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Archive for the ‘Chapter 13 plan’ tag

The Surprising Benefits: Resolving the “Preference” Problem through Chapter 13

April 30th, 2018 at 7:00 am

Avoid the risks or persuading or negotiating with the Chapter 7 trustee by solving your preference problem through Chapter 13. 

 

Our last several blog posts have been about the problem of preference payments:

  • 3 weeks ago we introduced the problem resulting from paying a favored creditor before you file bankruptcy
  • 2 weeks ago we discussed avoiding the problem by delaying filing your case or persuading the trustee to do nothing
  • Last week was about negotiating with the trustee to pay off the preference money yourself

Today we get into how to solve this problem by filing a Chapter 13 “adjustment of debts” case instead of a Chapter 7 “straight bankruptcy” one.

When Filing a Chapter 13 Case May Be Worthwhile

A Chapter 13 case is very, very different from a Chapter 7 one. For starters, instead of taking about 4 months a Chapter 13 case almost always takes 3 to 5 YEARS.  Using it to resolve a preference is almost never a good enough reason to file a Chapter 13 case.

But Chapter 13 CAN be better than Chapter 7 in many situations. It can accomplish a lot that Chapter 7 can’t. So if you already have a good reason or two to consider a Chapter 13 case, using it to solve a preference problem as well may push you in that direction.

Let’s say you have an expensive vehicle loan that you’re a month behind on. Chapter 13 would allow you to cramdown that loan. That would reduce your monthly payments and the total you would pay. Plus you wouldn’t have to catch up on the missed payment. Yet you’re on the fence as you wonder if the disadvantages of Chapter 13 outweigh these savings. So if you have a preference problem that Chapter 13 would deal with, that could push you into deciding on Chapter 13.

When You Really Need to Use Chapter 13

The Chapter 7 solutions don’t always work:

  • You often don’t have the luxury of delaying your bankruptcy filing enough so that more than 90 days has passed after the preferential payment. (Or a full year has passed, if the payment was to an “insider” creditor)
  • The trustee may pursue your previously paid creditor in spite of your bankruptcy lawyer’s efforts to dissuade the trustee.
  • You may not have the ability to pay off the trustee yourself. Or you may owe too much to pay it off fast enough to satisfy the trustee.

So you’re looking to file bankruptcy and your lawyer advises you that none of these three are going to work. Then, if you want to avoid having a Chapter 7 trustee chasing your prior-paid creditor, consider the Chapter 13 solution.

How Does Chapter 13 Fix a Preference Problem?

Chapter 13 solves the preference problem by enabling you to pay the trustee within your payment plan. You pay enough extra money into your Chapter 13 plan to pay what you would have paid a Chapter 7 trustee. But you have significant advantages in doing it this way.

But first an example to show how this works. Assume you paid off a debt of $2,500 to your sister 60 days before filing bankruptcy. You’d gotten a tax refund and she desperately needed the money. You’d put her off for years and then had promised to pay her from the refund. Now you’re about to have your home foreclosed on so you can’t wait to file bankruptcy. If you filed a Chapter 7 case the bankruptcy trustee would force your sister to return the $2,500. She’d get sued if she didn’t. You absolutely don’t want that to happen. So you file a Chapter 13 case—which you be doing anyway to save your home. Your lawyer calculates your Chapter 13 payment plan to pay an extra $2,500 beyond what you would otherwise need to pay. You pay that extra amount over the course of your 3-to-5-year case. This may increase your monthly payment somewhat, or it may extend the length of your case. But your sister would not have to pay back anything. The trustee would have no need to even contact her.

Advantages of Using Chapter 13

1. When you file a Chapter 7 case hoping to persuade the trustee not to pursue your prior payee, you may not know if that’ll work. Or if you hope to negotiate payments to the trustee, you don’t know if that will work. The trustee may want to try to get the money out of your payee after all. Or your trustee may reject your offer in order to get the money faster from your payee. Using Chapter 13 takes away these risks. The system allows you to use your Chapter 13 plan to pay what’s needed.

2. Chapter 13 gives you much more time to pay what you need to pay. A Chapter 7 trustee’s job is liquidation. He or she is under pressure to wrap up your case quickly, and so will pressure you to pay quickly. Ask your lawyer but generally a Chapter 7 trustee won’t give you more than a year to pay up. And he or she may simply require you to pay it all in a lump sum. In contrast, under Chapter 13 you have 3 to 5 years to pay.

3. You have more control over where the money goes, and when. Chapter 13 is often used to pay creditors that you want to or need to pay. For example, if you owe a recent income tax debt or back child support, it’s much better to have those debts paid through a court-ordered Chapter 13 payment plan.

4. You have more control over when debts are paid. If you have a debt or two that needs to be paid quickly, that can often be paid first. For example, if you need to catch up on a car payment (because it doesn’t qualify for cramdown), your plan may front-load money there. The extra money you are paying because of the preference can be put to better use early in your case.

 

Fully Complying with Your Chapter 13 Case

March 12th, 2018 at 7:00 am

Besides fulfilling the terms of your Chapter 13 payment plan, you may need to make other payments and meet other requirements. 

 

The bankruptcy court’s approval of your payment plan (at the Confirmation Hearing) happens about 2-to-4 months after filing your case. At that point your Chapter 13 case is fully on its way. You likely have about 3 to 5 years altogether to finish the case. Having gotten to this crucial point, there are a few other crucial steps you need to fulfill to successfully finish your case.

Last time we got into three of these:

  • Do your “debtor education”
  • Avoid or defeat “nondischargeability complaints”
  • Pay your Chapter 13 plan payments

Today we lay out two other crucial steps.

Pay Any Obligations NOT Within Your Plan Payment

In many Chapter 13 cases you pay nothing to your creditors except the single plan payment each month. The trustee divides that payment among your creditors as laid out in your court-approved plan. You pay nothing else to any creditor.  

But in other cases, you pay one or more creditors directly. This may be referred to paying “outside the plan.”

To be clear, you are not paying these secretly. Your plan clearly refers to these debts and their payments. So the bankruptcy court approves these payments. They’re just not included within the single monthly plan payment, for various possible reasons. (See the explanation in paragraph 3.1 of the official Chapter 13 Plan form.)

Often these are ongoing payments on secured debts such as home mortgages or vehicle loans. Direct payments are more likely used when you’re current and are simply continuing to make the regular payments. In some jurisdictions it’s considered easier for everybody that you continue to pay such straightforward payments directly to the creditor. Paying them through the trustee is seen as causing too much delay and accounting confusion.

Naturally it’s essential that you know whether all of your creditors are being taken care of through the single plan payment, or whether there’s a creditor or two you need to pay directly. Your income and expense schedules should make that clear, as well as the plan itself. But if you have any doubt, be sure to ask your bankruptcy lawyer.

Do Anything Else Required

Two documents combined—your plan and the Order Confirming Plan signed by the judge—are the law of your case. These documents contain requirements beyond making payments. They include some standard ones that apply to just about all consumer debtors. There may also be some special requirements for you.

The standard requirements usually include:

  • providing the trustee with copies of your annual income tax returns (paragraph 2.3 of the official Chapter 13 Plan form)
  • turning over to the trustee “income tax refunds received during the plan term” (paragraph 2.3 of the official Chapter 13 Plan form)
  • avoid using credit without prior Chapter 13 trustee or bankruptcy court permission

Special requirements can include:

  • a specified deadline to sell an asset
  • permission for you to use an income tax refund for a specific expense, such as a vehicle repair
  • a requirement to report when an unemployed spouse gets employed

Notice that these special requirements often relate to anticipated changes to your income, expenses, or assets. These changes can directly affect your future obligations under your Chapter 13 case. They may well require you to adjust the payment terms of your plan in the future.

Conclusion

It does take consistent effort to complete a Chapter 13 case successfully. But that effort is worthwhile because it gains you tremendous benefits. Chapter 13 provides many tools that Chapter 7 cannot. Through those tools you can likely meet some otherwise impossible goals. Once you’ve decided that these goals are worthwhile, usually the effort will be worthwhile as well. 

 

Examples of Reaffirmation Agreement vs. Chapter 13

January 5th, 2018 at 8:00 am

Here are examples of the reaffirmation of a secured debt (like a vehicle loan) in a Chapter 7 case vs. addressing it in a Chapter 13 case. 

 

The last blog post was about when to reaffirm a secured debt under Chapter 7 and when to handle that under Chapter 13 instead. This kind of comparison of options can get a bit dry. So today we’re demonstrating how it really works with some examples. We change the facts a few times to show when each of these two options makes more sense.

The Initial Facts

Let’s say a guy named Trevor just fell two months behind on his vehicle loan. He’s at immediate risk of getting his car repossessed. He really needs to keep his vehicle to get to and from work. He’s always behind on his vehicle loan because he has so many other debts—mostly medical bill and unsecured credit cards. What’s especially killing him is that he got sued on some big medical bills and is getting his wages garnished.

Trevor sees a good bankruptcy lawyer. She tells him that filing quickly under either Chapter 7 or 13 would stop the repossession. Either option would also permanently stop the paycheck garnishment. He tells her that his brother can give him the money to catch up on the two missed payments.  The brother is only willing to do this if he takes care of his other debts with some kind of bankruptcy solution.

Chapter 7 Reaffirmation If Can Bring Secured Debt Current

Much of the time if you want to keep collateral on a secured debt in a Chapter 7 case you must bring the debt current within a few weeks, and then reaffirm the debt on its original terms. This is particularly true with vehicle loans with the larger national lenders. In other words, you have to agree to remain fully liable on the debt. You have to agree to continue being legally bound by all the terms of the contract. (See our recent blog posts about the risks of reaffirming.)

Trevor has a relatively easy way to bring his vehicle loan current, thanks to his brother. So his lawyer recommends that he files a Chapter 7 “straight bankruptcy” case. Shortly after filing he can bring the vehicle loan current and sign a reaffirmation agreement. With all his other debts being discharged (legally written off), he’ll be able to keep current on his car payments. Problems solved.

If He Can’t Catch Up Fast

But what if Trevor didn’t have his brother’s help? He may not be able to catch up fast enough to be able to reaffirm his vehicle loan. In a Chapter 7 case he has about 2 months after filing—3 months at the most—to catch up. That’s because you usually have to get current before the creditor will let you reaffirm. And you have to reaffirm before the bankruptcy court enters the “discharge order” about 3 months after filing.

Assuming that Trevor didn’t think he could catch up in time, and because he absolutely didn’t want to risk not being able to keep his car, his lawyer would likely recommend Chapter 13 “adjustment of debts” filing instead. This would give him many months—maybe even a couple years—to bring the vehicle loan current.

Other Special Debts Encouraging a Chapter 13 Filing

Now also assume that Trevor’s financial pressures had also put him quite a few months behind on his spousal support.  His ex-spouse had actually been quite flexible, letting him skip payments here and there, or send smaller amounts. But once the lawsuit’s garnishments started, his spousal support payments became even more irregular. So, his ex-spouse got fed up and sent the account to the state’s support enforcement agency. Trevor now finds himself $4,500 behind on support, with aggressive collection to start any moment. And a Chapter 7 filing won’t stop the state’s collection of this support.

Trevor’s lawyer tells him that a Chapter 13 filing WILL stop collection for this $4,500 of support. He’d have up to 5 years to bring that current. His Chapter 13 payment plan would be based on what he could afford to pay. That plan would show how he would—over time—catch up on both the vehicle loan arrearage and the support arrearage, while keeping current on ongoing payments.

His lawyer tells Trevor that a possible downside to Chapter 13 is he’d have to pay all that he could afford to his other creditors during 3 years. (5 years if his income is too high based on his state and family size.) But there may be very little—even possibly nothing—going to his other debts if most of his income goes to living expenses and to bring these two special debts current.

Trevor decides on a Chapter 13 case. He will be able to keep his vehicle, catching up as his budget allows. He also has a reasonable way to bring his big spousal support arrearage current. He knows that at the end of the process he’ll be current on these two, and will otherwise be completely debt free.

 

Get a New Financial Start with this New Year

January 1st, 2018 at 8:00 am

Get a new financial start for 2018. Stop creditor pressures immediately, write off all or most debts, and responsibly deal with the rest.

 

An Overall New Financial Start

Get a new start by discharging (permanently, legally writing off) all or most of your debts. If you have mostly consumer or small business debts you have two main choices about how to make this happen.

A New Start with Chapter 7

With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.

Imagine if you filed a Chapter 7 case this month. Immediately your creditors could no longer chase you or anything of yours. All or most of your debts would forever be gone by April or May. The remaining critical debt or two you’d be able to handle sensibly. That quickly you’d have a new financial start.

A New Start with Chapter 13

With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.

Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts. You often have much more flexibility with secured debts like home mortgages and car loans. Same thing with income taxes and child support arrearages, among others, that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.

You finish your Chapter 13 payment plan in usually 3 to 5 years. Whatever debts you have not paid off get discharged. You are debt-free with limited exceptions like a home mortgage you want to still pay.

Under Chapter 13 you get immediate relief and a new start through a reasonable payment plan based on your budget. Then when that plan is done it’s followed by a full new start with (virtually) no remaining debts.

So, if you filed a Chapter 13 case this month, immediately your creditors could not chase you or any co-signers. You’d enter into a doable payment plan to handle your special debts in ways much better than Chapter 7. And when that plan is paid off you’ll have a full new financial start.

 

Simple and Not-so-simple Debts in Chapter 7 and 13

November 24th, 2017 at 8:00 am

Very broadly speaking Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.


Debts in Bankruptcy

When deciding between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” you look at many factors. You have to meet certain qualifications (usually easy to meet) to file either one. The amount of your income, the nature of your assets, whether you own a business, and your immediate and long-term goals—all of these come into play.

But the most important consideration is your debts. Bankruptcy is of course mostly a tool for dealing with your debts. Chapter 7 and Chapter 13 each deal better than the other with certain types and combinations of debts.

Today we get into which of these two consumer bankruptcy options is better for which debt scenarios.

A Helpful Starting Point

Our first sentence gives us a good starting point. Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.

So if you have mostly or all simple debts, then Chapter 7 will tend to be better for you. If you have a number of difficult debts, Chapter 13 will more likely be better.

The Different Types of Debts

There are basically three types of debts:

  1. General unsecured—There’s no collateral or “security” tied to these debts (“unsecured”), and they aren’t “priority”—given special treatment in the law. General unsecured debts include most credit cards, medical debts, no-collateral personal loans, utility bills, back rent, and many, many others.
  2. Secured—The debts are legally tied to collateral or with a lien on something of value. Included are home mortgages, vehicle loans, retail debts secured by the goods purchased, personal loans secured against personal possessions, business loans secured by business and/or personal assets—all debts secured by anything you own.
  3. Priority—Simply, debts that the law treats as special for whatever policy reason. The main examples for consumer debtors are recent income and other taxes, and child and spousal support.

These different types of debts are treated differently in Chapter 7 vs. Chapter 13.

Debt Scenarios Handled Well by Chapter 7

If ALL your debts are general unsecured debts, Chapter 7 will more likely be your better option. Most general unsecured debts are discharged—legally written off—in a Chapter 7 case. So you file a Chapter 7 case through your bankruptcy lawyer in usually less than 4 months all your debts are discharged. You have your fresh financial start.

Some secured debts are handled reasonably well in a Chapter 7 case. If you are current on a home mortgage or vehicle loan, you can usually keep your home or vehicle by maintaining your payments and “reaffirming” the debt. If you are very close to being current, you may be able to catch up and “reaffirm” as well. If you are surrendering a home or vehicle (or any other collateral) Chapter 7 often works well for that.

Chapter 7 may be appropriate for dealing with certain limited priority debts. If you owe an income tax debt or are behind on child support, discharging all or most of your other debts may enable you to catch up on the tax or support. But you are subject to collection actions by the tax authorities as soon as your Chapter 7 is over. And as for support debt, a Chapter 7 filing does not stop its collection even while your bankruptcy case is active. So if you owe any tax debt that you can’t comfortably pay through a standard IRS/state payment plan, Chapter 13 may be the better option. And if you are behind on child or spousal support, only Chapter 13 can stop the aggressive collection actions that an ex-spouse or support collection agencies can use against you.

Debt Scenarios Not Handled Well by Chapter 13

If ALL your debts are general unsecured debts, Chapter 13 is usually not your better option (assuming you have a choice). That’s because unlike Chapter 7, in a Chapter 13 case you usually have to pay a portion of your general unsecured debts. You pay as much of those debts as you can afford to do so over a 3 to 5-year period. Then the portion you did not pay gets discharged.

It’s important to understand that the general unsecured debts are often paid relatively little in a Chapter 13 case. It’s common that you’d pay only 5 or 10 cents on the dollar, and almost always no interest or penalties. In many parts of the country you can even pay 0 cents on the dollar. That’s because the debtor owes secured or priority debts which use up all the money he or she can afford to pay.

Debt Scenarios Handled Well by Chapter 13

Chapter 13 deals with secured debts often better than does Chapter 7. That’s especially true if you’re behind on a debt with collateral you really want to keep. Under Chapter 7 you’d usually have to get current on a vehicle almost immediately to be able to keep it. You have many months—or even a year or two—to catch up under Chapter 13. If you’re behind on your home mortgage you get up to 5 years to catch up.

Chapter 13 also gives you some very powerful tools for dealing with secured debts unavailable under Chapter 7. You may be able to “strip” a second or third mortgage off your home’s title. You may be able to do a “cramdown” on your vehicle loan or other personal property debt, potentially greatly reducing your monthly payment and the total you pay.

With priority debts, Chapter 13 gives you tremendous power and flexibility. It stops collection of support arrearage, and gives you months or years to catch up—as long as you keep current on ongoing support. With unpaid income taxes Chapter 13 provides many benefits. It prevents future tax liens. It enables you to deal with prior-recorded tax liens extremely well. Chapter 13 gives you up to 5 years to pay taxes that can’t be discharged. Usually throughout that time you pay no ongoing interest or penalties.

Conclusion 

It’s a bit of an oversimplification to say that simple debts lead to Chapter 7 while more complicated ones lead to Chapter 13. But, as we’ve just shown, that’s often the situation.

But just as you are a unique human being, your circumstances are unique. Get the unique assessment of your options that you need from an experienced and empathetic bankruptcy lawyer.

 

The Automatic Stay in Chapter 7 and 13

November 22nd, 2017 at 8:00 am

Filing a Chapter 7 or 13 case both stop creditor collection actions against you just the same. But after that the differences are huge. 


Last time we focused on how you can use the Chapter 7 and Chapter 13 options to your time advantage. Chapter 7 “straight bankruptcy” is very fast. If all or most of your debts can be discharged (written off), that quickness can be an important advantage. But its speed can be a downside. If you are behind on a secured debt, Chapter 13’s 3-to-5-year-long duration can be a crucial advantage. It not only buys you time but gives your protection and flexibility for dealing with such special debts.

So, both bankruptcy options provide protection, but of different kinds. Let’s see how these work to see which would be better for you.

The Immediate Protection

With either kind of bankruptcy you get immediate relief from almost all creditor collection actions.

The “automatic stay” kicks in simultaneously with the filing of your Chapter 7 or 13 bankruptcy petition. Its power is in how fast it works and how strongly it prevents creditors from taking further collection action against you. (See Section 362(a) of the U.S. Bankruptcy Code.)

How Long the Protection Lasts

The automatic stay lasts as long as your case does. So, it expires about 3-4 months after you and your bankruptcy lawyer file a Chapter 7 case. On the other hand, it expires about 3-to-5-years after filing a Chapter 13 case. (See Section 362(c) of the U.S. Bankruptcy Code.)

However, a creditor may be able to end that protection as applicable to that creditor. Creditors usually can’t prevent the automatic stay from going into immediate effect at the beginning of your case. However creditors CAN ask for “relief from the automatic stay.” That is, AFTER the automatic stay goes into effect a creditor can ask the bankruptcy court to make an exception for that creditor and let it pursue you or its collateral.   (See Section 362(d) of the U.S. Bankruptcy Code.)

How does all this all works in practice under Chapter 7 vs. Chapter 13?

Chapter 7 Is Not Designed for Ongoing Protection

As we’ve said, the automatic stay protection lasts just 3-4 months at best under Chapter 7. But in addition, certain important creditors have more reason to ask for “relief from stay” to make that even shorter.

Chapter 7 provides no mechanism for dealing with important debts that you want or need to pay. Consider debts backed by collateral you want to keep, such as a home mortgage or vehicle loan. If you’ve fallen behind there’s no tool under Chapter 7 for catching up. You have to make arrangements directly with the creditor. If you (through your lawyer) and the creditor can agree, that’s fine. But if not, the creditor can file a motion asking for permission to foreclose on or repossess the collateral. It may even do so right after you file your case, before you’ve even started any negotiation. It’s signaling that you better meet its terms or else it wants to take back the home or vehicle.

Chapter 13 IS for Ongoing Protection

Chapter 13 starts with the fact that the automatic stay lasts SO much longer. It lasts a few years instead of a few months. But just as with Chapter 7, under Chapter 13 a creditor with collateral can file a motion asking for permission to foreclose on or repossess the collateral.

The big difference is that Chapter 13 provides a mechanism for catching up on such debts. If you’re behind on a mortgage or loan with collateral, your Chapter 13 payment plan will specify how much you’ll pay each month to catch up. Assuming your proposed terms are sensible, the creditor will likely go along.

A key difference is that Chapter 13 gives you an efficient and effective way to take the initiative. Because creditors know that bankruptcy judges will approve reasonable terms, they don’t object. And they don’t waste their time and money asking for “relief from stay” knowing it would have no effect. Then once your proposed payment plan is formally approved by the judge, creditors must live with your terms.

Be aware that if a creditor thinks your catch-up terms are not reasonable it can object or file a motion. Then usually a compromise can be worked out.

Of course you have to comply with the terms of your plan as approved by the bankruptcy judge. If you don’t, the affected creditor can then file a motion asking to be allowed to pursue the collateral. Depending on the facts you may be given another chance or you may not.

Conclusion

The relatively short period of protection under Chapter 7 may be just fine if you have no surviving debts. Chapter 7 may also be fine if the surviving debt can be handled reasonably through simple negotiation. But Chapter 13 provides longer and stronger protection for you regarding past-due debts secured by collateral you want to keep.

 

Using Time to Your Advantage in Chapter 7 and 13

November 20th, 2017 at 8:00 am

Chapter 7’s big advantage is that it’s quick. Chapter 13’s big advantage is that it buys you more time to do what you want or need to do.


A Key Distinction-Treatment of Time

We’re starting a series of blog posts about the practical differences between Chapter 7 and Chapter 13 bankruptcy. Before getting down into the details let’s look at a difference that affects just about everything else—time. These two options deal with time very differently.

Sometimes getting something done quickly is to your advantage. Sometimes getting more time to get something done is to your advantage. Here’s how these play out with Chapter 7 and 13.

Chapter 7—In and Out Fast

If you’re like most people thinking about bankruptcy, you’ve been hurting financially for a long time. Understandably you want to get a fresh financial start fast.

With any kind of bankruptcy you get relief from almost all creditor collection actions the minute you file your case. Then with Chapter 7 “straight bankruptcy” your debts are discharged less than 4 months from the day you file the case. All or most of your creditors can never again attempt to collect on the debts.

So, you get immediate relief, your creditors are put on hold, and then just a few months later you’re done. You have your fresh start.

Chapter 7—One Point in Time

Chapter 7 bases just about everything on that moment in time when your case is filed. It particularly focuses in on your assets as of that moment. Generally your future assets are not relevant, unless they derive from assets owned as of the date of filing. (Rental income from property you own now would be an exception.)  Future income doesn’t count as present assets, unless it was for work done before filing.

Chapter 7—Short-Lived Automatic Stay

One problem with Chapter 7 is it can be TOO quick, when it comes to protecting you from certain creditors. The “automatic stay” is the name of the protection that kicks in the moment you file a bankruptcy case. That protection lasts only as long as the case is open. In a Chapter 7 case that means only 3-4 months, at the most.

Chapter 7 also gives you no enforceable mechanism for making payments on debts that you want or need to pay. For example, if you’re behind on a mortgage and want to catch up you have to bring it current by whatever terms and timetable the mortgage holder demands. There is nothing in Chapter 7 that compels the mortgage holder to give you more time. It’s the same if you’re behind on a vehicle loan, child or spousal support, or recent income taxes. You have little or no protection, and no power to compel these kinds of creditors to be more flexible.

(Chapter 7 does allow for “reaffirming” secured debts like vehicle loans. But “reaffirmation” doesn’t usually help if you’re behind on payments. It just makes you liable as if you hadn’t filed bankruptcy. And it doesn’t apply to other kinds of not-discharged debts like child/spousal support or income taxes.)

Chapter 13—Stretching Out Time in Your Favor

A quick bankruptcy procedure isn’t always in your favor. So getting in and out of bankruptcy quickly isn’t good if you’re left with ongoing special debts.

That’s not a problem if the surviving debt is one you can readily handle. You may have had trouble keeping up with payments on your vehicle loan. But after discharging all or most of your other debts under chapter 7 you may have no trouble making them. Same thing may be true if you still owe a relatively small amount of nondischarged income tax. You may well be able to pay it off conveniently through a negotiated monthly payment agreement.

Problems occur when the debt that would survive a Chapter 7 case is too large to handle on your own. It’s not at all unusual to have more than one such debt. Then you need the substantial additional time that Chapter 13 “adjustment of debts” gives you.

With Chapter 13 you’re not effectively being left on your own to deal with these special debts as under Chapter 7. Instead Chapter 13 can give you up to 5 years of time and protection. You have up to that much time to bring a debt current or to pay it off.

Chapter 13—Flexible Time

Chapter 13 doesn’t just buy you time to deal with those other problems. It buys you flexible time. It does so in three ways.

First, the amount of time it buys flexibly depends mostly on your budget. If your income qualifies you for a 3-year plan, you’re usually allowed to stretch it out longer. If you just need an extra 3 months, or the full 5 years, or anything in between, your personal budget is often the main determinant.

Second, if you have more than one important debt you need to pay, you often have flexibility about that. For example, let’s say you owe back home property taxes and child support, and recent income tax. All of them have to be paid in full before the end of your Chapter 13 case. But the property taxes accrue high interest. The child support you feel morally obligated to catch up fast. The income tax is not accruing interest. Your Chapter 13 payment plan could likely get the property tax and child support caught up before paying anything on the income taxes.

Third, Chapter 13 flexibly keeps your options open. For example, if you’re considering selling your home at some point, your payment plan could schedule that for 3 years into your case. You could keep your plan payments lower until paying a lump sum out of those later home sale proceeds. Or you may be able to leave that potential home sale open-ended, depending on what happens in the meantime.

Conclusion

As you can see, Chapter 7 and 13 each turn time in your favor, depending on what you need. If you don’t have a lot of debt that would not be discharged in a Chapter 7 case, then its quickness can be a big advantage. If you do have debt that would survive, Chapter 13’s length can be a great advantage. It not only buys you time but gives your protection and flexibility for dealing with these special debts.

 

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.

 

Good Timing Can Shorten Your Chapter 13 Case by 2 Years

October 11th, 2017 at 7:00 am


We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.  


Chapter 7 vs. Chapter 13

Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.

But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.

So assume you want to file a Chapter 13 case. One important question is how long you will be required to pay into your payment plan. Sometimes you’d want to have as much time as possible to stretch out and lower your plan payments. But in other circumstances you’d just want to get it over with as soon as possible. Then you can get on with life, and if you want start rebuilding your credit.

Your “Income” Dictates the Length of Your Chapter 13 Case

There is no “means test” under Chapter 13. Yet the same unusual way of calculating income in the Chapter 7 “means test” is used in Chapter 13. That same unusual calculation of income determines whether your payment plan can be 3 years long or instead must last 5 years.

So let’s look briefly again at how income is calculated.

The Chapter 13 Calculation of Income

To calculate your income for this purpose:

  • includes almost all sources of money other than from Social Security (not just taxable income)
  • total all gross amounts received precisely during the 6 FULL calendar months prior to filing your case
  • multiply this 6-month amount by 2 for the annual “income” total
  • compare that annualized amount to the “median income” for your state and family size

You may finish your Chapter 13 case in 3 years instead of 5 if your income is no larger than the applicable “median income” for your state and family size.

The “median income” amounts are adjusted regularly and are available online. You can find those state-by-state amounts for cases filed starting May 1, 2017 and for several months thereafter here. (And if you’re reading this well after this date, check here to see if this table has subsequently been updated.)

If you want you can go through each of the specific steps in this calculation right on the official bankruptcy court form. Download or print the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (effective 12/1/15).

How Smart Timing of Filing Can Make Such a Difference

See our last blog post for an example how even just a day or two difference in the date of filing a case can put you over or under your applicable “median income” amount.

This is even more crucial in Chapter 13 than in Chapter 7. In Chapter 7 the income step is just the first step of the “means test.” Even with higher-than-median income you may be able to pass the “means test” based on your expenses or other considerations. But under Chapter 13 your income as calculated above determines whether or not you’re required to be in it for 5 years.

Important Practical Notes

Even if your income ALLOWS you to finish in 3 years you can usually take longer if you want. As mentioned above, you may want to stretch out and so reduce your monthly payments. But in this situation you’d not be REQUIRED to go the full 5 years. And you generally don’t pay any more to your creditors while doing so.

Also, if you ARE required to go the full 5 years based on your income that doesn’t always hurt you. To pay everything you want and need to pay may take that long, without necessarily paying more to your creditors.

However, there ARE situations in which based on your budget you could finish your payment plan in 3 years. Or other situations in which you could finish sometime between 3 and 5 years. In these situations being required to go the full 5 years means paying more to your creditors—sometimes much more. And it delays getting to that point in time when you can actually start your fresh financial start.

 

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