Posted by Kevin on October 15, 2017 under Bankruptcy Blog | 
The Bankruptcy Code is divided into chapters. Chapters 1, 3, and 5 deal with basic concepts that apply to all the various types of bankruptcies. Chapter 7 deals with liquidations for individuals or businesses. Chapter 9 deals with municipalities. Chapter 11 deals with reorganizations and/or planned liquidations of mainly businesses. Chapter 12 deals with family farms (do not get many of them in northern New Jersey). Chapter 13 deals with repayment plans for individuals. For the average consumer, Chapter 7 and Chapter 13 are the two alternatives methods of filing bankruptcy. For individuals, the object of any bankruptcy is to get a discharge of your debts. In other words, wiped out.
Let’s look at Chapter 7. This is sometimes called a straight bankruptcy or a liquidation. Chapter 7 is basically an asset driven analysis. You do not make payments, but a trustee can sell your non-exempt property, and pay out your creditors. The repayment scheme is set out in the Bankruptcy Code. Upon the conclusion, many of your debts are discharged. Certain enumerated debts are not wiped out such as domestic support obligations, debts incurred by fraud, certain taxes and most student loans.
After the Bankruptcy Code went into effect, creditor groups complained for the next 25 years that it was too easy for debtors to file under Chapter 7, which in a vast majority of cases, translated into no payments to creditors. Creditors wanted more debtors to file under Chapter 13 where monthly payments must be made to a trustee and certain creditors need be paid in full. The 2005 revisions to the Bankruptcy Code considers a debtor’s income in whether he or she can file under Chapter 7. If the debtor’s income is below the median income for the State based on family size, it is presumed that the debtor can file under Chapter 7. If the income is above median, a debtor has to pass the “means test” to qualify for Chapter 7. The means test looks at the debtor’s income for the 6 months prior to filing to arrive arrive at what is called current monthly income. It then subtracts categories of expenses- some based on national or regional averages, and others based on actually cost. If the net income is above a certain amount, the debtor cannot file under Chapter 7.
Assuming that you qualify for Chapter 7, the next issue is what property is exempt. In New Jersey, we can use either the exemptions set forth in the Bankruptcy Code or the exemptions listed in New Jersey statutes. The New Jersey statutes are mostly about 100 years old and have not been adjusted for inflation, so we almost always use the federal exemptions.
You file a Chapter 7 by filing with the Bankruptcy Clerk a Petition, Schedules of assets, liabilities, income and expenses, and various ancillary documents (over 40 pages). A trustee is appointed to oversee the case. If the exemptions cover the value of all of your assets, the case is called a no-asset case. That means no assets go to the Trustee-you get to keep them subject to any security interests (mortgages and the like).
About 4 weeks after filing, the debtor (and legal counsel) appear before the trustee. The debtor is required to answer questions from the trustee and any creditors. Creditors rarely appear at this hearing. If the trustee believes that your filing is in order and no further action is necessary, a discharge order will be issued within about 6 weeks. The whole process takes about 4 months. You cannot file another Chapter 7 and obtain a discharge for 8 years from filing date of the first Chapter 7.
Clearly, Chapter 7 is a bit more complex, but as the title states, these are Chapter 7 basics.
Posted by Kevin on June 15, 2017 under Bankruptcy Blog |
Bankruptcy is about Discharge
The point of bankruptcy is to get you a fresh financial start through the legal discharge of your debts.
Both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts”—can discharge debts.
This blog post focuses on Chapter 7 discharge of debts.
What Debts Get Discharged?
Is there a simple way of knowing what debts will and will not be discharged in a Chapter 7 case?
Yes and no.
We CAN give you a list of the categories of debts that can’t, or might not, be discharged (see below). But some of those categories are not always clear which situations they include and which they don’t. Sometimes whether a debt is discharged or not depends on whether the creditor challenges the discharge of the debt, on how hard it fights for this, and then on how a judge might rule.
Why Can’t It Be Simpler?
Laws in general are often not straightforward, both because life can get complicated and because laws are usually compromises between competing interests. Bankruptcy laws, and those about which debts can be discharged, are the result of a constant political tug of war between creditors and debtors. There have been lots of compromises, which has resulted in a bunch of hair-splitting laws.
Rules of Thumb
Here are the basics:
#1: All debts are discharged, EXCEPT those that fit within a specified exception.
#2: There are quite a few of exceptions, and they may sound like they exclude many kinds of debts from being discharged. It may also seem like it’s hard to know if you will be able to discharge all your debts. But it’s almost always much easier than all that. As long as you are thorough and candid with your attorney, he or she will almost always be able to tell you whether you have any debts that will not, or may not, be discharged. Most of the time there are no surprises.
#3: Some types of debts are never discharged. Examples are child or spousal support, criminal fines and fees, and withholding taxes.
#4: Some other types of debts are never discharged, but only if the debt at issue fits certain conditions. An example is income tax, with the discharge of a particular tax debt depending on conditions like how long ago those taxes were due and when its tax return was received by the taxing authority.
#5: Some debts are discharged, unless timely challenged by the creditor, followed by a judge’s ruling that the debt met certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.
#6: A few debts can’t be discharged in Chapter 7, BUT can be in Chapter 13. An example is an obligation arising out of a divorce other than support (which can never be discharged).
The Bottom Line
#1: For most people the debts they want to discharge WILL be discharged. #2: An experienced bankruptcy attorney will usually be able to predict whether all of your debts will be discharged. #3: If you have debts that can’t be discharged, Chapter 13 is often a decent way to keep those under control.
Posted by on March 30, 2017 under Bankruptcy Blog |
If you owe recent income taxes, or multiple years of taxes, Chapter 13 can provide huge advantages over Chapter 7, and over other options.
The Example
Consider a husband and wife with the following scenario:
- Husband lost his job in 2008, so he started a business, which, after a few promising years in which it generated some income, failed in late 2012.
- The wife was consistently employed throughout this time, with pay raises only enough to keep up with inflation.
- They did not have the money to pay the quarterly estimated taxes while husband’s business was in operation, and also could not pay the amount due when they filed their joint tax returns for 2008, 2009, 2010, 2011 and 2012. To simplify the facts, for each of those five years they owe the IRS $4,000 in taxes, $750 in penalties, and $250 in interest. So their total IRS debt for those years is $25,000—including $20,000 in the tax itself, $3,750 in penalties, and $1,250 in interest.
- Husband found a reliable job six months ago, although earning 20% less than he did at the one he lost before he started his business.
- They filed every one of their joint tax returns in mid-April when they were due, and have been making modest payments on their tax balance when they have been able to.
- They have no debts with collateral—no mortgage, no vehicle loans.
- They owe $35,000 in medical bills and credit cards.
- They can currently afford to pay about $500 a month to all of their creditors, which is not nearly enough to pay their regular creditors, and that’s before paying a dime to the IRS.
- They are in big financial trouble.
Without Any Kind of Bankruptcy
- If they tried to enter into an installment payment plan with the IRS, they would be required to pay the entire tax obligation, with interest and penalties continuing to accrue until all was paid in full.
- The IRS monthly payment amount would be imposed likely without regard to the other debts they owe.
- If the couple failed to make their payments, the IRS would try to collect through garnishments and tax liens.
- Depending how long paying all these taxes would take, the couple could easily end up paying $30,000 to $35,000 with the additional interest and penalties.
- This would be in addition to their $35,000 medical and credit card debts, which could easily increase to $45,000 or more when debts went to collections or lawsuits.
- So the couple would eventually end up being forced to pay at least $75,000 to their creditors.
Under Chapter 13
- The 2008 and 2009 taxes, interest and penalties would very likely be paid nothing and discharged at the end of the case. Same with the penalties for 2010, 2011, and 2012. That covers $11,500 of the $25,000 present tax debt.
- The remaining $13,500 of taxes and interest for 2010, 2011, and 2012 would have to be paid as a “priority” debt, although without any additional interest or penalties once the Chapter 13 case is filed.
- Assuming that their income qualified them for a three-year Chapter 13 plan, this couple would likely be allowed to pay about $500 per month for 36 months, or about $18,000, even though they owe many times that to all their creditors.
- This would be enough to pay the $13,500 “priority” portion of the taxes and interest, plus the “administrative expenses” (the Chapter 13 trustee fees and your attorney fees).
- Then after three years of payments, they’d be completely done. The “priority” portion of the IRS debt would have been paid in full, but the older IRS debt and all the penalties would be discharged (written off), likely without being paid anything. So would the credit card and medical debts.
After the three years, under Chapter 13 the couple would have paid a total of around $18,000, instead of eventually paying at least $75,000 without the Chapter 13 case. They’d be done—debt-free—instead of just barely starting to pay their mountain of debt. And they would have not spent the last three years worrying about IRS garnishments and tax liens, lawsuits and harassing phone calls, and the constant lack of money for necessary living expenses.
The next blog post will follow up on this theme.
Posted by Kevin on October 17, 2016 under Bankruptcy Blog |
Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.
Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.
But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.
If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.
What are the type of non-exempt assets that would fit into this scenario? It’s not going to be your home. (That is why we have Chapter 13) But, say you recently closed down a business. You may still own some of the business assets, but you have no use for them. Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep. And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.
Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule. Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.
But, what types of debts have priority over taxes? The most important are the trustee commission and his/her professional fees. This could amount to a few dollars. Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.
So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.
Again, it’s not common that the “stars will line up”. But when it does, it can be a big plus. Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.
Posted by Kevin on March 27, 2016 under Bankruptcy Blog |
The policy behind bankruptcy is to give an honest debtor a fresh start. The fresh start begins with the filing of the bankruptcy petition. By just filing, almost all attempts at collection of a debt are stopped by the automatic stay. The fresh start is completed when the debtor receives a discharge. A discharge means that the debt is cancelled, wiped out.
Not all debts are discharged, however. And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery. For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt. Say, you borrower $500,000 from the bank. You sign a note which is a promise to pay back the $500,000 with interest. That is the debt. And you sign a mortgage which is the collateral for the debt. The mortgage says that if you do not pay back the $500,000, the bank can take your house. The bankruptcy discharge knocks out the note, the debt, but not the mortgage. So, the lender can foreclose on the house and get what it is owed from the house. What if the house is only worth $300,000? Then, that is what the bank gets. The bank cannot come after you for the deficiency because the debt is discharged.
What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.
The Bankruptcy Code, however, does not discharge all debts. Some are dischargeable sometimes. Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship. The burden is on the debtor to prove undue hardship which is not easy in New Jersey. Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge. The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.
Payroll and sales taxes are not dischargeable (called trust fund taxes). Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.
So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.
Posted by Kevin on March 24, 2015 under Bankruptcy Blog |
You can file a new bankruptcy immediately after finishing another one, but why would you?
The last blog was about how long you have to wait to file a new bankruptcy case if you already filed one in the past. Those timing rules talk about both the earlier case and the subsequent case resulting in the discharge of your debts. As the last blog emphasized, if the earlier case did not result in a discharge, then you can file a second case at any time. The waiting periods do not apply.
Similarly, even after successfully completing one bankruptcy case and getting a discharge of your debts, you could file a second one at any time. You just would not be getting another discharge of your debts.
At first glance, this situation doesn’t seem to make practical sense.
Why Would You Ever Even Need a New Bankruptcy?
There are two reasons for a quick second bankruptcy.
First: you could unexpectedly incur one or more significant new debts during your bankruptcy case. Those debts could not be incorporated into that initial bankruptcy case because only debts in existence at the time of its filing can be. And you may need protection from those new debts. Since Chapter 7 cases usually last only about 3 to 4 months while Chapter 13 cases last 3 to 5 years, these interim debts are more likely to arise during the course of a Chapter 13 case. These would usually not be conventional consumer debts, because you would not likely be getting consumer credit while you’re in the middle of a bankruptcy case. Instead the new debts would tend to be unusual kinds like income taxes, perhaps student loans, obligations from a new divorce, and/or a claim against you from a vehicle accident or some other kind of liability.
Second reason for the second bankruptcy: the existence of debts that the earlier case did not write off. A Chapter 7 case could well leave still owing some income tax debt, child support arrearage, and/or student loans, for example. In some circumstances you may need the extended protection of a Chapter 13 case while you either pay or strategically avoid paying those debts, depending on which kind they are.
But What Good Is the Second Bankruptcy Without a Discharge?
Although a discharge of debts would seem to be the primary benefit of bankruptcy, it is by no means the only benefit. Instead, the “automatic stay,” protection from the collection efforts of your creditors, is sometimes benefit enough.
That’s primarily true under Chapter 13. First, the protection often extends for years instead of just the few months that it does under Chapter 7. And second, Chapter 13 provides a mechanism—the court-approved payment plan—to satisfy many of these kinds of new or non-discharged debts while under that protection.
For example, imagine that you owe a large income tax debt, plus some back child support, which were either incurred after the filing of your original bankruptcy case or were not discharged in that case. A new Chapter 13 case would essentially give you up to five years to pay those debts, usually without paying any further interest or penalties on the taxes, all the while being protected from the otherwise very aggressive collection methods of those two kinds of creditors.
But Why Not Just File a Chapter 13 Case and Avoid Filing Two Cases?
That’s a very sensible question, and usually that’s exactly what is done. Chapter 13 is quite flexible, and so a single Chapter 13 filing can usually both take care of all of your debts—the conventional one and the unusual ones like taxes and support—in one package.
But there are a variety of situations in which a single filing would not work. Sometimes you have more debt than is allowed for Chapter 13. So you first need to discharge some of the debt through Chapter 7, thereby enabling you to use Chapter 13 to take care of the taxes and such.
Or you may be contemplating or be in a divorce in which you and your spouse agree to file a Chapter 7 case together to clean up many of your debts, then leaving one of you to file the follow-up Chapter 13 case for the taxes, to cure the arrearage on a home, and any other loose ends.
Or as mentioned above, unexpected new debt could hit you during your first case, making you consider a follow-up case to buy you some continued protection.
This discussion should make very obvious that this kind of strategic planning and execution of not just one bankruptcy but two coordinated ones requires the services of a highly qualified and experienced bankruptcy attorney.
Posted by Kevin on October 1, 2013 under Bankruptcy Blog |
“Straight” Chapter 7 bankruptcy can give some relief for dealing with your back and current taxes, but Chapter 13 can help so much more.
The last blog showed how Chapter 7 can help you with your income tax debt, mostly indirectly, by writing off your other debts so you can financially concentrate on getting the IRS happy. It may also help by discharging (writing off forever) some tax debts, but only if at least three years have passed since that tax’s returns were due, AND you meet some other conditions. But if you owe a lot, and especially if you owe a number of years of taxes, Chapter 7 will often not be enough. So what more is it that Chapter 13 can do?
Chapter 13 and Income Taxes
There are many situations in which you ought to look closely at the Chapter 13 option. Focusing on income taxes, the rule of thumb about when to do so is pretty simple:
File a Chapter 13 case if Chapter 7 does not gain you enough cash flow to allow you to get caught up on your back and current taxes through manageable monthly payments, made over a reasonable period of time. In other words, file a Chapter 13 if you need the extra protection provided by Chapter 13.
What extra protection? In a Chapter 7 case you are NOT protected from the IRS beginning about three months after that case is filed-when the discharge is entered and the “automatic stay” terminates. So that means you’re arranging and then making the catch-up tax payments without any protection from the IRS’ collection procedures. That’s generally not a problem if 1) you deal with the situation very proactively, 2) the payment amount that you can comfortably handle is acceptable to the IRS, 3) it’s an amount you can pay it consistently, and 4) you do pay it perfectly until you pay it off.
In contrast, under Chapter 13 your protection from the IRS’ collection efforts continues throughout the whole 3-to-5-year length of the case. That’s protection you’ll need if you can only afford payment smaller than what the IRS wants, and/or you need more flexibly than the IRS would allow.
Under Chapter 13 you are generally allowed to pay other even more important creditors ahead of the IRS—such as mortgage arrearage, vehicle payments, and back child support. Plus you will generally not pay additional penalties and interest on the taxes, and may not have to pay all or most of the previous penalties. If the IRS has recorded a tax lien, you will have the opportunity to pay off that lien without the IRS being able to enforce that lien, resulting in the lien being released at the completion of your case.
Chapter 13 often allows you to adjust your monthly plan payments in advance based on anticipated seasonal adjustments in your income and expenses, and change those payments mid-stream as your circumstances change. You do need to deal responsibly throughout the process, or else you will lose your protection from the IRS and from your other creditors. And if you are not in fact able to do what your plan states and what the Chapter 13 rules require, so that you don’t finish your Chapter 13 case successfully, you will not get a discharge of ANY of your debts. But if your plan was put together sensibly and you follow it carefully, you should end your Chapter 13 case being current on all your past and present taxes.
Posted by Kevin on September 28, 2013 under Bankruptcy Blog |
If you were already on the financial edge and just found out you owe a bunch of income taxes, here is how bankruptcy can help.
If you owed nobody but the IRS for last year’s income taxes, you wouldn’t likely need to think about filing any kind of bankruptcy. In many circumstances, the IRS is actually reasonably decent to work with, such as in setting up a monthly payment plan for catching up on a single year’s tax shortfall. Sure, you’ll pay some penalties and interest, but if you can pay it all off in reasonable monthly payments in the next year or so, that wouldn’t be such a bad thing.
But if you owe for more than one year, or are just filing for the 2012 tax year on extension, and still owe for 2013, then it looks like you’re getting into a vicious cycle. And if on top of that, you have a whole bunch of other debts, you owe it to yourself to check out Chapter 7 and Chapter 13 as possible ways out of that vicious cycle. Today we’ll briefly explore how Chapter 7 helps, and then how Chapter 13 does in the next blog.
Chapter 7 and Income Taxes
You may well have other reasons for choosing to file a Chapter 7 instead of a Chapter 13, but the rule of thumb as far as taxes is pretty simple, especially if the only taxes you owe are from the last year or two:
File a Chapter 7 case if after doing so you will be able to get caught up on your back and current taxes through manageable monthly payments made over a reasonable period of time. In other words, file a Chapter 7 if you don’t need the extra protection and benefits provided by Chapter 13.
Both Chapter 7 and 13 can legally write off (“discharge”) income taxes, but can never do so until at least three years from the time the tax returns for those years were due to be filed (including extensions, if any). So as of now you could discharge 2008 income taxes, and 2009 taxes that were filed on April 15. but not later ones. That’s because 2008 taxes were due either April 15, 2009 or October 15, 2009 depending on whether you got an extension, and you could discharge a 2008 tax debt starting three years later, after April 15, 2012 or after October 15, 2012. You could discharge the 2009 tax debt if you filed on April 15, 2010. If you filed your tax return on October 15, 2010, you could not discharge the tax obligation if you filed Chapter 7 today (but you may be able to discharge if you held off your bankrutpcy filing to after October 15, 2013). You’d have to meet some additional conditions as well, but this three-year condition is a good starting point.
So unless you currently owe income taxes going back further than 2009, Chapter 7 is not going to discharge any of them. That does not mean that Chapter 7 is without benefit, though. The benefit it will give you is discharging all or most of your other debts. So the analysis we will go through with you when you meet with us involves two questions:
1) How much will filing Chapter 7 improve your monthly cash flow? In other words, how much will you be able to pay to the IRS realistically on a monthly basis, both to catch up on the back taxes and to make any necessary adjustments to the current withholdings or estimated quarterly payments?
2) How much do you owe in back taxes? Will the amount that you can realistically afford to pay each month enable you to get current in a reasonable time (so you’re doing so within the length of time the IRS will allow, and without incurring a crippling amount in additional penalties and interest)?
Unless we confidently believe that Chapter 7 will solve your tax problem, we’ll look at whether Chapter 13 would do better. It’s wise to consider Chapter 13 regardless, so you’ll know the advantages and disadvantages of both options. See the next blog for that.
Posted by Kevin on September 12, 2013 under Bankruptcy Blog |
If you owe income taxes, and are at the point that the IRS is about to seize your assets, you need to consider bankruptcy. It can help in surprising ways.
Here are FIFTEEN ways that filing either a straight Chapter 7 bankruptcy or a Chapter 13 payment plan could relieve a major income tax headache. And even this long list is only a partial one!
1. Both Chapter 7 and 13 stop the IRS’ collection activities against you, including levies on your paycheck, bank account, and vehicles, and tax liens on your home and other real estate.
2. Both Chapter 7 and 13 can completely discharge (legally write off) some income taxes.
3. A Chapter 7 case would likely discharge all or most of your non-tax debts, more likely giving you the financial means to enter into a manageable installment payment plan afterwards with the IRS, to pay off whichever taxes not discharged in that bankruptcy case.
4. If you have an “asset” Chapter 7 case—the relatively unusual kind in which the bankruptcy trustee claims one or more of your assets to sell and distribute to creditors—non-dischargeable tax debts will generally be paid in that distribution ahead of other dischargeable debts, either paying off or at least paying down those tax debts.
5. Even if you cannot discharge a tax debt right now, you will likely be able to do so at some point in the future. There are strategies for buying time until that point.
6. Chapter 13 allows you to pay off non-dischargeable income taxes through payments based not on the IRS’ demands but rather on your own realistic budget.
7. If you have other conventional debt—credit cards, medical bills and such—along with back income taxes that can’t be discharged, Chapter 13 generally allows you to favor the tax debt ahead of these other creditors. So you would be allowed to pay the taxes in full before anything would trickle down to the conventional debts.
8. Once the Chapter 13 case is filed, that generally stops any further interest and penalties from being added to the nondischargeable tax debts, which reduces the amount that you need to pay.
9. During the time that payments are being distributed to creditors through the Chapter 13 case, the IRS has to wait its turn in line, often waiting behind debts that are even more important to you, such as back payments on your home mortgage, your child or spousal support arrearage, or even vehicle and furniture payments.
10. Even if you only have tax debts that would otherwise be discharged in Chapter 7, but you need to file Chapter 13 to deal with other debts that are important to you—such as on your home and vehicle and support arrearage—these other obligations can legitimately reduce how much you pay on your tax debts. Sometimes you pay nothing on the taxes. So Chapter 13 can be the best of all worlds: protection from all your creditors including the IRS while you take care of other debts, along with paying little or nothing on your tax debts.
11. If you have multiple years of income tax debts—some of which are dischargeable and some not—in most Chapter 13 cases your plan can arrange to pay the taxes that would not be discharged in full before paying a dime to the rest of the taxes. You may even avoid paying anything on those dischargeable taxes before they are discharged forever at the completion of your case.
12. Throughout all this time during a Chapter 13 case—three to five years—the IRS cannot take any collection action against you or any of your assets, unless it gets specific court permission, which would usually only happen if you failed to comply with your own plan commitments.
13. Even if the IRS recorded a tax lien against your home before your Chapter 13 case was filed, the IRS would be prevented from executing on that lien until you had the opportunity to pay off the debt behind that lien, and get a release of that lien.
14. If you are behind in estimated or withheld income taxes during the current tax year, you can file a partial-year tax return, and pay the taxes for that partial tax year through your Chapter 13 plan—with no additional interest and penalties. Then you can put together your budget from that point forward with appropriate estimated tax payments or withholdings so you have no tax owing from that remaining part of the tax year.
15. When your Chapter 13 case is successfully completed you can be tax-free and debt-free.
Posted by Kevin on April 14, 2013 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 September 10, 2012 under Bankruptcy Blog |
Bankruptcy protects your paycheck because it’s more powerful than a creditor’s garnishment court order
A garnishment is effectively a court order which tells your employer to pay a portion of your paycheck to the creditor instead of to you. Except in rare circumstances, a creditor can’t get that garnishment order without first suing you and getting a judgment saying that you owe the debt. A judgment is the court’s decision that you do indeed owe the debt, how much you owe, and the amount of any additional costs. A judgment authorizes a creditor to use a variety of powerful ways to get money or property out of you to pay the debt, often (but not always) including through wage garnishment.
Bankruptcy stops wage garnishments at four stages of the process:
- before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place
- very shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment
- after a judgment is entered, by not allowing the creditor to get a garnishment order
- after a garnishment order is signed by the court where the judgment was entered, by trumping the garnishment court order with a more powerful bankruptcy “automatic stay”
So your bankruptcy prevents most garnishments from happening. It stops future hits on your paycheck from a “continuous garnishment,” in which there is one garnishment order requiring money to be taken out of your paycheck until the debt is paid. And it also stops new garnishments on an old judgment, for example, when a creditor finds out about your new employer.
Bankruptcy Stops Some Wage Garnishments Only Temporarily
In preventing upcoming wage garnishments, bankruptcy USUALLY does so permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including garnishment. So in those situations the bankruptcy filing stops the garnishment, forever.
So when are garnishments NOT stopped permanently? Garnishments are just temporarily stopped by your bankruptcy filing if the debt is NOT being discharged in the Chapter 7 case—such as certain taxes, most student loans, and a few other kinds of debts. The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge about three months later. So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS can resume doing so after the discharge is entered (unless in the meantime arrangements are made with the IRS to make monthly payments on that debt, which hopefully you would be able to do after the discharge of your other debts).
Bankruptcy Does Not at All Stop A Few Rare Kinds of Wage Garnishments
If you are filing a Chapter 7 case, the automatic stay does not protect you from wage garnishment to pay child and spousal support obligations, for either current or back support. This means that an ongoing garnishment for support will not be stopped by a bankruptcy filing. And if there had been no garnishment earlier, those garnishments could actually start during your bankruptcy case.
Fortunately, Chapter 13 DOES stop garnishments for support, and provides a way to catch up on back support while under the protection of the bankruptcy court.
Present and Past Wage Garnishments
We’ve covered the effect of bankruptcy on future garnishments, including those that would have gone into effect right after the bankruptcy filing. But what about garnishment orders that go into effect just before filing bankruptcy? For example, what if you’re racing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? The next two blogs will get into these questions about present and past garnishments.
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 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.
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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.
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