Posted by Kevin on July 22, 2013 under Bankruptcy Blog | 
Filing bankruptcy can buy you a little time or a lot of time, enough time either to transition to a new home or else to save your present home.
The same bankruptcy power that stops a lawsuit or garnishment of your wages or bank account, also stops a home foreclosure. The practical question is: what happens to your home after the foreclosure is stopped?
Chapter 7: the Option that Buys You a Little Time
A Chapter 7 “straight bankruptcy,” is by far the most common type. It gives you protection against foreclosure for three months or so, or potentially for even less time if the mortgage lender is aggressive.
With such a short period of protection, a Chapter 7 would help you in two quite different situations:
1. if you have decided to surrender your home but need just a few weeks to move; or
2. if you want to keep the home, and can afford to catch up on the late payments within about a year of extra payments.
Filing a Chapter 7 is like hitting a pause button. If you’re letting your house go, it lets you catch your breath before you have to leave. If you’re hanging on to the house, a Chapter 7 gives us time to do a deal with the mortgage lender.
Chapter 13: the Option that Can Buy You Years of Time
Filing under Chapter 13 can potentially give you five years to pay off your back payments, and does so in a more flexible and powerful package.
Instead of negotiating with the mortgage lender and hoping that it will give you terms that you can live with, Chapter 13 generally gives you a set of rules to follow for catching up with that lender. It also gives you time to catch up on any back property taxes, can often get rid of a second mortgage or a judgment lien, and usually provides a practical way of dealing with other liens on your home, such as an income tax or child support lien.
A Chapter 13 case is flexible, so that if you have changes in your circumstances during your case your plan can be adjusted to account for the changes. That makes holding on to your real estate more feasible. It also means you can change your mind and decide to surrender it, months or even years after your case was filed.
The mortgage lender can always ask the bankruptcy court for permission to begin or restart a foreclosure. These kinds of creditors tend to do so either at the beginning of your case if they don’t like the Chapter 13 payment plan that you and your attorney are proposing, or later in the case if you’ve not made the payments that you said in your plan that you would make. The court balances your rights against those of the lender in deciding whether to give you the extra time you need.
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.
_________________________
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 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 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 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 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 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.
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 |
The point of filing bankruptcy is to get relief from your debts. So, under what conditions DO those debts get “discharged”—legally written off—in a regular Chapter 7 bankruptcy?
Here’s what you need to know:
1. You WILL receive a discharge of your debts, as long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” (“shall”is a catch word among lawyers which means the court must do it ) except in relatively unusual circumstances:
- If you’re not an individual! Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
- If you’ve received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
- you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
- you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
- If you hide or destroy assets, conceal or destroy records about your financial condition (This does not mean that you cannot find a bank statement from 2 years back. It means that you are playing games and not turning over things)
- If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.
2. ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:
- most but not all taxes
- debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
- debts which were not listed on the bankruptcy schedules on time
- money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
- child and spousal support
- claims against you for intentional injury to another person or property
- most but not all student loans
- claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)
3. A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction against the creditor from taking any action—through a court procedure or on its own–to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.
Posted by Kevin on 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 4, 2012 under Bankruptcy Blog |
Most of the time your attorney will know which debts will be legally written off in your bankruptcy. But not always, for two reasons.
A couple of blogs ago I made the point that the discharge order entered on your behalf by the bankruptcy judge will write off all of your debts, EXCEPT for those types of debts which are on a list in Section 523 of the Bankruptcy Code. The most common ones on the list include:
a. most but not all taxes
b. debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
c. debts which were not listed on the bankruptcy schedules on time in a case involving assets to be distributed to creditors
d. money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
e. child and spousal support
f. claims against you for intentional injury to another person or property
g. most but not all student loans
h. claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)
These different types of debts each deserve a closer look, which I will do in upcoming blogs. But let’s go back to the question in today’s title. Most of the time your attorney can reliably tell you whether a particular debt will be discharged in your bankruptcy case. But sometimes he or she will not know because:
1. With some types of debts—the ones described in items b, d, and f of the list above—the debt is discharged unless that creditor raises an objection by a specific deadline (which is usually 60 days after your meeting with the trustee). So the best your attorney can do is point out to you that you may have a problem. He or she sometimes may know that reputation of a given creditor to object under similar facts- a rough risk assessment. But whether the risk is high or low, with these types of debts neither your attorney nor you will know for sure whether that debt will be discharged until either the creditor objects or the deadline for objection passes without objection.
2. With the other types of debts—the ones described in items a, c, e, g, and h of the list above—at the beginning of the case sometimes either the facts are not sufficiently clear or how the law should be applied to the facts is not clear, or both. You might think that the attorney should get all the necessary facts before filing the case. But sometimes the facts are simply not available, the additional work to get them is not worth the cost, or there is no time to do so because of the need to file the case quickly. Add in the consideration that the bankruptcy statutes often use broad language that can be and is in fact interpreted differently by different judges. As a result, in these situations there is simply no absolute way to know at the start of the case whether a particular debt will be discharged.
Take as an example one of the types of debt listed—a claim against you for fraud or misrepresentation. Since intent of the debtor and reliance by the creditor are issues that the court must consider, it is not clear cut whether a claim of fraud can stand up. For example, if you fudge your income on a loan application, but the lender based the loan on the value of the collateral instead of your income, then the lender did not rely on your stated income. No reliance, no fraud; therefore, the obligation is dischargeable. But your attorney will not know this until discovery is conducted (and that’s only if the lender rep tells the truth.) So you can see that in these “gray areas” your attorney may well not be able to tell you in advance whether that particular debt will be discharged.
When you are consulting with an attorney about a bankruptcy filing, it is important to give that attorney all pertinent facts about your debts. Moreover, you should ask your attorney whether any of your debts may not be discharged.
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 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.
