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 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 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 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.
Posted by Kevin on July 9, 2012 under Bankruptcy Blog |
Most experienced bankruptcy attorneys know that there is a moral consideration in filing bankruptcy. We know that many clients wrestle with the idea of whether it is morally right for them to file. Books are written about the bankruptcy filings of famous Americans through the years for the dual reasons of demonstrating that filing bankruptcy does not necessarily make you a bad person, and also to demonstrate the moral ambivalence that confronted these famous people when they filed bankruptcy.
You could consider the choice whether or not to file bankruptcy to simply be a “business decision.” Merely a weighing of the costs and benefits of filing and not filing. For many people, that is as far as it goes (and I do not have a problem with that). After all, corporations of all sizes file “strategic bankruptcies” all the time. Their very smart and well-informed managers decide that bankruptcy is the best way to reduce debt and streamline their operations, so that the business can survive and hopefully thrive into the future.
And who doesn’t want to survive and thrive?
But for you, it may not be that cut and dry. You consider yourself more than a business. More than a corporation. For you, the human costs and benefits have to be added into the equation.
For many people, the decision to file bankruptcy is more than a business decision. For many, that’s where morality comes into the decision. We humans are moral creatures. That means that our important choices include the moral assessment of the situation. If we don’t engage in the moral component of this choice, we may experience something akin to “buyer’s remorse”; that is, after the fact we look back and say to ourselves, “why did I do that”?
So what do you need to do to make a good moral decision?
First, accept the choices that you made—good and bad, sensible and short-sighted, intentional and forced—and review the circumstances that got you where you are now. Accept that you made a series of legal commitments to pay your debts, consider how much choice you had at the time about them, and in hindsight what you could have done differently, if anything. Analyse honestly why are you now not able to keep those commitments? Is it because you lost a job or because your spending habits, especially in the area of non-necessities, are out of control? By analyzing choices made, you are not only assessing whether to file bankruptcy, but you are putting yourself on the path not to repeat your mistakes.
Second, consider both the financial costs and benefits of bankruptcy versus the moral costs and benefits of continuing to try to meet those financial commitments. Yes, you can get my debts discharged. But, how will your family, friends, co-workers view you in the future.? Am you being an honest debtor or are you gaming the system? Or will it be viewed that you are gaming the system? Do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs while doing so? And if you do not have a realistic chance, how do you weigh the benefit of putting up a good fight against the costs that come from just delaying the inevitable?
Third, recognize that you now have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments. To just accept the status quo without facing the situation honestly and bravely is making a decision by default, which is likely neither your morally best nor practically wisest move. In other words, you should control your destiny rather than destiny controlling you.
Fourth, get advice so that you know your legal options. You cannot make decisions, whether business or mixed business and moral, without knowing the facts and the law. An experienced bankruptcy attorney not only knows the law, he or she knows what you are going through. More importantly, an experienced bankruptcy attorney can guide you to bankruptcy alternatives if that makes sense for you. You may have the best of all intentions, but with your hours at work cut back, lots of debts, and bill collectors badgering you at work and home, bankruptcy is probably your best and only realistic alternative. On the other hand, you may be a candidate for debt consolidation through a reputable non-profit debt counselor. Or you may have enough equity in your home to get a second mortgage and consolidate your debts. Finally, filing under Chapter 13, where you pay back a portion of your debt, may be economically feasible and fit into your notion of fairness and morality. One size does not fit all. An experienced bankruptcy attorney can put you in a position to make the right decision for you and your family.
Posted by Kevin on July 6, 2012 under Bankruptcy Blog |
Background:
- A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt.
- In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
- If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
- Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people.
- But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.
Cramdown:
- This tool applies only to Chapter 13—it can’t be done in Chapter 7.
- If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
- In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 10%, then you would pay only the $600 secured portion, the remaining unsecured portion would get $40 spread out over the term of the plan, and would be discharged (written off) at the end of your Chapter 13 case.
THE cramdown rule with collateral other than your home or vehicle:
- “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.
So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.
Posted by Kevin on June 29, 2012 under Bankruptcy Blog |
A previous blog focused on ways in which Chapter 7 and Chapter 13 bankruptcy each make it possible for you to keep your vehicle by keeping your vehicle lender satisfied. But to be very practical, today let’s hone in on one very common scenario: you’ve fallen behind on your vehicle loan, but need to keep that vehicle. What are your options?
Saved by the Automatic Stay
As you probably already feel in your gut, you’ve got to accept right away that you are in a very precarious situation. Vehicle loans are very dangerous because of how quickly the collateral—your car or truck—can be repossessed. Realistically, most repossessions do not happen until you’re about 2 months late. But that depends on your payment history, the overall aggressiveness of the creditor, and, frankly, how the repo manager happens to be feeling that day. If you’re not current, you’re in danger.
Once a repossession happens, that does not always mean that your vehicle is gone for good. But in many situations that IS the practical result. To get a vehicle back after a repo usually takes serious money. Money you don’t likely have hanging around if you’re behind on your car payments.
And once the repo happens, thing’s often just get worse—your vehicle is sold at an auction, and you often end up owing thousands of dollars for the “deficiency balance,” the difference between what the vehicle was auctioned off for and the amount you owed on the loan (plus repo and sale costs). Next thing you know, you’re being sued for those thousands of dollars.
All that is preventable, IF you file either a Chapter 7 or Chapter 13 bankruptcy BEFORE the repossession. The “automatic stay”— a legal injunction against repossession—goes into effect instantaneously upon the filing of bankruptcy. Even if the repo man is already looking for your vehicle to repo, once you file that gets you off his list. At least for the moment.
Dealing with Missed Payments under Chapter 7
As stated in the last blog, most vehicle lenders play a “take it or leave it” game if you file a Chapter 7 case. If you want to keep the vehicle, you must bring the loan current quickly—usually within about two months after filing. Unless your lender is one of the relatively few that are more flexible, you need to figure out if not paying your other creditors is going to free up enough cash to catch up on your missed payments within that short time. If not, the lender will have the right to repossess your vehicle if you are not current the minute the Chapter 7 case is completed, usually about 3 months after it is filed. In fact, you may have even less time if the lender asks the bankruptcy court for permission to repossess earlier.
Dealing with Missed Payments under Chapter 13
You have much more flexibility about missed payments under Chapter 13. In fact, you do not need to catch up on them at all.
There are two scenarios, alluded to in the last blog.
If your vehicle is worth at least as much as your loan balance OR if you entered into your vehicle loan two and a half years or less before filing the case, than you will have to pay the entire loan off within the 3-to-5-year Chapter 13 plan period. However, you can reduce interest payments to what is known as the Till rate. That is prime plus a factor for the risk involved in your situation. For all intents and purposes, while interest rates stay low, you should be able to reduce interest to 4.5-5%. Depending on the amount of the loan balance, that can mean a reduction in monthly payments.
If your vehicle is worth less than your loan balance AND you entered into your vehicle loan more than two and a half years before filing the case, then you can reduce the total amount to be paid down to the value of the vehicle. With this so-called “cramdown,” you still must pay that reduced amount within the life of the Chapter 13 plan. And you can reduce interest to the Till rate. Now, you may need to pay a portion of the remaining balance, primarily based on whether you have extra money in your budget to do so. But the savings in terms of both the monthly payments and the total amount to be paid are often huge.
Conclusion
Bankruptcy stops your vehicle from being repossessed, and gives you options for dealing with previously missed payments. Chapter 7 may work if you can pay off the entire arrearage fast enough. Otherwise you may need the extra help Chapter 13 provides. Or you might want to file Chapter 13 to take advantage of the “cramdown” option and reducing interest to the Till rate.
Posted by Kevin on June 27, 2012 under Bankruptcy Blog |
Under Chapter 7, you can pay your vehicle loan mostly by getting rid of all or most of your other debts. Under Chapter 13, you can pay your vehicle loan ahead of most of your other creditors.
Bankruptcy law is about balancing the rights of debtors and creditors. When you file bankruptcy you gain some leverage against most of your creditors. But exactly how much leverage depends on the kind of debt. With a vehicle loan, you get much less leverage than with some other types of debts because the lender has a right to its collateral–your car or truck. But if you want to keep your vehicle (and you need a vehicle in Northern New Jersey), you may be able to use the lender’s rights over your collateral to your advantage.
Let’s see how this works under Chapter 7 and then under Chapter 13.
Favoring your vehicle loan in a Chapter 7 “straight bankruptcy”
Between you and the vehicle lender, your leverage is that you have the right to simply surrender your vehicle to the creditor and pay nothing. The bankruptcy discharges (writes off) any remaining debt. Usually the lender does not get paid enough from selling the vehicle to cover the full balance on the debt.
This means that sometimes we can use the threat of surrender to improve the vehicle loan’s terms, maybe even reduce the balance to an amount closer to the current fair market value of the vehicle.
But unfortunately, many major vehicle lenders don’t see it that way. They made a decision at some point that they make more money by requiring all their Chapter 7 customers to pay the full balance on the vehicle loans, and then take losses on those who aren’t willing to do that and instead surrender their vehicles. But it may be worth a try.
Favoring your vehicle loan in a Chapter 13 “payment plan”
Between you and the vehicle lender, your leverage is both lesser and greater under Chapter 13 than under Chapter 7.
You have less leverage in threatening surrender if your Chapter 13 plan is paying anything to your unsecured creditors. That’s because the vehicle lender would recoup from you at least some of its losses upon surrender, instead of none.
And if your vehicle loan is two and a half years old or less, if you want to keep the vehicle you must pay the full balance of the loan, regardless of the value of the vehicle compared to the loan balance.
But you have more leverage in two ways. With any vehicle loan, including those two and a half years old or less, you do not have to cure any arrearage, and can change the monthly payment, as long as the balance is paid in full by the end of the case.
And if the loan is more than two and a half years old, you can do a “cramdown”—reduce the amount you pay to the fair market value of the vehicle, plus whatever percentage you’re paying to the pool of unsecured debt, if any.
Clearly, Chapter 13 gives the debtor more leverage, if not more options, when it comes to a vehicle.
Posted by Kevin on June 11, 2012 under Bankruptcy Blog |
Support is Not Dischargeable, If It’s Really Support
If you owe a debt “in the nature of” child or spousal support, that debt cannot be discharged (legally written-off) in either a Chapter 7 or Chapter 13 case.
The point of the “in the nature of” language is that an obligation could be called support in a divorce decree or court order, and yet not actually be “in the nature of” support for purposes of bankruptcy. Or, for that matter, the obligation may not be labelled as support in the decree or order, but could be found to be support. The bankruptcy court makes the call whether an obligation is “in the nature of” support, and it looks beyond the label given to a debt in the separation or divorce documents. Practically speaking, this often times leads to litigation within bankruptcy proceeding- either a motion or an adversary proceeding.
So what’s an example of a debt which is not really “in the nature” of support? Well, how about a personal loan provided to the two spouses during their marriage by one of the spouse’s parents. In the subsequent divorce, the divorce decree obligated the other spouse to repay that loan by paying making payments of “spousal support” until that loan was paid off. In that obligated spouse’s subsequent bankruptcy case, that obligation for so-called “spousal support” would likely be seen as one not “in the nature of” support. Instead the court could well see that obligation for what it really is: an obligation for one spouse to pay a marital debt, not one actually to pay spousal support.
Any Possible Benefit from Chapter 7?
No usually. The best thing that a “straight” Chapter 7 can do to help with your support obligations is to discharge your other debts so that you can better afford to pay your support.
Beyond that there is one other relatively rare situation that can help if you owe back support payments—an “asset” Chapter 7 case.
In most Chapter 7 cases, all of the assets that the debtors own are protected by exemptions, so the debtors keep all their assets. Nothing has to be given to the trustee. Since the “bankruptcy estate” contains nothing, it’s a “no asset” case.
But if all of your assets are not exempt, then the trustee takes possession of the non-exempt assets and sells them. From the proceeds of the sale, the first priority, after payment of trustee fees, are back support payments. They get paid, in full, before other creditors get paid (like credit cards). So if you owe back child or spousal support in an asset case, some or all of it could be paid this way.
Any Possible Benefit from Chapter 13?
Although a Chapter 13 case does not discharge support obligations any better than a Chapter 7 one, it still gives you a potentially huge advantage: Chapter 13 stops collection activity for back support obligations. Chapter 7 does not. This is significant because support collection can be extremely aggressive. In many states, the debtor can lose his or her driver’s license.
In addition to stopping the collection effort, Chapter 13 provides you a handy mechanism to pay off that back support, usually allowing you to pay that debt ahead of most or all other debts. That usually translate into lower payments to your other creditors; in effect allowing you to pay your back support on the backs of other creditors
Posted by Kevin on June 6, 2012 under Bankruptcy Blog |
“Presumption” that certain recent credit card purchases and cash advances will not be discharged in bankruptcy
Some types of debts get written-off (“discharged”) in bankruptcy. Others do not. Included in the list of those that might NOT be discharged are those “incurred through fraud or misrepresentation, including recent cash advances and ‘luxury’ purchases.” Today’s blog focuses on these types of debts. In fact, this blog just looks at one particular subcategory of these debts—those that the Bankruptcy Code says “are presumed to be nondischargeable.” What is this “presumption,” how does it work, and what should you do about it?
The Fraud/Misrepresentation Exception to Discharge
First of all, the idea behind this exception to discharge is that debtor who cheats the creditor to borrow the money or get the credit should not be able to discharge that debt in bankruptcy. That follows one of the most basic principles of bankruptcy, that is, the purpose of bankruptcy is to give a fresh start to an honest debtor.
The Point of a “Presumption”
Debts which potentially belong to this fraud/misrepresentation category of debts ARE discharged UNLESS the creditor formally objects to the discharge of the debt within a rather quick deadline, usually 60 days after your meeting with the bankruptcy trustee. That objection would be in the form of a lawsuit the creditor files at the bankruptcy court. In that lawsuit the creditor lays out the facts of fraud or misrepresentation that would justify the debt not being discharged. The creditor would then need to prove those facts with evidence. The debt is still discharged unless the creditor present evidence that leads the bankruptcy judge to decide that the debt was in fact obtained by the debtor’s fraud or misrepresentation.
A presumption in the bankruptcy law that a debt is not dischargeable simply makes it much easier for the creditor to prove that point. The creditor simply needs to establish that those circumstances apply to the challenged debt. Then that debt is “presumed” not to be discharged. And it will not be discharged unless the debtor can bring contrary evidence showing the lack of fraud or misrepresentation by him or her. In terms that may be familiar, a presumption “shifts the burden of proof” from the creditor to the debtor.
Why is this important? Litigation is expensive. Most cases are settled before going to trial because the amounts at issue are not worth the costs of battling it out in court. Congress has decided in two sets of circumstances to tip the advantage in favor of the creditors, by giving them the presumption of no discharge.
The “Luxury Goods or Services” Presumption
The first of these circumstances arises if a consumer incurs a debt of more than $500 in “luxury goods or services” in the 90 days before filing the bankruptcy. That debt is presumed not to be dischargeable, meaning that the creditor doesn’t need to bring evidence establishing that the debtor intended to cheat the creditor by not paying the debt. The thought behind this is that either the person making the purchase knew he or she was going to file bankruptcy and was not going to pay the debt, or else at least was quite reckless to be using creditor that close to filing bankruptcy.
So what are “luxury goods or services”? Broader than it sounds. They include anything except those “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” The court decides what fits that definition. It’s up to the debtor to persuade the court that the goods and/or services totaling more than $500 were “reasonably necessary,” or that the debt was incurred with the honest intention, at that time, of paying it.
The Cash Advances Presumption
The second of these circumstances arises if a consumer incurs a debt of more than $750 through a cash advance or advances made in the 70 days before filing the bankruptcy. In the same way as with the “luxury goods” presumption, the creditor does not need to bring evidence establishing that the debtor did not intend to pay the debt. And in the same way, the debtor can try to persuade the court that the cash advance was incurred with the intention of paying it.
Debts for Luxury Goods or Cash Advances Outside the Presumption Period
In these situations the presumption would not apply. So the creditor would have to show the court convincing evidence that you did not intend to pay the debt. Since that is often not easy to show, creditors are not as likely to challenge purchases and cash advances that were made before the presumption period.
Avoiding These Presumptions
Avoid these presumptions by not using any credit and making cash advances in the few months before filing bankruptcy. If you did makes such purchases before the expiration of the presumption periods, you can hold off on your filing until the presumption periods have ended. Allowable but not 100% foolproof. It just put a tougher burden on the creditor.
Posted by Kevin on June 1, 2012 under Bankruptcy Blog |
Sometimes choosing between Chapter 7 and 13 is easy, but other times it means carefully weighing lots of considerations. Whether the choice is easy or hard, one of those considerations is how these two options compare in their discharge (legal write-off) of your debts.
The good news in favor of Chapter 13 is that it discharges a couple more types of debts than Chapter 7 does. So in the right case this “super discharge” could be reason enough to choose Chapter 13.
The bad news is about timing—the discharge is not effective until the very end of a Chapter 13 case—usually 3 to 5 years after it is filed. That means you have to successfully complete the case to get a discharge of your debts. In other words, you need to make all payments under the plan before you get the discharge. The fact is that a significant percentage of Chapter 13 cases are not successfully completed. If the case is converted to Chapter 7, the debtor is still eligible for for less inclusive Chapter 7 discharge. If the Chapter 13 is dismissed, however, the debts are still owed. That’s a risk that needs to be seriously considered before filing a Chapter 13 case.
The Mini “Super Discharge”
In the past, one way that Congress encouraged debtors to file Chapter 13s is by allowing various kinds of debts to be discharged under Chapter 13 that could not be discharged under Chapter 7. Chapter 13 was said to provide a “super discharge.” But over the last quarter-century or so, Congress has whittled away at the list of debts treated more favorably under Chapter 13 until now only two noteworthy ones remain:
1. You can discharge non-support obligations owed to an ex-spouse in a Chapter 13 case (and not in a Chapter 7 one). These obligations usually include those in a divorce decree requiring you to pay off a joint marital debt or to pay the ex-spouse to compensate for you receiving more than your share of the marital property. They are often called the “property settlement” part of your divorce.
2. An obligation arising from a “willful and malicious” injury that you are accused of causing to a person or to property can be discharged in Chapter 13. This refers to allegations that you hurt somebody or their property not merely through your negligence—which would be discharged in Chapter 7—but instead either intentionally or recklessly—the discharge of which could be challenged in a Chapter 7 case.
These are both very delicate areas. What’s a “property settlement” type of divorce obligation instead of a support obligation, and what’s a “willful and malicious” injury instead just of a negligent one—these are often not straightforward distinctions. The decision to use Chapter 13 to undo part of a divorce decree or to escape accusations of “willful and malicious” injury can have a variety of considerations. Moreover, if substantial amounts of money are involved, it is likely that the ex-spouse or victim of injury will file an action within the bankruptcy to challenge the discharge. This will add to the expense and complexity of the case.
As a practical matter, a prospective debtor and his or her attorney must carefully analyze the debtor’s situation to determine not only whether the debtor can make the payments under a Chapter 13 plan but whether the benefits of Chapter 13 outweigh the potential pitfalls.
r
Posted by Kevin on May 12, 2012 under Bankruptcy Blog |
According to a report issued by the Administrative Office of the US Courts, bankruptcy filings were down 11.5 percent in 2011. Yippee, the economy must be getting better! Not so fast.
As I have stated more than once on this blog, one of the purposes of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as BAPCPA, was to get more debtors to file under Chapter 13 so that creditors could get some payments as opposed to a no asset Chapter 7 where there are no payments to creditors.
The stark reality is that under BAPCPA attorneys have to do significantly more work in a consumer Chapter 7 or in a Chapter 13. Moreover, the attorney has to have a more complete understanding of the the statute and case law, because the reality is that there are fewer and fewer “easy cases”. More attorney time means higher legal fees. More complexity means higher legal fees. In fact, under the old law, the average legal fee for Chapter 7 in NJ was about $800-1200. Now, it is $1500-2200. A run of the mill Chapter 13 ran $1500-1800. Now, the basic fee is $3500 usually with court approved add on fees of a few hundred.
Moreover, irrespective of whether the debtor files under Chapter 7 or 13, BAPCPA requires more papers to produced by the debtor (which takes time), useless counseling sessions which run about $100-150, credit reports and judgment searches so that the debtor’s attorney can prove to the trustee that he/she engaged in due diligence ($100), comparative market analysis and the like.
So my take is that the main reason that filings are down is because BAPCPA has made the process unnecessarily complex and expensive. But that was just my take. Recently, however, Professor Lois Lupica of the University of Maine School of Law conducted a study of some 11,000 consumer cases under BAPCPA and confirmed what most bankruptcy lawyers in NJ know- the process under BAPCPA is expensive. Prof Lupica found out of pocket costs in no asset Chapter 7’s are up over 50%, and what she termed Total Direct Access Costs (attorney fees, filing fees, credit counseling fees and the like) are up 37% in Chapter 7 and 24% in Chapter 13’s. Finally, Lupica found that lawyers are put under increased stress because of the complexity of the law, and the perceived need to keep expenses down for the debtor.
So, is the economy getting better or has Congress made bankruptcy an alternative that is too expensive for many otherwise qualified debtors?
Posted by Kevin on March 14, 2012 under Bankruptcy Blog |
Bankruptcy gives the honest debtor a fresh start. We hear that often. Bankruptcy courts are courts of equity. Hear that too. We also hear words like “good faith”, “fairness”, and “substance over form”. These are not just empty platitudes but heart felt beliefs held by the court, trustees and a vast majority of practitioners.
The Code allows debtors to discharge most of their debts. That means that they go away. Chapter 13, which requires monthly payments over a period of 36 to 60 months, provides not only a discharge if all payments are made under a plan that was approved by the court, but also allows the debtor to adjust the obligations to certain secured creditors. A secured creditor is a creditor that has collateral. Like GMAC lends you money to buy a car and takes the car as collateral.
Now, in Chapter 13, you can adjust the interest rate on your car loan. So, if your loan is for 14%, you may, subject to court approval, reduce it to, say, 4%. The creditor can object to that treatment. Then, the court decides what is fair, what is good faith.
In a recent case in South Florida, a Chapter 13 debtor went too far. He bought a 2007 Suzuki and financed it at 19.95% interest. Less than 90 days later, he filed Chapter 13. In his plan, the debtor proposed to pay 5.25% interest. The debtor testified at the confirmation hearing and was cross-examined by the finance company’s lawyer. Debtor admitted that he conferred with and retained bankruptcy counsel just before he bought the car. Of course, he did not tell the car dealer that he was going to file. The court found that the debtor “pulled a fast one”, and bought the car knowing that he would knock down the interest rate in his plan. The court stated that good faith focuses on whether the filing is fundamentally fair to the creditors. Debtor was not fair. The Court found that the debtor must pay the contract rate of 19.95%. if he wanted the plan confirmed.
So play it straight.
Posted by Kevin on February 22, 2012 under Bankruptcy Blog |
I have spoken with a number of people who are in a tough economic situation because of the ongoing recession. The economy soured in 2008. They were laid off in 2009, and have been on unemployment since then. In the meanwhile, they have accumulated debt and fear legal action. Or have had judgments entered against them. Normally, the simple answer is that such a person would be a candidate for bankruptcy. But, there is an added wrinkle. The person filed Chapter 7 before and received a discharge. Can that person file bankruptcy again?
The law is that a person can file a Chapter 7 and receive a discharge but only if the second filing is 8 years after the first filing. How do you measure the 8 years? Say you filed Chapter 7 on August 1, 2004 and were discharged on January 15, 2005. When can you file Chapter 7 again and get a discharge? The answer is August 2, 2012. We measure the 8 years from filing date to filing date.
What if you accumulated new debt shortly after your first discharge or you fell behind on your mortgage.? Creditors are not going to wait 8 years. Well, you can file a Chapter 13 and obtain a discharge of debts if the Chapter 13 filing is 4 years after the Chapter 7 filing. Once again, the 4 years is measured from filing date to filing date.
These are the basic rules. In future blogs, we will explore situations where it may be advantageous to file a Chapter 13 within 4 years of filing a Chapter 7.
Posted by Kevin on February 13, 2012 under Bankruptcy Blog |
The New Bankruptcy Law (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) was adopted by Congress after a decade of lobbying by banks and the credit card industry. These groups argued that the Bankruptcy Code of 1978 allowed debtors who could afford to pay some of their debt off the hook by making Chapter 7 too available. They wanted more debtors to be required to file under Chapter 13 where they would have to make monthly payments for 36-60 months.
My position, which has been set forth in this blog and in an ezine article, is that the law is a failure, that Chapter 13 filings are down, and that the cost of bankruptcy has practically doubled. All you have to do is look at the yearly statistics compiled by the bankruptcy clerk in NJ. You will see that initially Chapter 13 filings were up, but now, the ratio of Chapter 13 to Chapter 7 filings is about the same as when BAPCPA was enacted. Costs are up because BAPCPA makes the lawyers do significantly more work, requires the debtor to take two dubious courses, and requires the debtor to pay for additional searches and credit reports to demonstrate due diligence.
Well, a recent study bears out my conclusions. A study conducted on over 11,000 bankruptcy cases from 90 judicial districts on cases filed from 2003 to 2009 indicated that costs had increased and distributions in Chapter 13 cases had gone down. Now, 11,000 cases is just a drop in the bucket since about 1,000,000 cases are being filed annually. But, it is a decent sample and goes beyond what is referred to as “anecdotal reporting”. The other thing the study found was that even though fees had increased, the lawyers doing Chapter 7’s and 13’s are being squeezed on fees by the courts and, at the same time, required to do more work. This is leading to more mistakes and more stress to both attorneys and their clients.
What does this all mean to a Bergen County resident who is considering filing bankruptcy. Well, on a philosophical level, it demonstrates that new may not mean better. Second, it should be an indication to the consumer that the process is not going to be particularly quick or cheap. Third, if you are content with getting it done on the cheap, beware, sometimes you do get what you pay for.
Posted by Kevin on January 29, 2012 under Bankruptcy Blog |
One on the advantages of Chapter 13 is that you can extend payments on long term debt. Section 1322 (b)(2) allows a debtor to modify the rights of holders of secured claims (collateralized claims) other than claims secured only by a security interest in the debtor’s principal residence. Section 1322 (b) (5) allows the debtor to cure defaults and make periodic payments during plan on debts where the last payment on the debt is due after the last payment under a plan.
Read more of this article »
Posted by Kevin on September 4, 2011 under Bankruptcy Blog |
Now, this is a little advanced. You open your mail in Hackensack and have been hit with a Notice of Federal Tax Lien. Not good because it applies to all your property and, more importantly, the collection agent is the IRS. The one thing that you do not want is for the IRS to start levying on your property to satisfy the lien. That will ruin your day or year, for that matter.
Read more of this article »
