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How to File a Chapter 7 “Straight Bankruptcy” Even If You Make More than the “Median Family Income”

Posted by Kevin on October 24, 2013 under Bankruptcy Blog | Be the First to Comment

The amount of your income alone may not disqualify you from Chapter 7.

The last blog said that:

• You can avoid the “means test” altogether if more than half of your debts are business debts—they were NOT incurred “primarily for a personal, family, or household purpose.”

• When comparing your “income” for the “means test” against the applicable “median family income,” your “income” is based on virtually all the money you receive during the previous six-full-calendar-month period. Which six months make up that period depends when you file, meaning that you may have some control over your “income” and whether or not is it above the “median family income” amount.

• But even if your “income” is indeed higher than your applicable “median family income,” that’s just the beginning of the “means test.”

So here are the remaining steps of the “means test,” each step giving you another opportunity to pass it and qualify for Chapter 7. Be forewarned: these additional steps are not the easiest to understand:

• You can deduct certain living expenses from your monthly “income” to see if your “monthly disposable income” is low enough. Unfortunately, the rules for determining what expenses you may deduct and how much for each are almost unbelievably complicated. It would take pages and pages to explain. For just a taste of this, the allowed amounts for some types of expenses are based on what you actually spend, some are based on tables of local standards amounts, others on national standards. For our present purposes, what counts is that after applying those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then you can still file Chapter 7.

• If your “monthly disposable income” after deducting expenses is between $117 and $195, then the following formula is applied. Multiply your “monthly disposable income” by 60. Then compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is not enough to pay at least 25% of those debts, then you can file Chapter 7.

• If after applying the above formula you CAN pay at least 25% of those debts, OR if after deducting your allowed living expenses the resulting “monthly disposable income” is more than $195, then you can still file under Chapter 7 by showing “special circumstances.” Examples of appropriate “special circumstances” in the Bankruptcy Code are “a serious medical condition or a call or order to active duty in the Armed Forces.”  So, be forewarned.  Special circumstances is very limited in scope.

The previous blog showed that even the relatively simple first step of the “means test”—comparing your “income” to the “median family income”—has its unexpected twists and turns. Today we’ve seen that if your “income” is indeed too high for that first step, there are other steps to the “means test” which—although admittedly complex—which may get you successfully through Chapter 7.

On a practical level, the amendments to the Bankruptcy Code make filing bankruptcy more expensive for the debtor.  Not only are there additional monies required for filing fees, courses and due diligence, there is substantial additional attorney time associated with filing even Chapter 7.  Completing the means test and justifying the result to a trust is one of those areas.

I Make Too Much for Chapter 7, Owe Too Much for Chapter 13, So Now What Do I Do?

Posted by Kevin on October 19, 2013 under Bankruptcy Blog | Be the First to Comment

If you don’t qualify for either Chapter 7 or 13, do you have to do a very expensive Chapter 11 reorganization?

Chapter 11 is dreadfully expensive. That’s part of the reason why consumers seldom file them compared to Chapter 7 and 13.  The court filing fee alone is $1,233 . The attorney fees can be tens of thousands of dollars. Why so expensive?  Because Chapter 11 was designed for large corporate reorganizations, and, in spite of efforts to streamline it for smaller businesses and for individuals, it’s a cumbersome, attorney-intensive procedure. So it is usually sensible to avoid Chapter 11 if either Chapter 7 or 13 will serve your needs.

But what if you’re disqualified from those other two? If you really ARE disqualified, then you may have to file under Chapter 11. But you may not be disqualified even if at first you think you are. So let’s look more closely at the qualification rules, especially as they apply to situations where at first it may look like you don’t qualify. Today we’ll give a broad overview about this as to both Chapter 7 and 13, and then in the next two blogs we’ll look more closely at each one.

Chapter 7 and the “Means Test”

The point of the quite complicated means test is to make people pay a meaningful amount of their debts if they have the “means” to do so. So those who do not pass the means test cannot file a Chapter 7 “straight bankruptcy,” or they can be forced out if. Instead they would usually have to proceed through Chapter 13, and be required to pay what they could afford to pay to their creditors over the following five years.

But the means test is often misunderstood. That’s not surprising given its multiple steps and odd combination of rigid formulas and discretionary enforcement. The following may help you understand it and potentially get around it:

  1. The means test may not even apply to you. It only applies to individuals with “primarily consumer debts,” meaning that you skip the means test altogether if half or more of your debts were incurred for business purposes instead of “primarily for a personal, family, or household purpose.”
  2. There’s a fixation on the first step of the means test—whether your income is above or below the “median family income” amount for your state and household size. Indeed a large majority of people who file Chapter 7 DO have lower income than the applicable median income. So they can skip the rest of the means test.
  3. The means test uses an odd and very specific definition of your income, one which focuses on the six-full-calendar-month prior to whatever date your Chapter 7 case is filed. This means that for many people their “income” shifts with each passing month, depending on the changes to their income of the past 6 or so months. So some careful tactical planning may enable you to fit under the median income amount by filing at the right time.
  4. Even if your income, as appropriately defined, is in fact over the applicable median income, that’s just the beginning of the analysis. There are a number of other steps to the means test, each with potential ways to pass the means test and qualify for Chapter 7. We’ll go through these additional steps in the next blog.

The Chapter 13 Debt Limits

At the time of filing a Chapter 13 case, your total unsecured debts must be less than $383,175, and your total secured debts must be less than $1,149,525.

As you can probably guess, there’s more to this than immediately meets the eye. For a start, the terms actually used by the statute for these limits are “noncontingent, liquidated secured debts” and “noncontingent, liquidated unsecured debts.”

Debtors with relatively high debt are often present or former business owners who signed personal guarantees for corporate debt. When are those guaranteed debts considered contingent and therefore would not count towards the debt limits, and when are they noncontingent so that they would count? And when is an unresolved claim against the debtor considered unliquidated so that they would not count towards the debt limits, and when are they liquidated so that they would count?

What these Chapter 13 debt limits really mean will be the topic two blogs from now.

Advantages of Being in Control of the Timing of Your Bankruptcy Filing

Posted by on October 13, 2013 under Bankruptcy Blog | Be the First to Comment

Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.

Timing Does Not Always Matter Much, But It CAN Be Huge

Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.

It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.

Today’s blog post covers the first one of those potential timing advantages.

Being Able to Choose between Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.

To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.

The “Means Test” Income Calculation

What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.

So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.

Conclusion

Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.

The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided.

Help! I Just Filed My Taxes on October 15 & Owe a Lot. Can Chapter 13 Help?

Posted by Kevin on October 1, 2013 under Bankruptcy Blog | Be the First to Comment

“Straight” Chapter 7 bankruptcy can give some relief for dealing with your back and current taxes, but Chapter 13 can help so much more.

The last blog showed how Chapter 7 can help you with your income tax debt, mostly indirectly, by writing off your other debts so you can financially concentrate on getting the IRS happy. It may also help by discharging (writing off forever) some tax debts, but only if at least three years have passed since that tax’s returns were due, AND you meet some other conditions. But if you owe a lot, and especially if you owe a number of years of taxes, Chapter 7 will often not be enough. So what more is it that Chapter 13 can do?

Chapter 13 and Income Taxes

There are many situations in which you ought to look closely at the Chapter 13 option. Focusing on income taxes, the rule of thumb about when to do so is pretty simple:

File a Chapter 13 case if Chapter 7 does not gain you enough cash flow to allow you to get caught up on your back and current taxes through manageable monthly payments, made over a reasonable period of time. In other words, file a Chapter 13 if you need the extra protection provided by Chapter 13.

What extra protection? In a Chapter 7 case you are NOT protected from the IRS beginning about three months after that case is filed-when the discharge is entered and the “automatic stay” terminates. So that means you’re arranging and then making the catch-up tax payments without any protection from the IRS’ collection procedures. That’s generally not a problem if 1) you deal with the situation very proactively, 2) the payment amount that you can comfortably handle is acceptable to the IRS, 3) it’s an amount you can pay it consistently, and 4) you do pay it perfectly until you pay it off.

In contrast, under Chapter 13 your protection from the IRS’ collection efforts continues throughout the whole 3-to-5-year length of the case. That’s protection you’ll need if you can only afford payment smaller than what the IRS wants, and/or you need more flexibly than the IRS would allow.

Under Chapter 13 you are generally allowed to pay other even more important creditors ahead of the IRS—such as mortgage arrearage, vehicle payments, and back child support. Plus you will generally not pay additional penalties and interest on the taxes, and may not have to pay all or most of the previous penalties. If the IRS has recorded a tax lien, you will have the opportunity to pay off that lien without the IRS being able to enforce that lien, resulting in the lien being released at the completion of your case.

Chapter 13 often allows you to adjust your monthly plan payments in advance based on anticipated seasonal adjustments in your income and expenses, and change those payments mid-stream as your circumstances change. You do need to deal responsibly throughout the process, or else you will lose your protection from the IRS and from your other creditors. And if you are not in fact able to do what your plan states and what the Chapter 13 rules require, so that you don’t finish your Chapter 13 case successfully, you will not get a discharge of ANY of your debts. But if your plan was put together sensibly and you follow it carefully, you should end your Chapter 13 case being current on all your past and present taxes.

Help! After Getting an Extension to October 15, I Just Filed My Taxes and Owe Tons!

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

If you were already on the financial edge and just found out you owe a bunch of income taxes, here is how bankruptcy can help.


If you owed nobody but the IRS for last year’s income taxes, you wouldn’t likely need to think about filing any kind of bankruptcy. In many circumstances, the IRS is actually reasonably decent to work with, such as in setting up a monthly payment plan for catching up on a single year’s tax shortfall. Sure, you’ll pay some penalties and interest, but if you can pay it all off in reasonable monthly payments in the next year or so, that wouldn’t be such a bad thing.

But if you owe for more than one year, or are just filing for the 2012 tax year on  extension, and still owe for 2013, then it looks like you’re getting into a vicious cycle.  And if on top of that, you have a whole bunch of other debts, you owe it to yourself to check out Chapter 7 and Chapter 13 as possible ways out of that vicious cycle. Today we’ll briefly explore how Chapter 7 helps, and then how Chapter 13 does in the next blog.

Chapter 7 and Income Taxes

You may well have other reasons for choosing to file a Chapter 7 instead of a Chapter 13, but the rule of thumb as far as taxes is pretty simple, especially if the only taxes you owe are from the last year or two:

File a Chapter 7 case if after doing so you will be able to get caught up on your back and current taxes through manageable monthly payments made over a reasonable period of time. In other words, file a Chapter 7 if you don’t need the extra protection and benefits provided by Chapter 13.

Both Chapter 7 and 13 can legally write off (“discharge”) income taxes, but can never do so until at least three years from the time the tax returns for those years were due to be filed (including extensions, if any). So as of now you could discharge 2008 income taxes, and 2009 taxes that were filed on April 15. but not later ones. That’s because 2008 taxes were due either April 15, 2009 or October 15, 2009 depending on whether you got an extension, and you could discharge a 2008 tax debt starting three years later, after April 15, 2012 or after October 15, 2012. You could discharge the 2009 tax debt if you filed on April 15, 2010.  If you filed your tax return on October 15, 2010, you could not discharge the tax obligation if you filed Chapter 7 today (but you may be able to discharge if you held off your bankrutpcy filing to after October 15, 2013).   You’d have to meet some additional conditions as well, but this three-year condition is a good starting point.

So unless you currently owe income taxes going back further than 2009, Chapter 7 is not going to discharge any of them.  That does not mean that Chapter 7 is without benefit, though.  The benefit it will give you is discharging all or most of your other debts. So the analysis we will go through with you when you meet with us involves two questions:

1) How much will filing Chapter 7 improve your monthly cash flow? In other words, how much will you be able to pay to the IRS realistically on a monthly basis, both to catch up on the back taxes and to make any necessary adjustments to the current withholdings or estimated quarterly payments?

2) How much do you owe in back taxes? Will the amount that you can realistically afford to pay each month enable you to get current in a reasonable time (so you’re doing so within the length of time the IRS will allow, and without incurring a crippling amount in additional penalties and interest)?

Unless we confidently believe that Chapter 7 will solve your tax problem, we’ll look at whether Chapter 13 would do better. It’s wise to consider Chapter 13 regardless, so you’ll know the advantages and disadvantages of both options. See the next blog for that.

Help! I Need to File Bankruptcy But Already Did One a Few Years Ago

Posted by Kevin on September 22, 2013 under Bankruptcy Blog | Be the First to Comment

If you need bankruptcy protection but already filed a bankruptcy case within the last few years, you may still be able to file a new one now.

There are some strict rules about when you can file a bankruptcy case after having filed a previous one. But as with so many other areas of law, there are opportunities when we look more closely.

Previous Bankruptcy Filing vs. Discharge

It’s not necessarily previously FILED bankruptcy cases that count, but only ones in which you received a DISCHARGE of your debts. All the timing rules in the Bankruptcy Code dealing with when you can file a new case refer to the length of time since “the debtor has been granted a discharge” or “has received a discharge” in the previous bankruptcy case.

In other words, if your previous case was not successfully completed—it was dismissed before you finished it—that case would not prevent you from filing a case now, no matter how long or short of a time since that previous case was filed.

So make sure—absolutely sure—that you got a discharge in your earlier bankruptcy case. If you distinctly remember that your case finished the way it was supposed to, you very likely DID get a discharge. But you definitely want to make sure. Find out from your former attorney. Or dig up the discharge order issued by the Bankruptcy Court from your old paperwork, or we can likely find out for you when you come in for your initial consultation.

The Timing Rules

If you’ve heard that you have to wait 8 years between bankruptcy filings, be aware that only applies to one of a number of possible scenarios: the length of time from the previous discharged Chapter 7 case to the filing of a new Chapter 7 case.

If your previous case was a Chapter 7 one and you now want to file a Chapter 13 case, the applicable length of time is only 4 years.

If your previous case was a Chapter 13 one and you now want to file a Chapter 7 case, the length of time is only 6 years. And in fact if that previous Chapter 13 case was one in which your unsecured creditors were paid at least 70% of their debts, then there is NO limitation on filing a Chapter 7 case afterwards.

And if your previous case was a Chapter 13 one and you now want to file a Chapter 13 case, the applicable length of time is only 2 years.

And very important: on all of these the clock starts running NOT at the time of discharge—generally at the end of a case—but rather earlier, at the date of filing at the very beginning of the prior case. So what count is the date of filing of the prior case to the date of filing the new case. For example, if your previous case was a Chapter 13 one that was filed on October 1, 2006, and it took five years to complete so that the discharge was entered on October 1, 2011, you would be able to file a Chapter 7 case starting October 1, 2012.

Why File a Bankruptcy Case If You Can’t Get a Discharge?

So if you need bankruptcy protection but not enough time has passed, you can still file the case but you just won’t receive a discharge of your debts. Why would you ever want to do that?

Probably never for a Chapter 7 case, since almost always the main benefit of a Chapter 7 case is the discharge of your debts.

But Chapter 13 provides a number of other benefits distinct from the discharge of debts. For example, it stops a foreclosure and gives you years to catch up on your mortgage arrears. It also stops extremely aggressive collection of unpaid support payments, including the suspension of professional/occupational/driver’s licenses, again giving you years to bring it current. It may be able to significantly reduce what you pay for your vehicle through a “cram down.” For these and other reasons it can make a lot of sense to file a Chapter 13 case while knowing that you’ll not get a discharge of any of your debts. You may not even have any debts to discharge, but just need one or more of those other powerful benefits.

In fact that’s usually the situation with the so-called “Chapter 20.” This usually involves, first, the filing of a Chapter 7 case, which results in the discharge of most of the debtor’s debts. Then, second, immediately after that’s done, a Chapter 13 is filed to use one or more of its benefits. (Chapter 7 + 13 = 20.) Since most of the debts were discharged in the prior Chapter 7, the debtor doesn’t need a discharge in the Chapter 13 case.

This blog should make it clear that a simple rule—8 years from one bankruptcy to the next one—is often woefully incomplete and misleading.  In addition, there are complicated rules concerning whether the automatic stay will apply in case involving multiple filings. This is another good argument that you truly need to talk with an attorney who focuses on bankruptcy instead of making misassumptions that could cause you lots of unnecessary grief.

Help! My Co-Signer and I Just Got Sued!

Posted by Kevin on under Bankruptcy Blog | Be the First to Comment

If you and someone else jointly owe a debt, bankruptcy can protect you against the debt and against your co-signer. Or if you want, bankruptcy can instead protect your co-signer.

Let’s look at two essentially opposite scenarios involving you and your co-signer getting sued on a debt you both owe:

1) You’ve had a falling out with the co-signer, and all you care about is escaping the debt; or

2) You believe you have a moral duty to protect the co-signer, so that is your highest priority.

We’re going to address the first scenario today, and then the second one in the next blog.

Protecting Yourself…

If you and your co-signer are being pursued by your creditor, and you cannot and will not pay the debt, you have two distinct obligations to worry about—a definite one to the creditor and a likely one to the co-signer.

… from the Creditor Itself

The obligation to the creditor is based on your promise to pay the debt. Most likely that obligation can be discharged (legally written off) by filing bankruptcy.

Like any other creditor, this one could object to the discharge on grounds of your fraud or misrepresentation, but those objections are rare.

You could discharge this debt through either Chapter 7 or Chapter 13, depending on whichever is in your best interest otherwise. Chapter 13 happens to come with the “co-debtor stay,” some extra protection for your co-signer which will be discussed in the next blog, because here we are assuming you don’t care about protecting the co-signer.

… from the Co-Signer

You very likely have a closely related but still distinct obligation to your co-signer, one that is likely less clear than the one you owe directly to the creditor. This obligation to the co-signer is indirect, likely only to arise if your co-signer pays all or part of your debt to the creditor. Even then you may or may not have a legal obligation to the co-signer. There is a good chance that you and the co-signer did not write out the terms of your obligation. So your obligation to the co-signer could be merely inferred, based on an unspoken assumption that you would make the co-signer whole if you ever failed to pay the debt and the co-signer paid the creditor all or part of it. But there could also be a sensible inference—depending on the facts of the case—that the co-signer did not expect you to pay it in that situation. So you could possibly defend against that liability.

But practically speaking, the creditor is going to pursue both you and your co-signer. If you can’t pay the creditor who you clearly owe, there may well not be much point in putting a lot of time and expense into defending against a legal obligation to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

If you do file bankruptcy, be sure to list among your creditors not just the direct creditor but also your co-signer. Otherwise you could remain liable to the co-signer after your bankruptcy case is finished.

As with your direct creditor, your co-signer could object to the discharge of his or her claim against you, based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. Although these objections are rare, they ARE more often raised by former friends, ex-spouses, ex-business partners. Why? Because 1) they have a personal axe to grind, 2) misunderstanding tend to arise more in informal arrangements, and 3) these kind of folks may  know more damaging information about you than would a conventional creditor.

The best way to protect yourself from such challenges is to explain the situation thoroughly to your attorney when you first meet. That way your bankruptcy documents can be prepared in a proactive way, and you’ll avoid being blindsided.

Help! I Just Got a “Final Notice of Intent to Levy” from the IRS!

Posted by Kevin on September 12, 2013 under Bankruptcy Blog | Be the First to Comment

If you owe income taxes, and are at the point that the IRS is about to seize your assets, you need to consider bankruptcy. It can help in surprising ways.

Here are FIFTEEN ways that filing either a straight Chapter 7 bankruptcy or a Chapter 13 payment plan could relieve a major income tax headache. And even this long list is only a partial one!

1.  Both Chapter 7 and 13 stop the IRS’ collection activities against you, including levies on your paycheck, bank account, and vehicles, and tax liens on your home and other real estate.

2.  Both Chapter 7 and 13 can completely discharge (legally write off) some income taxes.

3. A Chapter 7 case would likely discharge all or most of your non-tax debts, more likely giving you the financial means to enter into a manageable installment payment plan afterwards with the IRS, to pay off whichever taxes not discharged in that bankruptcy case.

4.  If you have an “asset” Chapter 7 case—the relatively unusual kind in which the bankruptcy trustee claims one or more of your assets to sell and distribute to creditors—non-dischargeable tax debts will generally be paid in that distribution ahead of other dischargeable debts, either paying off or at least paying down those tax debts.

5.  Even if you cannot discharge a tax debt right now, you will likely be able to do so at some point in the future. There are strategies for buying time until that point.

6.  Chapter 13 allows you to pay off non-dischargeable income taxes through payments based not on the IRS’ demands but rather on your own realistic budget.

7.  If you have other conventional debt—credit cards, medical bills and such—along with back income taxes that can’t be discharged, Chapter 13 generally allows you to favor the tax debt ahead of these other creditors. So you would be allowed to pay the taxes in full before anything would trickle down to the conventional debts.

8. Once the Chapter 13 case is filed, that generally stops any further interest and penalties from being added to the nondischargeable tax debts, which reduces the amount that you need to pay.

9.  During the time that payments are being distributed to creditors through the Chapter 13 case, the IRS has to wait its turn in line, often waiting behind debts that are even more important to you, such as back payments on your home mortgage, your child or spousal support arrearage, or even vehicle and furniture payments.

10.  Even if you only have tax debts that would otherwise be discharged in Chapter 7, but you need to file Chapter 13 to deal with other debts that are important to you—such as on your home and vehicle and support arrearage—these other obligations can legitimately reduce how much you pay on your tax debts. Sometimes you pay nothing on the taxes.  So Chapter 13 can be the best of all worlds: protection from all your creditors including the IRS while you take care of other debts, along with paying little or nothing on your tax debts.

11.  If you have multiple years of income tax debts—some of which are dischargeable and some not—in most Chapter 13 cases your plan can arrange to pay the taxes that would not be discharged in full before paying a dime to the rest of the taxes. You may even avoid paying anything on those dischargeable taxes before they are discharged forever at the completion of your case.

12.  Throughout all this time during a Chapter 13 case—three to five years—the IRS cannot take any collection action against you or any of your assets, unless it gets specific court permission, which would usually only happen if you failed to comply with your own plan commitments.

13.  Even if the IRS recorded a tax lien against your home before your Chapter 13 case was filed, the IRS would be prevented from executing on that lien until you had the opportunity to pay off the debt behind that lien, and get a release of that lien.

14.  If you are behind in estimated or withheld income taxes during the current tax year, you can file a partial-year tax return, and pay the taxes for that partial tax year through your Chapter 13 plan—with no additional interest and penalties. Then you can put together your budget from that point forward with appropriate estimated tax payments or withholdings so you have no tax owing from that remaining part of the tax year.

15.  When your Chapter 13 case is successfully completed you can be tax-free and debt-free.

Help! Support Enforcement Just Garnished My Paycheck, and is Threatening to Do Worse

Posted by Kevin on September 11, 2013 under Bankruptcy Blog | Be the First to Comment

If you’re behind on child or spousal support, the support enforcement agency can be extremely aggressive. Chapter 7 doesn’t help much. Chapter 13 CAN.

In most states an ex-spouse—or the state’s support enforcement agency acting on his or her behalf—has extraordinary ways to collect on current and back support obligations.  These include not just ways of getting directly at your money, but also ways to hurt you with the intent of forcing you to pay.

So we’re not just talking about garnishing your wages and bank accounts, taking away income tax refunds, or putting liens on your real estate. We’re talking coercive action. Your driver’s license can be suspended. This includes your commercial driver’s license, so that you can’t work if you’re a truck driver or have any other job requiring that license. Your professional or occupational license could also be suspended, preventing you from legally working in your profession or business as a nurse, doctor, realtor, insurance agent, mortgage broker, lawyer, or even in some places athletic trainer or funeral director!

There’s more. Your hunting, fishing, boating and other recreational licenses could be revoked. You can even be denied a U.S. passport.

Chapter 7 Gives Very Limited Help

“Straight bankruptcy” under Chapter 7 unfortunately does not stop any of these collection methods. The “automatic stay” that stops just about all other collection efforts has an exception for child and spousal support. (See Section 362(b)(2)(B) of the Bankruptcy Code.) The only way that Chapter 7 can help is that it can often legally write off (“discharge”) all or most of your other debt so that you would have the money to pay your support. But that does not help deal with your financial emergency if you’re in the support enforcement’s crosshairs.

Chapter 13 CAN Help Where it Counts the Most

The filing of a Chapter 13—the three-to-five-year “adjustment of debts” kind of bankruptcy—DOES stop all these aggressive ways of collecting on support obligations. The “automatic stay” does apply in most respects to Chapter 13, as long as it affects the collection of your assets that did not exist at the time your case is filed, such as future income. But to make this protection last more than just a few days or weeks, you must rigorously meet a number of conditions:

  • Your Chapter 13 plan must show that you are going to catch up on all the back support during the life of the plan. And then you must make your monthly plan payments on time to show that your plan is feasible and that the back support will in fact be paid in full.
  • Your budget must show that you will be able to start (or continue) making the regular monthly divorce court ordered support payments, AND then you must actually pay those on time. And that starts with the first one that is legally due on whichever day it’s due immediately after your Chapter 13 is filed, and then every month thereafter.
  • At the end of your Chapter 13 case you must certify that you are current on your ongoing support payments, or else you cannot complete your case and get a discharge of your remaining debts.

On the positive side, Chapter 13 neutralizes most of the extremely dangerous firepower of your ex-spouse or the support enforcement agency, and gives you the opportunity to solve an otherwise very difficult problem. Chapter 13 is often a great tool for catching up on your back support, because you are allowed to favor that debt over just about every other one. You could end up paying very little if anything else to your other creditors, except those other ones that matter to you, such as your mortgage, vehicle loan, taxes and such.

But you must be financially able to meet the above conditions, and then strictly abide by them. If during the Chapter 13 case you miss one of your regular monthly support payments, or one of your plan payments, you can expect your ex-spouse or support enforcement to ask the bankruptcy judge for “relief from the automatic stay,” that is, for permission to resume or even intensify their earlier collection efforts. At that point the judges will tend not to be very sympathetic to you, since you are not complying with the conditions that you had agreed to at the beginning of your case.

Advantages of Chapter 13 After Stopping Repossession of Your Car or Truck

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

Straight Chapter 7 bankruptcy gives very limited help if you’re behind on your vehicle and need to keep it. And Chapter 13? Provides much more help.

The last blog was about what happens after preventing your vehicle from getting repossessed by filing a Chapter 7 case. Today’s blog is about what happens if instead you file a Chapter 13 case, the payment plan type of bankruptcy.

Back Payments

If you are worried about a vehicle repossession, you are likely a month or two behind on your loan payments. Assuming you need to keep the vehicle, if you were to file a straight Chapter 7 case you would very likely be required to catch up on your back payments within a month or two after filing the bankruptcy case. Since you also need to resume making the regular monthly payments and keep current on them, catching up on the back payments at the same time and this quickly is impossible for many people.

With Chapter 13, in contrast, you either don’t have to catch up on the back payments at all or at least would likely have many months to do so.

“Cramdown”

If your loan is more than two and a half years old, and you owe more on the loan than the value of your vehicle, you can do a “cram down”—re-write the loan to reduce the portion of the loan that must be paid in full down to the value of the vehicle. The remaining amount of the loan—the unsecured portion above the value of your vehicle—is then paid the same as the rest of your unsecured creditors, often at a steep discount in your favor. In some jurisdictions, you may pay little or nothing on this unsecured portion.

As part of the re-writing of the loan in a “cram down,” you can often also lower the interest rate and/or stretch out the payments for a longer term, all of this usually resulting in a significantly reduced monthly payment.

Option to Surrender, Now or Later

Under Chapter 7, you must pretty much know at the time your case is filed whether you want to keep or surrender the vehicle. You sign a document called “statement of intent” which is filed at court usually at the start of your case. And then very quickly after that you need to put that intention into action. If you are surrendering the vehicle, you would need to do so within about a month after filing the case.

In Chapter 13 as well, your court-filed documents indicate your intentions, most directly in your formal plan. The plan states how much you intend to pay, and which creditors are to receive how much, including the vehicle loan creditor(s). It is prepared by your attorney, approved and signed by you, and presented to the court for the judge’s “confirmation.”

If you decide through the advice of your attorney that it’s in your best interest to surrender the vehicle, then your Chapter 13 plan will not propose to pay anything to the secured portion of the debt. Instead after you surrender the vehicle, the creditor will sell it, credit the sale proceeds to the balance, and report to the bankruptcy court how much it is still owed. Just as stated above, that unsecured amount will be added to the rest of your unsecured debt, and paid whatever percentage the rest are being paid. But in most cases the dollar amount being paid by the debtor towards the pool of unsecured debt does not increase. Instead that amount is just divided differently among all the unsecured creditors.  For example, if your monthly payment to the trustee is $110 and you have 9 unsecured creditors with $10 going to the trustee, then each unsecured creditor would get a little over $11 per month.  If you add a creditor, the payment is still $100.  So, after trustee fee, each unsecured creditor now gets $10 per month.

Unlike Chapter 7, Chapter 13 gives you some flexibility if you decide later that you can’t or chose not to maintain the payments on the vehicle. You can change your mind a year or two into the Chapter 13 case, deciding to surrender your vehicle after all.

Worried about Getting Your Car or Truck Repo’d? How Bankruptcy Could Help

Posted by Kevin on August 26, 2013 under Bankruptcy Blog | Be the First to Comment

Bankruptcy stops a vehicle repo from happening. But what then?

Vehicle loan creditors can be very aggressive about repossessing their collateral—that vehicle which happens to be your crucial means of transportation. They are probably so impatient because this kind of collateral is so mobile and easy to hide. Plus the creditors’ decades of experience probably tell them the longer they wait the less likely they’ll be able to find the vehicle, and have it still be in decent condition.

So, most vehicle loan contracts give the creditors the right to repossess as soon as you’re in default on your agreement, which means as soon as you miss a single monthly payment. But for a variety of practical reasons, they don’t tend to pop cars that fast, usually letting you get 30 or maybe 60 or even more days late, depending on a bunch of factors such as your payment history, whether and what you’re communicating with them, and the value and condition of the vehicle.

In your own circumstances you probably have a decent feel for when you should be getting worried about a possible car or truck repo. If you are concerned, you may feel better that one of the most powerful tools of bankruptcy—the “automatic stay”—can stop the repo man in his tracks. That’s the law that automatically goes into effect the moment your bankruptcy case is filed at court to stay—or stop—all collection activity against you or your property, including the repossession of collateral.

But assuming you file a bankruptcy and stop a repo before it happens, what happens next? The two different consumer bankruptcy options each help in different ways. The rest of today’s blog is about how Chapter 7 helps in this situation, and the next blog will be how Chapter 13 does.

Right after filing a Chapter 7 case you have to decide whether you want to and can afford to keep the vehicle, or instead will surrender it. (This is part of what we would discuss with you before your case is filed.)

If you want to keep your car or truck you will likely need to catch up on any late payments very quickly–within a month or two after your Chapter 7 was filed. The vast majority of vehicle loan creditors will only give you that much time. (The exceptions tend to be local lenders, perhaps with less expensive vehicles for which the debt is much higher than the value of the vehicle, so they have more reason to be flexible.)

Part of the reason the creditors are in a hurry to get you current is that this reduces their financial exposure compared to the value of the vehicle.

There is also a very practical bit of timing involved. To keep the vehicle, you will be required to sign a “reaffirmation agreement,” which is filed at the bankruptcy court. That agreement formally excludes the vehicle loan from the discharge of your debts. So understandably bankruptcy law requires the “reaffirmation agreement” to be filed at court before your debts are discharged. And the court order discharging all your debts is entered most of the time about three months after your case is filed. So you can see why your creditor wants you to be current on your loan before that “reaffirmation agreement” is prepared and filed at court.

If you don’t anticipate being able to bring the vehicle loan current that quickly—either with the Chapter 7 filing gaining you enough additional cash flow or from some other source—but you still need to keep the vehicle, Chapter 13 is often an excellent solution, as will be discussed in the next blog.

Assuming for the moment that Chapter 13 is not a viable option, and that you can’t pay the back payment(s) in time, you need to consider surrendering the vehicle. There are certain advantages to surrender—especially in the midst of your Chapter 7 case—that you should fully understand even if at first it doesn’t sound like a good idea.

Surrendering the vehicle:

  • gets you out of the monthly payments (and also the cost of the insurance premiums)
  • avoids needing to find the money to pay the accrued late payments and related late fees and other possible charges
  • discharges any “deficiency balance,” the amount that you would owe if you had surrendered  the vehicle without bankruptcy—after the creditor sold it, credited the sale proceeds to the balance, and came after you for the remaining balance.

Please return here in a couple days to read how Chapter 13 can help you keep your vehicle.

The Bankruptcy Clause in The Federalist Papers

Posted by Kevin on August 14, 2013 under Bankruptcy Blog | Be the First to Comment

The Federalist Papers are a key source for understanding the intentions of the drafters of the Constitution. What do these essays say about the Bankruptcy Clause?

The Bankruptcy Clause of Article 1, Section 8, Clause 4 of the U. S. Constitution gave to the Congress, and thus to the federal government, the power to make laws about bankruptcy. But this Clause gives no clue why that power is so given or how that power should be exercised.

The Federalist Papers would be a sensible place to look for such clues.

These were 85 essays published anonymously in New York newspapers during 1787-88 while the states were debating whether to ratify the proposed Constitution. These widely circulated essays unabashedly lobby for ratifying the proposed Constitution in the place of the existing Articles of Confederation. This is made clear from the first words of the first essay:

AFTER an unequivocal experience of the inefficiency of the subsisting federal government, you are called upon to deliberate on a new Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire in many respects the most interesting in the world. …Yes, my countrymen, I own to you that, after having given [the new Constitution] an attentive consideration, I am clearly of opinion it is your interest to adopt it. I am convinced that this is the safest course for your liberty, your dignity, and your happiness.

In other words: government by the Articles of Confederation has not worked, and this grand experiment in government by “reflection and choice” instead of by “accident and force” is hanging in the balance. And the new Constitution is the way forward.

The Federalist Papers can be a crucial window into what the drafters of the Constitution intended. These essays explain many provisions of the Constitution in great detail, and were written within weeks or months after The Constitutional Convention. Most of them were authored by Alexander Hamilton and James Madison who were themselves members of that Constitutional Convention.

So what do these detailed persuasive essays tell us about the framer’s intentions about bankruptcy?

Precious little.  Just one sentence.  In essay no. 42, written by James Madison and first published on January 22, 1788, after a long discussion on “a uniform rule of naturalization” (immigration)—the other power referred to in the same Clause—comes the following sentence:

The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.

This sentence makes two main points.

1. Madison, at least, focused on how a uniform national bankruptcy law would help creditors by preventing debtors from hiding themselves or their assets in other states. This simply reflects the pro-creditor attitude of bankruptcy law during this period.

2. Bankruptcy law is a natural part of the general regulation of commerce, so a federal government which has powers to regulate interstate commerce would just naturally have the power to create a uniform set of bankruptcy laws.

So, the U.S Constitution contains one brief but very important partial sentence about bankruptcy, making it the responsibility of the federal government. And The Federalist Papers contains only a single sentence on the topic saying, yes, of course we need a uniform bankruptcy law among all the states since commerce (and fraud) spills over the states’ borders.

The Bankruptcy Clause of the U.S. Constitution

Posted by Kevin on August 11, 2013 under Bankruptcy Blog | Be the First to Comment

The Constitutional Convention adopted the U.S. Constitution. Its Bankruptcy Clause was a quiet but crucial component of a much stronger national government.


Most people know that the U.S. Constitution refers explicitly to bankruptcy. The provision is short and sweet. Included among a long list of legislative powers given to Congress in Article 1 of the Constitution is the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.) Here’s some of the exciting (if you are at all historically inclined) backstory.

The Bankruptcy Clause Goes Right to the Heart of the Constitution’s Purpose

Back when we were kids we learned in school that before we had the Constitution, our new country floundered during its first few years under the loose Articles of Confederation. Each state acted pretty much as a sovereign country, with its own money, independent militia, and laws regulating trade with other states and even with other countries. There was no national court system and no executive branch to enforce the acts of Congress. The national government had no power to pass laws on interstate commerce, including on bankruptcy.

At the heart of the issue at the Constitutional Convention of 1787 and during the following year and a half of its ratification by the states was how strong of a national government to create. During colonial times and under the Articles of Confederation each colony or state could have its own laws of bankruptcy and insolvency, creating intense confusion and conflict among them. A national government with power over interstate commerce would sensibly avoid these problems by providing a bankruptcy law uniform among all the states.

Bankruptcy Almost Left Out of the Constitution

And yet the initial draft of the U. S. Constitution did not contain any reference to bankruptcy. Then towards the end of the Convention the issue went to a committee, which recommended the addition. The clause was adopted by the Convention by a vote of 9 states against one. “The only vote against was by Connecticut, with…  concern that bankruptcies could be punished by death [!!], as was still the law in England. Connecticut also had a comprehensive bankruptcy law of its own, which it wanted to preserve free of federal control.” (From “A Brief History of Bankruptcy Law,” by Prof. Charles J. Tabb.)

In the next blog: what The Federalist Papers, 85 essays written by Alexander Hamilton, James Madison, and John Jay to convince readers to ratify the Constitution, say about the Bankruptcy Clause.

The Nitty-Gritty about Catching Up on Your Mortgage through Chapter 13–Part 2

Posted by Kevin on August 7, 2013 under Bankruptcy Blog | Be the First to Comment

More answers about how Chapter 13 gives you up to 5 years to catch up on your past-due mortgage.


The last blog, and this one, answer questions about how Chapter 13 gives you time to “cure the arrearage.” Check out the last blog for answers to these questions:

  • Can you give a simple example how this “curing the arrearage” works?
  • If my Chapter 13 plan proposes to catch up my mortgage in 5 years, does my mortgage lender have to go along with this?
  • What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?

Now on to today’s questions:

How are back property taxes handled?

If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen significantly behind on those mortgage payments, the lender may well have paid the current year’s property taxes with its own money. If so, the lender will add the amount it advanced for your taxes into the total amount that you are behind. So through your Chapter 13 plan payments you will simply pay to your lender the amount that it paid for your taxes, as you pay the rest of your back mortgage payments.

If you are paying the property taxes directly (not as part of your regular mortgage payments) and have fallen behind on those taxes, your Chapter 13 plan will include payments to the county or other appropriate taxing authority.

What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?

Chapter 13 has a relatively efficient mechanism for determining the accurate amount of arrearage. Your creditors, including your mortgage lender, are required to file a document in  bankruptcy court—a “proof of claim”—stating the total amount owned, the amount of arrearage and how it is calculated, as well as the amount of any additional fees. You as the debtor then have the opportunity to object to that proof of claim. The bankruptcy judge is a convenient and experienced decision-maker in these kinds of disputes.

This area has been a controversial one in the past 5-10 years, mostly because lenders have often been inaccurate and unclear in their accounting, and been simply unable to justify the amounts on their proofs of claim. This particularly became a problem when lenders added fees to the balance without telling the homeowners, so that the homeowners would think that they were current only to learn, often after the completion of their Chapter 13 case, that supposedly they were still behind. Bankruptcy Rule 3002.1 was put into place to solve this problem. This rule requires lenders to give timely notice of the amount owed and any changes to the amount, and provides for serious consequences if they fail to follow these rules.

What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?

One of the great features of Chapter 13 is its flexibility. So you CAN change your mind and surrender your house part-way through your case. Or you can sell it.  And at that point you can either stay in the Chapter 13 case or get out of it.

You could stay in it if there were still worthwhile reasons to do so, reasons not related to your house. For example, you could continue the case if you had debts that were best handled in a Chapter 13 case—such as taxes, support obligations, or possibly student loans. Your attorney would work with you to amend your plan to stop payments going to the house and redirect them elsewhere.

But if you filed a Chapter 13 case solely because of your house and now no longer needed or wanted to catch up on the arrearage, your attorney could either “convert” your case into a Chapter 7 one or simply end the Chapter 13 case by “dismissing” it. More likely your case would be converted into a Chapter 7 one to finish taking care of your debts, including possibly debts related to your house.

A big caution comes with all this flexibility. Although it’s good to know when you start your Chapter 13 case that it does not HAVE to be completed as it was originally put together, it seldom makes practical sense to start a case that you don’t intend to finish. You need to have a reasonable chance to complete it. Consider very carefully whether you will be able to make the necessary payments over the whole 3-to-5-year length of your case. If you had trouble making your regular mortgage payment before filing bankruptcy, look at whether Chapter 13, with all of its benefits, will help your cash flow enough so that you will be able to do what the plan requires of you.

Stopping a Home Foreclosure with a Bankruptcy, Temporarily or Permanently

Posted by Kevin on July 22, 2013 under Bankruptcy Blog | Be the First to Comment

Filing bankruptcy can buy you a little time or a lot of time, enough time either to transition to a new home or else to save your present home.


The same bankruptcy power that stops a lawsuit or garnishment of your wages or bank account, also stops a home foreclosure. The practical question is: what happens to your home after the foreclosure is stopped?

Chapter 7: the Option that Buys You a Little Time

A Chapter 7 “straight bankruptcy,” is by far the most common type. It gives you protection against foreclosure for three months or so, or potentially for even less time if the mortgage lender is aggressive.

With such a short period of protection, a Chapter 7 would help you in two quite different situations:

1. if you have decided to surrender your home but need just a few weeks to move; or

2. if you want to keep the home, and can afford to catch up on the late payments within about a year of extra payments.

Filing a Chapter 7 is like hitting a pause button. If you’re letting your house go, it lets you catch your breath before you have to leave. If you’re hanging on to the house, a Chapter 7 gives us time to do a deal with the mortgage lender.

Chapter 13: the Option that Can Buy You Years of Time

Filing under Chapter 13 can potentially give you five years to pay off your back payments, and does so in a more flexible and powerful package.

Instead of negotiating with the mortgage lender and hoping that it will give you terms that you can live with, Chapter 13 generally gives you a set of rules to follow for catching up with that lender. It also gives you time to catch up on any back property taxes, can often get rid of a second mortgage or a judgment lien, and usually provides a practical way of dealing with other liens on your home, such as an income tax or child support lien.

A Chapter 13 case is flexible, so that if you have changes in your circumstances during your case your plan can be adjusted to account for the changes. That makes holding on to your real estate more feasible. It also means you can change your mind and decide to surrender it, months or even years after your case was filed.

The mortgage lender can always ask the bankruptcy court for permission to begin or restart a foreclosure. These kinds of creditors tend to do so either at the beginning of your case if they don’t like the Chapter 13 payment plan that you and your attorney are proposing, or later in the case if you’ve not made the payments that you said in your plan that you would make. The court balances your rights against those of the lender in deciding whether to give you the extra time you need.

Just Been Sued by a Creditor? How Bankruptcy Helps Right Away

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

Getting sued by a creditor is a wake-up call to consider filing bankruptcy. If it is the right thing to do, there are advantages to filing before your deadline to respond to the lawsuit.

If you get sued by a creditor, as discussed in my last blog it’s dangerous both short-term and long-term not to consult with an attorney. Today’s blog is about the immediate effect on that lawsuit if you do file bankruptcy.

The Basic Automatic Stay

The filing of your bankruptcy stops that lawsuit instantaneously. It doesn’t take a separate court order or any action by the bankruptcy court or judge to stop it. It’s the mere act of filing the bankruptcy case of itself that stops the lawsuit against you. The word “stay” in that statute means “stop.”

The Immediate Effect of the Automatic Stay

Timing is important with a lawsuit. A judgment will be entered against you if you don’t formally respond to the lawsuit by the stated deadline, and that judgment would give the creditor more ways to get money out of you. The entry of a judgment can also create a lien against your real estate, and filing bankruptcy afterwards will create complications in trying to clear that lien off your title.

So stopping the judgment from being entered in the first place can be very important.  The safe way to do that is to file bankruptcy plenty of time before your deadline to respond to the lawsuit. But if you are cutting it close, it helps that the automatic stay is effective instantaneously. If the creditor’s attorney is about to file documents to enter a judgment at court, but your bankruptcy is filed before that happens, that attorney can’t try to get a judgment quickly before the bankruptcy court acts, because the bankruptcy court doesn’t need to act. As its name says, the stay is automatic.

Telling the Suing Creditor about the Bankruptcy Filing

All your creditors will receive a formal notice of your bankruptcy filing, by mail and in some situations perhaps electronically. But that mailed notice is of course not instantaneous. It is mailed out a few days after the filing of your bankruptcy case, so that all of your creditors should know about it within about a week after you file. But that may well not be fast enough to stop the judgment documents from being filed by the creditor’s attorney and entered by that court. So in urgent situations either you or your attorney need to directly inform that attorney about the bankruptcy filing.

Creditors’ Violations of the Automatic Stay

But what if that attorney just goes ahead and submits the judgment papers, either from not finding out in time about your bankruptcy filing or in spite of knowing about it?

The judgment will not be effective, and the attorney will be required to undo the paperwork. If the entry of the judgment results in any damage to you (such as a garnishment of your bank account), the creditor would likely have to compensate you for the damage it (or its attorney) caused. These damages can include your attorney’s fees for enforcing the automatic stay. In circumstances where the bankruptcy court is persuaded that the creditor needs to be taught a lesson, the court may order the creditor to pay you punitive damages.  Because of these potential penalties, most creditors are cooperative about stopping their lawsuits immediately when they are informed about a bankruptcy filing.

The Bottom Line

As soon as you are sued by a creditor, the clock is ticking for a judgment to be entered against you. So use this lawsuit as an incentive to see an attorney right away to find out the short-term and long-term ways the judgment could hurt you. Find out whether bankruptcy is or is not a sensible option, and whether it is in your best interest to file a bankruptcy case before a judgment can be entered against you in the lawsuit.

The Collision between State Garnishment Law and Federal Bankruptcy Law

Posted by Kevin on July 10, 2013 under Bankruptcy Blog | Be the First to Comment

Bankruptcy quashes a garnishment, but only if it’s filed in time.

It’s all about federalism. OK.  Take a deep breath.  This is a little technical, but we can get through it.

Under our federalist system of government, first, federal law trumps state law in those areas of law—such as bankruptcy—in which the U.S. Constitution gives Congress the power to write laws. But second, federal law respects state law in areas of law where the states have the right to make laws—about the collection of debts, for instance.

So, state garnishment law and federal bankruptcy law butt up against each other when a garnishment and bankruptcy filing happen at about the same time.

Bankruptcy stops virtually all garnishments once the bankruptcy case is filed. But this power of bankruptcy—called the automatic stay—only kicks in at the moment of filing, not before that. So if a garnishment order is entered by the state court and your employer delivers money over to the garnishing creditor the minute before the bankruptcy case is filed, the garnishment is not prevented by the automatic stay.   But the automatic stay stops all future garnishments, because now the federal law is trumping state court in the area of law where it reigns supreme.

So it’s a race between a creditor completing a garnishment in the state court, and you filing a bankruptcy in bankruptcy court.

Close Calls Depend on the Details of State Garnishment Procedures

More about the automatic stay.

Bankruptcy law simply says that a bankruptcy filing “operates as a stay” (a “freezing”) of “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case.” A garnishment is an “enforcement… of a judgment obtained before” the bankruptcy case was filed.  “Property of the estate” consists of everything that you own at the time your bankruptcy is filed, including a paycheck that’s been earned but not yet paid to you.

So the creditor is stopped from garnishing from that paycheck, UNLESS according to that state’s laws at the moment of the bankruptcy filing the garnished money no longer belongs to you, and thus, not to your new “bankruptcy estate.” Exactly when that happens depends on that state’s exact garnishment procedure and on its property law. For example, who does the money being garnished belong to—you or the creditor—if the employer has cut the check for the creditor but not yet delivered it to the creditor at the moment the bankruptcy is filed. You get the idea how complicated this can get.

The Main Idea

Regardless how these hair-splitting issues would be resolved in your state, the main lesson here is to avoid this problem by having your bankruptcy case be filed well before a creditor has the right to garnish your wages. Yes, in the real world that may be harder said than done, but you can see why it makes sense.

In the next blog, we will re-visit this issue

$36 Billion in Student Loans Is Owed by Americans 60 Years Old and Older

Posted by Kevin on June 29, 2013 under Bankruptcy Blog | Be the First to Comment

This $36 billion is owed by 2 million older Americans.  Garnishment of their Social Security benefits to pay these student loans has skyrocketed.

Here are the facts:

  • You’ve likely heard that the total amount of student loan debt has surged beyond the amount of credit card and auto loan debt. The actual numbers as of a few months ago are:
    • Credit cards: $693 billion
    • Auto loans: $730 billion
    • Student loans: $870 billion
  • In addition to the student loan debt owed by 60+ year olds, nearly $100 billion is owed by 4.4 million 50 to 59 year olds, and $143 billion by 5.5 million 40-49 year olds. That’s nearly 12 million Americans 40 or older who still owe on student loans.
  • Among all Americans who owe student loans nearly one-third of them are 40 or older. More than one-sixth are 50 or older.
  • Through the Debt Collection Improvement Act of 1996, Congress centralized delinquent debt collection functions at the Department of Treasury, and authorized it to garnish borrowers’ Social Security payments to collect on federally insured student loans. (See p. 4 of this PDF of the Act, or 11 United States Code Section 3716(c)(3)(A)).
  • At the heart of this Act is the following language:

“Notwithstanding any other provision of law… all payments due to an individual under… the Social Security Act… shall be subject to an offset under this section.”

  • In 2000 six student loan borrowers had their Social Security payments garnished, in 2007 that number had shot up to 60,000 borrowers, and by last year 115,000 borrowers had their Social Security payments garnished.
  • The garnishments cannot exceed 15% of the Social Security payment, and must leave the borrower with at least $750 per monthly check.

Note: much of this information is from a recent report by the Federal Reserve Bank of New York, and the U.S. Treasury Department’s latest annual Report to the Congress on U.S. Government Receivables and Debt Collection Activities of Federal Agencies.

The Costs and Benefits of Surrendering Collateral in Chapter 13

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

The Simple Surrender

If you’ve decided to surrender your home, vehicle, or any other collateral that you no longer need or want to pay for, filing a Chapter 7 “straight bankruptcy” is usually the cleanest way to go. The remaining debt on the home is mostly either discharged (legally written off)—including 2nd mortgages, judgments, utilities—or is paid off by the mortgage holder after taking back the real estate—such as property taxes and homeowner association dues.  On your vehicle loan, the often large “deficiency balance”—the amount you would owe after the creditor sells the vehicle and applies the sale proceeds to the loan balance—is discharged. You give up the collateral but you are quickly free of the debt.

The Possible Delayed Surrender

If you wanted to keep the property, Chapter 13 allows for that.  But what if you know that your job may not last for more than another year, so you’re sensibly facing the reality that at that point you would likely not be able to continue making payments on the home or vehicle?  Once again, Chapter 13 is the way to go.  It allows you to make usually reduced payments while you have your job so you can keep the home or vehicle.  Then, if you lose your job, you can convert to Chapter 7, surrender the property and have the debt discharged.  Clearly, Chapter 13 gives you a lot a flexibility under these scenarios.

Flexibility at a Price

But, as with most things in life, there is a cost factor for this flexibility.  Chapter 13 costs more in fees than Chapter 7, easily twice the cost, or more. The attorney fees are much higher because it is more work over a longer period of time.  Plus the Chapter 13 trustee receives a percentage of what you pay to the creditors. Yes, you may save some money to retain the property in Chapter 13 as opposed to what the regular payment would be; however,  those savings you may be partially or even fully offset by these higher fees.

Power to Protect Your Home Against Your Mortgage Lender and Lienholders

Posted by Kevin on June 17, 2013 under Bankruptcy Blog | Be the First to Comment

If you want to hold onto your home, Chapter 13 gives you many extraordinary advantages.

A. If you are current on your mortgage: In most situations you will be allowed to keep making payments directly to your mortgage holder. The bankruptcy system puts a high priority on home mortgages, so almost always your Chapter 13 plan will be structured to pay your mortgage ahead of most other creditors.

B. If you are behind on your mortgage: You will likely have the whole 3-to-5-year length of your Chapter 13 case to catch up on your missed payments. Although theoretically you want to finish your case sooner than later, from a practical perspective the longer you have to catch up the less it will cost each month to do so. In fact because of this, homeowners often intentionally stay in their cases longer than their income requires just to make it easier on their monthly budget.

C. If you have a second mortgage: We may be able to “strip” that mortgage off your house, so that you won’t have to pay it. This is possible only if the home is worth no more than the balance owed on the first mortgage. And this can only be done in Chapter 13, not Chapter 7. Note that when the second (or third) mortgage is stripped off your title, you will be that much closer to eventually building some equity in your home

D. If you are behind on homeowner association dues: These special creditors usually have very aggressive collection methods available to them. But Chapter 13 can stop them and keep them at bay while you get current through payments earmarked to them through your plan.

E. If you are behind on your property taxes: Same thing. The county or other property tax agency is put on hold with any tax foreclosure or other collection procedures while the back taxes are paid through your Chapter 13 plan. Your mortgage company also sees that you are taking care of this responsibility and can monitor your performance in doing so.

F. If you have a judgment lien on your home: In many circumstances, judgment liens attached to your home can be “voided”—the lien undone and the underlying debt written off.  The debt itself is treated as an unsecured debt and is paid whatever percentage all your unsecured creditors receive through your Chapter 13 plan. Usually this does not increase how much you end up paying to the creditors, but rather just shifts how much each of your creditors gets paid (if anything at all).

G. If you have an income tax lien: Chapter 7 does not have an effective way of dealing with an income tax secured through a tax lien. Chapter 13 does. Whether the tax lien is on a tax which can or cannot be discharged, your Chapter 13 plan will arrange to pay only those taxes that must be paid during the life of your case. So at the end of your case all necessary taxes will have been paid in full and the tax lien will be released.

H. If you have a child or spousal support lien: Another situation where Chapter 7 cannot help, under Chapter 13  the ex-spouse or support enforcement agency would be stopped from enforcing the lien, you’d have the length of your case to pay the arrearage, so that by the end of the case you would be current and any lien would be released.

These are the main special powers that Chapter 13 provides to help you keep your home. Often these are used in combination, to fight back at each of the ways your home is being attacked. Whether you just need to use one or two or a bunch of them, these powers make keeping your home much more likely to actually happen.