Posted by Kevin on October 17, 2016 under Bankruptcy Blog | 
Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.
Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.
But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.
If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.
What are the type of non-exempt assets that would fit into this scenario? It’s not going to be your home. (That is why we have Chapter 13) But, say you recently closed down a business. You may still own some of the business assets, but you have no use for them. Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep. And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.
Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule. Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.
But, what types of debts have priority over taxes? The most important are the trustee commission and his/her professional fees. This could amount to a few dollars. Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.
So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.
Again, it’s not common that the “stars will line up”. But when it does, it can be a big plus. Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.
Posted by on September 8, 2016 under Bankruptcy Blog |
How to How to Get the Most Out of Your Bankruptcy
The focus in bankruptcy is on dealing with your debts, wiping out and getting a handle on the negative side of your balance sheet. But getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets—the positive side of your balance sheet. You can maximize this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE filing your bankruptcy case.
In my daily work as a bankruptcy attorney, I constantly meet with new clients who have sold, spent, or borrowed against important assets in desperate attempts to keep their heads above water. This is usually a mistake.
Bankruptcy Protects Assets
If you are like most people, bankruptcy will protect all of your assets. First, Chapter 7 “straight bankruptcy” protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 keep everything they own. Oddly enough, this is called a “no asset case” because the Trustee does not administer (= sells) any of the debtor’s assets. Second, if you have assets which are worth more than the applicable “exempt” amounts provided by law, Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well. And third, if you do have assets that are not “exempt,” with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney, those assets may be all the better protected once your bankruptcy case is filed.
Get Legal Advice BEFORE Wasting Your Assets
If you are considering spending, selling, or borrowing against any of your assets to pay your debts, do you know whether that asset is one which would be protected in bankruptcy?
Consider a person in her late-50s cashing in a substantial amount of her 401(k) retirement plan to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of her retirement lifetime, with no tangible benefit to show for it. Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition to pay creditors that eventually are written off in bankruptcy. Under certain circumstances, that vehicle may be exempted or a deal can be made with the trustee that allows you to keep the vehicle.
These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives.
Posted by on September 6, 2016 under Bankruptcy Blog |
Vehicle Surrender or Repossession Almost Never Good
Whether or not bankruptcy can save your car or truck, surrendering it without having a well-informed plan about what you are going to do next is almost never a good idea. And putting yourself into a situation in which it gets repossessed can really hurt, both immediately and long-term.
Almost always, if you surrender your vehicle, you will owe money on the debt after your creditor sells the vehicle and credits your account the sale’s proceeds. And you will usually owe much more than you think you will.
That’s partly because the vehicle will likely be sold for less than it is worth. The creditor is not trying to be unfair about this, but it’s usually efficient for it to sell repossessed vehicles at an auto auction, where most of the purchasers tend to be used car dealers who can only pay enough for the vehicle to be able to make a profit when they re-sell it. On top of a low selling price, your creditor will tack onto your balance all of its repossession and sale costs, which can really add up. The end result is that you will likely owe a lot of money, and will likely get sued to make you pay it. Once wage and bank account garnishments start, you will probably be forced to consider bankruptcy. As you will see, it’s much better to consider it BEFORE surrendering or losing your vehicle to repossession.
How Chapter 7 Can Help
The main way Chapter 7 “straight bankruptcy” can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payment. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to any approaching repossession. You would then have a month or two, sometimes more, to catch up. Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing Chapter 7 BEFORE losing your vehicle could well be your best move.
How Chapter 13 Can Help
But admittedly that may not be enough help. You may be able to afford the monthly payments if you had no longer had any other debts, but have no way to make up the missed payments that quickly. Or you might have other important debts that you’re behind on, like taxes or child support, and can’t see hanging on to your vehicle in the midst of all these financial pressures. And you might not even be able to quite afford the monthly vehicle payments even with no other debt obligations.
Chapter 13 may be able to cut through ALL of these problems.
First, Chapter 13 can give up to 5 years to catch up on the back payments. Under some circumstances, you might never even need to catch up on them.
Second, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.
And third, if your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s about two and a half years), you can do a “cramdown” on the vehicle loan: lower your monthly payment, and likely pay less overall for the vehicle before owning it free and clear. How much the monthly payment can be reduced depends on a bunch of factors, but especially if your vehicle is worth significantly less than you owe on it, the payment can often be made much lower.
And if you qualify for a “cramdown” and you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t ever have to catch up on those missed payments. They are just part of the re-written, new “crammed down” obligation.
Take Charge and Choose Your Best Option
Posted by on September 4, 2016 under Bankruptcy Blog |
Paying Your Favorite Creditor Before Filing Bankruptcy
Although bankruptcy law fixates on what you own and who you owe at the moment your bankruptcy case is filed, there are some important ways that the law can look into the past. “Preferences” are an example where the bankruptcy system can potentially look into and upset a certain limited piece of your past.
If during the 365 days before you file a bankruptcy you pay what is termed an insider creditor (90 days if not an insider creditor) more than you are paying at that time to your other creditors, then after you file bankruptcy that favored creditor may be required to give to your bankruptcy trustee the money that you had paid to this creditor. So for example, if you paid your mother $1,000 to pay off a debt you owed her, and then six months later filed a bankruptcy case, your trustee could likely require her to pay that $1,000 to the trustee. Mom certainly is not going to be happy about that especially if she already spent the money. That $1,000 would then be divided by the trustee among your creditors as prescribed by law (with your mother likely getting just a tiny portion of it, based on her pro rata share of all your debts).
That $1,000 is called a “preference” or a “preferential payment,” which the trustee can undo, or “avoid.” You are considered to have paid that creditor in “preference” to your other creditors.
The Good News—It’s Preventable
This mess can be avoided altogether if you get legal advice from an experienced bankruptcy attorney before you make the preferential payment(s) to your favored creditor. Or even if you’ve already made the payment(s) by the time you see your attorney for the first time, there are often ways to get around it.
Careful, though, because the law about preferences is complicated. Section 547 of the Bankruptcy Code on preferences is a head-scratcher. It’s about 1,300 words long, containing 56 sub-sections and sub-sub-sections. Take a look at it and you’ll see it’s certainly not clear.
What is clear that if there is any chance that you may be filing a bankruptcy case within a year, before paying anything to a relative, friend, or any other special creditor that you feel obligated to pay, talk first to an experienced bankruptcy attorney. Especially do so if you figure this does not apply to you because you don’t consider the person you are paying to be a “real” creditor—because it’s a “personal debt,” was never put into writing, or nobody knows about it.
And most importantly, if you’ve already made such a payment before you see your attorney, absolutely be sure that you disclose that to him or her, and do so right away, early at the first meeting. It could well affect your game plan, and maybe the timing of your bankruptcy filing.
Posted by on August 10, 2016 under Bankruptcy Blog |
Words I hate to tell new clients: “If only you’d come to talk with me sooner.”
Consumer bankruptcy attorneys are in the business of helping people put back in order their financial lives. Many times we succeed which makes the practice personally gratifying. However, life is not perfect and some situations are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made.
But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.
The goal of my next few blogs is to help you avoid these.
Here’s what we will be covering.
1) Preferences: If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).
2) Wasting exempt assets: New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.
3) Surrendering a vehicle that could have been saved: People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.
4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case.
5) Selling a home out of desperation: Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.
As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.
Posted by on July 22, 2016 under Bankruptcy Blog |
Many of the laws about bankruptcy are time-sensitive. When your case is filed can have significant consequences. This blog will address how timing of a bankruptcy filing can effect what debts can be discharged.
Income Taxes Can Be Discharged, with the Right Timing
Federal and state income taxes are forever discharged if you meet a number of conditions. Two of the most important of these conditions are met by just waiting long enough before filing your bankruptcy case:
- Three years must have passed since the time that the tax return for that tax was due (plus any extension if you asked for one).
- Two years must have passed since you actually filed the pertinent tax return.
For example, assume a taxpayer owes $10,000 to the IRS for the 2009 tax year. She had asked for an extension to file that year to October 15, 2010, but then did not actually file that tax return until October 31, 2011. The above 3-year condition is met after October 15, 2013, because that is three years after the tax return was due. But the 2-year condition has to be met as well, which would not occur until after October 31, 2013, two years after the actual tax return filing date. So filing a bankruptcy case on or before October 31, 2013 would leave that $10,000 tax debt still owing; filing on November 1, 2013 or after would result in it being discharged forever. Simply waiting this one day makes a difference of $10,000.
Now, there are other conditions involved in getting taxes discharged. So, it would be wise to seek professional help.
Posted by on June 20, 2016 under Bankruptcy Blog |
The automatic stay goes into effect simultaneous with the filing of your bankruptcy petition. The “petition” is the document “commencing a case under [the Bankruptcy Code].” Sections 101(42) and 301(a). So the very act of filing the petition itself “operates as a stay.” Section 362(a).
The instantaneous effect of the automatic stay is amazing especially in comparison to most other court procedures. Most take weeks, or even in the case of emergencies at least days or hours. Usually some kind of request or motion needs to be filed to get the court’s attention, the other side is given some opportunity to respond, and then there may be a hearing of some sort, before finally a judge makes a decision.
But the automatic stay skips all that. It is, at least at the beginning, completely one-sided, in your favor. You “win” an immediate court order, without the creditors having any immediate say about it, without involving a judge at all.
So the automatic stay gives you an immediate breathing spell, freezing all collection efforts against you, whether your creditors like it or not.
Awesomely Broad Protection
This break from your creditors covers “any act to collect, assess, or recover” a debt—just about anything a creditor could do to.
Besides stopping all collection phone calls and bills, the automatic stay stops all court and administrative proceedings against you from starting, or from continuing. If your bankruptcy is filed right before a lawsuit is to be filed at court against you, the lawsuit can’t be filed. Same with a home foreclosure. A prior judgment against you can’t result in your paycheck or bank account being garnished. If you’re behind on your vehicle loan payments, the repo man can’t come looking for your vehicle. If you owe back income taxes to the IRS, it can’t record a tax lien against your home and vehicle.
The automatic stay is powerful stuff.
“Relief” from the Automatic Stay
Any creditor can ask the court to cancel the automatic stay so that the creditor can again take action against you, your assets, or the collateral in particular. The most common situation for this is a creditor asking for the right to take back the collateral securing the debt—to repossess a vehicle or to start or continue a home foreclosure. Whether or not the court will give it this right, or give “relief from stay” in any situation, depends on all the details of the case. It requires a careful analysis to be done by and discussed with your attorney.
Exceptions or Limitations to Automatic Stay
There are some, and we will address some of them in upcoming blog posts.
Posted by on June 5, 2016 under Bankruptcy Blog |
Chapter 13 sometimes gives you huge advantages over Chapter 7. So how do you qualify for those advantages?
You can file a Chapter 13 case if:
- the amount of your debts does not exceed the legal debt limits
- you are “an individual with regular income”
Debt Limits
Under Chapter 7 there is no limit how much debt you can have. But under Chapter 13 there are maximums for both secured and unsecured debts.
Debt limits were imposed back in the late 1970s when the modern Chapter 13 procedure was created. Congress wanted to restrict this new, relatively streamlined option to simpler situations. With a very large debt amount, the more elaborate Chapter 11 was instead considered appropriate.
The original debt limits were $350,000 of secured debts and $100,000 of unsecured debts. In the mid-1990s these limits were raised to $750,000 and $250,000 respectively, with automatic inflation adjustments to be made every 3 years thereafter. The most recent of these adjustments applied to cases filed starting April 1, 2016, with a secured debt limit of $1,184,200 and unsecured debt limit of $394,725. These limits apply whether the Chapter 13 case is filed by an individual or a married couple—they are NOT doubled or increased for a married couple. Reaching EITHER of the two limits disqualifies you from Chapter 13.
These limits may sound high, and indeed do not get in the way of most people who want to file a Chapter 13 case. But they can cause problems unexpectedly. As just one example, a serious medical emergency or medical condition that is either uninsured or exceeds insurance coverage can climb to a few hundred thousand dollars of debt shockingly fast.
“Individual with Regular Income”
First, only “individuals”—human beings, not corporations or partnerships—can file a Chapter 13 case.
Second, an “individual with regular income” is defined in the Bankruptcy Code as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”
If that doesn’t sound very helpful to you, you’re not alone. How “stable and regular” does a debtor’s income need to be before it is “sufficiently” so, in that it enables the debtor to make plan payments? How is a bankruptcy judge going to make that determination at the beginning of the Chapter 13 case, especially if there hadn’t yet been any history of income from its intended source?
Having such a ambiguous definition gives bankruptcy judges a great deal of leeway about how they read this qualification. Most are pretty flexible at least at the beginning of the case, giving debtors a chance to make the plan payments, thereby proving by action that their income is “stable and regular” enough. But if your income has been inconsistent, you may need to persuade the judge that your income is steady enough to qualify. A good attorney, especially one who has experience with your judge, can present your circumstances in the best light and get you over this hurdle.
Posted by on May 28, 2016 under Bankruptcy Blog |
From the mid-1990’s to 2005, the creditor lobby worked hard to change the Bankruptcy Code. In their eyes, too many people, who could afford to pay part of their debts, were filing under Chapter 7 and walking away scot free. They wanted people to be forced into Chapter 13, where you have to make monthly payments to a Trustee for 36-60 months if the prospective debtor had the means to pay. Finally, in 2005, Congress changed the law which is called “Bankruptcy Abuse Prevention and Consumer Protection ” Act (BAPCPA). 11 years later, there is still confusion among the public about whether you can still file for Chapter 7, or you must file under Chapter 13. To qualify for Chapter 7, you have to pass the Means Test, the bankruptcy court version of what the IRS uses to determine what you can pay on back taxes. The Means Test is not straightforward, and some issues concerning its application are not clear even after a decade of BAPCPA. However, the bottom line is that you can still file under Chapter 7.
1. Bad Publicity
The creditor lobby, the media and sometimes even the bankruptcy system have all had a hand in making many people think that qualifying for “straight bankruptcy” is hard. While it is true that for the first couple of years, Chapter 13 filings were up, after debtor attorneys started to understand the new system, the vast majority of filings in New Jersey are still under Chapter 7.
2. A Confusing Statute
Upfront, BAPCPA is loaded with abuse prevention but I don’t see much consumer protection. The law is poorly written, confusing and sometimes one section contradicts another section. Moreover, because of these statutory contradictions and ambiguities, Courts, all the way up to the Supreme Court, have been scratching their heads trying to make sense of it. If the judges are having trouble with the complexities of the new law, then it is no surprise that ordinary people are confused.
3. Most Can “Skip” the “Means Test”
Parts of the “means test”–the major mechanism now for qualifying under Chapter 7—are mind-numbingly confusing, but many people can avoid all that simply by virtue of their income. Without getting into the calculations here, basically if your “income” (as specially defined for this purpose) before filing was no more than the published median income amount for your state and size of family, then you qualify for Chapter 7 without needing to go through any more of the “means test.”
Also, certain kinds of folks can skip the “means test” no matter the amount of their income, specifically present or recent business owners who have more business debt than consumer debt.
4. Passing the Means Test turned out to be easier than we thought
Even if you are a consumer debtor whose “income” IS higher than the applicable median income amount, through some good lawyering, which is creative but perfectly legitimate, you may well be able to lower your “income” or increase the reporting of your expenses to bring your overall under the applicable median amount. If so, you qualify for Chapter 7.
5. Chapter 13 is Sometimes the Better Option
The purpose of the “means test” is to make people who have the “means” pay back some of their debts through a Chapter 13 case. In the relatively few times that a person does not qualify under Chapter 7 and so has to do a Chapter 13 case, in almost all cases, the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt, making it not such a bad deal. Also, often a person who “just wants to file Chapter 7 and get it over with” learns that Chapter 13 comes with surprising advantages, which are more helpful to the debtor in the long run.
Posted by on April 28, 2016 under Bankruptcy Blog |
Chapter 7 and 13 are very different debt-fighting tools. But that doesn’t necessarily mean it’s obvious which is right for you.
The Not Always So Easy Choice
Once it is clear that you need bankruptcy relief, picking the right Chapter to file can be simple. Your circumstances may all point towards one option or the other. But sometimes it can be far from clear cut.
The First Impression IS Often Right
To be clear, when my clients first come in to see me, many have a good idea whether they want to file a Chapter 7 or a 13. There is lots of information available about this, including on this website. So lots of my clients come in having done some homework. Or at least they’ve heard something about the two Chapters and have an impression which makes sense to them. But sometimes after we have reviewed all the facts and options, the initial impression proves wrong.
An Illustration
Let’s say you have a home you’ve been struggling to hold onto for the last year or two, but by now have pretty much decided it wasn’t worth doing so any more. You’re seriously behind on both the first and the second mortgages. Like so many other people, the home is worth a lot less than you owe. In fact, let’s say you owe on the first mortgage a little more than what the home is worth, plus another $75,000 on the second mortgage, so the home is “under water” by that amount. Although for the last couple of years you’ve been hoping that the market value will start heading back up, but it’s just held steady. You and your family would definitely like to stay there, buy you absolutely can’t pay both mortgages. Besides it makes little economic sense to keep struggling to hang onto property worth $75,000 less than what you owe. So you’ve decided it’s time to give up on the home, and just file a Chapter 7 bankruptcy.
But then you meet with your bankruptcy attorney and find out some surprising good news. Because your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. You no longer have to make the monthly payments on it, making keeping your home all of a sudden hundreds of dollars cheaper each month. In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you can keep your home usually by paying very little—and sometimes nothing—on that $75,000 second mortgage. At the end of your case, whatever amount is left unpaid on that second mortgages would be “discharged”—legally written-off—so you own the home without that mortgage. You are debt-free, other than your first mortgage.
This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. The ability to keep your home by significantly lowering its monthly cost to you and bringing the debt against it much closer to its value could well swing your choice towards filing Chapter 13, contrary to your initial intention.
So, the Best Advice: Meet with Your Attorney with an Open Mind
Posted by on April 20, 2016 under Bankruptcy Blog |
Very rarely, the filing of a bankruptcy will NOT stop the creditors from chasing the debtor. Here’s how to avoid this happening to you.
The Essential “Automatic Stay”
In just about every bankruptcy case, stopping creditors from pursuing you and your assets is a crucial part of what you get for filing the case—regardless whether it’s a Chapter 7 or Chapter 13 case. This benefit of filing bankruptcy—called the “automatic stay”—generally applies to every case, to every creditor, and to just about to everything that a creditor can do related to collecting a debt.
Exceptions to the automatic stay are there, however, and can put you in a very bad position. About 2 weeks ago, I had a frantic telephone call from a homeowner who stated his house was being sold in three weeks. He was confused because he filed Chapter 13 and then he got notice of sale. He called the lender who refused to cancel the sale. After some questions, I discovered that this Chapter 13 filing was the second such filing in the last three months. The first Chapter 13 was dismissed for failure to file the schedules and plan.
BAPCPA, THE 2005 REVISIONS TO THE BANKRUPTCY CODE, PUT RESTRICTIONS ON THE AUTOMATIC STAY
Before BAPCPA, a very small minority of people filing bankruptcy would file a series of separate cases, one after another, with the intention each time of using the new “automatic stay” of each new case to repeatedly delay a foreclosure or some other collection action. Congress decided that this was an inappropriate use of the bankruptcy laws, and put a stop to it by taking away the benefit of the “automatic stay” as follows.
The Two Rules
The First Rule: The “automatic stay” WOULD NOT go into effect at all when filing a new case if within the past year you had filed two or more other bankruptcy cases, and those earlier cases had been dismissed. If this were to happen, the “automatic stay” COULD potentially still be applied to your case after filing but only by convincing the bankruptcy judge that you meet certain conditions.
The Second Rule: The “automatic stay” WOULD go into effect filing a new case if within the past year you had filed one other bankruptcy case, which was dismissed, BUT the “automatic stay” would expire after 30 days. Its expiration COULD be avoided, but only by convincing the bankruptcy judge that you meet certain conditions.
The conditions referred to above that you’d have to meet for imposing or preserving the “automatic stay” involve justifying why the previous case(s) was (were) dismissed and why the present case is being filed. (The details of these conditions are complicated and beyond what can be covered in this blog.)
Watch Out to Make Sure of No Prior Recent Bankruptcy
Be careful because sometimes people can file a bankruptcy case and have it dismissed without realizing or remembering what happened. For example, if someone files a bankruptcy case without an attorney, and somehow does not complete it, the case would get dismissed. Or is someone does hire an attorney and the case gets filed, because of some miscommunication the case could get dismissed. Either way, months later when this person wants to file bankruptcy he or she could not understand or recall that in fact a case did get filed and dismissed.
So…
Avoid this problem by thinking carefully about whether there is any possibility that a bankruptcy case was filed in your name in the past 365 days. And if it possibly happened, tell your attorney about it right away.
Posted by Kevin on March 31, 2016 under Bankruptcy Blog |
Don’t react to getting lawsuit papers by avoiding them. React by helping yourself. Get some competent legal advice about what this lawsuit really means, whether and how it can hurt you, and what you likely can do about it.
Lawsuits by most creditors aren’t “personal.” They’re just a business decision. The lawsuit papers you have in your hands tell you that the creditor has decided that suing you is a good bet. It thinks that the lawsuit will help get the debt paid. The creditor likely even has in mind specifically how it expects to get paid. It may well be targeting your bank account, your paycheck, your home, or some other income or asset.
The creditor is also making another easy bet—that in fact you won’t do anything about the lawsuit papers after getting them. At least not in time to prevent the lawsuit from turning into a judgment against you. Most people don’t.
So the creditor is banking on you letting them get a “default judgment,” a court decision in favor of the creditor which happens automatically (or at least without a trial) if you do not formally reply to the lawsuit on time.
Once armed with a judgment, the creditor to start grabbing your money and your assets, through orders of the court, sometimes in ways you might not expect.
A Judgment against You is More than Just an Admission that You Owe the Debt
But even if the judgment does not result in giving a creditor a way to get money out of your right away, it has longer-term consequences. For one, judgments can be reported to credit agencies. Affects your FICO score and, therefore, your ability down the line to get credit. In addition, once the deadline to respond passes and a judgment is entered, you’ve give up on some important rights:
a) Your right to raise possible defenses. Creditors and collection agencies can be shockingly cavalier about whether the debts they are pursuing are legally valid. Think about it: since in the vast majority of the time consumers don’t respond to lawsuits and judgments are rubber stamped, there’s not much incentive for the creditors to get their paperwork right. You need to have an attorney review the lawsuit to find out if the statute of limitations on the debt has expired, or if you have any other defenses. After the judgment is entered against you, it is extremely difficult, and a lot more expensive, to raise any such defenses.
b) Your right to raise counterclaims. A counterclaim is your argument that the creditor did something wrong—in the way the debt was created or in how it was collected. Counterclaims say that you have been legally damaged, entitling you to compensation. A default judgment against you either waives your right to bring a counterclaim, or takes away the counterclaim’s leverage when it would do you the most good.
c) Your right to dispute facts. The debt could become more difficult to write off in bankruptcy after a judgment is entered, if certain facts are alleged in the lawsuit (and deemed admitted by your lack of a response). This could put you at a serious disadvantage if you ever need to file bankruptcy.
That is not to say that you cannot, within a set period of time, come into court to set aside the default judgment and then raise those defenses. But, in NJ at least, you must file a motion and appear in court, and a judge makes the call. It is difficult to do and expensive as opposed to filing your answer on time and putting forth your defenses as a matter of right.
If you do get sued, do not bury your head in the sand. Consult and attorney.
Posted by Kevin on March 27, 2016 under Bankruptcy Blog |
The policy behind bankruptcy is to give an honest debtor a fresh start. The fresh start begins with the filing of the bankruptcy petition. By just filing, almost all attempts at collection of a debt are stopped by the automatic stay. The fresh start is completed when the debtor receives a discharge. A discharge means that the debt is cancelled, wiped out.
Not all debts are discharged, however. And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery. For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt. Say, you borrower $500,000 from the bank. You sign a note which is a promise to pay back the $500,000 with interest. That is the debt. And you sign a mortgage which is the collateral for the debt. The mortgage says that if you do not pay back the $500,000, the bank can take your house. The bankruptcy discharge knocks out the note, the debt, but not the mortgage. So, the lender can foreclose on the house and get what it is owed from the house. What if the house is only worth $300,000? Then, that is what the bank gets. The bank cannot come after you for the deficiency because the debt is discharged.
What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.
The Bankruptcy Code, however, does not discharge all debts. Some are dischargeable sometimes. Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship. The burden is on the debtor to prove undue hardship which is not easy in New Jersey. Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge. The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.
Payroll and sales taxes are not dischargeable (called trust fund taxes). Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.
So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.
Posted by on March 26, 2016 under Bankruptcy Blog |
Not responding to a lawsuit by a creditor can harm you in more ways than you think.
Three Different Sets of Reasons
Judgments can harm you in three distinct ways:
1) Give the creditor powerful collection tools against you to collect the debt.
2) Force you into filing bankruptcy when it’s not to your best advantage.
3) Makes it harder sometimes to discharge (write off) the debt later in bankruptcy.
Today’s blog addresses the first one of these. The other two will be covered in my next blogs.
The Temptation to Let a Lawsuit Turn into a Default Judgment
Most lawsuits filed by creditors and collection agencies to collect debts result in judgments against the people being sued. That’s because the main allegations in most of these lawsuits simple argue that the debt at issue is legally owed. And that’s usually not in dispute. So the people being sued understandably figure that there’s no point in responding to allegations that appear to be true.
Practically speaking, most of the time the people being sued are at the end of their financial rope. So they believe that they can’t afford to hire an attorney to find out what their options are, or the consequences of doing nothing.
What ARE the Consequences of Doing Nothing?
You may know that a judgment gives a creditor the right to garnish your wages and bank accounts. You may believe that you can prevent such garnishments from happening to you by keeping your money out of bank accounts and by being paid other than a regular wage or salary (although even those are not practical options for most people). Perhaps, but the “judgment creditor” usually has other rights against you once it gets that judgment.
The laws differ state by state, but generally a judgment becomes a lien against any real estate you own, or will own in the future. Depending on the facts and applicable law, the creditor may then be able to foreclose on that real estate to get its debt paid. Think about not only property under only your own name, but also your rights to property held jointly with a spouse, parent, or through a trust or estate.
An aggressive creditor usually has other tools available. In most states it can get a judge to order you to go to court to answer questions under oath about what you own so that the creditor can find out what it can take from you. The creditor may be able to get a court order sending a sheriff’s deputy to your home or business to seize some of your possessions for payment of the debt. If someone owes you any money (or anything else), that person can be ordered to pay that debt to the creditor instead of to you.
Similarly, if you own a business, the creditor can force your customers to pay it instead of you. This can be devastating both to your cash flow and to your business reputation. Your business could even be subjected to a “till tap”: a sheriff’s deputy arriving at your place of business to take money directly out of the cash register to pay towards the judgment debt.
Will These Happen to You?
We don’t want to give the impression that these kinds of aggressive collection procedures are used in most cases, or will necessarily be used in yours. Some of these are unusual, taking a fair amount of extra work and fees for the creditor or its attorney, and so likely won’t happen in most simple collection cases. The point is that once creditors have a judgment against you, they have many powerful options against you. We meet all the time with distressed new clients who have been shocked at how creditors with judgments against them have been able to financially hurt them.
Why See an Attorney If You Have No Defense to the Debt?
Flying blind is scary and dangerous. Getting sued and not knowing the potential consequences of just letting the creditor win is like flying blind. Besides potentially finding out about possible defenses to the lawsuit, consulting an attorney gives you the opportunity to consider your broader financial situation, and your options for addressing it. A lawsuit by a creditor is usually a symptom of a broader problem. By consulting with a knowledgeable attorney, you may learn about potential solutions to both the lawsuit AND the rest of your financial problems.
Please visit our website again for the next two blogs about the other very important reasons why you should not allow a creditor to take a default judgment against you.
Posted by on August 15, 2015 under Bankruptcy Blog |
If you had struggled to keep a business open, but have decided to throw in the towel, there’s a good chance you owe taxes. Here’s how to deal with them.
The Basic Choice
Let’s assume that you are seriously considering filing bankruptcy, but want to know your options.
You have two choices within bankruptcy for addressing tax debts after closing down a small business:
1. File a Chapter 7 case to discharge (legally write-off) all the debt that you can, which may include some of your tax debt, and then deal directly with the IRS and any other tax authorities to either pay the rest of the taxes in monthly installment payments or to negotiate a settlement (called an Offer in Compromise in the case of the IRS).
2. File a Chapter 13 case to deal with all your debts, which again may include the discharge of some of your tax debt, while you pay the rest of the taxes through a court-approved Chapter 13 plan, and being protected throughout the process from collection actions by the IRS and any other tax authorities.
Putting aside the many factors distinct from taxes, choosing between Chapter 7 or 13 comes down to this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case be small enough so that you could reliably make reasonable payments to the Internal Revenue Service (or other tax authority) which would satisfy that obligation within a sensible time period?
Answering that Question
The idea is that Chapter 7 is likely the way to go if you don’t need the long-term protection that comes with Chapter 13. In a Chapter 7 case, once that case is completed—usually only about three to four months after it is filed—the IRS/state can resume collection activity on the taxes that were not discharged in bankruptcy. You clearly want to avoid that. So a Chapter 7 makes sense ONLY IF before any collection activity begins you have arranged with the IRS/state to make payments, and 1) those payments are reasonable in amount, 2) your circumstances are stable enough so that you are confident that you will be able to pay them consistently, and 3) the length of time you would be making payments does not stretch out so long that the interest and penalties get too high.
Your attorney will be able to tell you—usually with high reliability—which tax debts will and will not be discharged in a Chapter 7 case, and thus how much in taxes you still owe. Then the next step is determining what the IRS/state would require you to pay in monthly payments, or possibly would accept in settlement. Your bankruptcy attorney may be able to give you guidance about this, or may need to refer you to a tax specialist (usually an accountant). Once you know the likely monthly installment payment amount—assuming you go that route—then you need to seriously consider whether that would be an amount you could reliably, reasonably pay, without incurring too much in interest and penalties before you paid it off.
If so, Chapter 7 likely is more appropriate. If not, then Chapter 13 is likely better because it gives you much more protection.
Posted by on August 11, 2015 under Bankruptcy Blog |
The IRS is just another creditor that you can get immediate protection from by filing bankruptcy. With some exceptions.
The “Automatic Stay”
The filing of a bankruptcy case—either Chapter 7 or 13—triggers one of the most powerful tools of bankruptcy—the “automatic stay.” That’s the aggressively protective law that goes into effect 1) automatically the instant your bankruptcy case is filed at court 2) to stay—which means stop—all collection activity against you and against any of your assets.
The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Here are some of them (focusing on those readily applicable to the IRS):
- start or continue a lawsuit or administrative proceeding to recover a debt you owe
- take possession or exercise control over property you own as of the time your bankruptcy is filed
- create or enforce a lien against such property
- collect by any means any debt that existed before the bankruptcy filing
Applied to the IRS
The IRS and similar state agencies are certainly not treated like your conventional creditors when it comes to the discharge (legal write-off) of your debts. But in most respects they ARE treated the same for purposes of the “automatic stay.”
The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (11 U.S.C. Section 362 (a).) Is the IRS an “entity”? The Code explicitly defines that term to include “governmental unit.” (Section 101(15).) So the IRS and all tax collecting “governmental units” are governed by the “automatic stay.”
What If the IRS Still Tries to Collect
Just like any other creditor, the IRS can get slapped pretty hard if it violates the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions. If you are
“injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS. (Section 362(k).) Indeed on occasion the IRS HAS been slapped hard. It now tends to follow the law and respect the “automatic stay” quite faithfully.
Special Exceptions to the “Automatic Stay” for “Governmental Units”
The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (Section 362(b)(9).) But these are sensible exceptions that apply more to the determination of amount of a tax debt than to its actual collection. These tax agencies can demand that you file your tax returns, can make an assessment of the tax and tell you how much you owe, and can do an audit to figure out the amount you owe. They cannot create a tax lien or take any other collection action.
Posted by on July 21, 2015 under Bankruptcy Blog |
If you’re filing a Chapter 13 case, what choices do you have about your income tax refund?
Start with What Happens with Refunds in Chapter 7
To understand how tax refunds are treated under Chapter 13, it helps to compare how they are treated under Chapter 7. For more details about that, see my last blog. But to summarize, when you file a Chapter 7 bankruptcy usually you can keep your tax refund either by 1) smart timing of the bankruptcy filing, or 2) by the use of “exemptions.” If you wait to file your case until after you have received and appropriately spent the refund (carefully following the advice of your attorney on where to spend it), then this refund is not an “asset of your bankruptcy estate”—the bankruptcy trustee and your creditors have no claim on it. On the other hand, if the refund IS an “asset of your bankruptcy estate” but it is covered by an “exemption,” then the refund is protected and you get to keep it.
The Good News about Tax Refunds under Chapter 13
- As with Chapter 7, if you are flexible about when to file your case, wait until you have received and spent the refund appropriately.
- Better than Chapter 7, if you have to file your Chapter 13 case when your tax refund is still pending, you may be able to get permission to spend that refund—or part of it—for some urgent and necessary expense, instead of having it just go to pay creditors.
- Also better than Chapter 7, to the extent that you are required to pay all or part of the refund to the trustee, you would likely have some discretion about where that money would get paid, by including that in the terms of your Chapter 13 plan.
But This Comes with Some Not So Good News
- Chapter 7 focuses only on assets you own or have a right to when the case is filed. So it involves only the tax refunds that are pending at that point in time. Chapter 13 in contrast involves your income throughout the three to five years that your case is active. Since future tax refunds are considered part of your ongoing income, they need to be accounted for, and generally must be paid to the trustee to pay to your creditors.
Paying the Trustee Future Tax Refunds Is Usually Not So Bad
- Usually you can minimize the issue by reducing the payroll tax withholdings made by your employer, thereby reducing that tax year’s refund. As a result you are giving yourself more money each month for living expenses or for making your Chapter 13 plan payments.
- If you still do receive a relatively large refund during your case, and you have some out-of-the-ordinary urgent need for all or part of that money, you may be able to get trustee and/or court permission to use it for that purpose.
- Even to the extent that you still have refunds going to the Chapter 13 trustee during the years of your case, that money could well be doing some serious good work, such as:
- In many situations that additional money beyond your regular monthly plan payments allows you to complete your case faster, giving you an earlier fresh start.
- Important creditors would likely be paid more quickly—such as a child support arrearage or the payoff of a vehicle.
- The extra money from the refunds may be critical in allowing you to pay off the plan within the mandatory maximum 5-years, so that you can discharge all your remaining debts and have a successful Chapter 13 case.
Conclusion
As with Chapter 7, you can usually time the filing of your Chapter 13 case so that you can keep your current-year income tax refund(s). But if you can’t wait to file, then under Chapter 13 you tend to have more control over what happens with the pending tax refund(s). You do have the disadvantage of losing some control over the next few years of tax refunds, but that is less of a practical problem than it may seem for the reasons just outlined.
Posted by on June 23, 2015 under Bankruptcy Blog |
If you’re filing a “straight bankruptcy” case, how do you keep your income tax refund?
Keeping tax refunds is all about timing. You can generally keep your refund but absolutely have to play it right, following rules that at first may not make sense. It is all too easy to mess this up, so you truly should have your attorney guide you through it, applying your unique circumstances to your local laws and practices. But here are the general principles at play.
Let’s start with some background to make sense of this:
- From the bankruptcy system’s perspective, a Chapter 7 case focuses on assets—determining whether you get to keep everything you own or not. That’s why it’s called the “liquidation” chapter. Most of the time you do get to keep everything, but sometimes some of it gets “liquated”—taken from you and turned by your bankruptcy trustee into cash, which then gets paid to your creditors.
- So where does your tax refund fit into this—is it is an asset that your trustee can take from you? That mostly depends on your timing.
- Everything you own or have a right to at the moment your Chapter 7 bankruptcy case is filed becomes your “bankruptcy estate.”
- That “estate” includes both your tangible assets and also intangible ones. One kind of intangible asset is a debt owed to you. A tax refund can be such an intangible asset of your “bankruptcy estate.”
The timing of the filing of your Chapter 7 case determines whether a tax refund is part of your “bankruptcy estate” and therefore could potentially be taken from you:
- An income tax refund is considered your asset as of the time of the last payroll withholding of the year being considered (so for this calendar (2015), the last withholding would be from your last paycheck in December and your employer would forward that money to the taxing authority in the beginning of January, 2016). That’s because as of that time, the full amount of that refund has accrued. Even though until you prepare your tax returns nobody knows the amount of your refund—or even whether you will be receiving one at all—for bankruptcy purposes, the anticipated tax refund is legally all yours as of the very beginning of the next year. And what’s yours is part of your “bankruptcy estate.”
- So IF you file after the beginning of the year but before receiving and appropriately spending the refund, that refund is part of your “bankruptcy estate” and is at least at risk of being taken from you. Again, this is true even if you have no idea how much that refund will be, or even whether you are entitled to one.
- BUT, if you DO receive and appropriately spend the refund before your Chapter 7 case is filed, then the refund is gone and is no longer your asset, and so is no longer part of your “bankruptcy estate.” Your trustee has no claim to it.
Even if your tax refund IS part of your “bankruptcy estate,” it will not be taken from you if it is exempt:
- Although theoretically it’s safest to file your Chapter 7 case when your tax refund is not part of your “estate”—such as after you receive and appropriately spend it beforehand, sometimes you don’t have that much flexibility about when you file your bankruptcy. Then especially it’s critical to get good legal advice about whether that refund will be exempt based on the local law applicable to the case.
- Usually, you get to keep most or all of your “estate” because it’s “exempt”—protected. In the same way, tax refunds are often exempt, depending on the amount of the refund and the exemption that’s applicable to it.
- Some states have specific exemptions applicable to certain parts of the tax refund, or laws that exclude them from the bankruptcy estate altogether, particularly for the Child Tax Credit or the Earned Income Tax Credit.
Even if a tax refund, or some portion of it, is not exempt, sometimes the Chapter 7 trustee may still NOT want it:
- The trustee may decide that the amount the “estate” would get—the refund by itself or in conjunction with any other non-exempt asset(s)—is not enough in value to justify creating an “asset case.” The amount of refund to be collected may be too small to justify the administrative cost involved to collect and distribute it. You might hear the trustee say that the amount of the refund is “insufficient for a meaningful distribution to the creditors.”
- What that “insufficient” amount is differs from one court to another, and often even from one trustee to another, so this is another specific area where you need the guidance of an experienced attorney.
- Caution: if the trustee is already collecting any other assets as part of the “estate,” then most likely he or she will want every dollar of your tax refunds that are not exempt.
Posted by on June 11, 2015 under Bankruptcy Blog |
Did You Know…
- The first income tax was enacted during the Civil War, but it expired a few years after the war ended.
- The first peacetime income tax was passed in 1894, an effort of the Populists to get the wealthy to pay a greater share of the cost of the national government. It was a two percent tax on incomes over $4,000 (worth about $108,000 in today’s dollars), which at the time affected only about the top two percent of wage earners.
- The next year the U.S. Supreme Court overturned this law as unconstitutional, in a 5-4 decision. Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 161 (1895).
- A constitutional amendment to allow an income tax was proposed by the Republican President William Howard Taft, and the resolution for that amendment was passed by Congress with the Republicans in control of both the Senate and the House of Representatives.
- The entire Sixteenth Amendment states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”
- After the required 3/4ths of state legislatures (36 of the 48 then-existing states) ratified it, on February 25, 1913 the Sixteenth Amendment was proclaimed ratified and became part of the Constitution.
So February 25, 2013 was the 100 year anniversary of the income tax becoming constitutional. Funny, I don’t remember any anniversary celebrations!
The MOST Interesting Facts
As the blogs in this series on taxes have been describing, bankruptcy can help you with income tax debts in a variety of ways. If it’s true that in life the facts that are most interesting to you are those that are going to help your pocketbook, then check out the following facts:
- Some income taxes CAN be forever discharged (legally written off).
- Taxes can be discharged under either Chapter 7 or Chapter 13, depending on which is right for you based on your other circumstances.
- The protection from creditors you receive by filing bankruptcy—the “automatic stay”—protects you from the IRS (and other tax creditors) like any other creditor.
- In a Chapter 13 payment plan, that protection can last for 3 to 5 years, giving you that much time to pay taxes that can’t be discharged.
- Even if you owe a tax that can’t be discharged, a Chapter 7 bankruptcy can put you in a much better position afterwards either to enter into a payment plan or negotiate a settlement.
- Chapter 13 usually stops accruing interest and penalties on tax debts that can’t be discharged, reducing the overall amount you have to pay.
- If you owe a number of years of income taxes, Chapter 13 is often an excellent tool because all your taxes—as well as all your other debts—are handled in one tidy package.
Taxes and bankruptcy DO mix, often greatly in your favor.
Posted by on May 30, 2015 under Bankruptcy Blog |
If you can’t discharge your income tax debt through Chapter 7, or make workable payment arrangements on the remaining tax debt, then Chapter 13 can be a good solution.
The Previous Chapter 7 Options
A consistent theme through these past blogs has been that in many situations you do not need to incur the extra expense and time of going through a three-to-five-year Chapter 13 case when other solutions will work. But Chapter 13 IS often an excellent mechanism for resolving all your income tax debts (and usually all your other debts, too).
Chapter 13 Can Be the Easiest Way to Address Your Income Tax Debts
A Chapter 13 payment plan is often a significantly easier way to deal with income tax debts than the other alternatives because:
1. The payment amount going to the taxes are often more reasonable than the IRS/state would require. That’s because they are based on what you can actually afford, by allowing you more reasonable amounts for your expenses.
2. Your Chapter 13 case incorporates ALL your debts in one package, so that you are not forced to satisfy the IRS/state to the exclusion of other important creditors (such as your mortgage, vehicle payments, and child/spousal support). The taxes may have to wait their turn to be paid after debts that are a higher priority for you, instead of just getting paid first.
3. Putting all your debts into one Chapter 13 package also includes all categories of your income taxes—particularly those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state for the taxes that were not discharged.
4. The payments going to the IRS/state can be adjusted during the course of the Chapter 13 if your circumstances change, usually without much room for their objection.
Chapter 13 Can Be a Cheaper Way to Pay Non-Discharged Taxes
It can be cheaper because:
1. In contrast to the other scenarios, under Chapter 13 usually no more interest and penalties can be added after the case is filed.
2. Often you don’t have to pay even the previously accrued penalties.
3. If you have a tax lien attached to any of your tax debts, the lien can sometimes be paid off more cheaply by paying the secured value of the lien instead of the full tax.
If your tax debt is high, and you are paying into your plan for the full five years, these savings can amount to many thousands of dollars.
Chapter 13 Is a Safer Way to Pay Non-Discharged Taxes
It’s safer because:
1. Instead of being at the mercy of the IRS/state if you are not able to make a payment, under Chapter 13 your “automatic stay” protection from all your creditors—including tax creditors—persists throughout your case. So you are not a hair-trigger away from being hit with tax liens, or levies on your wage and bank accounts.
2. You CAN lose this protection, but if you and your attorney deal with your situation proactively you can usually preserve it.
3. This protection is particularly important when your circumstances change—instead of being at the mercy of the IRS/state, your attorney can make adjustments to your Chapter 13 plan. Or if necessary, even more aggressive or creative steps may be appropriate, such as changing to a new bankruptcy case. The point is that you usually have much more control over the situation.
