the case would discharge the $75,000 in other debts.

But now assume that you have a boat that you no longer want because it costs too much to maintain.  There’s usually no exemption for a boat. So the Chapter 7 trustee takes and sells your boat for $5,000. The proceeds of that sale go first to pay the administrative fee of the trustee (since there is no exemption for the boat, the debtor gets nothing).  A trustee gets a fee of 25% on the first $5000 of assets that are distributed.  So, the trustee gets $1250, the IRS gets $3750 and general, unsecured creditor get nothing.  You would be required to pay the IRS $250.

Conclusion

In some circumstances paying a priority debt in a Chapter 7 case is not a bad deal. This is especially true if you have an asset not protected by an exemption that you don’t mind surrendering.

Priority Debts in a No-Asset Chapter 7 Case

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

Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.

 

Most Chapter 7 Cases Are No-Asset Cases

Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge the underlying debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.

A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. A large majority of Chapter 7 cases are no-asset ones.

What Happens to Your Priority Debts in a No-Asset Chapter 7 Case?

Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes.

Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets.  In fact, the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!

But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.

Dealing with Priority Debts During and After a Chapter 7 Case

However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).

The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support.

So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer should make arrangements to begin paying that debt. With debts not covered by the automatic stay, you need to be prepared to deal with them immediately.

If neither of these make sense in your situation, consider filing a Chapter 13 case instead. TChapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt, it can help.

Priority Debts

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

One of the most important aspects of bankruptcy is that all debts are not equal.  “Priority” debts are treated special in a number of ways.

Debts Are Different So the Law Recognizes Some Differences

The law does not treat all debts the same. That’s because you have different kinds of creditors that you owe for very different reasons. The law tries to be practical and so to some extent it respects these differences.

Your debts all fall into three categories:

  • Secured
  • General unsecured
  • Priority

Today we will start with priority debts.

Priority Debts

Priority debts are specific categories of debts that the law has decided should be treated as more important. Bankruptcy gives them higher priority, especially over “general unsecured” debts. Priority debts have power over you and over other debts in various ways.

Secured debts are debts with liens on something you own.  Secured debts are special in that the creditor usually has a stronger position because of its lien. The lien gives the creditor power over you if you want to keep whatever secures the debt.

Most priority debts are unsecured, but some may have a lien and so are secured. Secured priority debts have that much more power over you and over other creditors.

Reasons for Priority

Each of the priority debt categories have their own different reason to be treated as special.

For example, the two most common categories of priority debts in consumer bankruptcy cases are:

  • Child and spousal support
  • Income taxes—certain income taxes that meet certain conditions. See Section 507(a)(8).

Support payments are special essentially because society very strongly believes that children and ex-spouses should receive the financial support ordered by divorce courts. Federal bankruptcy law incorporates this social attitude. So support debt has the highest priority in the list of priority debts.

Income tax debts are special because taxes are a debt to the public at large. It’s not a debt to a private person or business. In effect it’s a debt to us all. So it deserves a higher priority than regular private debt. However, unlike support debt which is always a priority debt, an income tax is a priority debt only if it meets certain conditions. Those conditions mostly relate to how old the taxes are. The newer the tax is the more likely it is to be priority. Income taxes that do not meet the required legal conditions are mere general unsecured debts.

Priority Debts in Bankruptcy

In most bankruptcy cases there isn’t enough money to pay all debts. So the laws that determine the order that creditors get paid often determine which debts receive full or partial payment and which receive nothing. Priority debts often receive full payment while general unsecured debts receive less or, often, nothing.

This works very differently under Chapter 7 “straight bankruptcy” vs. Chapter 13 “adjustment of debts.” Our next blog posts will show how.

Protecting Your Pandemic Relief Payment from Creditors

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

 Most are aware that the average America received  $1,200 in pandemic relief payments. The CARES Act explicitly protected these payments from seizure for certain governmental debts. Generally, the payments can’t be reduced or taken to pay past-due federal taxes and student loans. They can be for past-due child support obligations.

But the CARES Act made no mention of protection from debts owed to non-governmental creditors. So the relief payments are generally subject to possible seizure by your creditors. Today we address this concern about private creditors’ access to these payments.

There are two classes of creditors at play:

1)      Setoffs by your own bank or credit union for a debt you owe to it

2)      Garnishment by other creditors which have a judgment against you

In our next blog, we address setoffs by for fees or other debts owed to your own financial institution. Today is about protecting your relief payment from other creditors.

Judgments and Garnishment Orders

Generally a non-governmental creditor can’t take money from your bank account without a court’s garnishment order. And to get a garnishment order a creditor virtually always must first sue you and get a judgment.

Do You have a Garnishment Order on Your Bank/Credit Union Account?

This question is not necessarily so easy to answer, for a number of reasons.

First, although most of the time you’d know that you received lawsuit papers, not necessarily. You may have not noticed it in the mail.  It may not have looked much different from other collections paperwork. If you’ve moved a lot, it’s possible you didn’t even get the lawsuit papers.

Second, you may not know that the lawsuit resulted in a judgment. If you didn’t respond within a very short time to the lawsuit papers, you probably lost the lawsuit by default. That almost always immediately turns into a judgment—a court decision that you owe the debt. The judgment gives the creditor power to—among other things—garnish your bank account.

Third, you may not know about the garnishment order, or the pertinent details about it. For example, you may think it only applies to your paycheck, not your bank account.  You are wrong.

Fourth, the laws about lawsuits, judgments, and garnishments are detailed, complicated, and different in every state.   So what you may have heard in one situation may not apply at all to you regarding these relief payments.

Finding Out If You Have a Bank Garnishment Order

Some common sense questions you should ask yourself. Have you:

  • ever received lawsuit papers and then did not fully resolve the debt?
  • had any kind of creditor garnishment or seizure, even if unrelated to your bank/credit union account?
  • had anything repossessed, especially a vehicle, where you may still owe a balance?
  • gone through a real estate foreclosure in which you may still owe a money to junior mortgage or other lienholder?
  • moved from another state and thought you left unresolved debts behind?

In these and similar situations you may have a judgment against you and a garnishment on your bank/credit union account. So your relief money would likely go to pay the judgment before you’d get any of it.

Is there any more direct way of finding out if there’s a garnishment order? Yes, you could contact your bank/credit union and ask. The problem is that in the midst of the pandemic you may well have trouble getting anyone to answer. More to the point, you’d likely have trouble getting through to somebody who could accurately and reliably answer this question.

A debtors’ rights or bankruptcy lawyer could help. He or she likely knows the right people to call at your financial institution, including that institution’s lawyers.

 What To Do If You Do Have a Garnishment Order

First, every state has exemptions that you may be able to claim to protect the relief money from garnishment. Each state has different procedures for claiming those exemptions. An extra challenge during the pandemic is getting access the courts to assert your exemption rights. Many courts are physically closed, you may be subject to a stay-at-home order, and contacting a lawyer may be harder. But if you don’t want to lose your relief money, you’ll likely need to assert your exemption protections.

Second, you may want to consider some other tactical steps:

  • If a garnishment order has expired and the creditor needs to renew it, you may have time to take the money out of the account immediately after it arrives.
  • Has the IRS has not yet direct-deposited your payment? Then you may be able to redirect it to an account at a different (non-garnished) financial institution. Go to the Get My Payment webpage to provide new bank account routing information (if it’s not too late).
  • Are you currently waiting to receive the relief payment in paper checks? Consider NOT providing the IRS direct deposit information even though that may delay the payment. (Here’s an article with the dates that the IRS is mailing out paper checks, based on income.)

Third, a number of states are issuing orders to prevent garnishments of bank accounts including California, Illinois, Indiana, Massachusetts, Nebraska, New York, Oregon, Texas, Virginia and Washington.  I do not see NJ on that list.

This IS Complicated

Garnishment law is detailed and not at all straightforward. And that was before all the legal and serious practical complications caused by the pandemic. So if at all possible, get through to a debtor’s rights or bankruptcy lawyer. We have spent our professional lives helping people deal with garnishments and protect their assets from creditors. This is just another twist on what we do all day every day.

Student Loan Changes in the CARES Act

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

The 880-page Coronavirus Aid, Relief, and Economic Security Act (“CARES”) has 4 pages of help for certain student loan borrowers. Section 3513 of CARES. It provides meaningful but temporary help for those who qualify by having the right kind of student loan.

The Kinds of Student Loans Covered

First, the relief applies only to federal student loans, not to private student loans.

Second, not all federal student loans are included. Direct Loans—those made directly by the federal government’s Department of Education—are covered. Federal Family Education Loans—FFELs—are covered if they’re currently owned by the federal Department of Education. FFEL loans held by commercial lenders and campus-based Perkins loans are not covered. These non-covered loans amount to only about 12 percent of federal student loan dollars, so most federal student loans are covered.

The Key Benefits

For the applicable federal student loans, CARES accomplishes the following:

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

1. Payment Suspension

The new law suspends “all payments due for [applicable student] loans… through September 30, 2020.” Section 3513(a), CARES Act. The law did not specify when this non-payment period started. But since then the U.S. Department of Education has specified that the “administrative forbearance will last from March 13, 2020 through September 30, 2020.”

If you’ve already made a payment during the same March 13 through September 30, 2020, your student loan servicer should refund it to you (don’t hold your breath). This includes auto-debit payments, which are supposed to stop automatically during this same period.

2. Interest Waiver

No interest will accrue during the March 13 through September 30, 2020 period. Section 3513(b). This should happen automatically.

3. Credit Reporting

“During [this same] period… , for the purpose of reporting information about the loan to a consumer reporting agency, any payment that has been suspended is treated as if it were a regularly scheduled payment made by a borrower.” Section 3513(d), CARES Act. The suspended payments should show as actually made payments on your credit reports.

4. Collection Freeze

“During the [same ]period [the loan servicers] shall suspend all involuntary collection related to the loan.” Section 3513(e), CARES Act. The law lists three specific types of collection that are explicitly included: wage garnishment, tax refund offset, and administrative offset by “a reduction of any other Federal benefit payment.” But it also broadly adds “any other involuntary collection activity.” Section 3513(e)(1-4), CARES Act. So during the March 13 through September 30 period, no collection activity of any kind should happen on the applicable student loans.

5. Non-Payments Count

“[E]ach month for which a loan payment was suspended [counts] as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program or loan rehabilitation program… for which the borrower would have otherwise qualified. Section 3513(c), CARES Act.

This means that you get credit for payment towards Public Service Loan Forgiveness (PSLF). Also, you get credit for payment on loan rehabilitation. you

Consumer Bankruptcy Changes in the CARES Act

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

The massive $2.2 trillion coronavirus relief law includes some legal relief for both Chapter 7 and Chapter 13 consumer debtors. 

$1,200 Relief Checks Excluded as Income for the Means Test

To qualify to file a consumer Chapter 7 case, you have to pass the “means test.” Part of that test is a rather complicated calculation of your “current monthly income.” That’s essentially the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $1,200 coronavirus relief payment—could pump up your “current monthly income” and make you fail the “means test.” Then you could be forced to file a multi-year Chapter 13 case instead of a 3-4 month Chapter 7 one.

The new CARES law solves that problem neatly. It simply excludes any coronavirus relief money from the definition of “current monthly income.” To be precise, the following is excluded:

Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).

What Payments Are Included?

This statutory language is broad. It doesn’t refer only to the one-time $1,200 (or so) relief payment. It’s clearly broad enough that it could include other “Payments made under Federal law” related to the coronavirus national emergency. That is, other such payments may be excluded from “current monthly income” for purposes of the means test.

For example, CARES provides unemployment benefits of $600 per week extra beyond the usual state-calculated weekly amounts.  These $600 weekly extra benefits sure sound like they’re “Payments made under Federal law” related to [this] national emergency.” Since these $600 payments can last up to 39 weeks, they can amount to way more money than the one-time $1,200 payments. So if these $600 payments are also excluded in applying the means test, that would be quite significant.

But this is a new law, and there certainly is no case law that has developed on this issue.  Moreover, any “law” on this issue may well be applied somewhat differently in different parts of the country. Contact your local bankruptcy lawyer for current information as it applies to you.

$1,200 Relief Checks Also Excluded in Confirmation of Chapter 13 Plan

Chapter 13 generally requires you to pay all of your “projected disposable income” into your 3-to-5-year payment plan. This monthly amount goes through the Chapter 13 trustee to your creditors under the terms of your plan. Then at the end of the plan you are usually debt-free (except sometimes for certain agreed long-term debts).

Your “projected disposable income” is based on virtually all your income, minus certain legally allowed expenses. The income side of this is your “current monthly income” as discussed above—based on your last 6 months of income. If that income would include a one-time coronavirus relief payment, it would greatly increase your “disposable income” and thus your required Chapter 13 plan payment.

The new CARES law solves that problem in a way similar to the above section about the Chapter 7 means test. Using the exact same language, it excludes any coronavirus relief money from the Chapter 13 definition of “current monthly income.” To again be precise, the following is excluded:

… payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

CARES, Section 1113(b)(1)(B).

As in the section above on Chapter 7, it’s not yet clear what federal payments are excludable. Besides the $600 weekly unemployment payments mentioned above, there may be other future coronavirus stimulus payments approved by Congress. Again, talk with your bankruptcy lawyer to get current information and advice.

Changes to Ongoing Chapter 13 Plans

During the course of a Chapter 13 you can change, or “modify” your approved payment plan under certain circumstances.  CARES added a new circumstance: if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C).

The bankruptcy judge still has to approve the modified plan, after the usual notice to creditors and opportunity for objection. The modified plan must comply with the usual requirements. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).)

It’s unclear what this all adds to the plan modification rights you already have, except for one huge change. The law has been clear for a long time: Chapter 13 plans cannot last longer than 5 years. CARES extended this to a new maximum of 7 years for applicable modified plans.

Although you’d think you would want to finish your plan as fast as possible, longer plans often allow you to reduce your monthly plan payments. It can give you more opportunities to preserve certain assets or collateral—keep a vehicle, save a home. Given the financial challenges so many of us are facing, this greater flexibility can make the difference between completing your case case successfully or not.

Important: Applicability to Cases

First, the Chapter 7 means test change and the Chapter 13 plan confirmation change “apply to any case commenced before, on, or after the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(i). But those changes have a sunset provision—they are deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021. Be careful about this deadline.

Second, the Chapter 13 plan modification change applies “apply to any case for which a plan has been confirmed… before the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(ii). But, same as above, this change has a sunset provision—it is deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

So this change applies to Chapter 13 cases which had a confirmed plan before March 27, 2020, and then successfully modified its plans by March 26, 2021. Be careful about this deadline as well.

Notice that by this language this change does not apply to cases either not filed, or already filed but not yet confirmed, as of March 27, 2020. This means that people in these situations appear unable to take advantage of the 7-year provision.

Bottom line all these changes to the Bankruptcy Code are temporary, currently lasting only this one year. Then they will be deleted and the Bankruptcy Code will revert to its prior language.

Tax Filing and Payment Extended to July 15

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

The federal April 15, 2020 tax filing and payment deadlines have been postponed to July 15, 2020.  Also, no interest or penalties accrue. 

 

Federal Income Tax Return Deadline Postponed

As you are probably aware, responding to the COVID-19 pandemic, the IRS has postponed the deadline to file federal income tax returns by 3 months. That date is fast approaching.

This tax return postponement applies to all individuals, but also more broadly. It includes every legal “person”:  “an individual, a trust, estate, partnership, association, company or corporation.” IRS Notice 2020-18. So it covers all individuals and businesses.

Federal Income Tax Payment Due Date Postponed

Just as important, the date that tax payments are due is also postponed from April 15 to July 15, 2020.  IRS Notice 2020-17.)

This applies more broadly than just taxes due for the 2019 tax year. For those paying estimated income taxes quarterly, the payment that was due April 15 is now instead due on July 15, 2020.

There’s no limit to the amount of tax amount postponed. There was a prior maximum amount postponed (in IRS Notice 2020-17) but that maximum has been eliminated. IRS Notice 2020-18, Section III, paragraph 2.

No Interim Interest and Penalties

Since taxes previously due on April 15 are now due on July 15, 2020, no interest or penalties will accrue during those 3 months. As the official Notice states:

the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax… will begin to accrue on July 16, 2020.

IRS Notice 2020-18, Section III, paragraph 5.

No Extension Needed

This postponement of tax returns and tax payments is automatic. You don’t need to file any extension forms.

If you’ll need more time past July 15, the IRS says:

Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.

IR-2020-58.

Tax Refunds Not Affected?

If you were expecting a tax refund, you should have filed as soon as possible. The IRS is encouraging you to do so:

The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds are still being issued within 21 days.

IR-2020-58. If you need your refund, the pandemic makes it all the more important to file as soon as possible.

ONLY April 15, 2020 Deadlines Affected

Things are changing fast, but at the moment this postponement does not apply to any other deadlines. For example, there’s no current extension for the March 16, 2020 deadline for corporate tax returns for tax year 2019 or the May 15, 2020 deadline for tax-exempt organizations. Also, the regular filing/payment date of July 15, 2020 still applies for quarterly filers. Again, these may also change.

State Income Tax Deadlines

On April 14, 2020, Governor Murphy issued an order extending the time for filing of individual returns and the payment of taxes thereon to July 15, 2020.

Who Does What in Your Bankruptcy Case?

Posted by Kevin on November 21, 2019 under Bankruptcy Blog | Comments are off for this article

The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee. 

Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.

Debtor

The debtor is the person or business entity filing the bankruptcy case.

The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.

A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).

Creditors

The creditors are of course the businesses and individuals to which the debtor owes debts.

Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.

Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.”

Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures.

For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.

Creditors Getting Involved

Although creditors can be involved in the bankruptcy process in a lot of ways, they tend to be less involved than you expect. Most unsecured general creditors decide that getting involved is not worth their cost or effort.  Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”

Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts.  Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.

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

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

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

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

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

Surrendering Your Vehicle

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

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

Keep Your Vehicle

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

If You Are Current

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

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

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

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

If You Are Not Current

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

Much greater Flexibility through Chapter 13

But that is for a later blog.

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

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

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

Chapter 13 Vehicle Loan Cramdown

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

Qualifying for Cramdown

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

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

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

Vehicle Cramdown

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

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

How Good Timing Can Work for You

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

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

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

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

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

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

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

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

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

Both Chapter 7 and Chapter 13 will stop a foreclosure.

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

But What if the Foreclosure Still Occurs?

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

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

A Foreclosure by Mistake

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

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

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

Chapter 7 vs. Chapter 13

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

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

Five Tremendous Tools to Save Your Home through Chapter 13

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

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

 

The Limits of Chapter 7 “Straight Bankruptcy”

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

The Extraordinary Tools of Chapter 13

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

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

Under Chapter 13 case you can:

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

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

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

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

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

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

Prevent Future Judgment Liens

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

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

 

Judgment Liens Are Dangerous

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

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

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

Judgment Liens Are Preventable

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

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

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

The Timing Can Be Crucial

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

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

Bankruptcy Helps with Debt Problems Even without Writing off Every Debt

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

Neglecting Bankruptcy as an Option

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

Getting the Law Right

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

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

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

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

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

Conclusion

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