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Archive for the ‘Changes In Bankruptcy Law’ Category

New Modified 7-Year Chapter 13 Plans

May 11th, 2020 at 7:00 am

The coronavirus CARES Act temporarily allows ongoing Chapter 13 plans to be amended or “modified” to last a total of 7 years (instead of 5). 

 

Last month we described the changes to bankruptcy law made by the coronavirus CARES Act enacted on March 27, 2020. One of those changes is the ability to extend the length of ongoing Chapter 13 payment plans. Until now these previously-approved plans could last from a usual minimum of 3 years to a maximum of 5 years. That maximum has now been extended to 7 years.

Longer Plans Can Be Very Helpful

Overall, longer Chapter 13 payment plans give you more flexibility. And greater flexibility is one of the main advantages of the Chapter 13 bankruptcy option.

Usually you want to finish your bankruptcy case as soon as possible to get on with life. But often having more time within Chapter 13 can be a huge benefit.

You choose Chapter 13 over Chapter 7 “straight bankruptcy” to meet a specific goal (or two). You’re saving your home from foreclosure, or cramming down a vehicle loan, or paying nondischargeable income taxes. You’re keeping an asset you’d otherwise lose, catching up on child or spousal support, or saving a sole proprietorship business.  

To accomplish these goals you have to pay a certain amount into your Chapter 13 plan over time. Having more time to do so means being able to pay less per month during the plan. This can make the difference between a plan payment that you can’t afford and one that you can. So, having the option of two more years to finish off a payment plan can make the difference between an impossible plan and a feasible one. It’s the difference between an unsuccessful Chapter 13 case and a successful one.

Longer Plans during the Pandemic

This is especially true during this time of the COVID-19 pandemic. If you lost your job or have taken a pay cut while you’re in a Chapter 13 case, you may not be able to make your plan payment at all. Or you may only be able to pay a lower amount.

More time to pay means that you would likely be able to skip some payments if your unemployment is temporary. You would likely be able to reduce the plan payments—either temporarily or from now on—and still finish successfully.

This greater flexibility could well become especially important going forward. That’s because for most of us the pandemic’s financial consequences will likely be playing out for many months. So having this extra two-year cushion to finish your case successfully may become invaluable.

Only Court-Approved Plans Included

However, these new 7-year Chapter 13 payment plans have two strict timing considerations.

First, this 7-year change applies “to any case for which a plan has been confirmed… before the date of enactment of this Act.” Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(D(ii). CARES was enacted on March 27, 2020. The “confirming” of a plan is the bankruptcy judge’s formal approval of a plan that you and your bankruptcy lawyer proposed. Confirmation usually occurs at or around the time of your “confirmation hearing.” That’s usually happens about two months after you file your Chapter 13 case.

So to be able to extend your plan up to 7 years you must have had a court-confirmed plan by March 27. Even if you’d filed your case but your plan wasn’t confirmed by that date, you’re limited to the 5-year maximum.

Second, this 7-year provision has a “sunset” clause. It’s deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2). So assuming you had a confirmed plan before March 27, 2020, you must successfully modify your payment plan by March 26, 2021. Otherwise you’d lose out on this temporary 7-year plan modification option.

The Primary Condition to Meet

The new law says that you can modify a plan if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C). What a “material financial hardship” is, especially one “due… indirectly… to the… pandemic,” isn’t clear. Presumably a job or income loss related in any way to the pandemic should count. Beyond that bankruptcy judges will be making case by case decisions about what circumstances qualify.  

The Usual Other Conditions for Modification Still Apply

The modified plan also must meet the normal set of conditions laid out in Chapter 13 of the Bankruptcy Code. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) [of the Bankruptcy Code] shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).) Generally these are the same conditions that you had to meet to get your original plan—or a previous modified plan—approved. Contact with your bankruptcy lawyer about qualifying.

Other Changes May Be Coming

There will very likely be more legislation coming from Congress regarding the pandemic. Some may tweak the Bankruptcy Code further. The 7-year provision may be extended more, such as to new Chapter 13 cases. We will report on any such future changes affecting bankruptcy.

 

Consumer Bankruptcy Changes in the CARES Act

April 13th, 2020 at 7:00 am

The massive $2.2 trillion coronavirus relief law also includes some legal relief for both Chapter 7 and Chapter 13 consumer debtors. 

 

If you’re thinking about filing a Chapter 7 “straight bankruptcy” case, the new CARES law may help, at least slightly. If instead you’re thinking about a Chapter 13 “adjustment of debts” case, the new law helps in more significant ways. That’s also true if you already are in a Chapter 13 case.

$1,200 Relief Checks Excluded as Income for the Means Test

To qualify to file a consumer Chapter 7 case you have to pass the “means test.” Part of that test is a rather complicated calculation of your “current monthly income.” That’s essentially the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $1,200 coronavirus relief payment—could pump up your “current monthly income” and make you fail the “means test.” Then you could be forced to file a multi-year Chapter 13 case instead of a 3-4 month Chapter 7 one.

The new CARES law solves that problem neatly. It simply excludes any coronavirus relief money from the definition of “current monthly income.” To be precise, the following is excluded:

Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).

What Payments Are Included?

This statutory language is broad. It doesn’t refer only to the one-time $1,200 (or so) relief payments. It’s clearly broad enough that it could include other “Payments made under Federal law” related to the coronavirus national emergency. That is, other such payments may be excluded from “current monthly income” for purposes of the means test.

For example, CARES provides unemployment benefits of $600 per week extra beyond the usual state-calculated weekly amounts. (See our blog post last week about the unemployment benefits under CARES.) These $600 weekly extra benefits sure sound like they’re “Payments made under Federal law” related to [this] national emergency.” Since these $600 payments can last up to 39 weeks, they can amount to way more money than the one-time $1,200 payments. So if these $600 payments are also excluded in applying the means test, that would be quite significant.

But the law may not be clear on this. At this writing, CARES is just two weeks old. How it will be applied may shift quickly, as in so many things related to the pandemic. The law may well be applied somewhat differently in different parts of the country. Contact your local bankruptcy lawyer for current information as it applies to you.

$1,200 Relief Checks Also Excluded in Confirmation of Chapter 13 Plan

Chapter 13 generally requires you to pay all of your “projected disposable income” into your 3-to-5-year payment plan. This monthly amount goes through the Chapter 13 trustee to your creditors under the terms of your plan. Then at the end of the plan you are usually debt-free (except sometimes for certain agreed long-term debts).

Your “projected disposable income” is based on virtually all your income, minus certain legally allowed expenses. The income side of this is your “current monthly income” as discussed above—based on your last 6 months of income. If that income would include a one-time coronavirus relief payment, it would greatly increase your “disposable income” and thus your required Chapter 13 plan payment.

The new CARES law solves that problem in a way similar to the above section about the Chapter 7 means test. Using the exact same language, it excludes any coronavirus relief money from the Chapter 13 definition of “current monthly income.” To again be precise, the following is excluded:

… payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

CARES, Section 1113(b)(1)(B).

As in the section above on Chapter 7, it’s not yet clear what federal payments are excludable. Besides the $600 weekly unemployment payments mentioned above, there may be other future coronavirus stimulus payments approved by Congress. Again, talk with your bankruptcy lawyer to get current information and advice.

Changes to Ongoing Chapter 13 Plans

During the course of a Chapter 13 you can change, or “modify” your approved payment plan under certain circumstances.  CARES added a new circumstance: if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C).

The bankruptcy judge still has to approve the modified plan, after the usual notice to creditors and opportunity for objection. The modified plan must comply with the usual requirements. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).)

It’s unclear what this all adds to the plan modification rights you already have, except for one huge change. The law has been clear for a long time: Chapter 13 plans cannot last longer than 5 years. CARES extended this to a new maximum of 7 years for applicable modified plans.

Although you’d think you would want to finish your plan as fast as possible, longer plans often allow you to reduce your monthly plan payments. It can give you more opportunities to preserve certain assets or collateral—keep a vehicle, save a home. Given the financial challenges so many of us are facing, this greater flexibility can make the difference between completing your case case successfully or not.  

Important: Applicability to Cases

First, the Chapter 7 means test change and the Chapter 13 plan confirmation change “apply to any case commenced before, on, or after the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(i). But those changes have a sunset provision—they are deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021. Be careful about this deadline.

Second, the Chapter 13 plan modification change applies “apply to any case for which a plan has been confirmed… before the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(ii). But, same as above, this change have a sunset provision—it is deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

So this change applies to Chapter 13 cases which had a confirmed plan before March 27, 2020, and then successfully modified its plans by March 26, 2021. Be careful about this deadline as well.

Notice that by this language this change does not apply to cases either not filed, or already filed but not yet confirmed, as of March 27, 2020. This means that people in these situations appear unable to take advantage of the 7-year provision.

Bottom line all these changes to the Bankruptcy Code are temporary, currently lasting only this one year. Then they will be deleted and the Bankruptcy Code will revert to its prior language. 

 

You’re Now More Likely to Be Paid More Back Wages by Your Bankrupt Former Employer

March 14th, 2016 at 7:00 am

Here’s an adjustment in the law that can benefit you if you are owed wages and/or benefits by a person or business filing bankruptcy.

 

This is the last of a series of blog posts on the effect of changes going into effect on April 1, 2016. These changes are a result of a cost of living adjustment that’s in the federal bankruptcy law. See Section 104(b) of the Bankruptcy Code.

Every one of these blog posts so far have been about these changes would affect you if you were filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” But today’s blog post assumes you’re on the other side of the table, that you are owed money—in the form of back wages and employee benefits—by a former employer that filed bankruptcy.

In this situation you are a creditor of the person or business owing you the wages and/or benefits. But the good news is that you are a creditor who the law treats relatively well. Plus the April 1 cost of living adjustment means that such debts for wages and/or benefits are going to be treated even slightly better.  

Priority Debts for Wages and Benefits

In bankruptcy law a few very select debts are considered “priority” debts that the debtor must pay in full before other unsecured debts are paid anything. Debts for unpaid wages and/or employee benefits meeting certain conditions are “priority” debts. This means that these are much more likely to get paid. (See Sections 507(a)(4) and (5).)

Even better, “priority” debts must be paid by the debtor in a particular order. So the higher priority ones must be paid in full before lower priority ones are paid anything. Among the highest priority debts are those for employee wages and benefits.

In many cases wages and benefits are the highest priority debts that a debtor owes. If the former or current business owner filing bankruptcy is an individual, instead of a corporation, usually only child and/or spousal support arrearage debt, if there is any, has a higher priority.

So if there is any money being distributed to creditors, there’s a good chance that your wage and/or benefits claim will be paid, at least in part.

Not All Wage/Benefits Debts Are Included

For a wage/benefits debt to be given “priority” status you must have earned the wages and benefits within the 180 days before the employer filed bankruptcy. Or if your employer went out of business before filing bankruptcy, you must have earned the wages/benefits during the 180 days before the going out of business.

There’s one more condition, which is where the April 1 cost of living adjustment comes in. There is a cap on the dollar amount of wages and benefits earned during the applicable 180-day period that would be treated as “priority.”

On the wage side that cap has been $12,475 for the last 3 years. It is going up to $12,850. See this announcement in the Federal Register of 2/22/16.

On the employee benefits side, the same dollar amounts apply—$12,475 in benefits earned during the 180 days either before filing or before close of business, going up to $12,850. But here there’s a twist. These amounts that are treated as “priority” are reduced by whatever others amounts are already being paid by the debtor to former employees in wages and other benefits.

“Priority” and “Non-Priority” Wages and Benefits

Any wages/benefits earned outside these 180-day windows or beyond the cap amounts could well be considered a valid debt. Such debts may even be paid in part or even in full in the former employer’s bankruptcy case. But they would not be paid as “priority” debts.

The “priority” portion of the debt would have a much, much better chance of being paid than any “non-priority” portion. Again, that’s because that “priority” portion would be at or very near the head of the line to be paid. In contrast, the non-“priority” portion of the wage/benefits debt would be in the pack with virtually all the other debts. That portion would only be paid if and to the extent there is any money left over after other more important debts are paid.

Conclusion

Regardless what kind of bankruptcy your former or current employer has filed, your back wages and benefits are much more likely to be paid if they fit the conditions for being “priority” debts. But that’s still not a sure thing. If you haven’t already done so, talk with an experienced bankruptcy attorney to understand your rights and to find out what you need to do to get paid.

 

Larger Families More Likely to Qualify for Shorter Chapter 13 Cases

March 11th, 2016 at 8:00 am

Soon families of larger than 4 people can have a bit more income and qualify for a 3-year Chapter 13 payment plan instead of a 5-year one.

 

How could it be that larger families can have shorter Chapter 13 “adjustment of debts” cases?

The reason is that on April 1, 2016—as happens every 3 years—there will be a modest increase in the “median family income” calculation for “a debtor in a household exceeding 4 individuals.” This matters because whether your Chapter 13 case can last 3 years or instead must go for 5 years depends whether your “current monthly income” is more than the published “median family income” amounts for your size of family in your state.

If your “current monthly income” is not more than the published “median family income” then your Chapter 13 case is not required to go longer than 3 years. If it is more, then your case is required to go 5 years.

We explain the upcoming change in the rest of this blog post, and why it only affects “households exceeding 4 individuals.”

Two Different Adjustments Happen in Tandem

This can get confusing because there’s another much more frequent “median family income” adjustment besides the April 1 every-3-year adjustment just affecting households of larger than 4. The published “median family income” amounts affecting every state and ALL household sizes are adjusted much more often—usually about 2 or 3 times a year. As of this writing the most recent across the board adjustments of this type were made effective November 1, 2015 and May 15, 2015.

“Median Family Income” for Households Larger than 4

But these more regularly updated “median family income” amounts only directly refer to household sizes of from 1 to 4 individuals. For larger households, you add a stated dollar amount for each additional individual in the household to come up with the appropriate “median family income” for the household. This monthly additional dollar amount per additional household member was $525 when the law on this was passed in 2005, and has been increasing every 3 years since then. For the last 3 years this amount to add for each additional household member was $675. On April 1 this amount is increasing to $700 more for each additional household member.

On an annual basis, this in an increase in the “median family income” from $8,100 per additional individual ($675 times 12) to $8,400 per additional individual ($700 times 12).

How This Works

If the published annual “median family income” for a household of 4 is $60,000, then before April 1 that amount for a household of 5 would have been $68,100 (which is $60,000 + $8,100). As of April 1 that amount will be $68,300 ($60,000 +$8,300). A small increase. But if it makes the difference between paying a Chapter 13 plan for 3 years instead of 5 years, that could make a huge difference.

 

More New Bankruptcy Dollar Amounts Effective Soon

February 24th, 2016 at 8:00 am

Here are the rest of the important changes affecting Chapter 7 and Chapter 13 bankruptcy cases filed on or after April 1, 2016.

 

Our last blog post a couple days ago described how every 3 years many of the dollar amounts within the bankruptcy laws are adjusted for inflation. The next set of these adjustments will be effective April 1, 2016. The changes don’t apply to ongoing bankruptcy cases but only to new ones filed on or after that date.

The upward adjustments are relatively small, reflecting a 3% or so increase in the consumer price index over the last 3 years. But because these changes affect so many aspects of consumer bankruptcy, they are worth noting.

Our last blog post described a couple of the increased amounts. Here are the rest that are worth your attention. (You can see the entire list as just published by the federal Judicial Conference .

Maximum IRA Exemption

In general, retirement funds are exempt (protected for you from your creditors) when you file a bankruptcy case. However, there is a cap on money that you can exempt in traditional individual retirement accounts (IRAs). The relatively high cap started out in 2005 at $1,000,000. Through inflation that cap will now be at $1,283,025. (Section 522(n) of the Bankruptcy Code.)

This cap does NOT apply to either “SEP IRAs” (Simplified Employee Pensions) or “simple IRAs” (Savings Incentive Match PLans for Employees).

A Limit on Recently-Acquired Homestead Exemption

If you live in or are considering moving to a state with a very high or unlimited homestead exemption (Massachusetts, Texas, and Florida, for example), you could be limited in how much of your state’s homestead exemption you could use. This limit only applies if you acquired the property in the 1,215-day period before filing bankruptcy. If so, the state homestead exemption limit is being increased from $155,675 to $160,375. (Section 522(p)). Since most state’s homestead exemptions are lower than this new limit, only homeowners filing bankruptcy in very high or unlimited homestead exemption states are affected by this increase.

Chapter 7 “Means Test” Calculation

The Bankruptcy Code’s “means test” contains a rather complicated formula for determining whether there is a “presumption of abuse” when a person files a Chapter 7 “straight bankruptcy” case. The purpose of this formula is to help determine whether you have the “means” to pay a meaningful portion of your debts within a Chapter 13 payment plan. If the formula says that you do have the “means” to do so then you are said to be “presumed” to be abusing the bankruptcy law if you are filing a Chapter 7 case.

This formula includes elements like your “disposable income” (your income minus allowed expenses) and the amount of your unsecured debts. It also includes some specific dollar amounts.

It’s these specific dollar amounts that are being increased. We’ll explain how this works in an upcoming blog post. For now know that the result is that in some circumstances you can have a little more disposable income and still qualify for Chapter 7. (Sections 707(b)(2)(A)(i)(I & II) and 707(b)(2)(B)(iv)(I & II).)

Chapter 13 Debt Limits

You can have an unlimited amount of debt when you file a Chapter 7 bankruptcy. But there are debt limits when filing a Chapter 13 “adjustment of debts for an individual with regular income.”

There are separate maximum amounts of unsecured debts and secured debts. Having too much of either type of debt disqualifies you from Chapter 13. The unsecured debt limit is increasing from $383,175 to $394,725 and for secured debt is increasing from $1,149,525 to $1,184,200. (Section 109(e) of the Bankruptcy Code.)

Length of Chapter 13 Plan

Whether your plan is obligated to last 3 years or instead 5 years turns on the comparison of your “current monthly income” with the published “median family income” amounts for your size of family in your state.

These published “median family income” amounts only include household sizes of from 1 to 4 individuals. For larger households, you add a stated dollar amount for each additional individual in the household to come up with the appropriate “median family income” for the household. This monthly additional dollar amount per additional household member is increasing from $675 to $700 per person. (Sections 1322(d) and 1325(b).)

Priority Debts for Wages and Benefits

Assume that you are not filing bankruptcy yourself but your employer is. You’re owed wages and employee benefits for work you did.

The bankruptcy law favors you by making the employer’s debts to you for unpaid wages and benefits “priority” debts. “Priority” debts must be paid in full by the debtor before other “general unsecured” debts are paid anything.

There are certain conditions to meet for wage and benefits debts to have this favored “priority” status. One of those conditions is a maximum amount that a wage or benefits debt can be “priority.” (Sections 507(a)(4) and (5).)

That maximum for “priority” wages is going up from $12,475 to $12,850. There is a separate and identical maximum for unpaid benefits payments by your employer, which is also increasing to the same $12,850 amount.

Next…

In the next several blogs we will more fully explain how these upward adjusted amounts work to potentially affect your bankruptcy case.  

 

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