Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘child and spousal support’ tag

Priority Debts in a No-Asset Chapter 7 Case

November 25th, 2019 at 8:00 am

Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.

 

Most Chapter 7 Cases Are No-Asset Cases

Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge any remaining debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.

A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. The trustee just verifies that you have no unprotected assets. He or she does this mostly by reviewing your bankruptcy documents and asking you some simple questions at your hearing. A large majority of Chapter 7 cases are no-asset ones. Your bankruptcy lawyer will tell you if yours is expected to be.

Although Chapter 7 is theoretically a liquidation form of bankruptcy, in a no-asset case there is nothing to liquidate. You lose no assets, and you lose all or most of your debts.

What Happens to Your Special, Priority Debts in a No-Asset Chapter 7 Case?

Yes, what about debts that do not qualify for discharge? There are various types of such debts, although most cases have either only one or two not-discharged debts, or none at all.

Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes. See the U.S. Bankruptcy Code subsections 507(a)(1) and (8). (Not to go into the rules here, but many older income taxes are not a priority debt and can be discharged.)

Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets.  In fact the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!

But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.

Dealing with Priority Debts During and After a Chapter 7 Case

However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).

The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support. (Note that Chapter 13 “adjustment of debts” can stop the collection of unpaid prior support under most circumstances.)

So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer make arrangements to begin paying the debt. With ones that the automatic stay does not apply to, you need to be prepared to deal with immediately.

If neither of these make sense in your situation, consider filing a Chapter 13 case instead. Talk with your bankruptcy lawyer about the advantages and disadvantages of each option. Chapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt (or secured or any other nondischarged debts), it can really help.

 

Priority Debts

November 18th, 2019 at 8:00 am

One of the most important aspects of bankruptcy is that all debts are not equal.  “Priority” debts are treated special in a number of ways.

Debts Are Different So the Law Recognizes Some Differences

The law does not treat all debts the same. That’s because you have different kinds of creditors that you owe for very different reasons. The law tries to be practical and so to some extent it respects these differences.

Your debts all fall into three categories:

  • Secured
  • General unsecured
  • Priority

Today we start a series of blog posts covering priority debts.

Priority Debts

Priority debts are specific categories of debts that the law has decided should be treated as more important. Bankruptcy gives them higher priority, especially over “general unsecured” debts. Priority debts have power over you and over other debts in various ways.

Secured debts that are debts with liens on something you own.  Secured debts are special in that the creditor usually has a stronger position because of its lien. The lien gives the creditor power over you if you want to keep whatever secures the debt.  

Most priority debts are unsecured, but some may have a lien and so are secured. Secured priority debts have that much more power over you and over other creditors.  

Reasons for Priority

Each of the priority debt categories have their own different reason to be treated as special.

For example, the two most common categories of priority debts in consumer bankruptcy cases are:

  • Child and spousal support—the support you would owe when filing your bankruptcy case. See Section 507(a)(1) of the U.S. Bankruptcy Code.
  • Income taxes—certain income taxes that meet certain conditions. See Section 507(a)(8).

Support payments are special essentially because society very strongly believes that children and ex-spouses should receive the financial support ordered by divorce courts. Federal bankruptcy law incorporates this social attitude. So support debt has the highest priority in the list of priority debts.

Income tax debts are special because taxes are a debt to the public at large. It’s not a debt to a private person or business. In effect it’s a debt to us all. So it deserves a higher priority than regular private debt. However, unlike support debt which is always a priority debt, an income tax is a priority debt only if it meets certain conditions. Those conditions mostly relate to how old the taxes are. The newer the tax is the more likely it is to be priority. Income taxes that do not meet the required legal conditions are mere general unsecured debts.

Priority Debts in Bankruptcy

In most bankruptcy cases there isn’t enough money to pay all debts. So the laws that determine the order that creditors get paid often determine which debts receive full or partial payment and which receive nothing. Priority debts often receive full payment while general unsecured debts receive less or, often, nothing.

This works very differently under Chapter 7 “straight bankruptcy” vs. Chapter 13 “adjustment of debts.” Our next blog posts will show how.

 

The Surprising Benefits: Chapter 13 Potentially Discharges Divorce Property Settlement Debts

September 10th, 2018 at 7:00 am

Chapter 13 can write off some or all of the non-support debts included in your divorce. But it comes with some potential disadvantages. 


Last week we explained how Chapter 7 cannot write off non-support divorce debts, but Chapter 13 can. We said if you owe a significant debt created by your divorce decree (for other than child or spousal support) you should talk with a bankruptcy lawyer. Don’t necessarily think that Chapter 13 is your best option with this kind of debt. Chapter 13 has advantages and disadvantages. We get into these now so you can start to see which option is best for you.

Non-Support Divorce Debts

Support debts are not discharged (written off) under either Chapter 7 or 13. Only non-support debts can be discharged under Chapter 13 (and not Chapter 7). So we need a quick, practical reminder what we mean by non-support debts.

We said last week:

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

… often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support divorce debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

… . This obligation by you to your ex-spouse to pay the debt is a non-support divorce debt.

Disadvantages of Chapter 13

The main advantage of Chapter 13 for this kind of debt is that you could avoid paying most or even all of it. Also, Chapter 13 has many other potential advantages over Chapter 7, some of which may well apply to your situation. These are beyond the scope of today’s blog post.

Let’s focus instead on three main potential disadvantages of Chapter 13 for this kind of debt. These are: 1) delay in discharge, 2) risk of no discharge, and 3) likely partial payment of the nonsupport divorce debt.

Delay in Discharge

A Chapter 13 case takes a lot, lot longer than a Chapter 7 one. It takes years instead of months. That is, a Chapter 13 case usually doesn’t finish for 3 full years, and often goes as long as 5 years. Contrast that with a Chapter 7 case, which usually takes less than 4 months from filing date until completion.

And you don’t get a discharge of your debts—including the non-support divorce debt(s)—until the end of the case.  Again, that’s 3 to 5 years.

Usually your ex-spouse can’t do anything to collect on that debt in the meantime. So the delay may not be much of a practical problem. But you’re still living in a sort of limbo in the meantime.

If you have other reasons to be in a Chapter 13 case the delay may well be worthwhile. Or if the amount of you non-support divorce debt is very large that alone may make the delay worthwhile. Just be aware of this downside.

Risk of No Discharge

Almost all Chapter 7 cases, especially those in which the person is represented by a lawyer, get successfully completed. But Chapter 13s are riskier. That’s because they involve a monthly payment plan that you and your lawyer put together, it gets court-approved, and then you pay on it for 3-to-5 years. In the right situations a Chapter 13 case can accomplish much more than Chapter 7. But there are more things that can go wrong.

As we said above, you don’t get the discharge of debts until the end of the case. So you have to get to the end successfully to discharge the non-support divorce debt. There’s a risk that you would not get to the discharge.           

Likely Partial Payment of the Non-Support Divorce Debt

The Chapter 13 payment plan referred to above very seldom results in all debts being paid in full. In fact, in some cases you’d pay certain debts nothing before they get permanently discharged. In the majority of cases a non-support divorce debt would get paid in part, but often only a small percentage.

Non-support debts would be treated like all your other “general unsecured” debts. These are all debts that are not secured by collateral and are not “priority” debts (such as recent income taxes) which must be paid in full. All of your “general unsecured” debts are put together into a single pool of debt. The extent to which you’d pay that pool of debt would be based on a bunch of factors, such as:

  • how much you can afford to pay all your creditors per month throughout the length of the case
  • the length of your Chapter 13 plan, generally 3 years or 5, determined by your income
  • the amount of your priority debts, which you paid in full before the “general unsecured” debts get paid anything
  • how much your plan must pay in administrative expenses—the Chapter 13 trustee fees and the attorney fees you did not pay before your case was filed—all paid before paying any of the “general unsecured” debts

As a result sometimes the “general unsecured debts, including your non-support divorce debts, get paid nothing at all. All of your available money is exhausted elsewhere. (This assumes your local bankruptcy court allows such “0% plans”). On the other hand, in rare cases the “general unsecured” debts get paid in full. This is more common when you have little or no priority debts and the general unsecured debts are relatively small. Most of the time your non-support divorce debts get paid a relatively small portion of the total you owe. It depends on all these factors.

 

The Surprising Benefits: Use “Preference” Money to Pay a Favored Debt

April 2nd, 2018 at 7:00 am

When a creditor is forced to pay back recently received money through “preference” law, that money can go to pay a debt you want to be paid. 


Last week we introduced the law of preferences. This law says that if a creditor takes or receives money from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. There are some complicated conditions that may apply, but in many situations the creditor does need to pay it back. See Section 547 of the Bankruptcy Code.

We ended last week by asking where this returned money goes. What good does it do you if that money just goes to your Chapter 7 trustee?  After all, this liquidating trustee’s job is to distribute that money among all your other creditors. So how does that help you?

Chapter 7 Trustee’s Collection of Bankruptcy Assets

It’s true that under Chapter 7 “straight bankruptcy” it’s your bankruptcy trustee who makes a creditor return a “preferential payment.” The Bankruptcy Code says “the trustee may avoid” a preference payment. It’s not you, the debtor, who has that role. Section 547(b). (“Avoid” means requiring the creditor to pay the recently received money back, but to the trustee.)

That returned money then goes into the pool of money the trustee uses to pay your creditors. In most consumer Chapter 7 cases that’s the only money available to the trustee. That’s because everything that most debtors own is protected through property exemptions. Exemptions are categories and maximum amounts of assets that you can keep in bankruptcy under state and/or federal law. So, when a trustee avoids, or undoes a creditor’s preferential payment, that money is all the trustee has to work with.

Whether the trustee only has the preference money or also liquidates an unprotected asset, what happens to the resulting money?

Chapter 7 Trustee’s Distribution of Bankruptcy Assets

Once the trustee has received the preference money (plus any other money from liquidating assets), he or she is required by law to then distribute that money in a very specific way. The law is laid out in the Bankruptcy Code’s Section 726, “Distribution of property of the [bankruptcy] estate.”

The distribution rules say that “priority” debts get paid in full before anything goes to any other debt.  Section 726(a)(1) says the money first goes to debts under Section 507, which are a listing of the priority debts.

When an “Avoided Preference” Directly Benefits You

Simply put, if you want or need to pay a debt that’s a “priority” debt, the trustee will pay it. The trustee will pay it out of the money it got from the creditor by “avoiding” the preference payment. The trustee will pay your favored priority debt before paying any other debt.

For example, an unpaid child support payment or recent income tax debt would be a priority debt. These debts could not be discharged—legally written off—in a bankruptcy case. So you’d have to pay them after your Chapter 7 case was completed. But the trustee would pay such a debt from the preference money. That would either eliminate or reduce what you’d have to pay yourself.

If your priority debt that you’d like to be paid is larger than the amount of money the trustee has from the preference, the trustee would only pay part of that priority debt. If the trustee has more than enough money, he or she would pay off the whole priority debt.

(The trustee also gets paid a fee out of the same money, so you need to take that fee into account. The fee is based on a sliding scale: a maximum of 25% on the first $5,000 distributed, 10% on the next $45,000, etc. See Section 326(a).)

Conclusion

Preference law can make a creditor give up money it took from you shortly before you filed your bankruptcy case. Then this same money can instead go to pay a priority debt which you very much want to get paid.

This is quite a nice benefit of bankruptcy. You can force one of your less important creditors in effect to pay your most important creditor!

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.

 

“General Unsecured Debts” in Chapter 13

December 13th, 2017 at 8:00 am

You pay your general unsecured debts only as much as you can afford during a Chapter 13 plan, with the rest then legally written off forever.  

 

Our last blog post was about how Chapter 7 “straight bankruptcy” deals with “general unsecured debts.” Mostly, they are discharged—legally, permanently written off. There are some exceptions. At the end of the last blog post we said we’d talk next about those exceptions. But before we do, today we want to give the Chapter 13 “adjustment of debts” side. What happens to “general unsecured debts” in a Chapter 13 case?

“Priority” and “General Unsecured” Debts

First, let’s remind you about the difference between these two kinds of unsecured debts. The difference is crucial because of how they completely differently they are treated in a Chapter 13 case.

Remember that priority debts are specific categories of debts that the law says must be treated very specially. They are all on a list at Section 507 of the U.S. Bankruptcy Code. The main “priority” debts in consumer Chapter 13 cases are past-due child and spousal support and certain recent income tax debts.

If an unsecured debt is not on the list of priority debts then it’s a general unsecured debt. They are by far the most common kind of debt.

The Difference in Treatment under Chapter 13

You must pay priority debts in full during the course of the 3-to-5-year Chapter 13 payment plan. You usually only have to pay general unsecured debts to the extent you have money available to pay them.

So, priority debts have to be paid 100%. General unsecured debts are often paid only a small percent, often only 5-10%, sometimes maybe even 0%.

In most situations the result is that during your Chapter 13 payment period you must pay your priority debts in full before paying your general unsecured debts anything.

General Unsecured Debts during a Chapter 13 Case

So during a Chapter 13 case you pay your general unsecured debts as much as you can pay them. But that’s after paying your living expenses, and your secured and priority debts. You usually even get to pay the costs of your case (your bankruptcy lawyer’s fees) and trustee fees ahead of your general unsecured debts.  

In fact, if your income goes down or expenses go up during your case, you may even be able to amend your payment plan to reduce what the general unsecured debts get paid because you can no longer afford to pay them as much as you originally expected.

General Unsecured Debts at the End of a Chapter 13 Case

After all this, what happens to your general unsecured debts at your successful completion of a Chapter 13 case? After paying these debts as much as you can afford to pay them (as specified in your court-approved payment plan), the remaining balance, no matter how much, is discharged—legally written off.

At that point you’ve paid your priority debts in full. To the extent you are taking care of secured debts (home mortgage, vehicle loan, furniture debt, etc.), you’ve paid all you need to pay them, leaving them current or paid off. You’ve paid the general unsecured debts whatever percentage (if any) your plan provides, with the rest discharged. You are now current on one or two long-term secured debts you’ve chosen to keep (if you had any), and otherwise you’re completely debt-free.

 

Unsecured Debts in Bankruptcy

December 8th, 2017 at 8:00 am

Your debts are either secured by something you own, or they are unsecured. Unsecured debts are either “priority” or “general unsecured.”  


Unsecured Debts

Debts that are unsecured are those which are not legally tied to anything you own. The creditor has no “security” attached to the debt, no “security interest” in anything. It has no right to repossess or seize anything of yours if you don’t pay the debt.  It can only pursue the debt itself.

It’s usually easier to deal with unsecured debts than secured ones in bankruptcy. Most unsecured debts can be discharged—legally written off—through either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”

An Unsecured Debt Can Sometimes Turn into a Secured One

Under some circumstances an unsecured debts can become secured if you don’t pay it.

For example, you could be sued by the creditor on a debt, resulting in a judgment against you. The creditor may be able to turn that judgment into a lien against your home and other possessions. The debt would then be secured by your home and/or other possessions. (The details of this depend on your state’s laws.)

Another example: if you get behind on income taxes the IRS can record a tax lien against your real estate and personal property. It does not need to sue you.

Filing bankruptcy can stop a lawsuit from turning into a judgment lien. It can often stop the recording of an IRS tax lien. In these and similar situations it’s much better to file bankruptcy before creditors can turn unsecured debts into secured ones.

Also, Sometimes a Secured Debts Can Turn into an Unsecured One

After a secured creditor repossesses or seizes its “security,” and sells it, any remaining debt would then be unsecured.

 A secured debt could become unsecured in various other ways. The “security” could be lost or destroyed, leaving the creditor with nothing to seize. Another secured creditor with prior rights could seize the “security,” leaving the creditor with the “junior” position no longer secured. There are various tools in bankruptcy for turning secured debts into unsecured ones.

Seemingly Secured Debts May Actually Be Unsecured

Creating a “security interest”—a creditor’s rights over its “security—takes specific legal steps. If the creditor fails to take those steps appropriately, a debt that seemed to be secured actually isn’t. Your bankruptcy lawyer may ask you (or the creditor) for documentation to find out if a certain debt is really secured.                                   

Two Kinds of Unsecured Debts

There are two kinds of unsecured debts: “priority” and “general unsecured.”

“Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, mostly by putting them ahead of other unsecured debts. Generally, “priority” debts have to be paid in full in bankruptcy before other unsecured debts receive anything.

“General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.”  “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”

Unsecured Debts in Bankruptcy

In the next blog posts we’ll look at how Chapter 7 and Chapter 13 treat “priority” and “general unsecured” debts. Depending on which kinds of debts you have, these will help you understand and choose between these two options.

 

Chapter 13 with a Judgment Lien, HOA Lien, or Child/Spousal Support

December 6th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a judgment or HOA lien on your home, or get behind on child or spousal support.  


You may need the extra help of Chapter 13 if you have any of the following liens against your home:

  • Judgment lien
  • Homeowner association lien
  • Unpaid child or spousal support

Or you may not need that extra help. Two blog posts ago we showed scenarios where Chapter 7 “straight bankruptcy” could handle these situations well. If you’re current on your mortgage but have any of these three issues, check out that earlier blog post.

But even if you are current on your first mortgage, if you do have any of these 3 debts/liens in some circumstances Chapter 13 could definitely be better for you. Today we show you how.

Judgment Liens

When we got into judgment liens two blog posts ago, we ended by saying that having a judgment (or “judicial”) lien is not a deciding factor in choosing between Chapter 7 and 13. That’s because judgment lien “avoidance” is available under both, with the same rules for qualifying for it. (That’s in contrast to a number of legal benefits only available under Chapter 13.)

However, getting rid of (“avoiding”) a judgment lien may be procedurally easier under Chapter 13. And arguably the judgment creditor is less likely to respond and object.

To avoid a judgment lien in Chapter 7 your bankruptcy lawyer has to file a Motion for Avoidance of Lien. It’s filed at bankruptcy court along with a formal Notice of that Motion. For example, see these Local Bankruptcy Forms 717 and 717.05. Both have to be formally served on the judgment creditor. So the creditor receives these documents that no other creditor receives.

In contrast, under Chapter 13 the judgment lien avoidance language is buried within the multi-page proposed payment plan. See page 4 of the bankruptcy court’s 8-page Official Form 113 Chapter 13 Plan. All creditors receive a copy of this proposed plan. So, there’s more of a tendency for a judgment creditor to not notice the lien avoidance. And if it does notice, it’s more likely to just shrug it away if the resulting unsecured debt is being paid anything under the plan.

(Please see our earlier blog post for the rules about qualifying for judgment lien avoidance, applicable to both Chapters. Also see the applicable Section 522(f)(1)(A) of the U.S. Bankruptcy Code.)

Homeowner Association Lien

Homeowner association liens are special, and especially dangerous, for a number of reasons. In certain circumstances they can be superior to your mortgage lender’s lien. (That means it comes ahead of the mortgage itself on your home’s title.) State laws differ but generally HOAs have unusually aggressive collection powers. So you need be especially attentive if you fall behind on your HOA dues or assessments. Doing so can result in serious risks for your home, both from the HOA and your mortgage lender.                          

You can protect yourself from those risks much better in a Chapter 13 case. In a Chapter 7 case, if you’re behind on any HOA obligation you essentially have to work it out with your HOA. And you may well have to placate your mortgage lender at the same time. You don’t have much leverage with either.

In contrast, in a Chapter 13 case you and your home are protected while you catch up on your HOA arrearage. You do need to keep current on any ongoing dues and/or assessment payments. But as far as the past-due payments, you’d generally have up to 5 years to bring them current. As long as you stick to the court-approved payment plan you won’t have to worry about the HOA. Nor your lender.

Child/Spousal Support

In most circumstances, being behind on support creates a lien against your home. (This is usually the result of the legal judgment arising out of your divorce decree).

Filing a Chapter 7 case doesn’t freeze the collection actions of any support obligations. The “automatic stay” is the usual protection from creditor collections during bankruptcy. There is an exception in the “automatic stay” for the collection of support. See Section 362(b)(2) of the Bankruptcy Code.

However, filing a Chapter 13 case DOES freeze the collection of PAST-DUE support. (The collection of ongoing monthly support payments can continue, but you’d want to pay those anyway.) Because support collections can be extraordinarily aggressive, this can be a crucial benefit of Chapter 13. You DO need to fastidiously keep current on any ongoing support, and maintain your Chapter 13 commitments. But as long as you do so you’d have up to 5 years to get current on the past-due support.

 

Chapter 7 with a Judgment Lien, HOA Debt, or Support Obligations

December 1st, 2017 at 8:00 am

Here are 3 more scenarios for when you are current on your mortgage, where Chapter 7 works well in dealing with other home-related debts.


Our last blog post was about situations in which Chapter 7 works well enough in the following 3 debt situations:

  1. Second or third mortgages
  2. Property taxes
  3. Income tax with a lien recorded on your home

In general, if you are current on your first mortgage but have any of these 3 debts, sometimes Chapter 13 helps much more than Chapter 7. But last time we showed scenarios when you don’t need the extra time and expense of Chapter 13.

We do the same today with the following 3 other home-related types of debts:

1. Judgment with a lien attached to your home

2. Homeowner association debt with a lien

3. Child/spousal support unpaid with a lien

Judgment Liens

In bankruptcy you can often remove a lien on your home arising from a creditor’s judgment against you. That’s important because otherwise the lien would continue on your home’s title even after you discharge (legally write off) the underlying debt.

Whether you can remove, or “avoid,” the judgment lien depends on the value of your home, the amount of its equity, and amount of your applicable homestead exemption. If all of the judgment lien “impairs,” or cuts into, your homestead exemption, you can remove that lien.

For example, assume your home is worth $200,000, you owe $175,000 on the mortgage, so you have $25,000 in equity. Your state’s homestead exemption is $30,000, covering all of your equity and more. You have a judgment lien on your home’s title in the amount of $10,000. All of that $10,000 cuts into the equity that’s protected by your $30,000 homestead exemption. So you can “avoid,” or remove the entire judgment lien in bankruptcy.

There are some tools affecting liens that are available only in Chapter 13, not in Chapter 7. This is not one of them. You can “avoid” a judgment lien under the same rules in either Chapter 7 or 13. So this is not a deciding factor between these two bankruptcy options.

Homeowner Association Lien

State laws differ on homeowner association liens. But in general not being current on your HOA dues and/or assessments can be a significant problem. It can catch you by surprise. So be sure to tell your bankruptcy lawyer if you are paying HOA dues or assessments. Of course be sure to tell if you are not current on them.

One of the reasons these liens are dangerous is that under some circumstances they are superior to your mortgage on your title. Falling behind is likely an independent basis for foreclosure by your mortgage lender—even if you’re current on the mortgage itself. Also, the timetable for action by your HOA may be quick compared to a home lender’s foreclosure.

If you have monthly HOA dues and you’re current on them, and intend to stay in the home, filing a Chapter 7 case should be fine.

But if you’re at all behind with your HOA and don’t have an agreed payment plan to catch up, talk with your lawyer about your options, including Chapter 13. You’d very likely have more time and flexibility in catching up and keeping your home protected while doing so.

Child/Spousal Support

Often, being behind on support creates a lien against your home. That may even happen when you’re current (through the judgment arising out of your divorce decree).

Filling a Chapter 7 case should be fine if you are current on all support obligations at time of filing. If you are not current but expect to be very shortly thereafter, be aware that filing a Chapter 7 case does NOT freeze the collection actions of any support obligations—neither ongoing monthly ones nor those in arrears.

However, Chapter 13 CAN stop the collection of support obligations that are in arrears. Those collections can be unusually aggressive—sometimes resulting in even the loss of your driver’s license, or possibly your occupational or professional license. So knowing that Chapter 13 can freeze collections and buy you time to catch up is important. If this debt is causing you serious problems this may be reason enough to choose Chapter 13.

 

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.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top