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Archive for the ‘chapter 7’ tag

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.


Debts Voluntarily Paid in Chapter 7

December 18th, 2017 at 8:00 am

Chapter 7 is usually much better if one of your high priorities is to favor a debt by paying it. You can do so more easily and flexibly. 


Our last blog post was about debts that you still pay after a Chapter 7 “straight bankruptcy” case. These included debts you might WANT to pay as well as those that you are legally REQUIRED to pay.

Today we focus on debts you might want to pay for no reason other than a sense of moral or personal obligation. That is, you’re not paying in order to be allowed to keep some collateral. You’re not “reaffirming” a mortgage or vehicle loan to keep the home or vehicle. (We’ll get into “reaffirmations” next time.)

One reason we’re looking at debts paid out of personal obligation is because how different this is in Chapter 7 vs. Chapter 13. For reasons we’ll show, it’s legally easy to favor such a debt in Chapter 7. But it’s not practical to do so in Chapter 13.

The Myth about Not Favoring a Debt after Bankruptcy

People have many fears about filing bankruptcy that are based on myths. One myth is that they think they won’t be allowed to pay a debt that they really want to pay.

Like most persistent myths this one is based on something that’s true only in certain limited circumstances. But then people assume it applies to them when it likely doesn’t.

It’s true that in certain circumstances in bankruptcy, debts within the same legal category must be treated the same. Similarly, in a Chapter 13 payment plan all unsecured debts that are not “priority” debts are paid the same percentage.

However, after a Chapter 7 case (by far the most common type) you are completely free to pay any debt that you feel like paying. The Bankruptcy Code is very direct about this: “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 524(f) of the U.S. Bankruptcy Code.

Don’t Avoid Filing Bankruptcy Because You Want to Pay a Debt

So being concerned about wanting to pay a debt for personal reasons is not a reason to not file bankruptcy.

And it’s certainly not a reason to put off seeing a competent bankruptcy lawyer about your options. The job of your lawyer is to listen to your concerns and help you solve them. If one of your priorities is to pay a debt for whatever personal reason, your lawyer will explain your options for meeting this priority. There are usually sensible ways to meet all of your concerns.

Scenarios for Wanting to Pay a Debt

In our experience there are three basic reasons people want to pay a debt they aren’t legally required to pay.

First, they think something bad will happen—legal or personal—if they don’t pay. For example, they want to pay a doctor bill because they think the doctor otherwise won’t be willing to see them anymore. (That is often not be true, so it’s worth asking the doctor’s staff.)

Second, they don’t want the creditor to know about their bankruptcy filing. For example, they’ve borrowed from their father and don’t want him to be disappointed in them.

Third, they simply feel some kind of deep personal obligation to make good on their promise to pay. For example, they want to repay a grandmother because she really needs the money.

If you filed a Chapter 7 case, in each of these types of situations you would likely be allowed to pay that debt while paying nothing on other debts.

Easier to Pay a Personal Debt after Chapter 7

If it isn’t obvious, paying such a personal debt should be much easier after filing a Chapter 7 bankruptcy case. You don’t have the financial pressure of your other debts, hopefully giving you more cash flow.  So, filing a Chapter 7 case actually helps you pay a debt or two that you really want to pay.

Discharge of the Personal Debt Gives You More Flexibility

Assume that the debt you want to pay is a legally enforceable debt. (It may be a gift or not legally enforceable on some other basis.) If it is a legal debt you’ll need to list it as a debt in your Chapter 7 case. And in all likelihood it will be discharged—you will no longer owe the debt, legally speaking. The choice whether or not to pay it then becomes completely yours. Your creditor cannot legally compel you to pay it.  

This means that you can pay it as slow or as fast as you want. You can pay for a while and then decide that it wasn’t such as good idea to pay it after all. You can pay only if the creditor treats you right—whatever. It’s up to you and whatever is motivating you to pay the debt.

Realize that your creditor should be doubly impressed if you do pay the debt. Not only are you going through bankruptcy in part to be able to pay this particular debt. You are also paying it in spite of no longer having any legal obligation to do so. You might want to tell these things to your creditor to get points for being so good!

Chapter 7 vs. 13 on a Voluntary Debt

We mentioned earlier that you have to pay all regular unsecured debts the same percentage of their debts in a Chapter 13 payment plan. You can’t favor one over the others except for very limited reasons. Feeling a greater moral or personal obligation toward one debt does not count.

AFTER your Chapter 13 case is over you CAN pay anybody as much as you want. If paid everyone 10% of what you owed them, you can arrange to pay one the remaining 90%.

But that’s not very practical in most situations because a Chapter 13 case usually lasts 3 to 5 years. Most creditors aren’t going to want to wait that long to be made whole. A commitment to begin finishing paying a debt so long from now is not going to impress most people. And who knows how you’ll feel that far down the line.

That’s why Chapter 7 makes more sense if one of your high priorities is to favor one of your debts.  Of course you have to weigh that against other reasons to file a Chapter 7 vs. Chapter 13. This is where you really need your bankruptcy lawyer to help you sort out your priorities so that you choose the best option.


Exceptions to the Discharge of Debts in Chapter 7

December 15th, 2017 at 8:00 am

Often all your debts are discharged—legally written off—in Chapter 7. But some you might want to pay, or might not be able to discharge. 


Two blog posts ago we ended by saying that most general unsecured debts get legally written off—“discharged”—in a Chapter 7 bankruptcy case, but that there are some exceptions. We’ll get into those exceptions now. These exceptions include all types of debts—general unsecured, secured, and priority debts.

Definitely Not Discharged vs. Might Not Get Discharged

When you file a Chapter 7 “straight bankruptcy” likely your main objective is to discharge your debts and move on.  The point is to get a fresh financial start. So when you’re considering your options you need to know whether you will still owe any of your debts after finishing bankruptcy.

Debts Definitely Not Discharged

You might still owe debts afterwards that you’ll know in advance you’ll owe. These include two types—those you’ll still owe voluntarily and those you’ll owe whether you want to or not.

Voluntarily Not Discharged

Why would you voluntarily agree to owe a debt after bankruptcy when the main point of Chapter 7 is to wipe out all the debts you can?  You’d do it to get something worthwhile in return.

What would you get in return? The debts most commonly retained are debts secured by collateral, such as a home, vehicle, or something else worth keeping. In return for continuing to make payments and owe the debt, you get to keep the collateral. And you get the sometimes important benefit of being able to quickly start rebuilding your credit record.

In these situations you’d usually formally “reaffirm” the debt. You’d sign a “reaffirmation agreement” to remain legally liable on the debt in return for keeping the collateral. See Section 524(c) of the U.S. Bankruptcy Code.

Or, rarely, you might just want to keep paying a debt, simply because you want to. This is usually done with special, usually more personal debts, such as one owed to a relative. It’s usually based on a moral or family obligation, not a binding legal one. As the Bankruptcy Code says, “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 522(f).

Not Discharged by Force of Law

There are also debts you simply can’t discharge in a Chapter 7 case because the law says you can’t. Here are the most common ones:

  • Child and spousal support can never be discharged, and most other divorce-related obligations can’t be under Chapter 7. Section 523(a)(5) and Section 523(a)(15).
  • Income tax debts can’t be discharged, unless they meet a list of conditions (mostly related to how old the tax is). Section 523(a)(1)
  • Most (but not all) student loans can’t be discharged unless imposing an “undue hardship” on the debtor. Section 523(a)(8)
  • You can never discharge criminal fines and restitution (except sometimes minor traffic infractions that are not considered “criminal.” Section 523(a)(7) and (13)

Debts that Might, or Might Not Get Discharged

There’s one more set of debts that WILL get discharged in a Chapter 7 case, UNLESS all three of these happens:

1. The creditor files a formal objection to the discharge at the bankruptcy court

2. That objection is filed on time—within 60 days after the “First Meeting of Creditors”

3. The court determines that the debt should not be discharged

As long as the creditor was included on your schedules of creditors and the creditor does not object in time, the debt is discharged just like any other debt.

The bankruptcy court determines whether the debt gets discharged based on whether the creditor convinces the court that the debt meets one of 3 sets of conditions. These conditions include whether you obtained the debt through:

1. Misrepresentation or fraud on the creditor (Section 523(a)(2))

2. Fraud while acting as a fiduciary (such as an executor of a decedent’s estate), embezzlement, or larceny (theft) (Section 523(a)(4))

3. “Willful and malicious injury” against someone or something (Section 523(a)(6))

Again, if the creditor does object on time but does not show that one of these conditions apply, the debt still gets discharged.

Because you don’t know for sure whether a creditor will object, and if one does how the judge will decide, this is a debt that you won’t know in advance whether it will get discharged. But of course you’d usually know if there is a risk that any of your creditors have a basis for raising such an objection. If you have any inkling that one does, talk with your bankruptcy lawyer about it. You’ll find out whether you or not you should be concerned. Often you’ll learn that your risk that the creditor would object is actually quite low. However, sometimes you’ll just have to wait to see if the creditor objects by the deadline.


This is just an outline of debts that don’t or may not get discharged. We’ll look more closely at these in the upcoming blog posts.


Your Home Mortgage in Chapter 7 and Chapter 13

November 27th, 2017 at 8:00 am

Here are 6 ways filing a Chapter 7 case can help you deal with your home lender and related debts, and 6 ways filing a Chapter 13 one can.


 If you’re buying a home your mortgage and other home-related debts are probably your most important ones. That’s especially true if you want to keep the home. So the choice between filing a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” often turns on how each would handle these kinds of debts. We’ll get into more detail about these in upcoming blog posts, but here’s an introductory list.

Chapter 7

  1. Maintain current mortgage payments: If you want to keep your home and are current on your mortgage, just continue making the payments. Doing so should become much easier since you’re likely discharging (legally writing off) all or most other debts.
  2. Forbearance agreement: If you are no more than a few months behind on your mortgage, enter into a “forbearance agreement” with your mortgage lender. You agree to pay an extra amount each month to catch up on the mortgage. This assumes that your bankruptcy filing frees up enough money each month so that you can catch up fast enough
  3. Judgment lien avoidance: Chapter 7 can often “avoid” (remove from your home title) a creditor’s judgment lien against your home.
  4. Stop ongoing foreclosure to buy time to sell: If you are in the midst of selling your home, filing bankruptcy may buy enough time to close the sale. A Chapter 7 case buys you only a limited amount of time. Plus the Chapter 7 trustee may also have a say in what happens. So be sure to discuss this carefully with your bankruptcy lawyer.
  5. Buy time to save money and move: If you’re surrendering your home, Chapter 7 can stop a foreclosure and buy you more time.  You can be in your home without paying your mortgage longer, giving you more time to save money for your upcoming rent payments and moving costs.
  6. Discharge any “deficiency balance”: Surrendering your home without bankruptcy could result in a large “deficiency balance” owed from your mortgage debt. That’s the difference between the amount the home would sell for and the amount of the loan balances. Any such “deficiency balance” would be discharged in your Chapter 7 case.

Chapter 13

  1. Maintain current mortgage payments: As with Chapter 7, it’s usually much easier to keep current than before filing. That’s because Chapter 13 usually greatly reduces how much you pay on other debts.
  2. Much more time to catch up: Chapter 13 gives you as much as 5 years to catch up on a past-due mortgage and/or property taxes.  You enter into a court-approved payment plan based on your ability to pay. You are protected from your mortgage lender and all your creditors.
  3. “Strip” a second and/or third mortgage: If the value of your home is less than the balance on your first mortgage, you may be able to remove junior mortgages from your home’s title. You could stop paying these monthly payments. This would make keeping your “underwater” home more economically sensible.
  4. “Avoid” creditors’ judgment liens: This is the same as in Chapter 7 listed above.
  5. Dealing with other liens on your home: Chapter 13 usually provides more flexible and practical ways to deal with most other kinds of liens. These include liens for income taxes, child/spousal support, and home repairs/remodeling.
  6. Flexible timing for selling your home: You can often arrange to sell your home 2-3 years after filing. This is handy if you want to stay in your present home until a child graduates, you make a career move, or until your home’s property value increases.


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.


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.


Keep an Open Mind about Chapter 7 or 13

November 17th, 2017 at 8:00 am

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


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

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

An Example Using Chapter 7

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

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

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

An Example Using Chapter 13

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

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

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


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

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


Chapter 7 or 13? You May Be Surprised

November 15th, 2017 at 8:00 am

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


Chapter 7 and Chapter 13

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

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

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

Be Flexible When You Meet with your Lawyer

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

Sometime Easy, Sometimes Difficult Choice

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

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

To Help You Be Informed

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


Buy Time to Deal with Multiple Years of Income Tax Debts

October 25th, 2017 at 7:00 am

What if you have some income tax debt that qualifies for discharge but one (or more) tax year that doesn’t? Does Chapter 7 ever help enough? 


Tax Liens under Chapter 7 

Last week we showed how Chapter 7 can sometimes permanently prevent an income tax lien from hitting your home. It does that by stopping the recording of the tax lien, and then discharging (writing off) the tax debt. 

This works under Chapter 7 “straight bankruptcy” when both:

  • that income tax debt meets the conditions for discharge (mostly it’s old enough)
  • the IRS/state has not already recorded a tax lien

But what if your tax debt meets these circumstances but you have other reasons to file a Chapter 13 case? (For example, you need to do a “cramdown” on your vehicle loan, catch up on a mortgage or on child/spousal support, or financially don’t qualify for a Chapter 7 case.) In particular what happens if you owe other income taxes that do not qualify for discharge? And what happens if a tax lien has already been recorded before you could stop it with a bankruptcy filing?

We’ll look into these circumstances in the upcoming blog posts. Today we get into what to do if you owe two kinds of income tax—those that qualify for discharge and those that don’t. (For the rules about what taxes can be discharged, see our blog post last month about this.)

When Chapter 7 is Appropriate

Assume that you have an income tax debt for one tax year that meets the conditions for discharge and another one from a later year that does not. To keep things simpler for now, assume that neither has had a tax lien recorded on it. So filing a Chapter 7 case would completely write off the first tax but leave you owing the second one.

That would be okay as long as, after discharging your other debts, you could afford to pay that remaining tax. The IRS and most state tax agencies have monthly payment plans that, under the right circumstances, give you a decent way of paying off a tax debt.

Common sense says that Chapter 7 tends to make more sense in two circumstances:

  • The tax(es) being discharged are relatively large
  • The tax(es) left owing are relatively small

An Example

Here’s an example of the combination of these two.

Assume that, after making payments of a while you still owe the IRS $10,000 for the 2012 tax year. And now you’ve just submitted your 2016 tax return (after getting an extension) and owe another $2,000. Assume also that your 2012 tax debt qualifies for discharge while the 2016 one does not. You’ve avoided filing bankruptcy so far, but because of new financial problems are now looking into it.

If you now filed a Chapter 7 case the $10,000 older tax debt would be permanently discharged. The newer $2,000 one would not. But especially if the bankruptcy case leaves you otherwise debt-free, paying off that $2,000 may be quite manageable.

Interest and penalties would continue to accrue during the payment period, so you need to consider that. Of course less interest and penalties would accrue if you paid the tax off faster.

The IRS would not likely record a tax lien for such a relatively small amount. But you should ask your bankruptcy lawyer about this, and about the practices of your state tax agencies if applicable.

Other Considerations

 But what if you:

  • can’t reliably pay anything monthly to the IRS/state because of other debts surviving the Chapter 7 case? (For example, if you’re behind on your home mortgage or vehicle loan or support payments.)
  • don’t qualify for Chapter 7 because of your income and expenses?
  • need to file a Chapter 13 case for its other benefits? (For example, you can “strip” a second mortgage from your home’s title, “cramdown” your vehicle loan, or delay collection of your student loans.)

 In these situations Chapter 13 “adjustment of debts” would likely be the better option. More on that in our next few blog posts.


Why Timing Can Be So Crucial for the Means Test

October 9th, 2017 at 7:00 am

The timing of your Chapter 7 filing—a difference of even just a day or two—can affect whether you qualify for it based on your income. 

How could filing your Chapter 7 a day or two earlier or later make such a big difference?

Usually it doesn’t. But sometimes it actually does. We’ll explain here.

The Point of the Means Test

One of the main goals behind the most recent major amendment to the bankruptcy laws in 2005 was to require more people to pay part of their debts through Chapter 13 payment plans instead of writing them off in a Chapter 7 “straight bankruptcy.” One of the main tools in the law for accomplishing this is the means test. This test uses a rigid financial test to determine who has the means to pay something to their creditors. This test is supposed to stop people from “abusing the bankruptcy system.” Those who have the means to pay a meaningful amount to their creditors in a Chapter 13 case are required to do so.

Taking Advantage of the Rigid Means Test

The means test was written rigidly to take qualifying for Chapter 7 out of the hands of bankruptcy judges. They were seen as being too soft on people filing bankruptcy.

But in real life rigid rules can have unintended consequences. An experienced and conscientious lawyer can turn these consequences to your advantage, and avoid their disadvantages. Here’s how this can play out with the means test.

What’s Rigid about the Means Test?

In our last blog post we explained the income step of the means test. That step qualifies most people because once you pass that step you pass the test. You don’t have to go any further (into your allowed expenses, for example.)

This income step essentially compares the income you received during the six FULL CALENDAR months before filing bankruptcy to a standard median income amount for your state and your family size. The question is whether your income DURING THAT PARTICULAR PERIOD is no more than the applicable median income amount. If not then you pass the means test and get to file a Chapter 7 case. (There are limited exceptions to this but they’re rare so we’re not getting into them here.)

If your income IS higher than the median amount, you may still be able to file a Chapter 7 case. But you’d have to jump through some extra hoops to do so. There’s a bigger risk that you would be forced to go through a 3-to-5-year Chapter 13 payment plan. So having your income be below the median income amount makes your case simpler and less risky.

The mean’s test is rigid in its fixation on those six prior full calendar months. Combine this with the fact that almost all money that comes into your hands during that period is counted. It’s not just taxable income. The means test includes ALL income during that precise period other than social security, tax refunds, and a few other rare exceptions. This combination of a very specific window of time plus including irregular sources of money creates opportunities to change your income for purposes of the means test.

How Can Filing a Day or Two Earlier or Later Matter So Much?

It can matter because that can change the 6-month period, which can significantly change your income for the means test.  It’s clearest to show this by example.

Imagine you received some irregular chunk of money—a few catch-up child support payments, or an insurance settlement or reimbursement.  Not a huge amount, say $2,500, received on April 10 of this year. Your only other income is from your job, with a $45,000 annual salary, or $3,750 gross per month.

Let’s say that the published median annual income amount for your state and family size is $48,000. Notice that your salary alone of $45,000 is less than applicable median income amount. Even including the $2,500 extra income—so totaling $47,500—you’d appear to have less than the median income amount.

Applying the Means Test

But that’s not the way the means test calculates income. If you were to file a Chapter 7 case in October—let’s say, on October 31, Halloween—you’d count the money received in the period from April 1 through September 30. That would be 6 months of your $3,750 salary—$22,500—plus the extra $2,500, which equals $25,000. Multiply that by two to get the annualized amount of $50,000. That’s higher than the $48,000 median amount for your family size in your state. So you’d fail the income portion of the means test, and may not be able to file a Chapter 7 case.

However, if you’d just wait to file one day until November 1 then the applicable 6-month period changes. It jumps forward by 1 full month to the new 6-month period of May 1 through October 31.  Now that new period does NOT include the $2,500 you received in April. So your income during this 6-month period is $22,500, multiplied by 2 is $45,000. Now you’re under the $48,000 median income amount. That means you’ve passed the income portion of the means test, and so you qualify for your Chapter 7 case. You can skip the expenses and other parts of the means test, avoiding the risk of failing the test.  


Protect Yourself from Your Co-Signer

August 7th, 2017 at 7:00 am

If you can’t or won’t pay a co-signed debt, or pay a co-signer, you need to protect yourself from that debt and from your co-signer. 


What if you owe a co-signed debt and need bankruptcy relief from all your debts?

In the last two blog posts we explained how bankruptcy helps you pay a co-signed debt and protect your co-signer. A Chapter 7 “straight bankruptcy” may free up enough cash flow so you can afford to pay the co-signed debt. Or the special “co-debtor stay” may protect your co-signer as you catch up on and pay off the co-signed debt over a longer span of time.

But what if—even with the help of bankruptcy:

  • you can’t afford to pay the co-signed debt now or at any time in the foreseeable future?
  • you no longer want to pay your co-signer because your relationship has changed?
  • your co-signer got the money or other benefit of the debt and so should pay it back?
  • you still want pay it eventually but have no idea when you’ll be able to?

In all these situations you need legal protection from your co-signer.

Your Legal Obligations to the Co-Signer

You need legal protection from your co-signer because you have a legal obligation to the person or may have one. You either have a clear obligation, or at least a significant risk of one. This actual or possible obligation means you should cover it in your bankruptcy case.

You likely have an actual legal obligation to your co-signer if the two of you were clear about its terms. You wrote it down, or maybe just talked about it but clearly agreed on the main terms.  Those basic terms would include who would pay the debt and what would happen if that person did not pay. For example, you agreed that you would pay the debt, and would pay back the co-signer if he or she had to pay any part of it.

Or sometimes when two people jointly sign on a debt they are not clear about the obligations between them. The terms of that obligation are not made clear. Then the co-signer less likely has a legally enforceable claim against the other, but may still try to assert one.

Include Your Co-Signer in Your Bankruptcy

Either way, cover yourself in your bankruptcy case. Whether or not your obligation to your co-signer is legally enforceable, you should act to discharge (permanently write off) whatever obligation to that person you may have. You do this by listing your co-signer as a potential creditor in your bankruptcy schedules.

Do this even if you think you don’t really owe the co-signer anything. You may remember the co-signer agreeing to make the payments if you couldn’t. You may remember the co-signer treating the whole arrangement as a gift. But now he or she may remember it differently. So err on the side of caution and cover whatever legal liability you may have to the co-signer.

How You’re Protected from Your Co-Signer

If you list your co-signer when you file bankruptcy, he or she can’t contact you to collect the debt. The “automatic stay” that prevents virtually all creditors from collecting on their debts applies to your co-signer. He or she can’t pressure you to pay the co-signed debt, or to pay him or her directly.  

If your co-signer violates the “automatic stay” by trying to make you pay, he or she could be punished. Similarly, once your debts have been discharged (including your obligation to your co-signer), his or her attempt to make you pay would be illegal, a violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.

You CAN Still Pay

Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. But then it’s still totally up to you whether to pay anything to the co-signer. The advantage is that if you do pay your co-signer or the co-signed debt, you do so without legal pressure. You pay whenever and as much as you can or want to.


Talk with your bankruptcy lawyer about how you would like to deal with your co-signer. To the extent that you have a sense of personal obligation, there are safe ways to satisfy it.


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