Posted by Kevin on May 29, 2013 under Bankruptcy Blog | 
If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman. It starts with a much more robust “automatic stay.”
The last blog explained how filing a Chapter 7 “straight bankruptcy” gives you certain leverage over secured creditors. In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.
Stopping Creditors from Taking the Collateral
The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:
1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.” (usually because the debtor fails to make make multiple payments to that creditor).
2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.
As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected.
3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”
Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid. As long as you abide by the Plan, the automatic stays continues in effect, and the taxing authority cannot foreclose.
Posted by Kevin on May 21, 2013 under Bankruptcy Blog |
Chapter 13 protects you while you catch up on your vehicle loan, or you may not need to catch up on that loan at all.
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Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. Chapter 13 gives you many months, or even a couple years, to catch up. And if you got your loan more than two years and a half years ago, and you owe on it more than the vehicle is worth, you probably won’t even have to catch up on any missed payments. And you will likely pay less per month, and pay less on the loan overall until you own it free and clear.
The Law of Vehicle Loans Arrears
A vehicle loan is in effect made up of two commitments you’ve made to your lender:
- a promise to pay a certain amount each month, plus interest, until the debt is paid off; and
- a lien on the vehicle, giving the lender a right to repossess your vehicle if you fail to keep your promise to pay.
If right before filing bankruptcy you were behind on your vehicle payments, your lender would have the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay” stops any repossession. This protection lasts as long as the bankruptcy case is open, unless the lender files a motion to get “relief from the automatic stay” and gets earlier permission to repossess.
Vehicle Loans in Arrears in Chapter 7
If you are not current on a vehicle loan and want to keep that vehicle, a Chapter 7 would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the likely practices of you lender when you discuss your vehicle loan options.
Vehicle Loans in Arrears in Chapter 13
If you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you. In most situations you would be allowed to catch up over a period of many months, potentially even a few years.
In some situations you may not even need to catch up at all. This happens if, and only if, 1) you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and 2) your vehicle is worth less than your debt against it. If so, you will not only NOT need to catch up on the loan, you will usually be able to pay a lower monthly payment, often a lower interest rate, and less on the loan overall, and then you will own the vehicle free and clear at the end of the case.
This is informally called a vehicle loan “cramdown,” and can ONLY be done under Chapter 13, not under Chapter 7.
Even if you are current on your vehicle loan, or could catch up within two months or so, and therefore would likely be able to keep your vehicle under Chapter 7, IF your vehicle is worth significantly less than what you owe on it you should talk with your attorney about how much money a Chapter 13 could save you through a “cramdown.” This might especially make sense if Chapter 13 also helps you in other ways.
Posted by Kevin on May 16, 2013 under Bankruptcy Blog |
Secured Debts
A secured debt is usually one in which your agreement to pay a debt is backed up with some collateral. If you don’t pay, the creditor can take possession and ownership of that collateral. So, a mortgage holder can foreclose on your home, a vehicle lender can repossess your vehicle, and the appliance store can haul away your washer and dryer.
But for the creditor to have rights to your collateral—for the debt to be truly “secured”—the creditor needs first to have gone through the appropriate legal steps to tie the collateral to the debt.
Besides secured debts in which you voluntarily gave the creditor rights to the collateral, there are many kinds of secured debts in which the creditor got those rights by operation of law. This happens without your consent, sometimes even without your knowledge, often as part of the debt collection process. An example is an IRS tax lien recorded against your real estate and/or personal property for non-payment of income taxes.
Power Provided by Chapter 7
A Chapter 7 case can help with both voluntary and involuntary secured debts. It will 1) temporarily or permanently prevent your creditor from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without economically hurting yourself.
Power # 1: Stop the Creditor from Taking the Collateral
The moment your Chapter 7 case is filed, all your secured creditors are immediately stopped from taking possession of your collateral. This is the same power that stops all collection activity by all your creditors again you and your property. You may hear this referred to as the “automatic stay.”
Very importantly, not only does the “automatic stay” stop secured creditors from chasing previously agreed to collateral, also stops unsecured creditors from becoming secured ones, such as by stopping the IRS from getting a tax lien. Since secured creditors have tremendously more leverage, inside and outside of bankruptcy, this is a very helpful power that bankruptcy gains for you.
Power # 2: Keep the Collateral
Whether the collateral on a secured debt is your home, vehicle, appliances, or everything you own (as with an IRS tax lien), if you want to keep the collateral or whatever is included in a lien, bankruptcy can help in a variety of ways, including:
- If you are current on a secured debt and want to keep the collateral—such as with a vehicle loan—you can virtually always do so. . This is also a good way for you to get a head start on rebuilding your credit.
- If you are not current on your payments, you will generally be given a limited amount of time to bring the account current.
- In some situations, the loan terms can be changed to waive payment of any missed payments, to lower the interest rate, and perhaps even lower the balance.
- Select kinds of secured debts—for example, judgment liens on your home—can be “avoided”—stripped off your home title.
Power # 3: Dump the Collateral
Outside of bankruptcy, simply surrendering collateral to the creditor because you do not need or want it any longer, or just can’t afford to pay for it, is often not an economically sensible option. That is because you can end up still owing much of the debt after the creditor sells the collateral for substantially less than the amount of the debt, adds all of its sale costs to the debt, and then sues you for the remaining “deficiency balance.”
And if instead the creditor just forgives that balance, in some situations you can be hit with a serious income tax obligation. The amount forgiven may be considered “cancelation of debt income” upon which you may be required to pay income taxes.
Chapter 7 solves both of these problems. Except in very unusual situations, it would discharge (permanently write off) any “deficiency balance” after the surrender of any collateral. And the discharge of debts in bankruptcy is not considered “cancellation of debt income,” so you don’t have the risk of it is being taxed. As a result, you can freely surrender collateral in a Chapter 7 case if you want to, without worrying about owing the creditor or owing taxes for doing so.
Posted by Kevin on May 14, 2013 under Bankruptcy Blog |
If your family income is more than the “median family income,” you may still be able to file under Chapter 7.
The “median family income” within a particular state is the dollar amount at which half of the families in that state make less, and half make more than that amount. “Median family income” amounts are calculated for different size families within each state. This information, which originates from the U.S. Census, is available on a table downloadable at the U.S. Trustee’s website. Make sure you’re looking at the most recent table.
Let’s be clear: if your income is at or less than the “median family income” for your size family, in your state, then you are eligible to file under Chapter 7. (Other separate hurdles may need to be addressed but those go beyond today’s blog.)
It only gets complicated if your income is more than the applicable “median family income.” As stated in the very first sentence above, you still may be able to file a Chapter 7 case. Here what you need to know to help make sense of this:
A. Simply figuring out your own family income to find out if you are above or below the “median family income” is much harder than you’d think. It’s not last year’s gross taxable income, or anything commonsensical like that. It’s instead based on a much broader understanding of income—basically every dollar that comes to you from all sources, with some very limited exceptions. And it’s based only on the income received during the last 6 full calendar months before filing, and then converting that into an annual amount. And that’s the easy part!
B. If your family income is higher than the applicable “median family income,” then you still have a number of ways that you can file a Chapter 7 case:
1.Deduct your living expenses from your monthly income to see if your “monthly disposable income” is low enough. The problem is that figuring out what expenses are allowed to be deducted involves understanding a tremendously unclear and complicated set of rules. In any event, after your attorney applies those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then it is low enough so that you can still file Chapter 7.
2. If after deducting your allowed living expenses, your “monthly disposable income” is more than $195, then you can’t file under Chapter 7, except by showing “special circumstances.”
3. And what happens if your “monthly disposable income” is between $117 and $195? That’s where the real fun begins. Multiply your specific “monthly disposable income” by 60. 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.
So to go back to the question in the title of this blog, you can see that even if your income is higher than your state and family size’s “median family income,” you can still file Chapter 7 under a number of different financial conditions. You can also see that the law is convoluted. This is definitely an area where you need to get solid legal advice.
Posted by Kevin on May 5, 2013 under Bankruptcy Blog |
If your financial life is legally simple, your bankruptcy will likely be simple. What is it about your financial life that makes for a not so simple bankruptcy case?
Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.
To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.
1. No non-exempt assets vs. owning non-exempt assets: In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.
2. Under median income vs. over median income: If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.
3. Not behind on real estate mortgage vs. you are behind: If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.
4. No debts with collateral vs. have such debts: The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.
5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts: Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.
6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge: In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.
7. Never filed bankruptcy vs. filed prior bankruptcy: Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.
We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.
Posted by Kevin on April 22, 2013 under Bankruptcy Blog |
Most creditors don’t challenge your write-off of their debts in bankruptcy. But if one does, the system is poised to resolve that challenge relatively quickly.
The last blog, and this one, are about what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. As emphasized last time:
- Most potentially dischargeable debts DO in fact get discharged. To avoid any particular debt from being discharged, the creditor has the burden of establishing that the debt arose out of a very specific sort of bad behavior by you, one that is on a list that is in Section 523 of the Bankruptcy Code.
- Your creditors have a very firm deadline to raise such a challenge, or else lose the ability ever to do so.
- The challenge is raised by filing a complaint . This starts an “adversary proceeding,” a lawsuit focused only on this question.
Avoid Losing by Default
After a creditor files a complaint, the most important thing to realize is that the creditor will automatically win if you and your attorney do not file a formal answer at the court within the stated deadline. So contact your attorney immediately if you receive a complaint.
Most Discharge Challenges Don’t Go to Trial
The adversary proceeding can go through all the steps of a regular lawsuit. After filing the answer, there can be “discovery”—the process of requesting and exchanging any pertinent information and documents, and holding depositions (questioning witnesses under oath). And there could be various kinds of motions, pre-trial hearings, and a full trial. But these kinds of adversary proceedings rarely go through all these step and get to trial, because the amount of money at issue usually does not justify the cost involved for either side to pursue it that far. So after both sides get a clear picture of the facts, there is usually a settlement. Or the debtor does some quick math, and decides that it would be cheaper to buy off a creditor than to spend the money on additional legal fees with the possibility that you could lose at trial and be forced to pay the creditor the full amount due (note that representation in an adversary proceeding is never included in the base fee).
But if there is enough at stake, or else if one or both sides are unreasonable and insist on getting a decision from the judge, the dispute does go to trial. These trials usually last a half-day, or a day, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not. Extremely rarely, this decision can be appealed, in fact theoretically all the way up to the United States Supreme Court!
What’s So Quick and Efficient about All This?
Any litigation is very expensive, so you hope to avoid any discharge challenges. But bankruptcy court is a relatively fast and efficient forum for a number of reasons:
1) Because creditors have the opportunity to review your finances beforehand, much of the time they will not bother to raise challenges at all.
2) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts.
3) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings tend to be resolved in a matter of few months.
4) Because bankruptcy judges deal with these kinds of challenges all the time, they are extremely familiar with these legal issues. So they move these cases fast.
Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. Help this happen by informing your attorney about any threats made by creditors before your bankruptcy is filed, and then working closely with your attorney if a creditor follows through on its threat by filing a complaint.
Posted by Kevin on April 20, 2013 under Bankruptcy Blog |
Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.
One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.
This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.
Creditors Have to Put Up or Shut Up
Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing you. But for sure tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.
Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.
And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.
The “Adversary Proceeding”
The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a mini-law suit, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example, you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks, by coercing a relative to change their will on your behalf… behavior of this sort.
Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.
Posted by Kevin on April 14, 2013 under Bankruptcy Blog |
Three more very practical ways that bankruptcy works to let you take control of your debts, even those that can’t be written off.
A few blogs ago I gave six reasons why it’s worth looking into bankruptcy even when you can’t discharge (write off) one or more of your debts. Today here are the final three of those reasons, each one paired with a concrete example illustrating it.
Reason #4: Taking control over the amount of the monthly payments.
The taxing authorities, support enforcement agencies, and student loan creditors have extraordinary power to take your money and your assets if you fall behind in paying them. Because of that tremendous leverage, you normally have no choice but to play by their rules about how much to pay them each month. Chapter 13 largely throws their rules out the window.
Let’s say you owe $15,000 to the IRS—including interest and penalties—from the 2010 and 2011 tax years, resulting from a business that failed. You’ve now got a steady job but one that gives you very little to pay the IRS after taking care of your very basic living expenses. The IRS is requiring you to pay that debt, plus ongoing interest and penalties, within 3 years. And it calculates the amount you must pay it monthly without any regard for your other debts, or for your actual living expenses. Even if you did not have unexpected expenses during those 3 years, paying the required amount would be extremely difficult. But if your vehicle needed a major repair or you had a medical problem, keeping up those payments would become absolutely impossible. But the IRS gives you no choice.
In a Chapter 13 case, on the other hand, the repayment period would stretch out to as long as five years, which lowers the monthly payment amount. And instead of a rigid mandatory monthly payment going to the IRS, how it is paid in Chapter 13 is much more flexible. For example, if in your situation money was very tight now but would loosen up down the line—for example, after paying off a vehicle loan—you would likely be allowed to make very low or even no payments to the IRS at the beginning, as long as its debt was paid in full by the end. Also, you would be allowed to budget for vehicle maintenance and repairs, and medical costs, and other reasonable expenses, usually much more than the IRS would allow. And if you had unexpected vehicle, medical, or other necessary expenses beyond their budgeted amounts, Chapter 13 has a mechanism for adjusting the original payment schedule. Throughout all this, you’d be protected from the IRS.
Reason #5: Stopping the addition of interest, penalties, and other costs.
Under the above facts, if you were not in a Chapter 13 case, the IRS would be continuously adding interest and penalties. So that much less of your monthly payment goes to reduce the $15,000 owed, significantly increasing the amount you need to pay each month to take care of the whole debt in the required 3 years.
In Chapter 13, in contrast, unless the IRS has imposed a tax lien, no additional interest is added from the minute the case is filed. No additional penalties get added. So not only do you have more time to pay off the tax debt, and much more flexibility, you have also have significantly less to pay before you finish off that debt.
Reason #6: Focusing on paying off the debt that you can’t discharge by discharging those you can.
This may be obvious but can’t be overemphasized: often the most important and direct benefit of bankruptcy is its ability to clear away most of your debt burden so that you can put your financial energies into the one that remain.
Back to our example of the $15,000 IRS debt, let’s say the person also owes $20,000 in credit cards, $5,000 in medical bills, and a $6,000 deficiency balance on a repossessed vehicle. Discharging these other debts would both free up some of your money for the IRS and avoid the risk that those other creditors could jeopardize your payments to the IRS. Entering into a mandatory monthly payment arrangement with the IRS when at any moment you could be hit with another creditor’s lawsuit and garnishment is a recipe for failure.
Instead, a Chapter 7 case would very likely discharge all of the credit card, medical and old vehicle loan debts. With then gone you would have a more sensible chance getting through an IRS payment arrangement.
In a Chapter 13 case, you may be required to pay a portion of the credit card, medical and vehicle debts, but in return you get the benefits of getting long-term protection from the IRS, a freeze on interest and penalties, and more flexible payments.
So whether Chapter 7 or Chapter 13 is better for you depends on the facts of your case. Either way, you would pay less or nothing to your other creditors so that you could take care of the IRS. Either way, you would much more likely succeed in becoming tax free and debt free, and would get there much quicker.
Posted by Kevin on under Bankruptcy Blog |
The last blog gave 6 reasons why it’s worth looking into bankruptcy even if you know that you can’t discharge (write off) one or more of your most important debts. Today here are concrete examples how the first three of those could work for you.
The first two reasons we’ll cover together. First, sometime debts which you might think can’t be discharged actually can be, and second, some debts that can’t be discharged now may be able to be in the near future.
Let’s say you currently owe $10,000 in federal income tax for the 2008 tax year. You filed that tax return on October 15, 2009 after getting an extension. The IRS assessed the tax and you’ve been making monthly payments to the IRS on a payment plan, but because of that you did not make adequate tax withholdings or quarterly estimated payments for 2011. You know that once you file your 2011 tax returns (by October 15, 2012, because you got an extension) you’re going to be in trouble because you will owe a lot for that year as well. You know the IRS will cancel the payment plan for 2008 because of your failure to keep current on your ongoing tax obligations. You’re pedaling as fast as you can, but October 15 is less than two months away and you don’t know what to do. You are quite certain that the $10,000 tax debt cannot be discharged in bankruptcy.
You’d be right about that… but only for the moment. Because under these facts that 2008 tax debt could very likely be discharged through either a Chapter 7 or 13 bankruptcy case filed AFTER October 15, 2012. (Whether you’d file a Chapter 7 or 13 would depend on other factors, including how big your 2011 and anticipated 2012 tax debts will be.) Instead of being in a seemingly impossible situation, you would avoid paying all or most of that $10,000—plus lots of additional interest and penalties that you would have been required to pay. Instead you would be more than $10,000 ahead on paying off the 2011 and 2012 taxes!
Now here’s an example where bankruptcy can permanently solve an aggressive collection problem.
Change the facts above to make that $10,000 debt one owed for the 2009 tax year instead of 2008. Since that tax return was also filed with an extension to October 15, 2010, that $10,000 would not be dischargeable until after October 15, 2013. But in this example you’ve already defaulted on your monthly payment agreement. So you are appropriately expecting the IRS to file a tax lien on all of your personal property and on your home, and to start levying on (garnishing) your financial accounts, and on your paycheck if you’re employed or on your customers/clients if you’re self-employed.
With all that the IRS can do to you, you can’t wait until October of next year to discharge that $10,000. But if you filed a Chapter 13 case now the IRS would not be able to take any of the above aggressive collection actions against you. You would have to pay the $10,000 (and any taxes owed for 2010 and 2011) but you would have as long as 5 years to do so. And most importantly, throughout that time you’d be protected from any future IRS collection action on any of those taxes, as long as you complied with the Chapter 13 rules.
As for the 2012 tax year, you would likely be given the opportunity to pay extra withholdings or estimated payments during the rest of this year, which you would be able to afford because of temporarily paying that much less into your Chapter 13 plan.
So instead of being hopelessly behind and deathly scared about everything the IRS is about to do to you, within a few days you could be on a financially sensible path to being caught up with the IRS. And then within three to five years you’d be tax debt free, AND debt free.
Posted by Kevin on April 3, 2013 under Bankruptcy Blog |
You owe the IRS a substantial amount of money for income taxes. You have heard that bankruptcy doesn’t discharge (legally write off) income tax debts. So you’re not seriously considering bankruptcy much less consulting with a bankruptcy attorney.
You may or may not be right about whether or not that income tax debt can be discharged now. However, you may be able to discharge the income tax debt in the future . But you will not know for sure unless you get some advice. Here are six reasons why you should not be your own lawyer, and should consult with an experienced bankruptcy attorney:
1. Some debts, which you think can’t be discharged, actually can. Certain income taxes can be discharged in either a Chapter 7 or Chapter 13 case. For the most part, it depends on when the tax obligation was incurred. And even though alimony is not dischargeable, there are some payments to an ex-spouse which are not considered nondischargeable alimony under the Bankruptcy Code. It’s certainly worth finding out whether the debt you assume can’t be discharged actually can be discharged.
2. Some debts that can’t be discharged now may be able to be in the future. Almost all income taxes can be discharged after a series of conditions have been met. So your attorney can put together for you a game plan coordinating these tax timing rules with all the rest of what is going on in your financial life.
3. Even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem. In many situations your primary problem is the devastating way a debt is being collected. For example, you may want to pay an obligation for back child support but the state support enforcement agency is about to suspend your driver’s and/or occupational license. A Chapter 13 case will stop these threats to your livelihood, and protect you from them while you catch up on the back support.
4. You have more control over the amount of the monthly payments on debts that cannot be discharged. Debts which the law does not allow to be discharged in bankruptcy also tend to be ones that give the creditors a lot of leverage against you. Chapter 13 takes some of this leverage away from them by allowing you to pay what your budget allows, not what these creditors would otherwise like to carve out of you.
5. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts are so much more difficult to pay off because a part of each payment goes to the ongoing interest and penalties. Some tax penalties in particular can be huge. Most of these ongoing add-ons are stopped by a Chapter 13 filing, allowing you to become debt-free sooner.
6. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged and a bunch of debts that can be. Even if bankruptcy can’t solve your entire debt problem directly, discharging most of your debts would likely make that problem much more manageable. Under Chapter 7, you would be able to pay off those surviving debts much faster, which is especially important if they are accruing interest or other fees. And under Chapter 13 you would have the benefit of a predictable payment program, one that focuses your financial energies on those nondischargeable debts while protecting your assets and income from them.
So don’t let the fact that you believe that you have debts that can’t be discharged in bankruptcy stop you from getting legal advice. What you find out may surprise you.
Posted by Kevin on March 29, 2013 under Bankruptcy Blog |
If you file bankruptcy, it’s okay to voluntarily repay any debt. But there can be unexpected consequences.
The Bankruptcy Code says “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 524(f).
But that doesn’t mean that repaying a debt won’t have consequences, including sometimes some highly unexpected ones. So what are those consequences?
To start off let’s be clear that we’re NOT talking about a creditor which you want to pay because it has a right to repossess collateral that you want to keep. Nor is this about paying a debt because the law does not let you to discharge (write off) it. Those two categories of debts—secured debts and non-dischargeable ones—have their own sets of rules governing them. We’re talking here about voluntary repayment, paying a debt even though you’re not legally required to.
And let’s also make a big distinction about the timing of those voluntary payments. We’re NOT talking here about payments made to creditors BEFORE the filing of bankruptcy. That was the subject of a blog a while back.. Be sure to check that out because the consequences of paying certain creditors at certain times before bankruptcy can be very surprising and frustrating, seemly going against common sense.
Instead, today’s blog is about paying creditors AFTER filing your bankruptcy case. The straightforward rule here is that you can pay your special creditor after filing a “straight” Chapter 7 case, but can’t do so in a “payment plan’ Chapter 13 case. For that you must wait until the case is completed, which is usually three to five years after it starts. So, if you would absolutely want to start making payments to a special creditor—such as a relative who lent you money on a personal loan—right after filing your bankruptcy case, you would have to file a Chapter 7 case instead of a Chapter 13 one.
Why is there such a difference between Chapter 7 and 13 for this? Basically because Chapter 7 fixates for most purposes on your financial life as of the day your case is filed, while Chapter 13 cares about your financial life throughout the length of the payment plan. You can play favorites with one of your creditors right after your Chapter 7 is filed because doing so doesn’t affect your other creditors. In contrast, in a Chapter 13 case your payment plan is designed so that you are paying all you can afford in monthly payments to the trustee to distribute to the creditors in a legally appropriate fashion. Here the law does not allow you to favor one creditor over the other ones just because you have a special personal or moral reason to do so. You can only favor a creditor AFTER the case is completed, again usually three to five years after filing.
So what would the consequences be of paying your special creditor “on the side” during an ongoing Chapter 13 case? The simple answer is that it’s illegal so don’t do it. Beyond that it’s difficult to answer because it would depend on the circumstances of the case (such as how much you paid inappropriately) and would depend on the discretion of the Chapter 13 trustee and of the bankruptcy judge. You’d be risking having your entire Chapter 13 case be thrown out. You would be wasting a tremendous investment of time and money, risking years of your financial life. Clearly, things you want to avoid.
Posted by Kevin on March 10, 2013 under Bankruptcy Blog |
In May, 2012, I published a blog entitled “Bankruptcy Filings Down- Better Economy?. My conclusion was that filings were down but the increased cost of filing bankruptcy may have had more to do with the decrease in filings than the economy getting better.
Well, ten months have passed. There has been a presidential election. Certain segments of the economy are doing much better (like the stock market), others not so well (housing). Filings are down in New Jersey17% from March 1, 2012 to February 28, 2013. But does that mean that we have a better economy?
Maybe and maybe not. A few days ago, the Labor Department announced that unemployment was 7.7%, the lowest since the meltdown/recession. But is that an accurate number? You see, the unemployment number goes down when employment goes up. But, it also goes down when people stop looking for work or take part time work instead of full time. If you consider the number of people who have dropped out the work force or who are working part time, the unemployment number (known as the U-6 unemployment number) is greater than 14%. So, if you factor in the broader measure of employment (U-6), the economy is still struggling.
How do you apply that to number of bankruptcy filings. While it is true that if you cannot afford the filing fee, you usually cannot afford bankruptcy, it is also true that if you don’t have any assets or income, creditors have nothing to go after. So, if you can put up with a few unpleasant telephone calls, people can generally avoid their creditors. As they say, you cannot get blood out of a stone. So, why file?
Unless the US slips back into recession, real unemployment should go down eventually. People will shift from government benefits to wage paying jobs. Rather than writing off your debts like in the old days (1980’s), credit card companies, hospitals and even doctors are selling your debt for pennies on the dollar to hedge funds or other debt collection agencies. Those guys do not go away. First, you will get letters and calls. Eventually, when they find out where you work, you will get judgments against you (if they do not have them already), and then wage garnishments. Something to think about.
So, if you have been out of work for a year or more, and get a job- congratulations. But if you also have judgments or owe lots of money and you get a job, you may want to give serious thought to speaking with a reputable debt counselor or bankruptcy attorney. Why? Because at that time you have options. However, if you want until your wages are garnished, your only recourse may be bankruptcy. The automatic stay, which occurs when you file a bankruptcy petition, will stop a garnishment dead in its tracks.
Word to the wise.
Posted by Kevin on February 26, 2013 under Bankruptcy Blog |
Ally is GM. Rescap is their subprime, residential mortgage subsidiary. Rescap and a slew of its subsidiaries filed bankruptcy. Prior to the filing, Ally reached a settlement with Rescap whereby Ally would pay $750 million to Rescap’s estate in return for a release from claims from outsiders (presumably based on the bad loans made or owned by Rescap).
Love it. Potential claims against Rescap could be tens of billions of dollars or more. So, what Ally tried to do is get a puppet subsidiary to enter into a sweetheart deal which would effectively screw investors, borrowers and other people in contact with Rescap bad paper.
At this point, the creditors have put their collective feet down. They have asked Rescap’s board to allow the creditors to sue Ally while at the same time, the creditors committee is seeking court approval to bring suit against Ally. Ally is pushing back saying it was an arm’s length transaction because Rescap had an independent board, and has threatened to take the $750 million off the table.
Government has not shown the cajones to litigate these matters. I hope that the creditors committee at Rescap does not lose its will. It is important for the Too Big to Fail banks to start to understand that they cannot buy themselves out of their own wrongdoing.
In the meanwhile, if you have a mortgage with Rescap, you may want to check the Rescap bankrutptcy docket periodically to make sure that your rights have not been sold out from under you.
Posted by Kevin on November 23, 2012 under Bankruptcy Blog |
Bankruptcy protects your home. Both Chapter 7 and 13 do so, but which is better for you?
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When you are dealing with your home, you are usually dealing with a mortgage. So, if you are comtemplating bankruptcy, you need to consider both the bankruptcy trustee and your mortgage lender. Here are 5 key questions to ask to find out whether a Chapter 7 straight bankruptcy or a Chapter 13 payment plan is what you need.
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1. Is your home worth more or less than the amount of your mortgage?
In other words, do you have equity in your home? Many people who purchased their homes after 2000 do not have equity in their home. In that case, a Chapter 7 trustee will abandon his or her interest in your home. That means, the trustee is not going to sell your home to pay off your unsecured creditors. But, remember, you still have to deal with your mortgage lender.
But, if you have owned your home for a long time, and have significant equity (that means more than the mortgage $43,250 for a married couple), a Chapter 7 trustee will sell your house. To avoid this, you should look into Chapter 13 to protect that value.
2. Are you current on your mortgage and property tax payments, and if not will you be able to get current within a short time after filing a Chapter 7 bankruptcy?
If you are not behind on your home obligations (and there is not equity in the home), in a vast majority of cases, you can continue making payments and keep the home after you file bankruptcy, regardless whether your other circumstances point you to a Chapter 7 case or a Chapter 13 one.
And if you are not so far behind, so that you could both consistently pay the regular monthly payments and catch up on your mortgage and any property tax arrearage within a few months, your mortgage lender may enter into a forbearance agreement with you to allow you to catch up. In those circumstances, you may want to consider filing under Chapter 7 and keep your home. However, if you would not be able to catch up within a short of period of time, you will likely need the extra power of Chapter 13 to buy more time.
3. Do you have a second (or third) mortgage which is not covered by equity in the home?
IF you have a second mortgage and you owe more on your first mortgage than your home is worth, Chapter 13 allows you to “strip” that second mortgage from your home. This means that you would pay very little or perhaps even nothing on it during your 3-to-5-year case, and then the entire balance would be forever written off. This cannot be done in Chapter 7. So of course if you have a significant second mortgage, this is a huge reason to file under Chapter 13.
This also applies if you have a third mortgage, and you owe more on the combination of your first two mortgages than the home is worth, allowing you to “strip” the third mortgage.
4. Do you have any current liens against your home which are not going to be resolved by filing Chapter 7?
Some debts result in liens against your home. Some of those liens can be taken care of with a Chapter 7 filing, some cannot.
For example, if in the past you were sued by a credit card company, medical provider, or collection agency, that creditor likely has a judgment lien against your home. As long as your home has no more equity than allowed by your homestead exemption (without even considering that judgment lien), you will likely be able to have that judgment lien released in a Chapter 7 case.
But, to use another example, if instead you have a lien against your home for owing back child support, a Chapter 7 is not going help you with that lien. After you file and finish a Chapter 7 case, your ex-spouse or local/state support enforcement agency may be able to foreclose on your home to enforce that lien. In contrast, a Chapter 13 case would protect you from any such foreclosure threat, while providing you a mechanism for paying off that debt while under this protection.
5. Do you have any special debts which could threaten your home later after filing a Chapter 7 bankruptcy case?
Even if you do not currently have any known liens or similar threats against your home, you may have future problems if you have one or more special debts which will survive a straight bankruptcy. The prime examples are income taxes, child and spousal support obligations, construction and home repair debts, and homeowner association dues and assessments. In most states, these kinds of debts either are automatic liens against a home or can easily turn into liens. And most liens can eventually be foreclosed to pay the debt underlying the lien. Chapter 13 can either help avoid a lien from attaching to your home or can enable you to pay the underlying debt and get the lien released without it threatening your home.
Posted by Kevin on November 21, 2012 under Bankruptcy Blog |
As we said in the prior blog, more complicated debts are usually handled better in the Chapter 13 context.
More complicated debts include those that 1) are not discharged (written-off) in bankruptcy or in a Chapter 7, 2) are in arrears but are secured by collateral you need to keep, and/or where the debtor has significant equity, or 3) are special situations under the Code.
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Debts Not Discharged in Bankruptcy
If you owe a not-so-large recent income tax debt, or are just a little behind on your support payments, you can file a Chapter 7 case and often be able to take care of the tax or support obligation by arranging for monthly installment or catch-up payments. Using Chapter 13 in that situation would likely be unnecessary.
But if the amount you owe or are behind on is too large, or if the creditor refuses to deal, then Chapter 13 would be better. Why? Because it forces the creditor to be lots more patient. It generally gives you up to five years to pay off or catch up on these kinds of debts.
Secured Debt, Lots of Equity
This is truly tricky. Remember, if the property has significant equity, the trustee may sell the property. If you want to keep the property, you will have a problem in Chapter 7. In fact, your only recourse is to make a deal by buying out the trustee’s interest. If this turns out to be too expensive, you may be SOL.
What about Chapter 13? Assuming you meet the debt ceiling, Chapter 13 can theoretically help. What does that mean? To get your Chapter 13 plan approved by the court, it has to pay out to unsecured creditors as much or more than they would have received in a Chapter 7. So, if you have $50,000 equity in the property after the liquidation analysis, that means that your creditors in a Chapter 13 will have to get at least $50,000. Over 3 years that is $16K+ per year, over 5 years-$10K per year. That’s a big nut to meet every month. So, Chapter 13, in theory, may help you, but , in reality, may be too expensive.
Secured Debts Where You Are Behind
If you want to hang onto your vehicle and/or home but you’re not current on the loan, Chapter 13 allows you to spread out the arrearages for up to the term of the plan. If an aggressive creditor objects, so what. You only need the Judge to confirm the plan.
Special Debts Handled Better in Chapter 13
Chapter 13 has some other features which simply are not provided in Chapter 7, much less provided outside bankruptcy.
Under certain circumstances you can “strip” your second mortgage from your home’s title, so that you pay little or nothing on that second mortgage. This can save a homeowner tens of thousands of dollars, and greatly reduce the monthly cost of the home. In New Jersey, stripping a second mortgage is only potentially available in Chapter 13, not in Chapter 7.
A vehicle “cram down”—in which the amount you owe on your vehicle is essentially reduced to the value of vehicle—is also potentially available only in Chapter 13, not Chapter 7.
If you owe any co-signed debts, they can be favored under Chapter 13 while your co-signer is protected. In contrast, in a Chapter 7 case the creditor would likely be able to pursue your co-signer.
The Limits of a Rule of Thumb
Once again, there’s so much more to deciding between Chapter 7 and 13 than looking at what kind of debts you have and whether those debts are “simple” or “complicated.” There are many other factors, and people so often have unusual combinations of circumstances. This rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—is simply a sensible starting point for your own thinking, and for your conversation with an experienced bankruptcy attorney.
Posted by Kevin on November 19, 2012 under Bankruptcy Blog |
The type of debts that you have are a factor in deciding whether to file under Chapter 7 or Chapter 13.
The Overly-Simplistic But Still Helpful Rule of Thumb
Here’s a decent starting point: Chapter 7 handles your simple debts better than does Chapter 13, and Chapter 13 handles your more complicated debts better than does Chapter 7.
There are three kinds of debts: “secured” for which there is collateral given, e.g., your house; “priority” debts which for most consumer creditors is child support, alimony or taxes; and “general unsecured” debts which include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many, many others.
Simple debts are generally general unsecured debts, and secured debts in cases where a) the debtor is current, their is no equity in the collateral and the debtor wants to keep the collateral or b) the debtor wants to give up or “surrender” the collateral.
Simple Debts- Better Off in Chapter 7
Chapter 7 treats “general unsecured” debts the best by usually simply discharging them (writing them off) forever in a procedure lasting barely three months. You make no payments and you get to keep the property if it is exempt.
Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are slated to be paid 15% of the amount owed. Moreover, if your income goes up during the term of the plan, your payments can increase. So, unless you feel morally compelled to make restitution to your creditors, Chapter 7 is the preferred economic method of disposing of “general unsecured” debts.
As for simple secured debts, in Chapter 7, if you surrender, you give up the property, the debt is discharged and you make no further payments. If you surrender the collateral in a Chapter 13, however, you may be subject to paying a portion of any deficiency through your plan. Clearly, in that case, Chapter 7 is the better alternative.
If you want to keep the property which is current with no equity, in a Chapter 7 the trustee “abandons” the property. That means that it drops out of the bankruptcy and you keep it subject to the secured claim. As long as you keep paying the secured creditor, you get to keep (and someday own outright) the collateral. Moreover, the underlying debt to the bank is discharged, so the bank can never come after you for a deficiency if you default down the line.
Now, you get pretty much the same deal in Chapter 13 ( you keep the collateral and continue with your payments), but you are subject to court supervision for up to 60 months. That can be a hassle. Hence, Chapter 7 is a better alternative because it is quicker and cleaner.
The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.
Posted by Kevin on November 16, 2012 under Bankruptcy Blog |
In Chapter 13 the trustee is a gate-keeper, overseer, and payment distributor. Quite different than in Chapter 7.
To understand what a Chapter 13 trustee does, we need to get on the same page about what Chapter 13 is. It’s an “adjustment of debts” based on a three-to-five-year payment plan. Moreover, upon successful completion of your Chapter 13 Plan, you get a discharge, and you get to keep your stuff- whether it is exempt or not.
The Chapter 13 Trustee as Gate-Keeper. The trustee’s first role as gate-keeper is to review your plan and object to any aspects of it that he or she believes does not follow the law. Usually any trustee objections are resolved by your attorney through persuasion or compromise, or by having the bankruptcy judge make a ruling on it.
The Trustee as Overseer
After the plan is approved, or “confirmed,” by the judge, the trustee and his or her staff continues to monitor your case throughout its three-to-five-year life. They track your payments, usually review your income tax returns each year to see if your income stays reasonably stable, and file motions to dismiss your case if you don’t comply with these and other requirements.
The Trustee as Payment Distributor
The trustee collects payments from you and distributes the money as specified by the terms of the court-approved plan. As part of that, the trustee’s staff reviews your creditors’ proofs of claim—documents filed by your creditors to show how much you owe—and may object to ones that do not seem appropriate. And when you have finished paying all you need to pay, the trustee informs you and the bankruptcy court, so that the court can discharge the rest of your remaining debt (except for long-term debts such as perhaps a home mortgage or student loan).
Practical Differences between Chapter 7 and 13 Trustees
- The Chapter 7 trustee liquidates assets, or, more often, determines if you have any assets which can be liquidated, fixating on your assets at the point in time when you filed your case. In contrast, the Chapter 13 trustee receives and pays out money over a period of years, based on a bunch of factors but mostly on your ongoing income and expenses.
- Both types of trustees are private individuals, carefully vetted and monitored. The Chapter 7 trustees are chosen out of a “panel” of several trustees within each bankruptcy court, so your attorney will not know (or be able to influence) which one of the trustees will be assigned to your case. In contrast, there is usually only one “standing” Chapter 13 trustee assigned cases from each court or each geographic area within the court’s jurisdiction. So your attorney will almost for sure know which Chapter 13 trustee will be assigned to your case.
Posted by Kevin on November 15, 2012 under Bankruptcy Blog |
Question #1 for cleaning up financially after a failed business: can the business file a bankruptcy without you? Question #2: should it?
This blog is NOT intended to give you all you need to know about whether your no-longer-operating business (or “on its deathbed business”) or you should file bankruptcy. Many factors go into that decision. This blog addresses only the very beginning of this decision-making process: is your business ELIGIBLE to file bankruptcy?
Is Your Business Its Own “Person”?
Your business can only file its own bankruptcy if it is a legally recognized business entity, a legal “person” distinct from you. If you established and ran the business under a formally registered corporation, that corporation can file a bankruptcy. If you established and ran the business as a formal partnership, that business partnership can file a bankruptcy.
In contrast, if you operated the business under your own name, or under a “dba” (“doing business as”), that business is not legally separate from you as an individual, so it cannot file a bankruptcy. That’s true even if you legally registered that “dba” name with a state agency (usually with the “corporation division” of your secretary of state’s office), paid for a local business license, and/or had separate bank accounts for the business. That business is legally just a part of you as an individual and cannot file its own bankruptcy.
How about if your business was established as a corporation but over time you did not keep the corporation’s finances distinct from your own? How about if operated your business in fact as a partnership of three partners and kept distinct partnership books but never formalized the partnership through the state or local authorities? Whether that corporation or that partnership can file a bankruptcy, and what the consequences would be of such a bankruptcy, depends on the circumstances, and requires a careful discussion with an experienced business bankruptcy attorney.
Corporations and Partnerships Cannot File Chapter 13
Chapter 13 is reserved for “individuals”—actual people, not corporations or business partnerships. Specifically “[o]nly an individual with regular income” and who does not owe more than certain amounts “may be a debtor under Chapter 13… .”
Corporations and Partnerships Can File Chapter 7, 11 and 12
Legal business entities like corporations and partnerships can file under Chapter 7, a straight bankruptcy, to help in the orderly liquidation of the business’ assets and the fair distribution of the proceeds to the business’ creditors. Such a Chapter 7 may not be necessary or helpful if the business does not have any of its own assets, other than those which are collateral on secured debts.
Under a Chapter 11 “business reorganization,” the business would continue to operate or be sold as a going concern. Although most bankruptcy courts make an effort to run small business Chapter 11 cases efficiently, they are still very expensive—seldom less than tens of thousands of dollars in court, U.S Trustee, and attorney fees. So Chapter 11 is seldom a practical solution for very small businesses.
Under a Chapter 12 “adjustment of debts of a family farmer or fisherman,” the family farming or fishing operation would continue operating. To qualify that operation must meet certain maximum debt limits, and other qualifications to show that it is sufficiently oriented towards farming or fishing and is sufficiently family-owned.
Whether a business CAN file its own bankruptcy leads to the question whether it SHOULD do so, to be covered in the next blog.
Posted by Kevin on November 14, 2012 under Bankruptcy Blog |
I am sure that you all have heard the term Trustee in the news. What exactly is a trustee and what does he do in a Chapter 7 case?
First, let’s get out of the way a whole other kind of “trustee” who you might hear about in the bankruptcy world, the “United States Trustee.” That’s someone who usually stays in the background in consumer bankruptcy cases, so you’ll usually not have any contact with anyone from that office. It is part of the U.S. Department of Justice, tasked with administering and monitoring the Chapter 7 and 13 trustees, overseeing compliance with the bankruptcy laws, and stopping the abuse of those laws.
The United States Trustee establishes a “panel” of trustees throughout the State of New Jersey who actually administer the Chapter 7 cases. That panel consists mainly of attorneys who are experienced in bankruptcy, but also includes some accountants and other business persons. The debtor and her legal counsel deal with the panel trustee.
A Chapter 7 case is a “liquidation,” meaning that if you own anything which is not “exempt,” it has to be surrendered and sold to pay a portion of your debts. But the reality for most people is that everything they own is “exempt,” so they get to keep their stuff. There is no “liquidation” in those situations.
The Chapter 7 trustee is an investigator-liquidator. He or she is the person assigned to your case by the bankruptcy system who does primarily three things:
1) investigates your filing to determine if you are honestly disclosing your assets and liabilities, income and expenses;
2) determines whether or not everything you own is “exempt,”;
3) only in the relatively few cases in which something is not “exempt,” decides whether that asset is worth collecting and selling, and if so, liquidates it (sells and turns it into cash), and distributes the proceeds to your creditors.
The Chapter 7 trustee’s investigation starts with a review of the Petition, Schedules and other Statements that are a part of your bankruptcy filing. In addition, the Chapter 7 trustee will require that we send him certain documents to verify what is said in our filing (tax returns, paystubs, deeds, mortgages, mortgage payoffs and appraisal). Then he or she presides at the so-called “meeting of creditors,“ and asks you a list of usually easy questions about your assets and related matters. Lastly, the trustee can expand his investigation and take other action such as deposing the debtor and/or third parties, hire experts like accountants or appraisers, and the like. It should be stressed that an expanded investigation rarely happens in a consumer bankruptcy.
In those cases where some of the debtor’s assets are not exempt and these available asset(s) is(are) worth collecting, the trustee will gather and sell the asset(s), and pay out the proceeds to the creditors, all in a step-by-step procedure dictated by bankruptcy laws and rules.
Posted by Kevin on November 12, 2012 under Bankruptcy Blog |
Chapter 7 often protects you from creditors well enough. But if need be, Chapter 13 protects you longer.
The “Automatic Stay” in Chapter 7 Bankruptcy”
The automatic stay is the power given to you through federal law to stop virtually all attempts by creditors to collect their debts against you and your property as of the moment you file a bankruptcy case. It stops creditors the same at the beginning of your case whether you file a Chapter 7 case or a Chapter 13 payment plan.
The benefits of the automatic stay last as long as your Chapter 7 case lasts—usually about three months or so. In many situations, that’s just long enough. The bankruptcy judge generally signs the discharge order just before the end of the case, writing off all or most of your debts. After that point those creditors can no longer pursue you or your assets, so you no longer NEED the automatic stay for your protection.
However, you may have some debts which you will continue to owe after the completion of your case, either 1) voluntarily, such as a vehicle loan on a vehicle you are keeping, or 2) as a matter of law, such as a recent unpaid income tax obligation.
In either of these situations you may well not need protection from these kinds of creditors beyond the length of a Chapter 7 case. You will likely enter into a reaffirmation agreement with the vehicle creditor, purposely excluding its debt from the discharge of your other debts so that you can keep the vehicle and continue making the payments. If you owe for last year’s income taxes, then before your Chapter 7 case is finished you could enter into a reasonable monthly installment payment plan with the IRS—if the amount is not too large and your cash flow has improved because of your bankruptcy case.
The “Automatic Stay” under the Chapter 13 Payment Plan
Simply stated, the automatic stay protection under Chapter 13 potentially lasts so much longer than under Chapter 7 because a Chapter 13 case lasts so much longer—3 to 5 years instead of 3 months. This can create some significant advantages with certain kinds of debts where you need more time, and need protection during that extended time.
Take the two examples above—the vehicle loan and the recent tax debt.
If you had fallen significantly behind on the vehicle loan and had no way to bring it current within a month or two after filing a Chapter 7 bankruptcy, most creditors would not allow you to keep the vehicle. In contrast, under Chapter 13 you’d likely have several years to bring the account current, regardless of the creditor’s objection. In fact in some situations you would not need to catch up the missed payments at all. And as long as you made your payments as required by your court-approved plan, you would be protected from the creditor throughout this time.
In the case of the recent income taxes, if you owed more than what you could pay in an installment plan set up with the IRS, Chapter 13 would likely give you more time and more flexibility. For example, you would likely be able to delay paying the IRS anything for a number of months while paying debts that were even more important—say, arrearage on a house mortgage or back child support—as long as you paid the taxes off within 5 years. Plus most of the time you would not need to pay any ongoing tax penalties or interest, saving you a lot of money. Again, throughout this time you’d be protected from any collection action by the IRS through the continuous automatic stay.
Conclusion
So, the automatic stay stops creditors in their tracks when either a Chapter 7 or Chapter 13 case is filed. The relatively short life of the automatic stay in Chapter 7 will do the trick either if you don’t still owe any debts when the case is done, or if you will be able to make workable arrangements on any that you do still owe. But if you need automatic stay protection to last longer, then Chapter 13 may well be able to give you that along with much more time and more flexibility in dealing with special creditors.
