Food for Thought

Posted by Kevin on April 21, 2014 under Bankruptcy Blog | Comments are off for this article

Paying Your 2013 Income Taxes on the Backs of Your Other Creditors

Posted by Kevin on April 16, 2014 under Bankruptcy Blog | Comments are off for this article

An income tax debt that you owe for the 2013 tax year presents both some challenges and opportunities if you file bankruptcy in early 2013. The challenges are practical ones. You have a debt that you wish you didn’t have, it can’t be written off (discharged) in bankruptcy, and you may well not know how much it is because you haven’t prepared the tax return yet. So it can be a frustrating and scary uncertainty.

The interplay between taxes and bankruptcy can be complicated, however, under the right circumstances your 2013 income tax debt can be—believe it or not–paid in full essentially without costing you anything. That’s because under bankruptcy law in many circumstances recent tax debts are paid in place of your other creditors, leaving less or nothing for those other creditors. This can happen in both Chapter 7 and Chapter 13, much more likely under that latter. This blog shows how your taxes can be paid in an “asset” Chapter 7 case, and the next blog shows the more common Chapter 13 situation.

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Payment of 2013 Income Taxes in an “Asset” Chapter 7 Case

Most Chapter 7 cases are “no asset” ones. This means that the bankruptcy trustee takes nothing from you because everything you have is exempt or else not worth the trustee’s effort to collect. So none of your creditors—including the IRS—are paid anything through your Chapter 7 case itself.  In that situation, you would have to make arrangements to pay any 2013 income tax with the IRS (and/or any state tax agency, if applicable).

On the other hand, an “asset” Chapter 7 case is one in which you own something that is NOT exempt and IS worth for the trustee to collect, sell, and distribute its proceeds to the creditors.

The Example

Consider this. You own a boat that has become more expensive and more work to own than you’d expected.  In a Chapter 7 case, if you do not claim an exemption on the boat and your bankruptcy trustee believes the boat is worth collecting from you and selling, then the 2013 taxes are among the first debts that the trustee will pay out of the proceeds.   Why?  Because the taxes are what is called “priority debts”.  Although most of your creditors are paid pro rata—equally, based solely on the relative amount of their debts— “priority debts” are paid ahead of your other creditors. So, assuming you do not have any debts that are even higher on the priority list (see Section 507 of the Bankruptcy Code), your 2013 IRS/state income tax will be paid in full before the trustee pays anything to any of your other creditors. As a result you would no longer have this tax to pay after your Chapter 7 case is completed.

Caution

For this to work as described takes just the right conditions, with more twists and turns than can be fully explained here. So definitely discuss all this thoroughly with your bankruptcy attorney.

Chapter 13 Bankruptcy Helps You with Special Debts When Chapter 7 Can’t

Posted by Kevin on April 11, 2014 under Bankruptcy Blog | Be the First to Comment

Chapter 7 sometimes doesn’t help you enough with certain debts. Included are some income taxes, child and spouse support you’re behind on, home mortgage arrearage, and vehicle loans, among others.

There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the practical means to take care of the remaining special debt(s). It frees up money.   But other times you need the extra protection that a Chapter 13 payment plan gives you.

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Here are the ways Chapter 7 could help with the first three of the special kinds of debts mentioned above, and ways that Chapter 13 can help more if necessary. The fourth kind—vehicle loans—are in some respects more complicated, so they’ll be addressed separately in an upcoming blog.

Income Taxes

Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7, but some can’t, generally more recent ones. If you have a tax debt that will not be discharged, but is the only debt that will not be and is small enough, you can file a Chapter 7 case and make payment arrangements directly with the IRS (or applicable state tax agency). If the monthly payment amount is manageable, this could well be the sensible way to go.

But if the tax amount is too large for what you can afford to pay, or you have a number of debts that would not be discharged under Chapter 7, then Chapter 13 would help in the following ways:

• You would likely get more time to pay off the tax.
• The IRS or state agency would be prevented from taking collection action without permission of the bankruptcy court.
• Generally you would not need to pay interest and penalties from the time your case is filed, allowing you to pay off the tax debt with less money.

Child and Spousal Support Arrearage

State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods.  Sometimes you can work out a deal with these enforcement agencies, sometimes not.  If you can make a deal, then Chapter 7 may make sense for you.

But otherwise you need the extraordinary power of Chapter 13. It gives you three to five years to pay the support current, as long as you rigorously keep up with your ongoing monthly payments in the meantime. And throughout this time all of the very tough collection tools usually available to your ex-spouse or support agency are put on hold for your benefit.

Home Mortgage Arrearage

If you are behind on your home mortgage but want to keep the home, and you file a Chapter 7 case, you are at the mercy of your mortgage company about how much time you will have to catch up on the mortgage.

In contrast, similarly to what is stated above, Chapter 13 will give you three to five years to cure that arrearage. So, if you are too far behind to be able to catch up within the time you would be given under Chapter 7, then you need to file under Chapter 13.

Defeating Creditors’ Accusations That You Misused Their Credit to Pay for the Holidays

Posted by Kevin on April 7, 2014 under Bankruptcy Blog | Comments are off for this article

The risk that creditors will not allow you to discharge some of their debts can be minimized through smart timing of your bankruptcy.

One of the most basic principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones don’t. One way you can be “dishonest” in the eyes of the bankruptcy law is to use credit when, at that point in time, you don’t intend to pay it back. That makes sense. Each time you sign a promissory note or use a credit card you are directly stating in writing, or else strongly implying, that you promise to pay the debt you are then creating. That makes moral common sense. And it’s the law: a creditor can challenge your ability to write off a debt that you did not intend to pay when you incurred it.

Creditors Have the Burden of Showing Dishonest Intent

But most of the time when a person takes out a loan or uses a credit card, they DO intend to pay the debt. The law respects that reality by holding that most debts are discharged (legally written off) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt. So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.

Dishonest Intent Inferred from When You Incurred the Debt

However, in the delicate balancing act between the rights of debtors and creditors, the law also recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a significant, although limited, advantage when consumer purchases or cash advances are made within a short period of time before the bankruptcy filing. A debtor’s use of consumer credit during that period is presumed to have been done with the intent not to pay the debt, on the theory that the person likely was considering filing bankruptcy at the time, and likely wasn’t planning on paying back that new bit of debt. So the statute says that this new portion of the debt is “presumed to be nondischargeable.”

Limitations on the “Presumption of Fraud”

This presumption is limited in lots of ways:

• Applies only to consumer debt, not debts incurred for business purposes.
• Covers only two narrow situations:
  • 1) cash advances totaling more than $750 from a single creditor made within 70 days before filing bankruptcy;
  • 2) purchases totaling more than $500 from a single creditor made within 90 days before filing bankruptcy, IF those purchases were for “luxury goods or services,” defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”
• The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt.

So there is no presumption of fraud, and no presumption of nondischargeability of the debt, if cash advances from any one creditor add up to $750 or less within the 70-day period, or if credit purchases for non-necessities from any one creditor add up to $500 or less within the 90 days. See Section 523(a)(2)(C). This means that one simple way to avoid the presumption is to wait until enough time has passed before filing bankruptcy so that you get beyond these 70- and 90-day periods. That is, this is easy unless you have some urgent need to file the case.  Either way, your attorney will help determine when you should file your case.

Possible Creditor Challenge Even Outside the Presumption

With all this focus on the presumption, be sure to understand that even if your use of credit doesn’t fit within the narrow conditions for the “presumption of nondischargeability,” a creditor could still believe that the facts show that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way. However, these kinds of challenges are relatively rare because:

• As stated above, the creditor has the burden of proof, and it’s not easy for it to prove your bad intention;
• The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway; and
• The creditor may also be required to pay YOUR attorney fees in defending the challenge if it loses. See Section 523(d).

“Converting” Your Chapter 13 Case into a Chapter 7

Posted by Kevin on April 4, 2014 under Bankruptcy Blog | Comments are off for this article

To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months).  In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan.  Of course, life throws you curve balls.  You lose a job, or your hours are cut.  You or a member of your family gets sick and insurance does not cover the whole bill.  The car breaks down-more than once.  Your wife has to quit her job to take care of her sick mother.  Whatever.  The Code takes this into account.  How?   One way  is by allowing you to convert your Chapter 13 to a Chapter 7.

Here’s an example to illustrate this.  You own a home and have two mortgages.  You are  $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover.   The home is worth a  less than the first mortgage.  You had been laid off, but got a new job, and are starting to get significant overtime.  But now, almost miraculously the debt collectors are calling again.  You are making enough to take care of that first mortgage, your current expenses, and  if everyone tightens belts,  a little more, say $250 per month.

Chapter 13 may be the answer.  How, you say.  Even if everything goes right, what am I going to do about that second mortgage?  Chapter 13 gives you the power to “strip” the second mortgage; that  is, convert the second mortgage secured debt into unsecured debt.  Then, the second mortgage gets paid pro rata with the credit cards and medical bills.  How much?  What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee.  Could be very little.  Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value.  Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter.   You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.

15 months into the plan, your boss cuts back on most of your overtime.  You can’t even pay the first mortgage  much less the trustee.  If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished.  What to do?

The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.

Not a perfect solution, by any means.  However, better than being thrown to the wolves.  Let’s look at the scenario under the converted Chapter 7.  First, you do not have to make any more payments to the trustee.  That comes out to $3000 per year.  Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge.  That means that you have knocked out all your debts (mortgage, credit card and medical).

BUT, the Code differentiates between the debt and the security for the debt.  The debt is discharged but the security (mortgage) remains on the property.   Unless you can make a deal with the mortgagees, you will probably lose your home.  But you will not owe any deficiency on the first mortgage or anything on the second.  Moreover, you will knock out the credit card and medical debt.

Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot”  to save your home.  If it works, God bless.  If not, you switch into a 7, get your discharge and move on with your life.

So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.

The Practical Consequences of Voluntarily Dismissing Your Chapter 13 Case

Posted by Kevin on March 25, 2014 under Bankruptcy Blog | Comments are off for this article

One advantage of filing a Chapter 13 case is that you can get out of it “at any time.”

Chapter 13 comes with a right to dismiss. This means that at any point of your case you can get out of the case and out of the bankruptcy system altogether. Since this type of bankruptcy generally takes three to five years to complete, and involves projecting your income and expense that far out into the future, you’re only being sensible to ask what happens if your financial circumstances change during that period.

There are a number of other options for dealing with changes in your income and expenses, such as making adjustments in your Chapter 13 plan, or converting your case into a Chapter 7 one. There’s even something called a “hardship discharge” which in limited circumstances allows you to complete your case early. We’ll look at these other options in future blogs.

Dismissing your case is probably the most extreme of all the options. But it can be the best one in some situations.

If you dismiss your case, here are some of the main consequences:

• Once the bankruptcy judge signs the order dismissing your case, you no longer need to make payments under the Chapter 13 plan, and neither the court nor the Chapter 13 trustee has any further jurisdiction over your income, your tax refunds, or anything else addressed in your Chapter 13 plan.
• You lose the immediate benefit of being in a bankruptcy case, the “automatic stay” preventing your creditors from collecting on their debts and repossessing or foreclosing on any collateral. So before dismissing your case, be sure you know how each of your creditors is likely to act in response to the dismissal.
• Because under Chapter 13 you do not get a discharge of your debts until successful completion of the case, if you dismiss your case you will owe all your creditors as before except to the extent that they received payments during the case. Most interest and penalties stopped during the Chapter 13 case will usually be able to be added onto your debts, including for the period of time that you were in the case.

So why would somebody ever want to dismiss their Chapter 13 case?  Simply because in some situations the advantages of dismissal outweigh any disadvantages. Chapter 13 cases can take such different forms and be filed for so many different reasons that it’s impossible to give a neat and tidy answer to this. So here is one scenario that illustrates when a dismissal can be the best choice.

Assume that a single mom with a young child has a vehicle loan, a home mortgage, and owes back income taxes. During a period of 10 months of unemployment she had managed to keep current on her vehicle loan because that was her absolutely highest priority. But while she was unemployed she could only do this and still take care of her necessary living expenses by not paying her mortgage. So she fell behind 10 payments of $1,500, or a total of $15,000. She also owed $2,000 to the IRS for the prior year’s income taxes because of not paying any withholding on her unemployment benefits. So she filed a Chapter 13 case a year ago in order to have three years both to catch up on that $15,000 mortgage arrearage and to pay off the income tax. She continued paying the vehicle loan so she’s still current on that.

But now she got a job offer in a neighboring state, where her parents live, who could help raise her child. So she’s ready to surrender the home to the mortgage company, and under the terms of her mortgage she would owe them nothing if she did so. The income from her new job would be enough to allow her to continue making her vehicle payments, and to set up an installment payment plan with the IRS to pay off the tax debt outside of bankruptcy. With her changed circumstances, and all her creditors taken care of, a dismissal of her Chapter 13 case would be appropriate and the best option here.

Changing Your Mind After Filing Under Chapter 7 or Chapter 13

Posted by Kevin on February 20, 2014 under Bankruptcy Blog | Comments are off for this article

You have some wiggle room if you either want to get out of your bankruptcy case or change to the other Chapter.

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After starting your bankruptcy case, your circumstances could suddenly change or for some other reason you may no longer want to be in the bankruptcy case that you’re in. Getting out of the bankruptcy court altogether—dismissing your case—is not very easy in a Chapter 7 case, easier in a Chapter 13 one. Changing from one Chapter to the other—converting the case–is usually allowed. We start today with some reasons why you might want to dismiss or convert, and then in the next two blogs talk about dismissal and conversion first under Chapter 7 and then under Chapter 13.

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Why Dismiss or Convert?

To put this into context, what types of situations would lead to a person to want to get out of a bankruptcy case after presumably giving the decision a lot of thought beforehand?

Although some situations could apply to both Chapter 7 and 13, these two procedures are very different in two very practical ways so that the situations that would motivate you to get out of the case tend to be different. The two big differences are their length and likelihood of successful completion:

• most Chapter 7 cases usually lasts only about three months, compared to three to five years for a successful Chapter 13 case; and

• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant percentage of Chapter 13 cases are not.

Why Would You Want to Dismiss or Convert Under Chapter 7?

Under Chapter 7 “straight bankruptcy,” there’s a lot less that can go wrong and a lot less time for your circumstances to change. The focus is on your assets and debts at a fixed moment in time, at the point your case is filed. So if a careful analysis of your financial situation at that time indicates that your case meets the requirements of Chapter 7, not much should change that.

Here are some problems that can nevertheless arise making you wish you could get out of your Chapter 7 case:

• Although assets are fixed as of the date of filing, under Section 541(a)(5) of the Bankruptcy Code, if a relative dies within 180 days of the filing of your case  leaving you as the beneficiary of an inheritance or a life insurance policy, that inheritance or insurance proceed becomes available to pay your creditors.

• If shortly after filing your case you have an accident and incur significant new medical debts because of having insufficient medical insurance, the new debt cannot be included and discharged in your case because that debt did not exist when your case was filed.

• You may be unaware at the time your case is filed that you have a legal right to a valuable asset, for example you did not know that your parents’ vacation home had been secretly deeded to you and your siblings.

Why Would You Want to Dismiss or Convert Under Chapter 13?

Under Chapter 13 “adjustment of debts bankruptcy,” there’s a lot more going on and so a lot more that can go wrong than in a Chapter 7 case. A Chapter 13 plan lays out how much and when the various creditors will be paid (if at all), and creditors can object to the plan and sometimes force it to be changed before it’s approved by the bankruptcy judge. Then you have to comply with the terms of the plan, over the course of three to five years, which give a lot of time for your circumstances to change. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.

So all kinds of things can happen which could make you wish you could get out of your Chapter 13 case, but here are some representative examples:

• Your plan is designed around your desire to save your home, but a year or so later you find a job which requires you to move, taking away the primary purpose of your case.

• You filed a joint Chapter 13 case with your spouse, but two years later you go through a divorce, totally changing your financial life.

• Your income is significantly reduced permanently; so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.

• Your income is significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.

Again, the next two blogs will be about getting out of Chapter 7 and then Chapter 13, in situations like the examples given above.

Income Taxes and Self-Interest in a Marriage

Posted by Kevin on February 3, 2014 under Bankruptcy Blog | Comments are off for this article

Each spouse in a marriage with significant tax debts has his or her self-interest, which may need a different solution than the other spouse.

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Married couples can and often file bankruptcy together. Doing so when they both owe substantial income taxes may especially makes sense. But each spouse needs to understand his and her own rights and options before deciding whether to file bankruptcy or not, and if so whether to join in the other’s bankruptcy or file his or her own case.

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If a couple owes a lot of income taxes, often it is because of the actions of one of spouses—such as one spouse running a business into which that spouse puts his or her heart and soul but still eventually failed. The spouse who is “at fault” may well be feeling deep frustration and guilt, while the other spouse is experiencing feelings of anger, disappointment, and even betrayal. This extra source of conflict can not only make their situation more emotionally challenging but legally as well.

This blog suggests some principles to consider if you’re in a similar situation.

The Two Spouses Each Have Their Own Self Interest

To state what is probably obvious, just because two people are married does not mean that their financial situations are the same, or that their legal problems and the potential solutions are the same. While some spouses do have close to identical situations—if they are jointly liable on all the same debts and share ownership in all their assets—often that’s not the case. Each person can have his or her own separate debts and to some degree his or her own assets, making their financial situations very different. And beyond those tangible differences, each person can have different goals and different attitudes about how to deal with his or her individual problems and their ones in common.

Because income taxes are such an unusual debt, they can greatly complicate the self-interest of each spouse. Taxes are unusual in how they are incurred. For example, a tax debt can arise primarily out of the actions of one of the spouses, with the other spouse becoming completely liable by simply signing a joint tax return. That spouse might eventually be able to get out of that liability through the “innocent spouse” exception, another complication not available with any other kind of debt. Taxes are also quite unusual in how they are treated in bankruptcy.  There are relatively complicated rules about what taxes will and will not be discharged, and how each portion of each tax account can be handled under Chapter 13.

Each nuance of these rules can create different self-interests for each spouse.

The Two Spouses May Each Need Their Own Bankruptcy

The two spouses’ different self-interests may well lead to different solutions. Sometimes that may mean one person filing bankruptcy and the other not, or one person filing a Chapter 7 case and the other a Chapter 13 one.

The Two Spouses Could Need Separate Attorneys

Without getting deeply into delicate attorneys’ ethical rules about conflict of interest, attorneys need to be careful about simultaneously representing any two people who have different interests. This is true regardless if these two people are married and have some common interests. In the end the two may end up filing a joint bankruptcy because it is in their individual and mutual best interest to do so. But before getting there each person must be made fully aware of his or her individual rights and legal options, whether this happens through two separate attorneys or through a single one. One or both spouses may decide to sacrifice some of their individual interests for their common good, but can only do so when their rights and options have been clearly laid out for each of them.

Spouse Needs to Join Bankruptcy to Discharge Income Taxes, But Reluctant Because Has No Other Debts and Has Separate Asset

Posted by Kevin on January 25, 2014 under Bankruptcy Blog | Comments are off for this article

Finding the best way out of this seeming Catch-22 depends on a full understanding of your unique situation and your goals.

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The last blog explained that filing a bankruptcy by yourself immediately protects YOU from IRS collection activity but does NOT protect your spouse. Similarly the legal write-off (“discharge”) of any tax applies to the person(s) filing the bankruptcy but not to your spouse if he or she does not either join you in your bankruptcy case or else files his or her own case.

That makes perfect sense—you don’t get the benefit of bankruptcy if you don’t file bankruptcy! So the simple solution is for spouses to file bankruptcy together. But there are many situations where that’s not so simple. The next few blogs discuss some of the practical problems that can arise, and how to resolve them.

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One Spouse Has Most of the Debts, the Other May Have Assets

Often one spouse is the only one individually liable on most of the debt. Or one spouse  is solely liable on all debt except they are jointly liable on the secured debts—their mortgage and/or vehicle loans–that the couple intend to keep paying on. These situations can happen when one spouse incurred all the debt from operating a business that failed, or that spouse was simply the primary income source, and/or the one with good credit.

In these situations only the spouse whose debts would be discharged would directly benefit from a bankruptcy filing, so the other is appropriately reluctant to be in a bankruptcy that appears to provide him or her no benefit.

But now add two more ingredients to this scenario: 1) a large personal income tax debt that is old enough and meets the other conditions so that it can be discharged in bankruptcy, which both spouses owe because they both signed the joint tax return; and 2) a significant asset not protected by the applicable exemption owned separately by the spouse with less debts. To make this clearer, let’s say the income tax debt is $25,000 for the 2008 tax year, and the one spouse’s separate asset is his or her share in the childhood vacation home, inherited before the marriage, with this spouse’s share being worth about $20,000.

Seeming Catch-22 for Spouse with Less Debt but Liable on Tax Debt

Without the joint income tax debt, the spouse with little or no other dischargeable debt would not want to join in a Chapter 7 bankruptcy case because his or her share of the old family vacation home could well be claimed by the bankruptcy trustee and sold to pay the couple’s creditors. But with the existence of the joint tax debt, a Chapter 7 filed by the other spouse alone would forever discharge that tax debt as to THAT spouse only, leaving the non-filing spouse owing all of the tax—and the continually accruing interest and penalties—by him- or herself. Clearly not a good result.

Indeed the situation on the surface looks like a Catch-22: the asset-owning spouse either joins in on the bankruptcy thus jeopardizes the asset, or else doesn’t join and is stuck with the tax.

Best Solution Depends on the Unique Facts of the Case

It’s in these tough situations that an experienced bankruptcy attorney becomes very valuable. Determining the best solution depends on thorough understanding of the law along with a careful analysis of all the facts of this case—such as whether the couple owed any other taxes and if so how much and for which years, whether they owed any other “priority” debts (including back child or spousal support payments from a prior marriage, or employee wages from the failed business), their current income and expenses, and lots of other potentially relevant facts.

Married Couples’ Protection from the IRS under Chapter 7 and Chapter 13

Posted by Kevin on January 18, 2014 under Bankruptcy Blog | Comments are off for this article

Filing bankruptcy with or without your spouse, and under Chapter 7 or Chapter 13, may affect what protection you each receive.

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The last few blogs have been about what happens if you file bankruptcy with or without your spouse, and whether you file under Chapter 7 or 13. Today’s blog addresses the protections you and your spouse get or don’t get from collection activity by the IRS (and any pertinent state income tax agencies) under those options.

The “automatic stay” which you get with any bankruptcy filing stops the IRS and state agencies from any further collection actions just like any other creditor. But to get this protection, whoever owes the tax has to be in on the bankruptcy filing. The co-debtor stay of Chapter 13 does not apply to income taxes, so that does not give any help to a non-filing spouse.

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The “Automatic Stay” Applies to Income Tax Debts

Some people have the misimpression that the IRS and other income tax authorities are exempt from the “automatic stay,” the protection from creditor collection you receive immediately when your bankruptcy is filed. Not true. If the IRS continues to pursue a tax debt after being given notice of a bankruptcy filing, it is breaking federal law just like any other creditor. And the bankruptcy court can order the IRS to pay damages if it does break the law. Since the IRS and similar state agencies have been punished for this in the past, they tend to follow the law and stop collections right when you file bankruptcy, like most other creditors.

There ARE some exceptions to the “automatic stay” that apply to taxing authorities—actions that they can still take in spite of a bankruptcy filing, but these actions are very limited.. They can “assess” a tax (determine the amount of tax) and send out a notice about it, make a demand for tax returns, send a notice of tax deficiency (but not act to collect on that deficiency), and conduct an audit (but again not act to collect any debt arising from the audit). So these permitted actions are deemed not to involve actual collection activity.

The “Automatic Stay” Applies Only to the Filing Spouse(s)

The “automatic stay” protects only the debtor—the person or persons filing the bankruptcy case, and his or her, or their, assets. On a jointly owed tax, if only one spouse files the bankruptcy, the IRS or state agency can continue pursuing the non-filing spouse as if the bankruptcy was not filed. And because the tax debt is jointly owed, the non-filing spouse can be required to pay the debt in full.

Chapter 13 “Co-Debtor Stay” Does Not Apply to Income Taxes

The lack of protection for the non-filing spouse is true both under Chapter 7 and 13, because the usual protections for non-filing “co-debtors” in Chapter 13 under the “co-debtor stay” do not work. As discussed a couple blogs ago, the ‘co-debtor stay” provides a way to protect even non-filing spouses from consumer debts owed jointly with a spouse filing under Chapter 13. But it’s inapplicable to income taxes owed to the IRS or other tax agencies, basically on the rationale that the “co-debtor stay” applies only to “consumer debts,” and courts have determined that income taxes are not “consumer debt.”

Applying the Stay Rules to Income Taxes

Because the tax agencies can pursue a non-filing spouse who jointly owes an income tax—under both Chapter 7 and 13—both spouses need to file bankruptcy whenever there is any significant joint tax debt.

Usually this means a joint filing—two spouses filing together on one bankruptcy case. But sometimes—when their financial circumstances are different enough, or perhaps when the marriage is not stable—they may find worthwhile for each to file a separate case, and maybe for one to file a Chapter 7 case and the other a Chapter 13 one.

Lastly, the IRS has been known to not pursue a non-filing spouse if the taxes are being paid in full through the other spouse’s Chapter 13 plan. But this would be done purely at the discretion of the IRS, and should not be counted on unless first carefully discussed with your attorney. But even in these situations, the non-filing spouse is on the hook for penalties and interest that can be wiped out in a Chapter 13 plan.  This is yet another reason to include both spouses in the Chapter 13 filing.

The Discharge of Debts for Married Couples in Chapter 7 and Chapter 13

Posted by Kevin on January 6, 2014 under Bankruptcy Blog | Be the First to Comment

Filing bankruptcy with or without your spouse affects the discharge of debts you each receive, and also affects whether you file under Chapter 7 or 13.

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Continuing from the last blog:

• There are consequences to filing separately or together, consequences affecting:
  • the discharge of your debts.

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The last blog was about what happens to a spouse who doesn’t file bankruptcy when the other spouse does, specifically as to the “automatic stay,” the immediate protection from creditor collection activity. In a nutshell, there is NO protection from joint creditors for the non-filing spouse in Chapter 7, while there IS some important but limited protection in Chapter 13 through the “co-debtor stay.”

The “automatic stay” is temporary protection that goes into effect at the beginning of and can last the length of the case. The “discharge”—the permanent legal write-off of a debt which is the topic of today’s blog—happens at the end of either a Chapter 7 or Chapter 13 case.

Debts Are Individual

A debt is an individual liability. Discharging a debt in bankruptcy is not so much a destruction of that debt as a legal pronouncement that an individual is no longer liable on that debt.

Each person owes a debt individually—we are not automatically liable for our spouse’s debts. So if ALL of a couple’s debts are owed by one spouse and only that spouse, then a bankruptcy by that spouse will leave the couple with no debts (assuming the debts are of the kind that can be discharged).

Chapter 7 Discharges Debts Only of the Filing Spouse(s)

Much more common is the situation in which two spouses each have some individual debts and some joint debts.

If they file a JOINT Chapter 7 straight bankruptcy, at the completion of the case their debts will be discharged (legally written off). That includes debts that each spouse owes individually, as well as those for which they are both legally liable.

If only ONE of two spouses files a Chapter 7 case, only that spouse’s debts will be discharged. That includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse. But the non-filing spouse’s debts will not be discharged. And that includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse.

Distinguishing Individual and Joint Debts

What this means is that one spouse should not file without the other unless they know exactly how much debt the non-filing spouse is legally liable for—both his or her separate debt and their joint debt.

This is not always obvious. A seemingly non-liable spouse can in fact be legally liable on a debt in numerous possible ways. A creditor’s monthly bill that is addressed to only one spouse does not necessarily mean that the other spouse did not sign and become obligated under the original loan agreement. Under certain states’ laws a spouse is obligated for the other spouse’s debts under certain circumstances. Also, specific creditors—such as the IRS—are favored with special laws creating liability for the other spouse. So both spouses’ debts need to be reviewed carefully to see who is liable on each contractually and as a matter of law.

There’s No “Co-Debtor Discharge” in Chapter 13

There is no discharge of a non-filing spouse’s liability analogous to the special “co-debtor stay” of Chapter 13. The filing spouse has the opportunity to protect the non-filing spouse during the course of the 3-to-5-year Chapter 13 case through the “co-debtor stay,” but if the debt is not paid in full during the case then the creditor can pursue the non-filing spouse once the case is over. That’s true even though the filing spouse’s liability for the same debt is discharged at the end of that Chapter 13 case.

Take as an example a husband and wife owing $5,000 on a credit card that they both thought only the husband was liable on because they understood it was tied to his business that failed. They’d forgotten that long ago they had both signed the credit card application. If only the husband files a Chapter 13 case, the “co-debtor stay” would immediately prevent the credit card creditor from pursuing the wife. That creditor may not bother to object to the “co-debtor stay.” Then at the end of the husband’s Chapter 13 case, any of his remaining liability on that credit card debt (beyond whatever portion was paid through his plan, if any) would be discharged, and his case completed and closed. That would terminate the “co-debtor stay,” allowing the creditor to pursue the wife for the full $5,000 debt (less any payments made in the Chapter 13 plan), plus years of interest and late charges.

The Bottom Line

Be very cautious about filing a separate bankruptcy case—Chapter 7 or 13—without your spouse. Discuss your debts thoroughly with your attorney, getting strong verification that the non-filing spouse is liable neither contractually nor by operation of law on debts. Use the “co-debtor stay” to protect the non-filing spouse on a limited joint debt(s), but only to give the filing spouse time to pay off the debt(s) in full so that there is no surviving liability at the end of the Chapter 13 case for which the non-filing spouse would continue to be liable.

The “Automatic Stay” for Married Couples in Chapter 7 and Chapter 13

Posted by Kevin on December 27, 2013 under Bankruptcy Blog | Be the First to Comment

Filing bankruptcy with or without your spouse affects the protection from creditors each of you receives, and also affects whether you file under Chapter 7 or 13.

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Continuing from the last month’s blog:

• There are consequences to filing separately or together, consequences affecting:
  • protection from your creditors’ collection activity.

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Bankruptcy Only Protects Bankruptcy Filers, Right?

Start with the sensible proposition that if you want bankruptcy protection from your creditors, you need to file bankruptcy to get it. Sounds obvious and sensible, but it’s only partly true.

It’s True in Chapter 7

If you file a Chapter 7 straight bankruptcy case by yourself—without your spouse—and one of your debts is owed by both you and your spouse, the creditor will be able to continue pursuing your spouse to pay that debt. That’s because the “automatic stay” which stops creditors from collecting debts immediately upon the filing of a Chapter 7 bankruptcy only protects the person who files. The section of the federal Bankruptcy Code which provides for the “automatic stay” says that it stops “any act to collect… a claim against the debtor.” And a “debtor” is a person who has filed a bankruptcy case.

So if your spouse did not join in your bankruptcy case (and didn’t file his or her separate case), nothing stops this spouse’s creditors from pursuing the debts owed by him or her. And that includes debts that the two of you owe jointly. That’s the simple reason that usually married folks file joint bankruptcies—besides any individual debts each may have, most spouses have joint debts which both spouses need protection from.

But Chapter 13 Could Protect a Non-Filing Spouse

Bankruptcy CAN protect a co-obligor, such as a spouse, in a limited but potentially crucial way, ONLY under Chapter 13. The “co-debtor stay” of Chapter 13 extends the “automatic stay” immediately upon the filing of the case not just to the filing “debtor” but to also to co-debtors—any individual that is liable on a consumer debt with the debtor. A spouse who does not join the other spouse’s bankruptcy filing is a protected by this “co-debtor stay” as to any of their joint consumer debts.

But this protection comes with conditions. If the creditor challenges the co-debtor stay as to the non-filing spouse, the bankruptcy court will allow the creditor to pursue him or her EXCEPT to the extent the filing spouse is paying that debt through the Chapter 13 case. So the filing spouse can fully protect the non-filing spouse by arranging through the Chapter 13 plan to pay that debt in full. That way the debt is slowly paid off during the 3-to-5-year plan while both are protected from collections—the filing spouse by the “automatic stay” and the non-filing spouse by the “co-debtor stay.” Chapter 13 debtors are generally allowed to favor such consumer joint debts in their plans over other non-joint debts in order to protect co-debtor. So if the amount of such joint debt is relatively modest, this can be a way for only one spouse to file bankruptcy and still protect the other spouse from a joint creditor or two.

Since the “co-debtor stay” is available only under Chapter 13, if there are good reasons for only one spouse to file bankruptcy, and both spouses are liable on a limited amount of consumer debt, then Chapter 13 could well be the better option.

The Honest Christmas

Posted by Kevin on December 23, 2013 under Bankruptcy Blog | Be the First to Comment

Your abundant love for your children, spouse, and others is not defined by an (over)abundance of holiday gifts.

That’s especially true if you have children. Every ounce of your parenthood is pushing you to create a happy and memorable Christmas for them. You know you can’t afford to add to your debt and you hate to do it, but there just isn’t nearly enough in the regular paycheck to pay for it. After all, you sure can’t do without a Christmas tree, or without the family feast that’s been the tradition forever. And of course the kids need at least a few decent gifts—they don’t deserve a miserable holiday. Nor does your spouse or other special person.

All true. It is necessary and appropriate to celebrate. To enjoy our precious times of togetherness.

It’s easy for others to tell you not to use your credit cards, but they’re not in your shoes.

Sure, real love is not dependent on the monetary value of gifts, and yet love yearns to be expressed through the giving of gifts.

Everybody knows that they should live within their means, buy non-necessities like gifts only out of their spare income, and save up over the rest of the year for holiday gifts. But sometimes this is all virtually impossible.

We know that we should not judge our own worth—as a parent, spouse, or friend—by the price tag of the gifts we give to our loved ones. And yet we DO feel inadequate if we can’t give them “enough.”

So what’s a financially stressed person to do?

We grudgingly admit that we should have age-appropriate conversations with our children about the true meaning of the holidays, and about the appropriate role of gifts. We know that we should have similar honest conversations with our spouses and other adults we share a home with. At least a part of us accepts that more than anything we need to be honest—again in an age-appropriate way—with both the adults and the children in our lives about our financial limitations. We need to communicate clearly that our abundant love for them is not bound up in abundant gifts. And certainly not in overabundant gifts.

It takes serious bravery to have these conversations. And it all starts with what might be the bravest step of all: a good honest conversation with yourself about all this. You know you are in a vicious cycle of debt, and don’t see any way out. The last thing you need to do is add to your financial pressure. Instead, face your situation. Be completely honest with yourself about where you stand. Be honest about your fears. About how you don’t see a way out. Recognize that that there IS a way out. Then think about what concrete steps you can take to find the best way. Think about where you can find out some answers (such as the phone number on this website).

As you get honest with yourself, get honest with the people you love. Celebrate your love and friendship in a less material but more meaningful way. Celebrate true to the season.

Filing a Chapter 7 Case to Save Your Business

Posted by on December 16, 2013 under Bankruptcy Blog | Be the First to Comment

A Chapter 13 case is often the preferred way to keep a sole proprietorship business alive. But can a regular Chapter 7 one ever do the same?

In my last blog I said that “if you own an ongoing business as a DBA… which you intend to keep operating, Chapter 7 may be a risky option.” Why? Because Chapter 7 is a “liquidating bankruptcy,” so the bankruptcy trustee could make you surrender any valuable components of your business, thereby jeopardizing the viability of the business. But this deserves further exploration.

Your Assets in a Chapter 7 Bankruptcy

When a Chapter 7 bankruptcy is filed, everything the debtor owns is considered to be part of the bankruptcy “estate.” A bankruptcy trustee oversees this estate. One of his or her primary tasks is to determine whether this estate has any assets worth collecting and distributing to creditors. Often there are no estate assets to collect and distribute because the debtor can protect, or “exempt,” certain categories and amounts of assets. The exempt assets continue to belong to the debtor and can’t be taken by the trustee for distribution to the creditors. The purpose of these “exemptions” is to let people filing bankruptcy keep a minimum amount of assets to get a “fresh start”.

Business Assets in a Chapter 7 Case

If you own a sole proprietorship, are all the assets of that business exempt and protected? In other words, is the entire value of the business covered by exemptions, whether approaching the business as a “going concern” or broken up into its distinct assets.

Many very small businesses cannot be sold as an ongoing business because they are operated by and completely reliant for their survival on the services of its one or two owners.  In most such situations the business only has value when broken into its distinct assets.  So the Chapter 7 trustee must consider whether the debtor has exempted all of these business assets to put them out of the trustee’s reach.

The assets of a very small business may include tools and equipment, receivables (money owed by customers for goods or services previously provided), supplies, inventory, and cash on hand or in an account. Sometimes the business may also have some value in a brand name or trademark, a below-market lease, or perhaps in some other unusual asset.

Whether a business’ assets are exempt depends on the nature and value of those assets, and on the particular exemptions that the law provides for them. For example, a very small business may truly own nothing more than a modest amount of office equipment and supplies, and/or receivables. In these situations the applicable state or federal “tool of trade” or “wildcard” exemptions may protect all the business assets. You need to work conscientiously with your attorney to make certain that all the assets are covered.

So it is possible for a business-owning debtor to have a no-asset Chapter 7 case, potentially allowing the business to pass through the case unscathed.

The Potential Liability Risks of the Business

However, there is an additional issue: will the trustee allow the business to continue to operate during the (usually) three-four months that a no-asset case is open or instead try to force the business to be shut down because of its potential liability risks for the trustee?

How could the Chapter 7 trustee be able to shut down the business? Recall that everything that a debtor owns, including his or her business, becomes part of the bankruptcy estate.  As the technical owner—even if only temporarily—of the business, the trustee becomes potentially liable for damages caused by the business while the Chapter 7 case is open. For example, if a debtor who is a roofing subcontractor drops a load of shingles on someone during the Chapter 7 case, the estate, and thus the trustee, may be liable for the injuries.

The main factors that come into play are whether the business has sufficient liability insurance, and the extent to which the business is of the type prone to generating liabilities. There’s a lot of room for the trustees’ discretion in such matters, so knowing the particular trustee’s inclinations can be very important. That’s one of many reasons why a debtor needs to be represented by an experienced and conscientious attorney who knows all of the trustees on the local Chapter 7 trustee panel and how they deal with this issue.

Conclusion

In many situations it IS risky to file a Chapter 7 case when you want to continue operating a business. You need to be confident that the business assets are exempt from the bankruptcy estate, and that in your situation the trustee will not require the closing of the business to avoid any potential business liability.

Married Couples in Chapter 7 and Chapter 13

Posted by Kevin on November 25, 2013 under Bankruptcy Blog | Be the First to Comment

Bankruptcy law allows married couples to file bankruptcy separately or together. That option comes with consequences, which can also affect whether you file under Chapter 7 or 13.

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If you’re considering filing bankruptcy with or without your spouse, consider the following:

• Each spouse has the legal right to join the other spouse’s bankruptcy or not.
• There are consequences to filing separately or together. Consequences affecting:
  • the preservation of your assets;
  • protection from creditors’ collection activity;
  • the discharge of your debts; and
  • dealing with the IRS and any other income tax authorities.

Today’s blog covers the first couple of these points, and the next ones cover the rest.

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1.  Each spouse has the legal right to join the other spouse’s bankruptcy or not.

Married spouses often ask if they CAN file together, or if they MUST file together. By law, each person can file his or her own case alone, can file jointly with his or her spouse,  or can decide not to file at all. But the fact that all the options are on the table doesn’t necessarily make the choice easier. In many situations it is in both spouses’ best interest to file either a Chapter 7 or 13 case together, but sometimes there are good reasons for one of them not to be part of that filing.

It can be a delicate choice, legally and personally. One spouse may owe most of the debt, because of a failed business or a prior divorce. One spouse may have run up some debt irresponsibly, perhaps without telling the other. The marriage itself may well be at risk because of financial stress. We’ve all heard that financial problems are one of the top reasons for divorce. The survival of the marriage may hinge on making wise choices about whether to file bankruptcy, who should file, and what kind of case to file.

Another delicate question is whether your marriage will outlast a 3-to-5-year Chapter 13 case. The realities are that:

1) many Chapter 13s do not get finished successfully;

2) when one isn’t finished, dealing with the fallout can be awkward;

3) as much as a Chapter 13 can help your finances, it is a long process requiring some stability and consistency;

4) Chapter 13s can handle changes in circumstances, sometimes even a divorce, but it’s generally not wise to file one if the odds are that the marriage isn’t going to outlast it.

So, if realistically the marriage is not stable enough to survive beyond the completion of a Chapter 13 case, then think about the Chapter 7 option instead.

2.  There are consequences to filing separately or together. Consequences affecting—

a. the preservation of your assets:

One spouse filing alone versus both filing jointly can have an effect on how well your possessions are protected by your applicable property exemption scheme.

In some states you must use that state’s property exemptions, in others you have a choice of that state’s and a federal set of exemptions.  NJ gives you the option.  99% opt for the federal exemptions because the NJ exemptions are so puny.  Under the federal exemptions, if a husband and wife file jointly, the exemptions are doubled.   Say, for example, you have $50,000 equity in your home.  Using the federal exemptions, you can protect around $43-44,000 from creditors.  That together with costs of sale may preclude any trustee action on your home.

Beyond this, sometimes one spouse—one who has much less debt, for example—owns an asset that the spouse who owes most of the debt has no legal right to. For example, consider a relatively new marriage in which the spouse without much debt inherited some property before the marriage. That spouse may understandably not want to risk having that inherited property go to a bankruptcy trustee to pay the other spouse’s debts. So that spouse would understandably not want to file bankruptcy with her spouse.

This kind of situation has to be analyzed very carefully. Both spouses need to understand how well the separate property of the non-filing spouse can be insulated from the other spouse’s bankruptcy case. In Chapter 13 it is harder to avoid having the non-filing spouse’s income and assets affect the other spouse’s case. The two spouses need to be very clear about all the consequences of only one person filing either a Chapter 7 or Chapter 13 case.

Please visit us for our next blog for part 2 of this topic.

Your Vehicle in Chapter 7 and Chapter 13

Posted by Kevin on November 21, 2013 under Bankruptcy Blog | Be the First to Comment

Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.

1.  Is your vehicle protected by the applicable exemption?

The first thing to find out if whether there is any risk that a bankruptcy trustee could take your car or truck from you if you filed a Chapter 7 case.   In NJ, the exemption is only $3675  plus whatever you do not use on your homestead exemption.  So, if your car is reasonably new (and not leased), chances are it is not completely protected by exemption.  So, you have three possible options:

1) File a Chapter 13 case to protect the vehicle. This way you pay enough to your creditors through a court-approved plan so that your creditors receive over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.

2) File a Chapter 7 case and pay the trustee—usually through a short series of monthly payments—for the right to keep the vehicle. This prevents the trustee from selling your vehicle by paying him or her about as much as would have gone to the creditors had the vehicle been sold.

3) Surrender the vehicle in a Chapter 7 case—assuming you don’t absolutely need it—and allow the proceeds to go to your creditors, an especially sensible option if the debt to be paid first is one you need to be paid anyway, such as income tax or back child support.

2.  Are you current or almost current on your vehicle payments but really struggling to keep current?

Either Chapter 7 or 13 can enable you to keep up your vehicle payments by reducing or eliminating your other debts. Bankruptcy is a reprioritization. It empowers you to focus on what’s most important in your financial life. That often is your vehicle, which gets you to work and enables you to take care of your other personal and family responsibilities. Bankruptcy allows you to be wisely proactive, protecting your ability to pay your car payments—and for its necessary maintenance and repairs—before it’s too late.

3.  Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?

If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7 or Chapter 13.

And if you are not current but can catch up very quickly after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle. However, if you can’t catch up that quickly, you will likely need the extra power of Chapter 13 to buy more time with your creditor.

4.  Is your vehicle worth less than what you owe on it, AND did you buy your vehicle at least two and a half years ago?

If you say yes to both of these questions, you would likely be able to do a “cram down” on your vehicle loan in a Chapter 13 case. This means that through your court-approved plan you would in effect be able to reduce the balance of your vehicle loan down to the value of your vehicle, often also reducing the interest rate and extending the payments over a longer period, usually resulting in a greatly reduced monthly payment.   So if you qualify for a vehicle cram down that may be a good reason to file under Chapter 13, because it is not available under Chapter 7.

5.  Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?

Although bankruptcy can help you keep your vehicle in many ways, it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances. Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction.  Bankruptcy gives you the opportunity to get rid of that deficiency balance.   Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances pointed you towards filing Chapter 13.

Who’s Who in Chapter 7 and Chapter 13

Posted by Kevin on November 6, 2013 under Bankruptcy Blog | Be the First to Comment

The Cast of Characters

You—the Debtor

A Chapter 7  debtor is looked at quite differently from a Chapter 13 debtor. Focusing here on one main difference, Chapter 7 fixates on who you are financially at the moment your case is filed. Chapter 13 focuses not only on that moment,  but also who you are financially for the next the three to five years (the length of your payment plan).

For example, if you started earning a higher income a year after your case is filed, that would have no effect if you had filed a Chapter 7 case.  But in a Chapter 13 case, that income increase would likely increase what you’d have to pay your creditors. On the other hand, because Chapter 7 pretty much doesn’t get involved in your future, it also doesn’t protect your future income from certain potentially dangerous debts which are not written off, such as certain taxes and child and spousal support arrearage. Chapter 13 does protect such future income. It allows you to pay these kinds of special debts based on your budget instead of leaving you at the mercy of those creditors’ aggressive collection powers.

Your Primary Challenger—the Trustee

In both Chapters 7 and 13, most likely the person you would have the most contact with would be the trustee. They are carefully selected and supervised individuals who are assigned to your case to take care of certain tasks.  I called them your “challengers” because that’s their primary job, but most of the time your attorney and you will work cooperatively with them.

The Chapter 7 trustee’s most important task is to determine whether or not he or she has the right to take anything from you—in other word whether everything that you own is “exempt,” meaning that you can keep it all, as is usually the case. The Chapter 13 trustee’s two primary tasks are to raise any appropriate challenges to your proposed payment plan, and then, once a plan is approved by the bankruptcy judge, to distribute to creditors payments that you make under that plan.

Your Adversaries—the Creditors

Under both Chapter 7 and 13, your creditors can play a major role but often don’t. They can challenge your ability to discharge (write-off) their debts, and can raise a variety of objections. Often, we don’t hear from them at all, but if we do it’s usually a secured creditor (one who has a right to collateral such as your home or vehicle) or a special “priority” creditor—a taxing authority or support enforcement agency. How the various kinds of creditors are handled in Chapter 7 vs. 13 will be discussed in future blogs.

The Enforcer—the U.S. Trustee

This is an office under the U.S. Department of Justice which administers and, to a large degree, oversees the whole system, including the Chapter 7 and Chapter 13 trustees. You will usually not hear directly from them, and if you do it’s usually not good news, indicating that you or your paperwork are not following the rules.

The Paper-Pusher—the Bankruptcy Clerk

This is the office where we file the bankruptcy documents (which is virtually all done electronically, not by paper being physically delivered anywhere). They send out the official bankruptcy court notices.

The Deciders—the Bankruptcy Judges

A bankruptcy judge is assigned to every Chapter 7 and Chapter 13 case, but mostly they work behind the scenes. You will almost never actually go to the judge’s courtroom in a Chapter 7 case, and seldom in a Chapter 13 case.

In most Chapter 7 cases, a judge is hardly involved, except in signing the discharge order releasing you from your debts at the completion of your case, assuming that it proceeded appropriately. In the relatively unusual situation of a creditor objecting to the discharge of its debt, the bankruptcy judge will decide whether the objection meets the relatively limited grounds for a debt not to be discharged.

In contrast, a judge is always involved in a Chapter 13 case, at the very least in the approval of your payment plan at what is called the confirmation hearing. But again, you almost never need to attend this hearing, which is taken care of by your attorney.  Because of the length of a Chapter 13 case, it’s more likely than in a Chapter 7 case that issues will arise that need the judge’s attention—changes in your plan if your circumstances change, challenges by creditors  or the trustee if you are not meeting the terms of your plan, and such. Chapter 13 is a 3-5 year journey that you take with the court, the trustee, your creditors and most importantly, your attorney.   So a word to the wise, make your payments in a timely manner and stay in close communication with your attorney throughout your case so that you know whether issues are being put before your judge and how he or she is deciding them.

The Usually Easy to Answer First Question for Your Bankruptcy Attorney

Posted by Kevin on November 3, 2013 under Bankruptcy Blog | Be the First to Comment

In deciding between Chapter 7 and 13, get this question out of the way right away: “Can I keep everything I own if I file a Chapter 7 case?”

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Most people do not lose anything that they own when they file bankruptcy. That’s because the law protects (“exempts”) certain kinds of your assets and usually a certain dollar value of them. If everything you own fits within those kinds and those amounts, then you can file a Chapter 7 “straight bankruptcy” and protect everything. Even if you DO own and want to keep things beyond those limits, filing a Chapter 13 case will likely protect those additional things. So, a way to put the question is whether 1) all your possessions are protected under Chapter 7 or instead 2) you need the extra protection provided by Chapter 13.

(This blog is about things you own free and clear. Those that are collateral on debts, such as your home with its mortgage, are a whole separate discussion for later.)

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This is a good first question once you start seriously considering bankruptcy because usually your attorney will be able to answer it quite quickly and assure your possessions are protected in a Chapter 7 case. And if some are not protected, that’s an issue that should be addressed by your attorney and you from the very beginning.

Just because your attorney can usually make this determination quite quickly does not mean that it is not an important question, or that it’s an easy one for someone who isn’t highly experienced in this area of law.

It’s an important question because:

1) If you’re filing bankruptcy you likely can’t spare to lose what you own, so you don’t want to put any of it at risk.

2) You especially don’t want to lose something unnecessarily, since there usually are ways to prevent that from happening.

It’s not an easy question for the inexperienced because:

1) In some states the state law determines what you can keep, while in some other states federal law does, and in others either state or federal law can apply.

2) After knowing which law applies, the asset categories are often not clearly stated in the statutes, and their meaning can turn on court interpretations or even on the informal practices of the local bankruptcy trustees or judges.

3) The laws change—the statutes, the formal court interpretations, and the informal practices, and it is very difficult to keep up with all this without working with it full time.

4) If you moved from another state, the statutes and court interpretations applicable to your former state may or may not apply.

And if everything you own is NOT protected, then Chapter 13 MAY be a great tool for keeping everything. But here are some good questions to ask your attorney in this situation:

1) Are the substantial extra time and cost of a Chapter 13 case worth this benefit?

2) Can those unprotected assets be more efficiently protected by some appropriate pre-bankruptcy planning?

3) Can those assets be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee—in reasonable monthly payments—while avoiding the extra hassles of a Chapter 13 payment plan?

4) If you would pay such money to the trustee, where would that money go, and might at least some of it go where it would benefit you—such as to pay taxes or some other debt that you would not be written off by the Chapter 7 case so you would have to pay anyway?

5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets, so that overall it would be worthwhile?

The Most Important Choice in Bankruptcy

Posted by Kevin on October 30, 2013 under Bankruptcy Blog | Be the First to Comment

Chapter 13 costs much more than Chapter 7, takes about 10 times as long, so you do a Chapter 7 if possible, right?

No. These two options each have advantages and disadvantages that need to be carefully matched to your immediate and long-term goals. The greater cost of Chapter 13 sometimes is far outweighed by what you may save through that procedure—possibly even by tens of thousands of dollars. The length of Chapter 13 can itself be an advantage when you’re trying to buy time or stretch payments out over a longer period to lower their monthly amount. But in other situations, Chapter 7 may be just what you need.

Be Informed, But Be Open-Minded

It’s good to inform yourself in advance about these options. But it’s also wise to have an open mind when you first go to see an attorney for legal advice. You may simply not know about a crucial advantage or disadvantage that could swing your decision one way or the other. And you don’t want to be too emotionally invested in going in one direction when the other may be a better choice.

Easy Choice, Hard Choice

Sometimes your circumstances and/or your goals push your decision strongly in one direction or the other. Sometimes you may even only qualify for one, and that one provides what you need. Or you may qualify for both, but still everything points towards either Chapter 7 or 13. In either situation, it could be a very easy choice.

But often you could go through either a Chapter 7 or Chapter 13 case AND BOTH may have attractive features. So it can come down to a deeply personal choice.

For Example…

A couple of simple examples will make this clearer.

If you are behind on your home mortgage and want to hang onto the home, a Chapter 7 case would likely write off all or most of your other debts. Then you’d likely have a few months to catch up on the mortgage. In contrast, a Chapter 13 case would give you up to 5 years to catch up. And it may allow you to avoid paying a second mortgage. This choice turns to some degree on factual issue like whether you have a second mortgage that could be “avoided,” and how much you’re behind on the mortgage payments. But on a personal level it comes down on how important it is to you to keep the house, and how much you’d be willing to bet that you’d be able to do that though Chapter 7 by negotiating a relatively quick catch-up of payments instead of getting much more time and far greater protection through Chapter 13.

Similarly, if you owed some recent income taxes that would not be written off under either Chapter, you could file a Chapter 7 case and write off all or most of your other debts so that you could focus your financial resources on the IRS. You’d arrange with the IRS to make monthly payments to pay off that tax debt, plus ongoing interest and penalties.  Or you could file a Chapter 13 case and pay those taxes through a formal plan based on your own budget, usually avoiding additional interest and penalties, all the while being protected from the IRS. But you would pay extra fees for these advantages. This choice also depends on the facts, such as how much tax you owe and how much you would be able afford to pay each month once your Chapter 7 case were completed. But then it comes down to the more personal question of how confident you’d be that your present income and expenses would stay stable throughout the repayment period, so that you could make those payments no matter what.

It’s Good to Have a Choice, Even If It’s Not an Easy One

To be honest, it is not unusual for people to have some factors pointing towards Chapter 7 with others pointing towards Chapter 13. But instead of wringing your hands about having tough choices, realize it is usually a good thing to have more than one choice, even if neither is perfect. An experienced, conscientious attorney will walk you through this, help you prioritize your goals, weigh any risks, and give you what you need so that you can confidently make a smart choice.

Coming Right Up…

Because being informed is a good thing, and because this decision between Chapter 7 and Chapter 13 is so important, the next few blogs will look at both the basic and some more subtle differences between them.

The Chapter 13 Debt Limits

Posted by Kevin on October 28, 2013 under Bankruptcy Blog | Be the First to Comment

Why Does Chapter 13 Have Debt Limits?

Chapter 7 has no debt limit. But the Bankruptcy Code does impose a limit on the amount of debt that person can owe when filing a Chapter 13 case. Why? Although in conventional consumer situations an average Chapter 7 case is much quicker and easier than an average Chapter 13 case, in fact Chapter 7 can be used with a wide variety of business and consumer arenas, including for corporations and partnerships, including those with many millions of dollars of debt. Chapter 13 is a tremendously flexible procedure, but it is still a relatively streamlined one—especially compared to Chapter 11 reorganization. It was specifically designed for individuals and married couples with relatively straightforward debts.

The primary way that the law tries to limit Chapter 13 to simpler cases is with debt limits. Currently the individual filing one, or the married couple filing together, must have less than $383,175 in total unsecured debts and ALSO less than $1,149,525 in secured debts.

What’s with the Odd Amounts?

These dollar limits do sound arbitrary, and to some extent they are, simply reflecting a Congressional compromise going back 34 years to the original passage of the Bankruptcy Code in 1978. The limits back then were only $100,000 unsecured debt and $350,000 secured debt. These didn’t change until more than doubling in 1994 to $250,000 and $750,000, respectively, with inflationary increases every three years thereafter. The current amounts have been in effect since  April 1, 2013.

What Are “Noncontingent, Liquidated Debts”?

The statute specifically says that you “may be a debtor under Chapter 13” only if you owe, “on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525” (with the appropriate current amounts inserted).

To be a bit over simplistic, these two descriptive words are intended to make clear that only real debts count for these limits. “Noncontingent” means that you are presently liable on the debt, not liable only if some event does or does not occur. “Liquidated” means that you owe a specific and determinable amount. A contingent debt would include one that you would only owe if somebody else did not pay it. A noncontingent debt would be one which you owe jointly with someone else but the creditor has no obligation to first pursue the other debtor. An unliquidated debt would include a lawsuit against you for unspecified damages; a liquidated debt could be a lawsuit where the alleged debt amount can be determined, even if it might be disputed.

Conclusion

In most cases, you will either be clearly under both secured and unsecured debt limits or clearly over one of them. But if you are at all close, be aware that these “noncontingent, unliquidated” distinctions are not always clear. And even if you are over the limits, there may be other solutions if you really need the benefits of a Chapter 13. One possibility is filing a so-called “Chapter 20”—filing a Chapter 7 case to discharge much of your debts, followed immediately by filing a Chapter 13 (7 + 13 = 20). The Chapter 7 discharge should get you under the Chapter 13 debt limits, and then although the Chapter 13 cannot discharge any more debts, it could well protect you from your remaining creditors as you pay their debts—such as mortgage arrearage, back child support, or taxes—at your own schedule.