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Archive for the ‘Chapter 13 trustee’ tag

“Preferences” Around the Holidays

December 3rd, 2018 at 8:00 am

Do you feel like you should pay on or pay off a certain debt now, even though you’re behind on all your debts?  It may be dangerous to do so. 


Last week we explained how giving a significant gift before bankruptcy could cause problems during bankruptcy. This also applies to selling something for much less than it is worth. Such a gift or sale might possibly be considered a “fraudulent transfer.”

A similar problem could arise from paying a creditor before you file bankruptcy. That’s especially true if it’s somebody you want to favor or maybe don’t even see as a regular creditor. This payment might possibly be considered a “preference,” or a “preferential payment.”  This is today’s topic.

Your Desire and Ability to Pay a Special Creditor

Especially around this time of year you may be extra motivated to pay on or pay off a special debt. A relative, or a friend, may really need of the money. He or she may be pressuring you to pay.

You might be thinking about filing bankruptcy and you don’t want it to affect this person. So you pay him or her off thinking that would help. Or you do so because you don’t want the person to know about your bankruptcy, for whatever personal reason.  

Besides wanting to, you may be able to pay on a special debt this time of year more than usual. For many people because of the expenses of the holidays money is especially tight. But, as mentioned a couple weeks ago:

The month of December is the month that people receive more income than any other month of the year. [F]or at least the past 9 years U.S. personal income was the highest in December… .

You may be getting a bonus from work or more income from working extra hours or part-time job during the holidays. So you might be able to pay a special debt now more than at any recent time.

So you may have the desire and ability to pay a debt now, before filing bankruptcy. But it may not be a smart thing to do.

What Makes a “Preference”?

If during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you’d paid to this creditor earlier. See Section 547(b) and (c) of the U.S. Bankruptcy Code. 

This one-year look-back period is shortened to only 90 days for creditors that are not “insiders.” The Bankruptcy Code defines “insiders” basically as relatives and business associates, but the definition is open-ended. See Section 101(31). So it could include friends and just about anybody that you have a personal reason to favor. Your bankruptcy lawyer will advise you whether a potential preferential payment was to an insider or not.

Your favored creditor could be required to return the money (or other form of payment) that you’d paid. The money would usually not be given to you but to your bankruptcy trustee. The trustee would then distribute it among your creditors.

The result: instead of satisfying your favored creditor as you’d intended, you could have an unhappy one. This is not.

What’s the Point of All This?

Preference law is related to one of the most basic principles of bankruptcy—equal treatment of legally similar creditors. People or businesses which are financially hurting must be discouraged from favoring any of their creditors before filing bankruptcy. Otherwise they would—the theory goes—pay all of their last money or other resources to their favored creditors, leaving nothing for the rest of the creditors. Under preference law, if they do so within the 365-day/90-day look-back periods, those payments made to the favored creditor could be taken back from that creditor. This disincentive is supposed to make the situation fairer to all the creditors.

“Preferences” Can Be Frustrating, But They’re Avoidable

“Preferences” are relatively rare problems in consumer bankruptcy cases, partly because they are relatively easy to avoid. Next week we’ll give you a scenario showing a potentially preferential payment made during the holidays, and practical ways to avoid it.


The Chapter 13 Trustee

September 8th, 2017 at 7:00 am

The Chapter 13 trustee is an important player in your “adjustment of debts” case so it helps to know how to deal with him or her. 


Chapter 13 Trustee vs. the Chapter 7 One

In a Chapter 7 “straight bankruptcy” case the bankruptcy trustee’s role is very different than in a Chapter 13 case.

Most Chapter 7 consumer cases involve a quick determination whether you can keep everything you own—whether it’s all “exempt.”  It’s the Chapter 7 trustee’s job to determine this. This would usually happen within about a month after you and your bankruptcy lawyer would file your case. If everything is exempt—as it usually is—your case is usually done 2 or 3 months later. The trustee has some other important roles but in most cases nothing comes of them. Within about 4 months of filing your case is finished.

A Chapter 13 case is very different and so the role of the trustee is as well. Your Chapter 13 case is based on a three-to-five-year payment plan. So a lot of it involves putting together, getting court approval for, and then implementing that payment plan. The plan usually greatly reduces what you need to pay to most of your creditors. It often allows you to pay much more to secured creditors and special “priority” creditors to achieve certain goals. Then by the end of your Chapter 13 case usually some of your debts have been paid off or else get written off then.

The Chapter 13 trustee is involved in every step of this process, and has various roles along the way.

Plan Requirements

The Chapter 13 payment plan you and your bankruptcy lawyer propose can have a fair amount of flexibility. But that plan also has to follow the law in many ways. The trustee’s first role is to ensure that your plan complies with legal requirements. So the trustee raises concerns about any aspects that he or she finds inappropriate. He or she works with you and your lawyer to adjust the plan accordingly. For example, the trustee tries to ensure you pay into your plan as much as the law requires you to. In this role the trustee acts on behalf of all the creditors, especially the unsecured ones. Usually these kinds of trustee concerns are resolved through compromise, or by having the bankruptcy judge decide the matter.

Monitoring the Plan

Your Chapter 13 plan is approved by the judge, usually about two or three months after you file your case. It’s approved, or “confirmed,” either as originally proposed or after it goes through some adjustments. After “confirmation” the trustee and his or her staff continues to monitor your case closely to see if you are complying with the plan throughout the three-to-five-years that it will likely take to complete. They make sure you’re making the monthly payments. They review your yearly income tax returns to see if your income stays reasonably stable. The trustee’s office contacts you and your lawyer about concerns that may arise. They can file a motion to dismiss your case if you don’t comply with your payment plan.

Disburse Payments to Creditors

The trustee collects payments from you and distributes the money according to the terms of the court-approved plan.  Related to this, the trustee’s staff reviews your creditors’ proofs of claim. These are documents filed by your creditors to show how much they claim you owe. The trustee may object to ones he or she believes are not appropriate. Then, when you have finished paying all that’s required under your plan, the trustee informs you and the bankruptcy court. Then the court discharges (writes off) the rest of your remaining debt (except for long-term debts like a home mortgage).

Final Comments

Both Chapter 7 and Chapter 13 trustees are not court employees but private individuals, carefully vetted and monitored. The Chapter 7 trustees are selected out of a “panel” of several trustees within each bankruptcy court. So your lawyer would usually not know which of the trustees from the panel would be assigned to your case. In contrast, there is usually only one “standing” Chapter 13 trustee assigned cases from each bankruptcy court or area. So your lawyer will usually know which Chapter 13 trustee will be assigned to your case.


Your Voluntary Dismissal of a Chapter 13 Case

August 25th, 2017 at 7:00 am

The Bankruptcy Code explicitly says that, at the request of the person in a Chapter 13 case, the bankruptcy “court shall dismiss” the case. 


The last three blog posts have been about amending, or “modifying,” your Chapter 13 payment plan. But what if you don’t want to be in the Chapter 13 case at all? Can you just end it altogether?

Yes, almost always you can end a Chapter 13 case, by getting it “dismissed.”.

A Clearly Stated, Special Right

You can dismiss a Chapter 13 case easily because the Bankruptcy Code says you can, and says so very clearly:

On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].

(Section 1307(b) of the Bankruptcy Code.)

Two parts of this deserve to be highlighted:

  1. You can ask for a dismissal “at any time”—at any point in the life of a Chapter 13 case. So you can dismiss it soon after filing, if you realize you’ve made a mistake and change your mind. And you can dismiss your case after your payment plan has been approved by the court, for example, if your circumstances change and you don’t want to be in it any more.  
  2. The law says that “the court shall” dismiss the case whenever you ask. This seems to mean that the bankruptcy court doesn’t have any choice about it. The wording isn’t that the court “may” but rather that it “shall” dismiss your Chapter 13 case.

As a result if you ever want your Chapter 13 case dismissed, usually within a day or so of your bankruptcy lawyer filing a motion to dismiss your case will be dismissed.

Be aware that there isn’t a similar statute enabling the easy dismissal of a Chapter 7 “straight bankruptcy” case. So this is a powerful right special to Chapter 13.

Why Is This Reserved for Chapter 13?

Most likely Congress included this right to provide an incentive for people to file under Chapter 13. Naturally you’ll be more inclined to try a particular legal solution if you can always get out of it. The idea is to encourage people to pay part of their debts instead of writing them off under Chapter 7.

In fact Congress thought this right to dismiss so important that you can’t be forced to give it up. The statute finishes by saying: “Any waiver of [this] right to dismiss… is unenforceable.” (Section 1307(b)) You can‘t be forced to sign away this right by contract or otherwise.

The Importance of the Dismissal Option

A Chapter 13 case lasts a long time compared to a Chapter 7 case—usually 3 to 5 years. A lot can happen during that time. So it can be important to be able to get out.

The major reason you filed your case may no longer apply. For example, you may have filed to catch up on home mortgage payments but you get a job out of state. So now you decide to surrender or sell the home instead, and don’t need the Chapter 13 case.

Or your financial circumstances change so that you don’t need Chapter 13 help, or else it doesn’t help you enough. In the example of being behind on your mortgage, if you came into some money you might be able to quickly catch up and no longer need the time that Chapter 13 buys you. Or your income goes down significantly so that you can’t catch up even within the extended time Chapter 13 provides.

In these and countless other circumstances, it’s good to be able to get out if that’s your best option.

But IS Dismissal Your Best Option?

As easy as it is to do, simply dismissing the case is often not your best option. That’s because most likely you have debts which you would continue to owe. Chapter 13 does not result in a “discharge”—legal write-off—of your debts until its successful completion. So if you dismiss before then you will continue to owe those debts. It may be better to instead “convert” into a Chapter 7 case. But there are situations when dismissal is the best. We’ll address these issues in the next few blog posts.

Can You Definitely Dismiss Your Case If You Want To?

In spite of what we said about the clear language in the statute, there may be some extreme situations when a debtor could not dismiss a Chapter 13 case.

There has been debate among bankruptcy judges about this. Some have decided that in situations of serious debtor abuse or fraud, the debtor can’t escape the jurisdiction of the court by simply getting his or her case dismissed. There may be other statutes or legal principles that can defeat even the clearly stated right of dismissal.  So in limited situations a judge might prevent a Chapter 13 case from being dismissed. 

However, in the vast majority of situations, just about as soon as you ask your Chapter 13 case will be dismissed.


Plan Modification After It’s Court-Approved

August 23rd, 2017 at 7:00 am

It’s good to know that your Chapter 13 payment plan can be changed during the 3 to 5 years the case lasts to address changing circumstances.  


Last time we discussed making adjustments in your Chapter 13 plan during the first couple months of the case. That’s when you and your lawyer may adjust your plan to get court approval, or “confirmation.” Today we get into changes you may make to your payment plan AFTER confirmation.

Why Modify Your Plan After Confirmation?

A lot can happen during your Chapter 13 case, which will likely last 3 to 5 years.

  • Financial changes: Your income could go up or down; your expenses could do the same. If the changes are modest, that may not require a change in the terms of your plan. If they are more significant you may either benefit from changing your plan or you may be required to.
  • Goal changes: One or more of the goals of your case may have changed, resulting in changes to the plan. For example, you no longer want to keep your home because you got a job in a different state.
  • Legal assumption changes: Your plan might possibly get approved before some legal issue is resolved. For example, you may not yet know whether you’ll be able to establish that a big student loan debt qualifies for a “hardship discharge.” Or it may yet be clear whether a particular tax qualifies as a “priority” debt. Your plan may have to be modified depending on how such issues are resolved.
  • Planned-for changes:  Sometimes your lawyer puts together your Chapter 13 plan with the intent of modifying it later. For example, you intend to sell your home as soon as your two young adult children finish their schooling. So a couple of years into your case you modify your case reflecting that.

How Plans Are Modified After Confirmation

Changes to the terms of your Chapter 13 plan are made as follows:

  • After some change in your circumstances you and your bankruptcy lawyer discuss your options and you decide to modify your plan.
  • Based on information you provide him or her, the lawyer prepares the modified plan and any accompanying documents. Those documents include amended schedules of your income and expenses showing how those have changed.
  • You review and sign the modified plan and other documents; your lawyer files them at court. Copies are sent to all creditors or to all which are still legally involved.  (Those are mostly the ones who’ve filed proofs of claim in your case, confirming you owe them money). 
  • Creditors have an opportunity to object to the proposed modified plan. If one does your lawyer either resolves the objection informally with the creditor or else there’s a court hearing. (You very seldom need to attend such a hearing, but always can if you want to.) Often no one raises objections.
  • Once the deadline for objections has passed, or any objections are resolved, your new plan becomes the official plan in the case.

See Section 1329 of the U.S. Bankruptcy Code, “Modification of plan after confirmation.”

How Much Flexibility to Modify Your Plan

As we said a couple of blog posts ago, how much you can change your plan after it’s been court-approved is different in each case. Some plans have a huge amount of flexibility, some have very little.

Understandably a modified plan has to meet all the requirements of a Chapter 13 plan. Original plans that are on the edge of meeting the requirements tend to be harder to modify. Ones that easily meet the requirements tend to be easier.

An example of a plan that may be harder to modify is one in which a debtor fell far behind on a mortgage and is paying all they can afford in their plan to catch up. What happens if a couple years into their case their income significantly decreases or expenses increase? It may not be possible to reduce their plan payment to match what they can now afford. That’s because a plan can take no longer than 5 years. See Section 1329(c) of the Bankruptcy Code. If the original plan stretched payments out as long as possible there’s no flexibility to stretch them any further.

But there are many, many types of Chapter 13 plans with a lot of flexibility.

Take this example of a person who owes $4,000 in “priority” income taxes. This means these taxes can‘t be discharged under Chapter 7 and must be paid in full during a Chapter 13 plan. The original 3-year plan had monthly payments of $350 per month (covering all creditors). This was based on how much the person could afford. The remaining money beyond what was earmarked for the taxes went to pay the remaining creditors 30% of their debts. After a year of paying the $350 per month the person lost her job and got another one with $250 less net income. Her original plan can easily be modified to pay only $100 per month for the final two years. Why? That’s a total of $6,600  being paid into the plan. ($350 for the first 12 months and $100 for the remaining 24 = $4,200 + $2,400 = $6,600.) That’s more than enough to pay off the $4,000 in income taxes. The remaining creditors would receive much less than 30% but still receive all that the person can afford to pay. Assuming that the modified plan would meet all the other Chapter 13 requirements, it would be approved.

There are countless other kinds of successfully modifiable Chapter 13 plan. When you and your bankruptcy lawyer set up your original plan ask how modifiable it would likely be. You should not enter into a plan without discussing the scenarios in which it might need to be modified, and how successfully that could be done.


Chapter 13 Plan Modification

August 18th, 2017 at 7:00 am

Before committing to a Chapter 13 “adjustment of debts” it’s good to know that its plan can likely be “modified” if your situation changes. 


The Chapter 13 Plan

Chapter 13 is all about the payment plan. The point of Chapter 13 usually is to radically reduce most debts so you can afford to pay special debts. The Chapter 13 payment plan describes the details of how this is to happen.

For example, in your Chapter 13 plan you’ll pay a bunch of recent income taxes that can’t be discharged (written off) in a Chapter 7 case, while paying very little to the rest of your debts.

The most important practical aspect of such a plan is how much you will be paying each month—your plan payment. That payment generally covers all of your debts, although sometimes you’ll continue paying a mortgage or other secured debt directly.

The other main part of the plan describes which debts get paid, how much, and maybe when. Some debts are referred to by name in your plan, others just by category of debt. For example, the plan specifically lays out payment amounts going to a “priority” debt like the income taxes. But “general unsecured” debts are not named individually; the plan just states the anticipated percent-of-debt this category will be paid.

Here is a sample Chapter 13 plan form.

The Usual Procedure

A lot goes into preparing and getting approval for your plan, and then making it work.

Basically, your bankruptcy lawyer prepares a proposed Chapter 13 plan based on the information you provide him or her. He or she reviews and explains it to you in detail, making whatever changes are appropriate. The creditors have an opportunity to review the plan and raise objections based on alleged noncompliance with legal requirements. Often no creditors object, or only one or two do, and usually any objections are resolved. The Chapter 13 trustee carefully reviews the plan for legal compliance, and raises any concerns. This is usually done at the so-called Meeting of Creditors about a month after you file your case. Again, any objections are usually worked out.

Then the plan goes before the bankruptcy judge at the “confirmation hearing,” usually around two months after filing your case. If there were no objections or they’ve been resolved by then, the judge virtually always approves the plan. If there is a lingering objection sometimes the judge resolves it at that hearing. Or the judge may give the parties more time to resolve things by the time of an “adjourned confirmation hearing.”

Once the judge approves the plan through an Order Confirming Plan, that plan is essentially the law of your case.

Important to Know that Your Plan Can Be Modified

It’s important to realize that a lot goes into putting together and getting a Chapter 13 plan approved. But it’s also important to understand that the plan can usually be changed, or “modified.”

Most Chapter 13 plans last 3 to 5 years. That’s a long time to be living under one particular budget. So it helps to know that you’re not stuck with your original plan terms throughout this time.

Candidly, some Chapter 13 plans are put together with some doubt about whether a certain intended goal can be achieved. For example, you believe you can find a better job and increase your income during your Chapter 13 case. So you tie keeping your home (and catching up on the mortgage) onto that belief within your Chapter 13 plan. You need to know that if that higher income does not materialize that you can modify your plan (although you may also need to modify your goals).

Sometimes the goals themselves change. In the example of the better job, that job may unexpectedly come requiring a move to a different state. So now you may want to sell your home but remain in your Chapter 13 case because of other debts. It’s good to know that Chapter 13 gives you the flexibility often to adjust to even major life changes.

Limited Flexibility

Your Chapter 13 plan can stretch but that has limits. It’s good to get a feel of how much a plan can and cannot bend. We’ll explain this more in our next blog post or two.


Using the Co-Debtor Stay of Chapter 13

August 4th, 2017 at 8:04 am

If protecting your co-debtor from having to pay your debt is a high priority, Chapter 13 has a remarkable tool for doing that.  


Chapter 7 Doesn’t Always Help

Our last blog post was about helping your co-signer through a Chapter 7 “straight bankruptcy” case. You discharge (legally write off) most or all your other debts. Then you may be able to afford to make payments on your co-signed debt.

But that doesn’t always work. What if:

  • discharging your other debts still does not leave you enough money to make the monthly payments on the co-signed debt?
  • you have other debts that you would continue to owe after a Chapter 7 bankruptcy—recent taxes, child support arrearage, non-support divorce debt, student loans—leaving you unable to pay your co-signed debt?
  • you are behind on the co-signed debt and can’t afford to catch up on the missed payments right away?
  • the creditor says it will start or continue to pursue your co-signer in spite of you filing bankruptcy?

Chapter 7 does not solve any of these problems. However, Chapter 13’s special co-debtor stay is a powerful and flexible tool that can cut through these problems in many situations.

Assumes You Want to Pay the Co-Signed Debt

All of this assumes that you are willing to pay the co-signed debt to protect your co-signer.

If you don’t want to for whatever reason then you don’t need the benefits of the co-debtor stay. Your relationship with your co-signer may not motivate you to pay the debt. Or your co-signer may have agreed to take care of the debt without your help. If so, then you don’t need the co-debtor stay. You can stop reading here. But check out our next blog post about protecting yourself in those situations.

The Special Chapter 13 Co-Debtor Stay

When you file either a Chapter 7 or a Chapter 13 case you get the “automatic stay.” That protects you and your assets from virtually all the collection efforts of your creditors. It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, vehicle repossessions, calls and letters from creditors, and such.

With Chapter 13 you also get the “co-debtor stay. “ This can protect your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt.  It acts somewhat like the automatic stay for your co-signer although in a more limited way.  So when you file a Chapter 13 case, there’s some immediate protection for your co-signer. Chapter 7 does not have a co-debtor stay.

How the Co-Debtor Stay Works

Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan. Its crucial advantage is that throughout this time your co-signer is protected from collection by the creditor.  

Your Chapter 13 payment plan must show you’ll pay the co-signed debt in full during the course of your case.

This can often be easier than you think because in most parts of the country you can favor a co-signed debt in a Chapter 13 plan. That means you can arrange to pay it in full while your other general unsecured creditors receive little, or maybe nothing. Focusing your financial resources on paying off that co-signed debt makes paying off the co-signed debt much easier.

You have to have your Chapter 13 plan show the co-signed debt is being paid in full. That’s because to whatever extent your plan does NOT show that the debt will be paid in full, the creditor can ask for permission to pursue your co-signer DURING the Chapter 13 case.

Also, you need to make sure that you comply with your Chapter 13 plan, actually paying off the co-signed debt.  To whatever extent the co-signed debt is not paid in full during the case, the creditor can pursue your co-signer AFTER the case. It can do so then without asking anybody’s permission.

So you simply have to make sure that your Chapter 13 plan is put together to pay that co-signed debt in full. And then make sure you make your plan payments so that actually gets accomplished.

Two Important Conditions

First, the co-debtor stay helps you only with co-signed CONSUMER debts, not business debts.

For this purpose tax debts are NOT considered to be consumer debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner.  The co-debtor stay does not work so the other person has to file his or her own bankruptcy case.  Or file jointly with you, in the case of a spouse.

Second, the creditor can challenge the co-debtor stay if YOU didn’t receive the benefit of the debt (either the cash borrowed or the item(s) purchased), but rather your CO-SIGNER did. The co-debtor stay still goes into effect at the filing of your Chapter 13 case to protect the co-signer. But then the creditor could ask the bankruptcy court for permission to pursue the co-signer. The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt.  If so, the co-debtor stay would not apply and the creditor could chase the co-signer for the full debt.


Look to Chapter 13’s co-debtor stay if protecting your co-signer from collection is a very high priority. It protects much better than Chapter 7 can.

Chapter 13 allows you to pay that co-signed debt in your plan on terms consistent with your budget. And it does so while fitting it in among other special debts like recent income taxes, back child support, or mortgage payments. Chapter 13 is a powerful and flexible way to satisfy your co-signed creditor and protect your co-signer.


Treatment of Different Types of Creditors in Chapter 13

July 26th, 2017 at 7:00 am

The laws about the treatment of different types of creditors can often be used in your favor to pay who you want or need to pay. 

Your Chapter 13 payment plan has to treat debts that are legally the same type of debts essentially the same way. But your plan can and must treat different types of debts quite differently. The laws related to this can be used to your advantage in many, many ways. Today we begin showing how this works with each of the three major types of debts.

Secured Debts

A secured debt is one which is legally tied to something you own. The secured creditor has rights against that property you own. Those rights usually include to repossess or foreclose on the property if you don’t pay the debt.

For example, your home mortgage(s), unpaid property taxes, judgments with liens on your home, income tax liens can all be debts secured against your home. And your vehicle loan is secured against your vehicle.

Debts may be secured because you directly agreed to make them secured, like a vehicle loan. But debts can also be secured involuntarily by certain creditors in certain circumstances. An involuntary example is an income tax lien on your home.

Secured creditors have rights against whatever property of yours secures their debt. That gives them leverage in a Chapter 13 case if you want to keep that property. You usually have to pay part or all of the debt to keep the property.

If you want to keep the property securing the debt, and it’s something reasonably necessary for you to keep (like your primary vehicle or your home), that creditor leverage actually helps you. It usually allows you to favor that creditor over most of your other creditors.  This means that you can pay your secured debt ahead of or instead of most other debts.

For example, you would usually be allowed to catch up on a vehicle loan in your Chapter 13 plan ahead of paying your unsecured credit cards. Often as a result your vehicle loan gets paid in full while your credit cards get only partially paid. Sometimes the credit cards (and other such unsecured debts) get nothing at all.

Priority Debts

Priority debts are simply those which the law has determine are worthy of more favored treatment over other debts. Each type of priority debt has a particular reason for being treated specially.

Some of the most common and important priority debts for consumers are child and spousal support and recent income taxes. Support obligations are treated as special because of the hardship nonpayment tends to cause. Taxes are treated as special because their nonpayment hurts everyone.

In a Chapter 13 payment plan, you must pay priority debts in full before paying other unsecured creditors anything. As with secured debts, you usually want and need to pay your priority debts. You may well have decided to file a Chapter 13 case because you are protected while paying your priority debt(s).

As with secured debts, being required to pay your priority debt(s) ahead of other unsecured debts means those other debts get less, and sometimes nothing. You are essentially paying the priority debts to the detriment of your other debts.

General Unsecured Debts

This third type includes everything else. These are debts that have no rights to anything you own, and are not on the list of priority debts.

A Chapter 13 plan may pay general unsecured debts anything from 0% of what you owe them to 100%, depending on the circumstances. How much you pay your general unsecured debts depends on many factors. Broadly speaking, these debts get paid whatever is left over after you pay the secured and priority debts.

Limited Flexibility 

In Chapter 13 you and your bankruptcy lawyer have to follow a detailed set of rules about treatment of creditors. But those rules come with a certain amount of flexibility. The rules give structure to a Chapter 13 plan. The flexibility can help make it work to fit your unique personal circumstances.

We’ll show specific ways that these somewhat flexible rules can help you in our next few blog posts.


Resolving a Fraudulent Transfer Painlessly through Chapter 13

May 5th, 2017 at 7:00 am

If you owe “priority” debts like income taxes and/or support payments, you may be able to pay no more to protect a transferee. 


Let’s follow up on something we said in our last blog post two days ago. We showed how you can use a Chapter 13 “adjustment of debts” case to resolve a fraudulent transfer. Essentially, you pay extra into your Chapter 13 payment plan to make up for doing the fraudulent transfer. In the example we used, the debtor would pay a $225/month plan payment for about 22 extra months to make up for the $5,000 vehicle he or she’d had given away a year before filing bankruptcy.

But we ended that blog post by saying that under certain circumstances the results may be better. We show you how today.

Turning Lemons into Lemonade

Chapter 13 has a knack for solving two financial problems by setting them off against each other.

The first problem: the fraudulent transfer. You gave your friend your spare car a year ago because she desperately needed reliable transportation to commute to work. She now still needs it just as badly, so you don’t want a bankruptcy trustee to take it from her.

If you were insolvent at the time you gave it to her, the car could be taken under Chapter 7 “straight bankruptcy.” “Insolvent” simply means that you owed more in debts than you owned in assets. Then it wouldn’t matter that you gave her the car without any bad intentions towards your creditors.

So the solution we presented was to pay extra into your Chapter 13 plan to make up the difference. You in effect pay for the fraudulent conveyance. You double your generosity to your friend. After giving her the car earlier, you now pay its value over time so your friend can keep it. And you stay longer in your Chapter 13 case, delaying your fresh start. That’s awfully generous to your friend. Maybe too generous!

The second problem: you owe income taxes, or are behind in child or spousal support. Or you are behind on your mortgage and/or property taxes. Any and all of these problems could surprisingly help solve your fraudulent transfer problem.

How Owing Taxes/Support/Mortgage Payments Can Actually Help

Let’s say you owe $6,000 for 2016 federal income taxes and are behind $3,000 on child support. Neither can be written off in bankruptcy. These are also so-called “priority” debts, which must be paid in full in bankruptcy before anything goes to other debts.  

Let’s also say that you are $4,000 behind on your mortgage payments. Under Chapter 13 you are generally allowed to catch up on your mortgage before having to pay other debts.

These three special debts total $13,000. Assume you also owe an additional $75,000 in other debts: medical bills, credit and store cards, and personal loans.

Using the example used in the first paragraph above, let’s assume that you can afford to pay $225 per month into your Chapter 13 plan. Your income obligates you to do that for a minimum of 3 years, a maximum of 5 years. To pay the $13,000 at $225 per month will take nearly 58 months. (This excludes administrative expenses like trustee and lawyer fees, to simplify the calculations.)

This would leave nothing for the remaining $75,000 of debts. That means that those “general unsecured” debts would receive nothing—0%. In most bankruptcy courts that is allowed, as long as you genuinely can’t afford to pay any more than $225 per month.  

How This Solves the Fraudulent Transfer Problem

Chapter 13 law requires you to pay into your plan all that you can afford to pay for a certain length of time. For certain incomes it’s 3 years; for larger amounts it’s 5 years. Here we are assuming that the 3-year minimum applies.

In our example you are paying beyond the 3-year minimum in order to pay the three special debts. (The income tax, child support, and mortgage arrearage.) You can do so if you are indeed paying all you can afford, and finish within 5 years.

The Chapter 13 trustee will generally agree not to pursue the vehicle given through a fraudulent transfer if you agree to pay $5,000 beyond what you are legally obligated. That is what you are effectively doing here. You are legally obligated to pay for three years. However, you are paying nearly two extra years at $225 per month, essentially $5,000 extra. The fact that all this money is going to special debts—ones that you need and want to be paid—makes no difference.

The end result is that you kill two birds with one stone. You pay debts that must be paid (while being protected from their creditors).  You pay an “extra” $5,000 beyond the first 3 years, but that’s money you’d have to pay anyway. So those 4th and 5th years of payments both finishes what you need to pay to your special debts and prevents the trustee from chasing your friend for the car you gave her a year before filing.


The facts used in the example are no doubt different than your facts. And your facts may not fit so neatly into the lesson we are presenting. But the point is to show the possibilities. The point is also to show that the tactics involved tend to be quite sophisticated, especially when dealing with a complication like a fraudulent transfer. It should be very clear that the best solution for you will come through the counsel of an experienced bankruptcy lawyer.  


Preventing Avoidance of Fraudulent Transfers through Chapter 13

May 3rd, 2017 at 7:00 am

Overall, Chapter 13 can be more powerful and more flexible than Chapter 7. That often also applies to a fraudulent transfer. 


The Problem

Our last four blog posts have been about so-called fraudulent transfers. Today we look at a way to possibly avoid the hassles caused by a fraudulent transfer.

A fraudulent transfer is a sale or gift of an asset you made during the two years before filing bankruptcy case, a sale or gift  that can be undone (“avoided”) during your case. (See our post of Monday of last week introducing fraudulent transfers.)

Consider this example. A year before filing bankruptcy you gave a friend a second car you didn’t need and she desperately did. Now a year later, there is a good chance that your bankruptcy trustee could make her surrender that car. Under certain conditions the trustee would take it, sell it, and pay the proceeds to your creditors.

Your direct intention when you gave her the car a year ago could have been to keep that car from your creditors. Or you could have given her the car with no such intent, but instead only wanting to help your friend. However, even without any intent to hinder your creditors, the gift could be a trustee-avoidable fraudulent transfer.

Depending on your relationship to the person to whom you gave the car, you may not care what happens. But let’s assume you do care—a lot. She REALLY needs that car. You very much do not want a bankruptcy trustee to take it from her. You need to file bankruptcy to fix your financial situation, but you don’t want to risk her losing the car. You’re willing to do whatever is reasonable to resolve this problem.

Chapter 13 in General

One possible solution is to file a Chapter 13 “adjustment of debts” instead of a Chapter 7 “straight bankruptcy.” This is not the place to compare these two very different options in detail. Do that with your bankruptcy lawyer, if you haven’t already. If you’ve seen a lawyer and didn’t hear much about Chapter 13, it may be worth asking him or her specifically about it.

In general, Chapter 13 involves a payment plan spanning a period of three to five years. Before you decide that’s not right for you, be aware that it’s often much better than you’d expect. Chapter 13 provides significant advantages with many kinds of debts and certain asset situations. It is also usually better in solving the fraudulent transfer problem outlined above.

Paying to Protect Your Transferee

Chapter 13 is better with fraudulent transfers because it gives you more leverage and more flexibility.

Let’s use the example outlined above about the car you gave to a friend a year before you filed bankruptcy. Assume the car is worth $5,000. Assume also that if you filed a Chapter 7 case you giving away that car would qualify as a fraudulent transfer. The bankruptcy trustee would be able to take that car from your friend, sell it, and distribute the proceeds among your creditors.

How would that be different in a Chapter 13 case? Assume that under your budget you could afford to pay $225 per month to all of your creditors. Assume also that based on your income you would be required to pay into your plan for three years. So normally you’d pay $225 per month for three years.

But you really want to protect your friend and enable her to keep the car. Most Chapter 13 trustees would likely allow her to keep the car if you paid extra into your payment plan to make up for the money that selling the car would have gotten to your creditors. In our example you could continue paying the $225 per month beyond the required three years until you paid an additional $5,000. That would take about 22 extra months.  (We’re simplifying the calculations a bit by skipping some complicating details like trustee fees.)

The end result is that the trustee gets that extra $5,000 through payments from you instead of by selling your friend’s car.


The Bankruptcy Code that governs Chapter 13 cases is the same federal codified law all over the country. But bankruptcy judges and appeals courts, and even individual trustees, interpret these statutes differently. So, in your part of the country you may not be able to use Chapter 13 as outlined here. On the other hand, in certain circumstances the results may be even better. So talk with your local bankruptcy lawyer to find out what’s available with your court and trustee.


Fraudulent Transfers without the Actual Intent to Defraud

April 28th, 2017 at 7:00 am

Selling or giving away something innocently, without trying to hurt your creditors, could still give the trustee the right to get it back.


“Fraudulent Transfers” without Bad Intentions

It’s confusing: so-called “fraudulent transfers” don’t have to be fraudulent. They can be innocent of any bad intentions by you, the debtor.

In our last blog post we got into “fraudulent transfers” that DO come with bad intentions. Those involve the giving away or sales of assets WITH the “actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.) Basically, we’re talking here about hiding or disposing of assets to prevent the paying of debts. “Fraudulent transfer” law allows the bankruptcy trustee to undo, or “avoid,” that gift or sale. The person who got the asset from the debtor before bankruptcy has to give it to the trustee, and then to be distributed to the debtor’s creditors in bankruptcy.

It’s understandable why assets that were fraudulently hidden from creditors should be made available to them. But should same thing happen when the sale or gift was innocent of any bad intentions towards creditors?  The law says “yes,” under certain circumstances. Today we get into those circumstances.

The Two Main Conditions for “Constructive Fraudulent Transfer”

Let’s say you have a second vehicle that you don’t need. So a year before filing bankruptcy you sell that asset and get paid what it’s worth. Then you use the proceeds of that sale to pay living expenses. Selling that vehicle is fine because you got fair market value for that vehicle.

Or let’s say you have that vehicle, but now you give it to a friend without getting anything for it. But at the time you are and continue to be solvent: you have more assets than debts. You file bankruptcy a year later because of a serious accident and huge medical bills that made you insolvent. That earlier giving away of the vehicle is fine because of your solvency at the time. You could do whatever you wanted with your assets a year earlier because then you had more assets than debts.

“Less Than Reasonably Equivalent Value” and “Insolvent”

But now let’s say you didn’t get anything for the vehicle at the time you were already insolvent. You weren’t intending to prevent your creditors from getting at the vehicle. You made no connection in your mind between that vehicle and your debts. You were just helping your good friend who needed a reliable car to get to work. Then you file bankruptcy a year later. That giving away of the vehicle is likely a constructive fraudulent transfer.

The law essentially says that regardless of your intentions, you shouldn’t be giving away assets when you have more debts than you have assets. The law says you should know better. And regardless of your intentions, your creditors should later be able to get at the value of that given-away vehicle. In bankruptcy, the trustee, standing in for the creditors, may well have a right to get that vehicle from your friend, sell it, and pay the proceeds to your creditors.


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