Posted by Kevin on September 1, 2019 under Bankruptcy Blog | 
First, let’s review the different types of debts in bankruptcy.
Secured debts are collateralized usually by your home, your car or your truck, maybe your furniture and appliances. Priority debts are ones that are usually not secured but are favored in various ways in the bankruptcy law. For most consumer debtors, they include child and spousal support, and certain taxes.
The remaining debts are called general unsecured debts. Think credit cards and medical bills. What do all these debts have in common-no collateral attached to these debts and not given a favored (priority) position under the law.
In most Chapter 7 bankruptcies, the vast majority of debts are general unsecured debts. In Chapter 7 bankruptcy, most general unsecured debts are legally, permanently written off. The legal term is “discharged”. That means that once they are discharged—usually about 3-4 months after your case is filed—the creditors can take absolutely no steps to collect those debts.
The only way general unsecured debts can be paid anything is if either 1) the debt is NOT dischargeable or 2) it is paid (in part or in full) through an asset distribution in your Chapter 7 case.
1) “Dischargeability”
A creditor can dispute your ability to get a discharge of your debt. In the rare case that the discharge of one of your debts is challenged, you may have to pay that particular debt. That depends on whether the creditor is able to establish that the facts fit within the narrow grounds for an exception to dischargeability. This usually involving allegations of fraud, misrepresentation or other similar bad behavior on your part. If the creditor fails to establish the necessary grounds, the debt is discharged.
There are also some general unsecured debts that are not discharged unless you convince the court that they should be, such as student loans. The grounds for discharging student loans are quite difficult to establish. Check /http://studentdebtnj.com/ for more detailed information relating to your student loans.
2) Asset Distribution
In order for a debtor to get a fresh start, the Bankruptcy Code allows a debtor to exempt certain property. That means you keep that property. If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of your assets from you. This is what usually happens—you’ll hear it referred to as a “no asset” case. But if the trustee DOES take possession of any of your assets for distribution to your creditors—an “asset case”— your “general unsecured creditors” may receive some of it. The trustee must first pay off any of your priority debts, as well as pay the trustee’s own fees and costs. Whatever remains goes to the unsecured creditors on a pro rata basis.
Conclusion
In most Chapter 7 cases your general unsecured debts will all be discharged and, most of the time, general unsecured creditors will receive nothing from you. Rarely, a creditor may challenge the discharge of its debt. If the creditor is successful, you will still owe that debt after the close of the bankruptcy. And if you have an “asset case,” the trustee may pay a part, or in extremely rare cases, all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.
Posted by Kevin on August 19, 2019 under Bankruptcy Blog |
Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home.
A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home. A judgment lien holder on your home can, under some circumstances, foreclose on your home. At the least, it can force you to pay the debt when you sell or refinance your home.
Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt. The problem is that in many situations bankruptcy does not curtail creditors’ lien rights which pass through the bankruptcy. Even though you discharge that debt, the lien still survives. It can and does come back to haunt you even after a successful bankruptcy.
However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien. This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.”
The Conditions for Judgment Lien Avoidance
Here’s how the process works.
When you file bankruptcy, to “avoid” a judgment lien you must file what is called a motion with the Court and meet certain conditions:
- The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Mostly, this refers to judgment liens.
- The judgment lien can attach to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.”
- The judgment lien can’t be for child or spousal support or for a mortgage.
- The judgment lien “impairs” the homestead exemption. In earlier versions of the Bankruptcy Code, the concept of impairment was, at times, confusing. However, under the current Code, it is pretty much a straightforward analysis.
Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.
For Example
Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:
- It’s a judicial lien—one “obtained by judgment.”
- The lien attaches to your homestead—the place you “use as a residence.”
- The lien was not for child or spousal support or related to a mortgage.
- All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.
In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.
Posted by Kevin on August 6, 2019 under Bankruptcy Blog |
Lawsuits against You that Bankruptcy Ends
Many legal claims against you or your closed or closing business are resolved by the filing of your bankruptcy case. They are resolved either legally or practically, or both.
Claims that are legally resolved by your filing of bankruptcy are those intended to make you pay money. The discharge (the legal write-off) in bankruptcy of whatever debt you owe will usually result in you not needing to pay anything on the claim under Chapter 7 “straight bankruptcy.” There’s not much point to a lawsuit to determine whether you owe money or about how much you owe if any such debt will just get discharged in bankruptcy.
Lawsuits that Bankruptcy Does NOT End
However, there are certain types of debts that would still need to be resolved by a court. In these situations the creditor would likely get permission from the bankruptcy judge to start a lawsuit or to continue one already started. Here are three types that need court resolution.
1) Determining the Amount of a Debt
If a debt is being discharged in a no-asset Chapter 7 case—one in which all assets of the debtor are “exempt” and protected—then, as indicated above, the amount of that debt makes no practical difference. Whatever the amount of the debt, it is getting discharged without payment of anything towards that debt.
But in an asset Chapter 7 case, in which the bankruptcy trustee is anticipating a pro rata distribution of the proceeds of the sale of assets, the amounts legally owed on all the debts need to be known for that distribution to be fair to all the creditors. That’s because the established amount of any single debt affects the amounts received by all the creditors. So litigation to determine the validity or amount of a debt needs to be completed, even if by a relatively quick settlement.
2) Possible Insurance Coverage of the Debt
If a claim against a debtor may be covered by insurance, then the affected parties likely want the dispute to be resolved legally.
That’s because a court needs to determine 1) whether the debtor is liable for damages, 2) whether those damages are covered by the insurance, and 3) whether the policy dollar limits are enough to cover all the damages or instead leave the debtor personally liable for a portion. The following types of business litigation tend to involve insurance coverage issues:
- vehicle accidents involving the business’ employees or owners, especially those with the complication of multiple drivers (and thus, multiple possible insurance coverages)
- claims on business equipment damaged by fire or flood, or stolen
In these situations the bankruptcy court will likely give permission for the litigation to continue outside of bankruptcy court, while not allowing the creditor to pursue the debtor as to any amount not covered by the insurance policy limits.
3) Nondischargeable Debts
Some of the biggest fights about business-related debts occur when a creditor argues that its debt should not be discharged in the bankruptcy case. The grounds for objecting to discharge are quite narrow—in general the debtor must have defrauded the creditor, embezzled or stolen from the creditor, or intentionally and maliciously hurt the creditor or its property.
Also, and much more prevalent in the last few years, are student loan debts. Since the average student loan debt for an undergraduate is zeroing in on $40,000, litigation over whether the student loan debt is dischargeable, is become much more commonplace.
Posted by Kevin on August 4, 2019 under Bankruptcy Blog |
Debtors’ prisons? There’s that and a lot more to the very colorful history of bankruptcy law.
American bankruptcy law naturally grew out of the law of England during our colonial history. Pre-Revolutionary War bankruptcy laws were extremely different from current law.
- The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry VIII. Debtors were called “offenders” under this first law, in effect seen as perpetrators of a property crime against their creditors. The purpose of this law, and as expanded during the following hundred and fifty years, was not to give relief to debtors. Rather it was to provide to creditors a more effective way to collect against their debtors.
- Given this purpose, it is not surprising that this first law did not give debtors a discharge—a legal write-off—of their debts. In a bankruptcy the assets of the “offender” were seized, sold, and the proceeds distributed to creditors. And then the creditors could still continue pursuing the “offender” for any remaining balance owed.
- A bankruptcy proceeding could only be started by creditors, not by debtors. Creditors accused a debtor of an “act of bankruptcy,” such as physically hiding from creditors, or hiding assets by transferring them to someone else. The current extremely seldom used “involuntary bankruptcy” is a remnant of this.
- Strangely, only merchants could file bankruptcy. Why? Credit was seen as immoral, with only merchants being allowed to use credit, for whom it was seen as a necessary evil. As the only ones who had access to credit, only merchants had the capacity to become bankrupt.
- For the following century and a half through the late 1600s, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” to seize their assets, put them into pillories (structures with holes for head and hands used for public shaming), and even cut off their ears.
- Finally in the early 1700s the discharge of debts was permitted for cooperative debtors, but only if the creditors consented!
- Yet the law still provided for the death penalty for fraudulent debtors (although it was very seldom used).
- Cooperative debtors received an allowance from their own assets, the very early beginnings of the current Chapter 13 “adjustment of debts.”
So this was the English bankruptcy law that was largely in effect at the time that the U.S. Constitution was adopted. That gives some perspective on what the framers may have had in mind with the Bankruptcy Clause of the U. S. Constitution. That Clause gave Congress power to “pass uniform laws on the subject of bankruptcies.” Fortunately the language is so open-ended that it gave bankruptcy laws the opportunity to evolve during the last two hundred fifty years into one infinitely both more compassionate and beneficial for the economy.
But this evolution during our national history was extremely rocky, until surprisingly recently. That is the topic of the next blog.
Posted by on July 14, 2019 under Bankruptcy Blog |
Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership. You are liable for the debts of a sole proprietorship and a partnership. You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.
“Asset” and “No Asset” Chapter 7
Chapter 7 is sometimes called the liquidation form of bankruptcy. That usually does NOT mean that if you file a Chapter 7 case, all of your assets will be liquidated or sold. One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start. You get a fresh start by the discharge of most of your debts and keeping property that is exempt.
As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes. Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions. If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .
In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”
The Quick “No Asset” and the Drawn Out “Asset” Case
Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.
A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise). An asset case can take a year or more.
The Potential Benefits of an “Asset” Case
If you have an asset case, that can be turned to your advantages. Two situations come to mind.
First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors . If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.
Second, in the Chapter 7 process, certain debts, called priority debts, are paid first. General debts get paid afterwards to the extent there are available funds. More importantly, certain priority debts are not discharged by the bankruptcy. That means you still owe them after the bankruptcy is completed. Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.
So, as a debtor, you want to pay off as much non-dischargeable debts as you can. To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.
Posted by Kevin on June 3, 2019 under Bankruptcy Blog |
Chapter 13 “adjustment of debts” case enables you to include 2018 income taxes into your Chapter 13 payment plan. That would:
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- Save you money on payment of your 2018 tax;
- Give you financial flexibility;
- Stop any present and future tax collections and the recording and enforcement of a tax lien on the 2018 tax.
So Chapter 13 is a helpful tool for dealing with taxes you owe for the 2018 tax year. Sometimes it’s even absolutely indispensable—it solves a debt dilemma that appeared otherwise insolvable.
When You Also Owe Income Taxes for Earlier Years
However, Chapter 13 is a particularly powerful tool if you owe not just for 2018 but for other tax years (or year) as well. This is true wherever you stand with the earlier tax debt, whether:
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- the IRS/state is now aggressively collecting the taxes;
- you are currently paying them through an agreed monthly payment plan;
- you haven’t yet filed the tax returns for the prior years.
1. Dealing with Aggressive Collection of Earlier Tax Debt
The minute your bankruptcy lawyer files the Chapter 13 case for you all the aggressive tax collection actions will stop. That is the power of bankruptcy’s “automatic stay.” You will have 3 to 5 years to deal with ALL of your debts through a payment plan. This includes all your income taxes. The Chapter 13 payment plan will be based on what you can genuinely afford to pay. You may well not need to pay some of your earlier taxes. You will likely not need to pay any more accruing interest and penalties on ANY of the income taxes. You will not need to worry about tax collections throughout the time you’re in the case—including the recording of tax liens. At the completion of your case you will owe no income taxes.
2. In a Monthly Payment Plan
Are you already in a payment plan with the IRS/state for the prior tax debt?
In most cases, installment plans push you to your financial limits. The end result is that you probably did not withhold enough to pay your current year taxes. That digs you into a deeper hole and the IRS could care less.
Furthermore, you know that you’ll violate your installment agreement if you don’t stay current in future income taxes. As stated in IRS Form 9465, the Installment Agreement Request form, “you agree to meet all your future tax obligations.”
Chapter 13 avoids this trouble. As mentioned above, the “automatic stay” immediately protects you from the IRS/state. Your monthly installment plan is cancelled right away. You make no further payments on it once you file you file your Chapter 13 case. All your prior income taxes AND your 2018 one(s) are handled through your Chapter 13 payment plan. You get the financial advantages and the peace-of-mind referenced in the above section. When you successfully complete your Chapter 13 case you’ll be totally free of any tax debt.
3. Not Filing Tax Returns
You may be in the scary situation that you can’t pay your taxes so you don’t file your tax returns.
Or you may be in an installment payment plan and you don’t want to violate it by admitting you owe more for 2018. You know you’ll be in violation of it upon filing the 2018 tax return, so you simply don’t do so.
But you know that not filing your 2018 tax return (and any prior unfiled ones) only delays the inevitable. You’re in a vicious cycle in which you may well be falling further behind instead of getting ahead.
Chapter 13 can likely enable you to break out of that cycle. The vicious cycle is broken because your Chapter 13 budget will also address your 2019 and future income tax situation. It does so because your new budget will include enough withholding or quarterly estimated payments so you can stay current for 2019 and thereafter. Again, you should end the Chapter 13 plan being completely tax-debt free.
Posted by Kevin on February 17, 2019 under Bankruptcy Blog |
“Adjustment of Debts of an Individual with Regular Income”
That is the formal name given to Chapter 13 of Title 11—the U. S. Bankruptcy Code.
As the word “Individual” indicates, you must be a person to file a Chapter 13 case—a corporation cannot file one. This also applies to a limited liability company (LLC) and other similar types of legal business entities.
But if you have a business which you operate as a sole proprietorship, you and your business can file a Chapter 13 case together.
The assets of your sole proprietor business are simply considered your personal assets. The debts of your business are simply your debts.
This is true even if your business is operated under an assumed business name or d/b/a.
Chapter 13 Helps Your Sole Proprietorship Business in 6 Major Ways
1) Chapter 13 addresses both your business and personal financial problems in one legal and practical package. You are personally liable on all debts of your sole proprietorship business, as well as, of course, your individual debts. So as long as you qualify for Chapter 13 otherwise, you can simultaneously resolve both your business and personal debts.
2) Chapter 13 stops both business and personal creditors from suing you, placing liens on your assets, and shutting down your business. The “automatic stay” imposed by the filing of your Chapter 13 case stops ALL your creditors from pursuing you, including both business and personal ones. Your personal creditors are prevented from hurting your business, and your business creditors are prevented from taking your personal assets.
3) Chapter 13 enables you to keep whatever business assets you need to keep operating. If you do not file a bankruptcy, and one of either your business or personal creditors gets a judgment against you, it could try to seize your business assets. Also, if you filed a Chapter 7 “straight bankruptcy,” under most circumstances you could not continue operating your business. However, Chapter 13 is specifically designed to allow you to keep what you need and continue operating your business.
4) Chapter 13 gives you the power to retain business and personal collateral which secure a business debt even if you are behind on payments. Chapter 13 will allow you to pay those arrearages over the term of the Chapter 13 plan which could be between 36-60 months usually with no interest.
5) If you have second or third mortgages of your personal residence which are completely underwater (e.g. residence worth $200,000 subject to a $225,000 first mortgage and a $60,000 home equity loan), Chapter 13 allows you to strip off the second mortgage and treat it like an unsecured date. That means that the $60,000 second gets paid for pennies on the dollar from your monthly payments to the Chapter 13 trustee. And if you successfully complete the Plan, the second mortgage must be cancelled of record.
6. Business owners in financial trouble are generally also in tax trouble. Chapter 13 gives business owners time to pay tax debts that cannot be discharged (permanently written off), all the while keeping the IRS and other tax agencies at bay. Chapter 13 usually stops the accruing of additional penalties and interest, enabling the tax to be paid off much more quickly. Tax liens can be handled especially well. At the end of a successful Chapter 13 case you will have either discharged or paid off all your tax debts, and will be tax-free.
Posted by Kevin on February 11, 2019 under Bankruptcy Blog |
Chapter 13 Is a Powerful Package
If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.
When Chapter 7 is Enough
But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?
Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?
Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7.
Buying Just Enough Time for What You Need
The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13. So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.
But Chapter 7 usually buys you much less time than a Chapter 13 could.
If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.
Where do you get the money to make these extra payments? By discharging your pre-petition debt in the Chapter 7, it could free up hundreds of dollars per month. The key, then, is to make sure that you use that money to pay the mortgage arrearage and not spend it on other items.
If instead, you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.
The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts. A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.
Or on the other extreme, a mortgage lender could potentially take no action during the 3-4 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer. Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.
Posted by on February 4, 2019 under Bankruptcy Blog |
Most debts that people get behind on are at some point—often quite quickly—assigned by the original creditors to collection agencies. This can happen two ways. Either the creditor still owns the rights to the debt and the collection agency simply gets a percentage of what it collects, or the creditor sells all of its rights to the debt to a collection agency and then is legally no longer in the picture.
Either way, the collection agency then tries to get you to pay the debt. At first—it will tend to contact you and try to make you pay whatever it can. Depending on the facts of the situation—including whether you have a job or real estate or other assets—the collection agency will then decide whether it’s worth suing you. If you ARE sued, there’s a good chance that the collection agency believes it can force payment from you by garnishing your paycheck or bank account, or by putting a lien on your home or by attaching other assets.
This is a signal you need to pay attention right away.
In fact, the collection agency is banking on you not taking the lawsuit seriously enough. The sad truth is that a large majority of the time people don’t respond to lawsuits so that judgments are entered against them by default.
Don’t assume that there is nothing you can do. Learn your options. How? Most consumer or bankruptcy attorneys will give you a free consultation. This consult should provide you with the following:
a) You will understand the consequences of the lawsuit, and your options for dealing with it. Know what your options are instead of assuming you have none.
b) You may have defenses so that you don’t legally owe the debt after all. Collection agencies routinely try to collect debts on which the statute of limitations has expired. They can sue the wrong person. They may include allegations which are not accurate or supported by law.
c) You may have a counterclaim—an argument that the creditor acted illegally in some way and actually owes you money for damages. At the least this could give you leverage to settle the debt under much better terms.
d) Once the time to respond expires and a judgment is entered, it is usually too late to deny the allegations in the complaint.
e) By having an attorney review the lawsuit and your overall debt picture, and discuss your options, you may end up solving deeper problems. Most consumers do not have an attorney who they talk with regularly. So problems accumulate. You don’t have a chance to ask questions when they arise. This often leads to lots of confusion and anxiety. Seeing an attorney about a pending lawsuit could lead to addressing how to improve your entire financial life.
Final advice worth repeating- if you are sued, you must act quickly. In NJ, you have only 35 days to respond to a lawsuit.
Posted by on February 1, 2019 under Bankruptcy Blog |
The Core Principle Behind the Four Conditions
There is a simple principle behind all four of these conditions: under bankruptcy law taxpayers should be able to write off their tax debts just like the rest of their debts, AFTER the IRS (or other tax authority) has a reasonable length of time to try to collect those taxes.
What’s a reasonable length of time in the eyes of the law?
The four conditions each measure this amount of time differently, based on the following:
1) when the tax return for the particular income tax was due,
2) when the tax return was actually filed,
3) when the tax was “assessed,” and
4) whether the tax return that was filed was honest and therefore reflected the right amount of tax debt when it was filed.
To discharge an income tax debt, it must meet all four of these conditions.
Here they are in order:
1) Three Years Since Tax Return Due:
All income taxes have a fixed due date for its return to be filed. That date may be delayed by a certain number of months if you asked for an extension, but it’s still a specific point in time. This first condition gives the tax authorities three years from the tax return filing date, or from the extended filing date if you asked for an extension. Note that this is fixed date, not affected by when you actually filed the return.
2) Two Years Since Tax Return Actually Filed:
This second condition is different than the first because it is a time period triggered by your own action, your filing of the tax return.
Note that you can file a tax return late and still be able to discharge the debt if at least two years have passed since you filed the return. (Caution: there are some parts of the country where some court opinions have questioned this—be sure to talk with your attorney about the law in your jurisdiction.)
3) 240 Days Since Assessment:
This third condition can be a bit confusing. It very seldom comes into play—most tax debts meet this condition without any problem.
Assessment is the tax authority’s formal determination of your tax liability. It usually happens in a straightforward way, when it receives, processes, and accepts your tax return.
Most of the time an income tax is assessed within a few days or weeks that it is received. So the period of time of 240 days after assessment usually passes long before the above three-years-since-the-return-is-due or two-year-since-tax-return-filed time periods. Possible exceptions- lengthy audits, litigation or offers in compromise.
4) Fraudulent tax returns and tax evasion:
This last condition effectively means that the above time periods are not triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way.
If your tax debt meets these four hoops, you should be able to discharge that tax in either a Chapter 7 or Chapter 13 bankruptcy.
If You Don’t Meet These Conditions
Then, for the most part, not dischargeable. That means, not able to be written off.
Posted by Kevin on January 28, 2019 under Bankruptcy Blog |
In a Chapter 7 bankruptcy, the debtor makes no payments and gets to keep her exempt assets. For a vast majority of debtors, this means they get to keep all their assets. The average Chapter 7 is completed in about 4 months
Creditors did not like this and lobbied for 20 years for a major overhaul of consumer bankruptcies. The result was the 2005 revisions to the Bankruptcy Code which was supposed to force more debtors to file under Chapter 13 where monthly payments of 36-60 months are required. This was accomplished by imposition of the “means test” -supposedly an objective way to decide who qualifies to file a Chapter 7 bankruptcy.
The “Objective” Rule
If you make under the median income for your State based on household size, you pretty much qualify for Chapter 7. If your income is above median, you must deduct from your income a combination of actual expenses and average local, State and national expenses to come up with your monthly disposable income.
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- If your monthly disposable income is less than $128.33, then you pass the means test and qualify for Chapter 7.
- If your monthly disposable income is between $128.33 and $214.17, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
- If EITHER you can pay 25% or more of those debts, OR if your monthly disposable income is $214.17 or more, then you do NOT pass the means test. With rare exceptions, that means that you cannot file under Chapter 7.
There is not much difference between $128.33 per month and $214.17 per month- about $86 per month. Just enough for dinner for 2 at a decent restaurant. But at the low end, you can get through bankruptcy in 4 months and make no payments. At the high end, you make monthly payments for 3 to 5 years.
So where do these hugely important numbers come from? The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,700 and $12,850. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.
So where did those original $6,000 and $10,000 amounts come from?
They are basically arbitrary. Maybe creditor lobbyists or congressional staffers floated the idea. Who knows? But, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts.
The Bottom Line
Sensible or not, if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7. But if you are over the median income amount, then the amount of your monthly disposable income largely determines whether you are able to file a Chapter 7 case.
Posted by Kevin on January 21, 2019 under Bankruptcy Blog |
Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt. If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.
Chapter 13 can help.
Payment of 2018 Income Taxes in Chapter 13 Case
Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018. In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.
Basic Benefits
No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.
1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.
2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).
3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.
Paying Off Your 2018 Tax For Free
Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?
The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them. However, priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).
An Example
Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000. You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.
But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors. Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.
Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors. And you not only discharge your credit card debt but you paid your taxes in full. Not bad.
Posted by on January 13, 2019 under Bankruptcy Blog |
Because of how precisely the amount of your “income” is calculated, filing bankruptcy just a day or two later can make all the difference.
Passing the “Means Test”
“Income” for purposes of the Means Test includes income from any source except monies received under the Social Security Act. It includes income from irregular sources such as child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits. Also, the Means Test is time-sensitive in that it is based on the amount of money received during precisely the 6 FULL CALENDAR months before the date of filing. This means that your “income” can shift by waiting just a month or two.
Why is the Definition of “Income” for the “Means Test” So Rigid?
One of the much-touted goals of the last major amendments to the bankruptcy law in 2005 was to prevent people from filing Chapter 7 who were considered not deserving. The most direct means to that end was to try to force more people to pay a portion of their debts through Chapter 13 “adjustment of debts” instead of writing them off Chapter 7 “straight bankruptcy.”
The primary tool intended to accomplish this is the “means test,” Its rationale was that instead of allowing judges to decide who was abusing the bankruptcy system, a rigid financial test would determine who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case, and therefore could not file a Chapter 7 case.
The Unintended Consequences of the “Means Test”
If your income is at or under the applicable median income, then you generally get to file a Chapter 7 case. If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. Having income below the median income amount makes qualifying for Chapter 7 much simpler and less risky.
Filing your case a day earlier or later can matter because of the means test’s fixation on the six prior full calendar months.
So if you receive some irregular chunk of money, it can push you over your applicable median income amount, and jeopardize your ability to qualify for Chapter 7.
An Example
It does not necessarily take a large irregular chunk of money to make this difference, especially if your income without that is already close to the median income amount. An income tax refund, some catch-up child support payments, or an insurance settlement or reimbursement could be enough.
Imagine having received $3,000 catch up support payment on July 15 of last year. Your only other income is from your job, where you make a $42,000 salary, or $3,500 gross per month. Let’s assume the median annual income for your state and family size is $45,000.
So imagine that now in January, 2019, your Chapter 7 bankruptcy paperwork is ready to file, and you would like to get it filed to get protection from your aggressive creditors. If your case is filed on or before January 31, then the last six full calendar month period would be July 1, 2018 through December 31, 2018. That period includes that $3,000 extra money you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus the extra $3,000 received, totals $24,000 received during that 6-month period. Multiply that by 2 for the annual amount—$48,000. Since that’s larger than the applicable $45,000 median income, you would have failed the income portion of the “means test.”
But if you just wait to file until February 1, then the applicable 6-month period jumps forward by one full month to the period from August 1 of last year through January 31 of this year. That new period no longer includes the $3,000 you received in mid-July. So your income during the 6-month period is $21,000, multiplied by 2 is $42,000. This results in your income being less than the $45,000 median income amount. You’ve now passed the “means test,” and qualified for Chapter 7.
Posted by Kevin on December 10, 2018 under Bankruptcy Blog |
The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.
The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.
Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This can create potential timing advantages and disadvantages.
The Means Test Definition of Income
When considering income for purposes of the means test, don’t think of income as you normally would. Instead:
1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).
2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year.
The Effect of this Unusual Definition of Income
This timing rule means that your means test income can change depending on what month you file your case.
So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31. Think year end bonus. Remember, if you file bankruptcy in December, only money received June through November gets counted.
So let’s say you got an extra $1,500 as a bonus in December. If you file in December that extra doesn’t count. But if you wait until January to file, December money is counted because the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size. Then, you may not qualify for Chapter 7.
Conclusion
It is a fact that most people wait way too long before their initial consultation with a bankruptcy lawyer. Our advice is to consult early so you can know your options and possibly formulate a strategy which can save you money over the long haul.
Posted by Andy Toth-Fejel on November 11, 2018 under Bankruptcy Blog |
Chapter 7 vs. 13 for Income Taxes
Thinking that the only way to handle your income tax debts in bankruptcy is through Chapter 13 is a misunderstanding of the law. It’s an offshoot on the broader error that you can’t write off taxes in a bankruptcy.
Both are understandable mistakes.
It is true that some taxes cannot be discharged (legally written off) in bankruptcy. But some can.
And it is true that Chapter 13 can be the best way to solve many income tax problems. But that does not necessarily mean it is the best for you. Chapter 7 might be better.
When Chapter 13 Is Better
Chapter 13 tends to be the better option if you owe a string of income tax debts, and especially if some are relatively recent ones. That’s because in these situations Chapter 13 solves two huge problems in one package.
First, if you owe recent income taxes which cannot be discharged, you are allowed to pay those taxes over the term of your Chapter 13 plan (up to 60 months) usually avoiding most penalties and interest that would have accrued during the term of the plan. That can be a huge savings. Moreover, you can often hold off on paying anything towards the back taxes while you first pay even more important debts—such as back child support.
Second, if you have older back taxes, under Chapter 13, you pay these taxes as general unsecured debt under your plan. If you complete all payments under your plan and otherwise satisfy the requirements of Chapter 13 any remaining older taxes are discharged; i.e., wiped out.
When Chapter 7 is Better
But you don’t need the Chapter 13 package if all or most of your income tax debts are dischargeable. In that situation, the generally much simpler Chapter 7 could be enough.
So, what makes an income tax debt dischargeable under Chapter 7?
The Conditions for Discharging Income Taxes
To discharge an income tax debt in a Chapter 7 case, it must meet these conditions:
1) 3 years since tax return due: The tax return for the pertinent tax must have been due more than three years before you file your Chapter 7 case. Also, if you requested any extensions for filing the applicable tax returns, add that extra time to this three-year period.
2) 2 years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.
3) 240 days since “assessment”: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.
4) Fraudulent tax returns and tax evasion: You cannot file a “fraudulent return” or “willfully attempt in any manner to evade or defeat such tax.”
These four conditions and the procedure for utilizing them are a bit complicated. Therefore, we advise that you retain an experienced bankruptcy attorney to assist you.
Posted by Kevin on November 7, 2018 under Bankruptcy Blog |
In the previous blog, we talked about debts in general, and secured debts in particular. Today, we will talk about general unsecured debts and priority debts.
General Unsecured Debts
All debts that are not legally secured by collateral are called unsecured debts. And “general” unsecured debts are simply those which are not one of special “priority” debts that the law has selected for special treatment. (See below.) So the category of “general unsecured debts” includes all debts with are both not secured and not “priority.”
General unsecured debts include every imaginable type of debt or claim. The most common ones include most credit cards, virtually all medical bills, personal loans without collateral, checking accounts with a negative balance, unpaid checks, payday loans without collateral, the amount left owing after a vehicle is repossessed and sold, and uninsured or under insured vehicle accident claims against you.
It helps to know that sometimes a debt which had been secured can turn into a general unsecured one. For example, a second mortgage that was fully secured by the value of the home at the time of the loan can become unsecured in a Chapter 13 bankruptcy if the home’s value falls significantly. Or what was originally a general unsecured debt may, in certain circumstances, turn into a secured debt.
Priority Debts
As the word implies, “priority” debts are ones that Congress has decided should be treated better than general unsecured debts.
Also, there’s a strict order of priority among the priority debts. Certain “priority” debts get paid ahead of the others (and ahead of all the general unsecured debts). In bankruptcy getting paid first often means getting paid something instead of nothing at all.
This has the following practical consequences in the two main kind of consumer bankruptcy:
In most Chapter 7 cases there is no “liquidation” of your assets for distribution to your creditors. That’s because in the vast majority of cases, all the debtors’ assets are protected; they are “exempt.” But in those cases where there ARE non-exempt assets which the bankruptcy trustee gathers and sells, priority debts are paid in full by the trustee before the general unsecured ones receive anything. And among the priority debts those of higher priority are paid in full before the lower priority ones receive anything.
In a Chapter 13 case, your proposed payment plan must demonstrate how you will pay all priority debts in full within the 3 to 5 years of your case. Then after the bankruptcy judge approves your plan, you must in fact pay them before you can be discharged
Here are the most common priority debts for consumers are:
- child and spousal support—the full amount owed as of the filing of the bankruptcy case
- certain income taxes, and some other kinds of taxes.
Posted by Kevin on October 21, 2018 under Bankruptcy Blog |
Debts in Bankruptcy
If you are thinking about bankruptcy there’s no more basic question than what it will do to each of your debts. Will it wipe away all your debts or will you still owe anybody? What about debts you would like to keep like your car or truck loan or your home mortgage? What help does bankruptcy give for unusual debts like taxes, or child and spousal support?
The Three Categories of Debts
At the heart of bankruptcy is the basic rule of treating all creditors within the same legal category the same. So we need to understand the three main categories of debts. You may not have debts in all three of these categories, but lots of people do. A basic understanding of these three categories will help make sense of bankruptcy, and make sense of how it treats each of your creditors.
The three categories of debts are “secured,” “general unsecured,” and “priority.”
Secured Debts
Every single debt is either “secured” by something you own or it is not. A secured debt is secured by a lien—a legal right against that property.
Most of the time you know whether or not a debt is secured because you voluntarily gave collateral to secure the debt. When you buy a car, you know that you are signing on to a vehicle loan in which the lender is put onto your car’s title as its lienholder. That lien on the title gives that lender certain rights, such as to repossess it if you don’t make the agreed payments.
But debts can also be secured as a matter of law without you voluntarily agreeing to it. For example, if you own a home and an unsecured creditor sues you and gets a judgment against you that usually creates a judgment lien against the title of your home. Or if you don’t pay federal income taxes you owe, the IRS may put a tax lien on all your personal property.
For a debt to become effectively secured, for purposes of bankruptcy, certain steps have to be taken to accomplish that. Otherwise the debt is not secured, and the creditor does not have rights against the property or possession that was supposed to secure the debt.
In the case of a vehicle loan, the lender and you have to go through certain paperwork for the lender to become a lienholder on the vehicle’s title. If those aren’t done right, the vehicle will not attach as collateral to the loan. That could totally change how that debt is treated in bankruptcy.
Finally, it’s important to see that debts can be fully secured or only partly secured. This depends on the amount of the debt compared to the value of the collateral securing it. If you owe $15,000 on a vehicle worth only $10,000, the debt is only partly secured—secured as to $10,000, and unsecured as to the remaining $5,000 of the debt. A partly secured debt may be treated differently in bankruptcy than a fully secured one.
In the next blog we will be reviewing general unsecured debts and priority debts.
Posted by Kevin on September 20, 2018 under Bankruptcy Blog |
Over the years, I have received numerous phone calls from people who have tried to file a bankruptcy by themselves (known as “pro se” debtors) and have gotten into trouble. I also see first hand what happens when people file without an attorney when I attend “meetings of creditors”, also known as 341a meetings. A 341a meeting is the usually straightforward, usually short meeting with the bankruptcy trustee that everyone filing bankruptcy must attend. Unfortunately, with many pro se debtors, the 341a meeting is not always straightforward or short.
But I wondered whether anybody has actually investigated this question. In searching the internet, I came across a book published a few years ago titled Broke: How Debt Bankrupts the Middle Class. This book is a series of articles about current issues in bankruptcy. One such article is titled “The Do-It-Yourself Mirage: Complexity in the Bankruptcy System” by Professor Angela K. Littwin of the University of Texas School of Law. Professor Littwin analyzed data from the Consumer Bankruptcy Project, “the leading [ongoing] national study of consumer bankruptcy for nearly 30 years.” Her finding: “pro se filers were significantly more likely to have their cases dismissed than their represented counterparts.”
Very interestingly, she also learned from the data that
consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process. Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom.
She concluded that after bankruptcy law was significantly amended back in 2005 in an effort to discourage as many people from filing, “bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.”
Almost 10 Times More Likely to Get a Discharge of Your Debts
In another study, Prof. Littwin stated that “17.6 percent of unrepresented [Chapter 7 “straight bankruptcy”] debtors had their cases dismissed or converted” into 3-to-5-year Chapter 13 “adjustment of debts” cases. “In contrast, only 1.9 percent of debtors with lawyers met this fate.” Even after controlling for other factors such as “education, race and ethnicity, income, age, home ownership, prior bankruptcy, whether the debtor had any non-minimal unencumbered assets at the time of the filing,” “represented debtors were almost ten times more likely to receive a discharge than their pro se counterparts.”
The bottomline is that you are better off going to an experienced bankruptcy attorney.
Posted by Kevin on September 7, 2018 under Bankruptcy Blog |
A creditor can challenge the discharge of its debt in bankruptcy.
Why Creditor Challenges Are More Common in Closed-Business Bankruptcies
For the following reasons, creditors tend to object more to the discharge of their debts in bankruptcy cases that are filed after the debtor has operated and closed a business:
- The amount of debt owed in business bankruptcies tends to be larger than in a consumer case, making objection more tempting to the creditor.
- In the business context some debtor-creditor relationships can be very personal. Consider debts between former business-partners who are blaming each other for the failure of the business, or between a business owner and the business’ primary investor who believes the owner drove the business into the ground, or between the contract buyer of a business and its seller in which the buyer feels that the seller misrepresented the profitability of the business. In these situations the aggrieved creditor is more personally motivated to fight the discharge of its debt.
- The owners of businesses in trouble find themselves desperate to keep their businesses afloat. So they may make questionable decisions which then expose them to objections to discharge.
- In the kinds of close creditor-debtor relationships mentioned above, the creditor often has hints about the business owner’s questionable behavior, and so is more likely to believe it has the legally necessary grounds to object.
But Objections to Discharge Are Still Not Very Common
When former business owners hear that any creditor can raise objections to the discharge of its debt, they figure an objection would very likely be raised in their case. But in reality these objections occur much less frequently than might be expected, for the following reasons:
- The legal grounds under which challenges to discharge must be raised are quite narrow. To be successful a creditor has to prove that the debtor engaged in rather egregious behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to property. These are not easy to prove.
- In his or her bankruptcy case the debtor files, under oath, papers containing quite extensive information about his or her finances. The debtor is also subject to questioning by the creditors about that information and about anything else relevant to the discharge of his or her debts. If the information on the sworn documents or gleaned from any questioning reveals that the debtor truly has no assets worth pursuing, a rational creditor will often decide not to throw “good money after bad” by raising an objection.
Conclusion
In a closed-business bankruptcy case there are these two opposing tendencies. Challenges to discharge are more likely, especially by certain kinds of closely related creditors. But these challenges are still relatively rare because of the narrow legal grounds for them and the financial practicalities involved. A good bankruptcy attorney will advise you about this, will prepare your bankruptcy paperwork to discourage such challenges, and will help derail any such challenges if any are raised.
Posted by Kevin on June 7, 2018 under Bankruptcy Blog |
Eligibility depends on 1) the kind of debtor, 2) the kinds and amounts of debts, 3) the amount of income and 4) of expenses.
1) The Kind of Debtor
If you are a human person, you may be eligible for either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” case. You and your spouse may also be eligible to file one or the other of these together in a joint case.
However, if you are the owner or part-owner of a business partnership, corporation, limited liability company or other similar business entity, that business entity could not file its own Chapter 13 case. But it could file under Chapter 7.
2) The Kinds and Amounts of Debts
If your debts are “primarily consumer debts” (more than 50% by dollar amount), then to be able to file a successful Chapter 7 case you have to pass the “means test.” That’s a test related to your income and expenses (discussed more below.) If 50% or more of your debts are not consumer debts, than you can skip the “means test.”
Chapter 7 does not limit the amount of debt you can have to be eligible to file a case. However, you cannot file a Chapter 13 case if your debts exceed the maximums of $394,725 in unsecured debts and $1,184,200 in secured debts (or if you do file a case it will very likely be “dismissed” (thrown out)).
3) Amount of Income
You can quickly and easily satisfy the “means test” and be eligible for a Chapter 7 case if your income is no more than the regularly adjusted and published “median income” for your family size and state.
To be eligible for Chapter 13 you must have “regular income.” That is defined not very helpfully as income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.”
Also for Chapter 13, if your income is less than the “median income” for your family size and state of residence, then the plan generally must last a minimum of three years (but in many situations it can last longer, especially if you need it to, but for no longer than five years). If your income is at or above the applicable “median income” amount, the plan must almost always last five years.
4) The Amount of Expenses
In Chapter 7, if your income is NOT less than “median income” for your family size and state of residence, then you may still pass the “means test” and be eligible for filing a Chapter 7 case IF, after accounting for all your allowed expenses, you don’t have enough money left over to pay a meaningful amount to your creditors.
In Chapter 13, a similar accounting of your allowed expenses determines the amount of your “disposable income,” the amount you must pay into your plan each month.
Summary
Once you recognize that you need relief from your creditors, choosing between Chapter 7 and 13 is often not difficult. But because there are many, many differences between them, the choice can sometimes turn into a delicate balancing act between the advantages and disadvantages of those two options. That’s why when you have your initial meeting with your bankruptcy attorney, it’s smart to be aware of and communicate your goals, but also be open-minded about how best to accomplish them.
