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Keep an Open Mind about Chapter 7 or 13

November 17th, 2017 at 8:00 am

Here’s an example why to keep an open mind about filing under Chapter 7 vs. Chapter 13. Slightly different facts can make all the difference. 

 

Last time we introduced some of the main differences between Chapter 7 and Chapter 13. We suggested that you learn about them but also keep an open mind when you go see a bankruptcy lawyer. At that meeting you will always hear about advantages and disadvantages of each option you didn’t know about. Often you hear for the first time about certain tools that can really help you. So you may end up going a different route than you expected.

Here are two versions of an example that illustrates this well.

An Example Using Chapter 7

Assume the following. Three months after losing a job you get another one at a somewhat lower salary than before.  Over the years before you’d accrued $50,000 in credit card debt and medical bills on which you’d started falling behind. While you weren’t working you fell even further behind and one medical collector has just sued you. You’re now also 2 months behind on your $1,500 monthly home mortgage payments ($3,000). For personal and financial reasons you really want to keep your home.

A Chapter 7 “straight bankruptcy” case would very likely discharge (legally write off) all of your non-mortgage debts. In this example that would enable you—with a short-term tight but realistic budget and a temporary part-time job—to pay one and a half mortgage payments each month ($1,500 + $750) for four months to catch up. Your lawyer contacts your mortgage lender which agrees to that catch-up schedule.

So you decide to file a Chapter 7 case as a means to get current on your mortgage, and to get a fresh financial start. About 4 months after filing the case you’d have both.

An Example Using Chapter 13

Change the facts this time so that now you’re 8 months behind ($12,000) on your mortgage instead of just 2. Also your budget is tighter and no part-time job is available. So without paying any of your credit card and medical debts you can only afford $300 per month. At that rate you would need 40 months to catch up on your $12,000 mortgage arrearage. Your lender says that’s totally unacceptable.

A Chapter 13 “adjustment of debts” would give you up to 5 years to catch up on the mortgage. The mortgage lender would generally have to go along with this—be unable to foreclose or take other collection action—as long as you consistently stuck with your plan. You would have to pay all you could afford to every month for at least 3 years. You’d have to pay for 5 years if your income was too high. Either way the money would first go to catch up the mortgage. (This would be after or simultaneously while you were paying your lawyer fees and trustee fees). You would usually only pay the other debts—the credit cards and medical debts) if and to the extent you had money left over during the 3-to-5-year payments period.

Because you really want to keep your home you decide to file a Chapter 13 case. You don’t mind its length because that’s to your advantage—more time to catch up on the mortgage so that you can reasonably afford to do so. About 4 years after filing the case you finish catching up, the remaining debts are forever discharged, and you have a fresh financial start. You owe nothing except the fully-caught up mortgage. It took a lot longer than a Chapter 7 case but saving your home made it well worthwhile.

Conclusion

In both of these scenarios you were behind on a mortgage on a home you wanted to keep. In the first scenario the tools of Chapter 7 enabled you to meet your goal. In the second you needed the stronger tools of Chapter 13.

This is a simplistic example. Even here this illustration show that it’s important to keep an open mind about which Chapter is better for you. Real life is usually much more complicated. That’s all the more reason to get informed about your options and then be receptive about your lawyer’s legal advice about them.

 

Chapter 7 or 13? You May Be Surprised

November 15th, 2017 at 8:00 am

Chapter 7 takes about 4 months, while Chapter 13 takes 3 to 5 years, and likely costs more. But that doesn’t begin to answer which is better. 

 

Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” is usually, but not always, for simpler situations. It’s often the right choice if your income is relatively low, your assets are modest, and your debts are straightforward.  You keep all of your assets, all or most of your debts are discharged (legally written off), and if you want you keep paying on your vehicle and/or your mortgage or rent.

Chapter 13 “adjustment of debts” is usually, but not always, better for somewhat more complicated situations. Your income may be too high to qualify for Chapter 7. You may have an asset or two that is not “exempt”—not protected. Or you may have debts much better handled under Chapter 13. Do you owe income taxes or student loans or a second mortgage? Are you behind on a vehicle loan, home mortgage, property tax, or child or spousal support? These and certain other kinds of debts are often handled much better in a Chapter 13 case.

Overall, these two options each have advantages and disadvantages that need to be carefully matched to you and your goals. Chapter 7 may be able to solve immediate problems and do so quickly. Chapter 13 is more expensive but that can be far outweighed by the money you save over using Chapter 7. In some situations the unique tools of Chapter 13 can save a person many thousands of dollars. Chapter 13 takes so much longer but that length can itself be an advantage. When you need or want to pay a special debt, you can stretch payments out to lower their monthly amount. So it just depends on your personal situation.

Be Flexible When You Meet with your Lawyer

You’re reading this blog post, so we’re glad that you’re working on getting informed about your options. But it’s also important to have an open mind when you go to see your bankruptcy lawyer for legal advice. If you do inform yourself in advance you may tentatively decide which option is best for you. Or you may just not know. It is easy to not be aware of a crucial advantage or disadvantage that could be decisive. So don’t be too convinced about going with one option when the other may actually be better.

Sometime Easy, Sometimes Difficult Choice

The reality is that sometimes it’s pretty clear which option is better for you. Sometimes you only qualify for one of the two. Or your circumstances can push your decision strongly towards either Chapter 7 or 13. In these situations, you may have an easy choice.

But often you qualify for both. It’s not unusual that each gives you some advantages and disadvantages that the other doesn’t. Especially in these situations it’s crucial to know all these advantages and disadvantages in order to make the best choice.  Then it comes down to a deeply personal decision based on what goals and benefits are most important to you.

To Help You Be Informed

It IS good to be as informed as you much as your time and energy allows. This choice between Chapter 7 and Chapter 13 is very important. So during the next few weeks we’ll look at the differences between them.

 

Chapter 7 Prevents Judgment Liens on Your Home

November 13th, 2017 at 8:00 am

Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing. 


Recently we went through a list of ways Chapter 7 buys you time when dealing with debts affecting your home. Included was that filing a Chapter 7 case can “stop a lawsuit from turning into a judgment lien.” That judgment lien could turn a debt that you wouldn’t have to pay after bankruptcy into one you would. That’s certainly a result you want to avoid.

Some judgment liens against your home can be “avoided”—or undone– in bankruptcy. Then maybe you wouldn’t have to pay the underlying debt. But some judgment liens can’t be “avoided.” The debt behind such a lien would therefore have to be paid, even after filing bankruptcy. Again, that’s a result you really want to avoid.

In those situations filing a Chapter 7 case before there’s a judgment usually prevents that bad result. Let’s dig into this more to better understand it.

Lawsuits by Conventional Creditors

If you’re thinking about bankruptcy the judgments you mostly likely need to be worrying about are those by creditors. By “creditors” we mean conventional ones like those you might owe for credit cards, medical bills, a repossessed vehicle, personal loans, and such.

Lawsuits by such creditors often don’t leave you with much defense. You concede owing the money you’ve contracted to pay, haven’t paid, so usually (but not always) you have no defense. The creditor will get a judgment by default against you if you don’t respond to the lawsuit in time.

Less Conventional Creditors

But you might also be involved in other kinds of legal disputes potentially resulting in a judgment against you. That could arise from just about anything. A few examples would be:

  • a vehicle accident with a dispute about fault, damages, or insurance coverage
  • an injury to someone on your property that for some reason isn’t covered by your homeowner’s or renter’s insurance
  • a disagreement with a contractor or other service provider on repairs to your home
  • a dispute with family members about the proceeds of a deceased relative’s estate
  • a disagreement with your business’ investor, co-founder, employee, supplier, or its commercial landlord

It’s not unusual for people involved in such disputes to file bankruptcy if such litigation is not going well. They have much financially riding on wining the lawsuit. Then when it becomes clear that’s not happening they desparately need to cut their losses.

Filing Bankruptcy Prevents a Judgment against You

Whether with conventional creditor lawsuits or these other kinds of disputes, the timing of your bankruptcy filing is crucial. It has to be filed in time to prevent the lawsuit from turning into a judgment, and then into a judgment lien against your home.

So when dealing with a conventional creditor lawsuit, your bankruptcy lawyer generally needs to file your Chapter 7 case in bankruptcy court before your deadline to file the formal answer to the creditor’s complaint in the state court. (There are also likely other more expensive ways to prevent a default judgment from being entered against you.)

When dealing with ongoing litigation, talk with your lawyer about when you’d have to file bankruptcy to prevent entry of a judgment.

Judgments and Judgment Liens

State laws differ about what it takes for a creditor who gets a judgment against you to turn that into a judgment lien against your home. This may take an extra procedure. Or it may happen simultaneously with the court’s entry of the judgment. Again, talk with your lawyer. But in most situations, the judgment lien can happen very fast after the judgment, if not at the same time. So, for practical purposes, you’re going to want to file bankruptcy before the entry of the judgment.

Next: Avoidable vs. Unavoidable Judgment Liens

If you already have a judgment lien against your home, don’t despair. As we said in the first couple paragraphs, bankruptcy allows you to “avoid” some judgment liens against your home. In our next blog post we’ll distinguish between judgments that can and can’t be “avoided”—or undone—in bankruptcy.

 

Chapter 7 Buys Time and Money to Move from a Foreclosing Home

November 10th, 2017 at 8:00 am

Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing. 

 

Last week we went through a list of ways Chapter 7 buys you time when dealing with a home foreclosure. Included was that filing a Chapter 7 case “can give you time to surrender your home while saving up for moving expenses.”  This deserves a more thorough explanation.

 Stopping a Foreclosure

The filing of a bankruptcy case, including a Chapter 7 “straight bankruptcy” one, stops a pending home foreclosure sale. This happens through the “automatic stay,” the law which freezes most creditor collection actions the moment you file bankruptcy. In particular, the automatic stay statute says that a bankruptcy filing stops “any act to… enforce any lien” against your property. (See Section 523(a)(4) and (5) of the U.S. Bankruptcy Code.)  A mortgage lender’s foreclosure of your home is an act to enforce a lien. So your bankruptcy filing stops it from happening.

It’s crucial to time your bankruptcy filing strategically. Otherwise you will file it too soon or too late. You want to buy as much time as possible. And you don’t want to mess up and fail to stop the foreclosure. 

You absolutely need to talk with your local bankruptcy lawyer to determine the best timing. This decision requires a thorough understanding of BOTH federal bankruptcy law and state property and foreclosure law.  While bankruptcy law provides the ins and outs of the “automatic stay,” state law lays out crucial considerations like exactly when a foreclosure takes away your rights to your home. For example, filing too late would leave you with no rights to your home that your bankruptcy filing could protect.

After Your Bankruptcy Stops the Foreclosure Sale

What happens after you file the Chapter 7 case? In particular how much time will you have before you have to move away from your home?

A consumer Chapter 7 case usually takes about 3 or 4 months. The automatic stay is in effect that whole length of time, UNLESS the mortgage lender asks for “relief from stay.”

So if your lender does not file a motion asking for that “relief,” filing Chapter 7 can buy you 3 or 4 months. It could be even longer. That’s because there is usually some delay between when the foreclosure process is restarted and the new foreclosure takes place.

If your lender does file a motion for “relief from stay,” your Chapter 7 filing may only buy you an extra month or so. That’s because if you’re surrendering the home you’re presumably not making the mortgage payments. So you don’t have much defense against the lender’s motion, and it would almost certainly be granted.

However, if your mortgage lender does ask for “relief” to resume foreclosure, that often presents an opportunity for negotiation. You have something to offer in the way of surrendering the home peaceably at an appropriate time. The lender may well save attorney fees and foreclosure costs. Under some circumstances it may even pay you some money to move and sign the home to the lender.

Gathering Funds for Your Move

Usually the main benefit to delaying a foreclosure once you’ve decided to give up the home is for time to gather moving costs. By moving costs we mean everything needed for your transition, including rent, security deposit, moving truck rental—everything. Every month you are not paying your mortgage should give you the opportunity to save a chunk of money. In some states money you save for this purpose even before filing your Chapter 7 case can be protected under the homestead or some other exemption. Money saved after filing is virtually never a problem.

Conclusion

Filing Chapter 7 bankruptcy stops a foreclosure, although you have to time it right through the help of your lawyer. The point of buying time is to give you more time to cover your costs in transitioning to new housing. The amount of time you can buy depends in part on the aggressiveness of your mortgage lender. The extra time will usually be between one and four more months. You can often negotiate your leaving to make it less disruptive for you.

 

Chapter 7 Buys Time to Change to Another Vehicle

November 8th, 2017 at 8:00 am

Filing a Chapter 7 case stops repossession of your vehicle temporarily. If you are getting another vehicle, that can be valuable time. 

 

A week ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it “gains you some time to get another vehicle before surrendering your present one.” We’ll show you how this works.

Transitioning to Another Vehicle

The two different types of consumer bankruptcy give you a number of ways to keep a vehicle that you’re having a hard time making the payment on.

Chapter 7 stops a repossession if you’re behind on payments or insurance. It discharges all or most of your other debts so that you can better afford your vehicle payments. This can also help you afford insurance, vehicle repairs and maintenance, and the other costs of ownership. If you’re a little behind on payments it gives you a month or two to catch up.

Chapter 13 does most of these and more. If you’re behind on payments you get many months to catch up. You can fit that in with other urgent debts—such as child/spousal support and income taxes—on  a flexible schedule. If you qualify for “cramdown” you can even lower your monthly payment and significantly reduce the total you pay for the vehicle before it’s yours free and clear.

But what if AFTER getting well informed about these options you still want to surrender your vehicle and get another one? Real life situations in which this might happen include:

  • You’ve learned that the vehicle you’re paying for is a lemon, unreliable, and will cost too much to keep repaired.
  • Your life circumstances have changed and you don’t want or need a vehicle that’s so expensive.
  • You simply have a way to get another cheaper vehicle, and need to get out of your vehicle loan obligation.

Buying Time by Stopping a Repossession

If you behind on your vehicle loan at all, your vehicle is at risk of repossession. How fast your lender will repossess depends on its policies and on the history of your relationship. Usually you have to be a full month late, sometimes even two months. But you can’t assume this—it can happen whenever you are behind.

If you let the vehicle’s insurance lapse—even without being late on loan payments—that’s separate grounds for repossession. Lenders can be very aggressive about this, because they risk losing their entire collateral. And you are showing yourself to be irresponsible in their eyes.

In these situations your Chapter 7 bankruptcy filing will not buy you much time, but the time it buys could be extremely helpful. A repossession is often very, very disruptive. One minute you have your car or truck and the next it’s gone. You have no transportation to work and to everywhere else you need to go. Preventing that huge disruptive surprise is a big benefit.

Buying Time Even If You’re Current

Even if you’re not behind on vehicle loan payments or insurance, Chapter 7 gives you an orderly process for surrendering your vehicle.

It also gives you a chance to calmly consider whether you should or shouldn’t keep your vehicle and its debt. You sit down with a bankruptcy lawyer who has only one job: to help you decide what is best for you and your future. You look at what your budget will look like after filing the Chapter 7 case. You think about whether there’s room for that vehicle payment. You have a bit of time to figure out whether and how you could get ahold of replacement transportation.

Procedure and Timing

Whether you’re current or behind, how much time will filing Chapter 7 buy? Partly it depends on the aggressiveness of your lender, especially if you’re behind.

In every Chapter 7 case you have to specifically state what you intend to do with collateral on all secured debts. You do so with a document called a “Statement of Intention.” This is usually filed at the bankruptcy court along with the rest of your Chapter 7 documents. But for tactical or other reasons it can be filed later. The document itself states:

You must file this form with the court within 30 days after you file your bankruptcy petition or by the date set for the meeting of creditors, whichever is earlier, unless the court extends the time for cause. You must also send copies to the creditors and lessors you list on the form.

(See also Section 521(a)(2) of the U.S. Bankruptcy Code about this.)

On the Statement of Intention you declare, under penalty of perjury, your “intention about any property… that secures a debt…  .” You declare whether you want surrender or retain the vehicle. If you want to retain it you say whether you want to redeem the vehicle or reaffirm the debt. (These two options are discussed in recent blog posts.)

Practically speaking you usually have to surrender your vehicle between about 30 and 45 days after your Chapter 7 filing. If your lender is unusually lax you may get a little more time than that.

The Surrender Itself

Arrangements for the surrender itself are made between your lawyer and the lender or its lawyer. The surrender is almost always done in a way that’s convenient to you. Usually you either drive the vehicle to an agreed location or give the keys to the lender whose representative picks up the vehicle from wherever you agree to leave it.  This in infinitely better than a repossession. 

 

Chapter 7 Buys Time to Redeem Your Vehicle

November 6th, 2017 at 8:00 am

If your vehicle is worth less than its debt, and you can get the money representing that value, you can “redeem” the vehicle free and clear. 

 

Two blog post ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it buys “time to gather funds to redeem your vehicle for less than you owe on it.” This “redemption” option deserves more attention.

Reaffirmation and Redemption

If you want to keep your vehicle in a Chapter 7 “straight bankruptcy,” your two options are “reaffirmation” and “redemption.” You can either reaffirm the debt or redeem the vehicle.

Reaffirmation is far more common. You enter into a reaffirmation agreement, agreeing to repay the loan as if you had not filed bankruptcy. You almost always recommit to paying the entire loan balance, reaffirming that you want to pay it. You agree to remain liable on the original loan, excluding it from the discharge that you are receiving of all or most of your other debts. (We covered reaffirmation a few months ago.)

Redemption is far less common. But it can sometimes save you lots of money so it’s worth knowing about.

Redemption in Contrast to Reaffirmation

It might help to think of redemption as being the opposite of reaffirmation in three ways:

  • You don’t resurrect the vehicle loan (excluding it from the discharge of debts) as in reaffirmation. With redemption you get rid of the loan.
  • You don’t agree to pay the full amount of the loan. With redemption you pay only the current retail fair market value of the vehicle.  
  • You don’t pay the debt through your regular monthly payments. With redemption you must pay off the vehicle’s value “in full at time of redemption.” In practical terms that means you have to come up with that full amount in one lump sum just a month or two after filing your Chapter 7 case.

See the short Section 722 of the Bankruptcy Code about redemption.

Paying Off the Redemption Amount

This lump sum payoff of the vehicle value is obviously often a problem. If you owe lots more than your vehicle is worth you’d love to save the difference. But even if the value is much less than the debt, coming up with the money may seem impossible. Sometimes it is.  Where do people come up with redemption money? Here are three ideas:

  • Brainstorm about creative ways to come up with the necessary cash out of your own assets. Do you have anything you can sell or borrow against to raise the cash? Can you get access to any retirement savings, and is doing so worthwhile? Although you should almost always protect any retirement money, tapping into it might be worthwhile if the amount you’d save on the vehicle loan justify doing so. Overall, think outside the box. Don’t immediately assume you don’t have any way to pull together the money.
  • Consider asking relatives or friends to lend or even donate to you the money you need for redemption. Explain how this will allow you to keep your necessary transportation for much less money. Offer to make the friend or relative the lienholder on the vehicle after redeeming from your original lender.
  • Talk with your bankruptcy lawyer about getting a redemption loan from a financial institution. Certain ones do this specialized kind of financing. You will likely pay a relatively high interest rate, so carefully review the terms with your lawyer. In the right circumstances a redemption loan reduces your monthly payment amount and/or how long you make the payments to make it very worthwhile.

 

Chapter 7 Buys Very Short Amount of Time to Get Vehicle Insurance

November 3rd, 2017 at 7:00 am

Chapter 7 stops a repossession of your vehicle for lapsed insurance, but almost always the amount of time it buys you is very short. 

 

Our last blog post went through a list of ways Chapter 7 buys you time with your vehicle lender. Included in that list was that it gives you “a very limited time to reinstate required vehicle insurance.” This deserves more attention.

Vehicle Insurance Required

According to Minimum Car Insurance Requirements by State, a recent article in nerdwallet.com, almost every state’s laws require vehicle owners to have at least a certain dollar amount of liability insurance coverage. That covers damages that you cause in an accident. The one state that doesn’t require liability coverage is New Hampshire. There are other exceptions. In Virginia drivers with a clean driving record can drive without liability insurance by simply paying an annual fee. In Arizona and some other states you can avoid liability insurance by providing a bond, certificate of deposit, or cash to the DMV.

According to this wallethub.com article 15 states also require personal injury protection (PIP) insurance. That covers medical expenses from an accident, for you, household members, and your passengers, regardless of fault. Also, 21 states require uninsured and underinsured motorist coverage. This covers you when you’re harmed by someone with no insurance or an insufficient amount.   

Your vehicle lender or lessor requires two other kinds of insurance to protect your vehicle, its collateral.  Collision insurance covers your vehicle in an accident. Comprehensive insurance covers it in events other than an accident, such as theft and fire.

The Urgency of Vehicle Insurance Coverage

Vehicle lenders and lessors get extremely concerned if your insurance coverage lapses. That’s because then at any moment their collateral could be totaled and turn worthless.

If you miss a payment deadline, the lender/lessor is only out a few dollars. But if you have no insurance it’s potentially out the entire loan/lease balance.

This is why as part of your loan or lease agreement:

  • you must maintain insurance throughout the term of your loan or lease
  • your lender/lessor must be named in your insurance as a loss payee (it gets paid if your vehicle is damaged)
  • the collision and comprehensive coverages must be enough to cover the vehicle’s full value, with limited dollar amount deductibles
  • if your insurance ever lapses the lender/lessor can “force-place” insurance and make you pay for it.

 (For example, see this Wells Fargo Dealer Services “agreement to furnish insurance; also this webpage from the federal Consumer Financial Protection Bureau about force-placed insurance.)

As a result of such contractual requirements your lender/lessor can legally repossess your vehicle whenever your insurance coverage lapses.  

Buying You Time in Chapter 7

The moment you file a Chapter 7 “straight bankruptcy” case through your bankruptcy lawyer your vehicle is protected by the “automatic stay.” See Section 362 of the U.S. Bankruptcy Code. This prevents your lender/lessor from repossessing your vehicle. That’s true whether you’re behind on monthly payments or your insurance has lapsed.

So if your vehicle insurance has lapsed before filing your Chapter 7 case, that filing buys you some time to get the insurance reinstated. But, as the title to this blog post says, it usually only buys you a very short amount of time.

Why’s that? It’s because the lender/lessor’s concern about losing its collateral is a legitimate one. The bankruptcy court respects that concern.  Lapsed insurance will encourage the lender/lessor to quickly file a motion with the court for “relief from the automatic stay.” That is a formal request to be able to repossess the vehicle, in this case for lack of insurance. The court will grant that motion unless you’ve reinstated insurance by the time the court hears the motion. So filing bankruptcy may only buy you a few more days or a couple weeks to get insurance.

Also, in the meantime the lender/lessor can force-place its own insurance on your vehicle. It adds the cost of this insurance to your balance, and it’s astoundingly expensive. Furthermore, force-placed insurance only protects the lender. You’re still violating state law by driving uninsured. And of course driving without insurance is extremely risky. Plus this cost will significantly increase the amount you need to pay to get current.

Conclusion

Filing a Chapter 7 bankruptcy will prevent your vehicle from being repossessed for lapsed insurance. But the amount of time the filing buys before you need to reinstate the insurance is quite short. Plus the force-placed insurance will make catching up on your loan/lease cost you much more. So, stopping a repossession for lapsed insurance can be great, but the amount of time it buys you for this violation of your vehicle loan/lease is very limited.

 

Many Ways to Buy Time for Your Vehicle and Home through Chapter 7

November 1st, 2017 at 7:00 am

Chapter 7 buys you the crucial time you need in many situations when falling behind in your obligations related to your vehicle or your home.

 

In the last several weeks of blog posts we’ve given many examples of how bankruptcy can buy you time for your vehicle and for your home. Here’s a summary how a Chapter 7 “straight bankruptcy” can do so.

1. Chapter 7 Buys Time for Your Vehicle

  • Stops your vehicle from being repossessed, at least temporarily
  • Gives you a some limited amount of time to catch up if you’re behind on payments
  • Gives a very limited time to reinstate required vehicle insurance
  • Gains you some time to get another vehicle before surrendering your present one
  • Buys time to gather funds to redeem your vehicle for less than you owe on it
  • Buys time to enter into a redemption loan to lower your debt on the vehicle

2. Chapter 7 Buys Time for Your Home

  • Stops your immediate home foreclosure sale, at least temporarily
  • Gives you limited time to catch up on your mortgage through a lump sum payment or in monthly “forbearance” payments
  • A delay in foreclosure usually gives you a few more months to sell your home
  • This delay can give you time to surrender your home while saving up for moving expenses
  • Stops  a lawsuit from turning into a judgment lien, creating a debt that can’t be discharged written off in bankruptcy
  • Stops an income tax lien recording on your home’s title, potentially turning that tax into one that can’t be written off

 

Dealing with Recorded Tax Liens through Chapter 13

October 30th, 2017 at 7:00 am

A recorded tax lien gives the IRS/state a lot of leverage against you and your home. Chapter 13 can gain you back some of that leverage.  


Stopping Tax Liens by Filing Bankruptcy

In our last blog post we showed how Chapter 13 can buy you more time and flexibility than Chapter 7. We showed an example how that’s especially true if you owe more than one year of income taxes. Our example assumed that two tax years met the conditions to discharge (legally write off) that debt, while another tax year didn’t.

That example assumed that the IRS/state had not yet recorded a tax lien on your home for either tax year. A bankruptcy filing stops a tax lien’s recording. Then if the tax debt is discharged, the debt is gone so there’s no further basis for a tax lien. Or if the tax debt is paid in full (usually through a Chapter 13 payment plan) again there’s no further debt on which to impose a tax lien.

Dealing with Tax Liens under Chapter 13

But what if the IRS/state HAS already recorded a tax lien on your home?

That can cause all kinds of problems. Two weeks ago we wrote about how a tax lien can turn a completely dischargeable tax debt into one you have to pay in full. Beyond that, any tax lien is terrible on your credit report. It can make refinancing your home much harder. It may even add a problematic hurdle in the selling of your home. Even if you have little or no equity in your home, the tax lien can sit on your title until there’s enough equity to pay it in full.

So if you get a tax lien recorded against your home you need to consider your options. Assuming you want to keep your home, filing a Chapter 13 “adjustment of debts” is one option worth understanding.

Let’s take the same example we used in our last blog post, with a few more facts.

Our Example

Assume again that you owe income taxes of $24,000—$8,000 for the each of the 2012, 2013, and 2014 tax years. The 2012 and 2013 taxes meet all the conditions for discharge. The 2014 one doesn’t, mostly because it hasn’t yet been 3 years (as of when this is being written) since the date its tax return was due on April 15, 2015.

The IRS/state has just recorded tax liens on all three tax years against your home. Your home is worth $250,000, and has a $245,000 first mortgage owed on it. So, before the tax liens’ recordings you had $5,000 of equity in the home. Now you have NEGATIVE $19,000 of equity. And you are under the financial risks outlined above from the tax liens.

So on advice of your bankruptcy lawyer you file a Chapter 13 case. You do so because you:

  • can’t afford to pay nearly as much as the IRS/state are demanding each month in monthly installment payments
  • are afraid of the actions the IRS/state can take against you and your home on the tax liens
  • are afraid of the other collection actions they can take on the $24,000 in taxes
  • need a plan for taking care of these taxes in a way that you can reasonably manage

The Example’s Chapter 13 Plan

In this example the $16,000 of 2012 and 2013 tax debts would be treated as “general unsecured” debts. That is, they would but for the tax liens. Now those two tax debt are “secured” against your home because of their tax liens.

However, under Chapter 13 you have the power to establish that they are secured only to the extent of your home’s equity. So, the 2012 debt of $8,000 is secured by the $5,000 equity in the home. The remaining $3,000 is not secured. The 2013 debt of $8,000 has no remaining equity in the home for it to be secured by. So both that and the remaining $3,000 of the 2012 tax it is treated as a “general unsecured” debt.

This means that this $11,000 ($3,000 + $8,000) would be paid—if at all—to the same extent as your other ordinary debts with no collateral. In most Chapter 13 cases there’s only a set amount available to pay to the entire pool of “general unsecured” debts. This means that usually that $11,000 would just go into the pot with those other debts, and you’d pay no more than if there was no such $11,000 tax debt. That $11,000 tax debt just reduces how much other “general unsecured” debts get paid, without increasing how much you pay. In fact, in many bankruptcy courts you’re even allowed to pay nothing to the “general unsecured” debts. That happens if all your money during the life of the plan goes elsewhere.

The “Priority” Tax Debt

And how about the third tax year—2014—which doesn’t meet the conditions for discharge? What affect does its tax lien have on it?

It has no effect because all of the home’s equity has already been absorbed by the 2012 tax year.  This 2014 tax already has to be paid in full through the Chapter 13 payment plan. It’s a “priority” debt.  Had there been equity in the home to cover this lien then you’d also pay interest on this tax. Without any equity this 2014 tax is effectively unsecured. So it’s treated like any other “priority” debt. You have to pay it in full during your 3-to-5-year Chapter 13 payment plan.

So you have up to 5 years to pay the $5,000 secured portion of the 2012 tax and the $8,000 2014 tax. Throughout that payment period you’d be protected from the IRS/state by the “automatic stay.” This usually protects you throughout the years of the case (not for just 3-4 months like Chapter 7). That means no further IRS/state or other creditor actions against your or your house throughout your case.

Your payment plan may or may not include some money to pay towards your “general unsecured” debts. This includes the unsecured part of the 2012 tax and all of the 2013 tax. How much, if any, you’d pay on these would mostly depends on what you could afford to do so, after paying the other taxes. The secured part of the 2012 tax and the 2014 “priority” tax debts would usually get paid in full before the “general unsecured” debts would receive anything.

The End of the Chapter 13 Case

At the end of your successful Chapter 13 case the following would happen:  

  • Having by that point paid off the $5,000 secured part of the 2012 tax debt, the unpaid portion of the remaining $3,000 would be forever discharged.
  • The unpaid portion of the 2013 tax debt would also be discharged.
  • Having by that point paid off the $8,000 “priority” tax debt, any interest and penalties that would have accumulated on that tax would be forever waived.
  • With all your tax debts either paid or discharged, there’d be no further risk of a lien against your home from that tax.
  • You’d be tax-debt-free, and altogether debt-free (except for long-term debt like your home mortgage).

Buy Lots More Time to Deal with Multiple Years of Income Tax Debts

October 27th, 2017 at 7:00 am

If you have an income tax debt that qualifies for discharge and also some tax debt that doesn’t, Chapter 13 is often your best option. 

Stopping Tax Liens through Chapter 13 

In our last blog post we showed how Chapter 7 might prevent an income tax lien from hitting your home. It stops the recording of the tax lien through the power of the “automatic stay,” which stop virtually all creditor collection activities. And then you get a discharge (write-off) of the tax debt.  But then we added a twist: owing one or more additional tax years’ of debt which does not qualify for discharge. What if you have a tax that meets the conditions for discharge and one or more years’ that don’t? We showed how sometimes Chapter 7 can deal with this effectively, if the still-remaining tax debt is manageable.

But what if the taxes you still owe are not manageable? In a Chapter 7 case the protection of the “automatic stay” ends as soon as the case ends, usually just 3-4 months after it’s filed. So after that you could easily get a tax lien recorded against your home for the still-owed taxes.

Last time we ended by saying a Chapter 13 “adjustment of debts” could be a better option in these situations.

An Example

Let’s show how Chapter 13 could be a better option with an example.

Assume that you owe income taxes of $24,000—$8,000 for the each of the 2012, 2013, and 2014 tax years. The 2012 and 2013 taxes meet all the conditions for discharge. The 2014 one doesn’t, mostly because it hasn’t yet been 3 years (as of when this is being written) since the date its tax return was due on April 15, 2015.

On advice of your bankruptcy lawyer you file a Chapter 13 case. You do so because you:

  • couldn’t reliably pay into a monthly installment plan with the IRS/state for the remaining $8,000 tax owed for 2014. That’s because you have some other important debts that would also survive the Chapter 7 case. In particular you’re behind on your home mortgage and child support payments. Support enforcement is getting very aggressive, and you don’t want to lose your house. Chapter 7 would not help with these.
  • don’t qualify for Chapter 7 under the “means test.”  Your income under that test is too high, and your allowed expenses leave you with too much disposable income. You don’t have Chapter 7 as an option.
  • need to file a Chapter 13 case for its other benefits. You want to get lots of protected time to catch up on your first mortgage and your child support. Chapter 13 gives you strong tools for dealing with these special debts (and many others).

(Note that any one of these reasons may well be enough to make Chapter 13 worthwhile or appropriate. The particular combination of facts here would very likely make Chapter 13 the right choice.)

The Example’s Chapter 13 Plan

In this example the $16,000 of 2012 and 2013 tax debts would be treated as “general unsecured” debts. This means that they’d be paid—if at all—to the same extent as your other ordinary debts with no collateral. In most Chapter 13 cases there’s only a set amount available to pay to the entire pool of “general unsecured” debts. This means that usually that $16,000 would just go into the pot with those other debts, and you’d pay no more than if there was no $16,000 tax debt. That $16,000 tax debt just reduces how much other “general unsecured” debts get paid, without increasing how much you pay. In fact, in many bankruptcy courts you’re even allowed to pay nothing to the “general unsecured” debts. That happens if all your money during the life of the plan goes elsewhere.

Speaking of money going elsewhere, you’d pay the remaining $8,000 for the nondischargeable 2013 tax during the course of your 3-to-5-year Chapter 13 payment plan. It’s a “priority” debt, one that you have to pay off during your case. Throughout that 3-to-5-year period you’d be protected from the IRS/state by the “automatic stay.” That’s because it usually protects you throughout the years of the case (not for just 3-4 months like Chapter 7). That means no tax lien being recorded against your house throughout your case.

Your payment plan would also include money to catch up on your home mortgage and on your child support. These two debts could be paid ahead of or alongside the “priority” tax debt.

The End of the Chapter 13 Case

At the end of your successful Chapter 13 case the following would happen:  

  • Having by that point paid off the $8,000 “priority” tax debt, any interest and penalties that would have accumulated on that tax would be forever waived.
  • With that tax debt gone there’d be no further risk of a lien against your home from that tax.
  • To the extent that the $16,000 in older taxes would not be paid, they’d be permanently discharged. (This would usually be most, or sometimes even all, of the $16,000.)
  • Your home mortgage and child support would be caught up as well.
  • You’d be tax-debt-free, and altogether debt-free except for the on-time first mortgage.

 

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