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Archive for the ‘discharge debts’ tag

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: Discharge Divorce Property Settlement Debts

September 3rd, 2018 at 7:00 am

Chapter 13 enables you to discharge—legally write off—some or all of any non-support debts included in your divorce. Chapter 7 does not do this.

                               

“Discharging” a Debt or Legal Obligation

When you successfully complete a consumer bankruptcy, you get a discharge of some or all of your debts. When a debt is discharged the creditor is legally forbidden to take any action “to collect, recover or offset any such debt.” See Section 524 (a)(2) of the Bankruptcy Code. The debt has become legally uncollectible. So, one of your main goals in bankruptcy is to discharge all your debts, or as many debts as the law allows.

Chapter 7 vs. Chapter 13 Discharge

Chapter 7 “straight bankruptcy” discharges most debts. But there are exceptions.

Some debts you may want to continue paying and don’t want to discharge. One reason may be because you want to keep the collateral securing that debt. So, for example, you might legally agree to continue paying your vehicle loan in order to keep that vehicle.

Certain other debts the law does not allow to be discharged. Examples include child and spousal support, many student loans, and recent income taxes.

The kinds of debts that a Chapter 13 case does not discharge are mostly the same kinds as under Chapter 7.  These include the kinds mentioned above. You can voluntarily pay a vehicle loan under a Chapter 13 “adjustment of debts” case. (Plus you may well get some extra advantages).  And Chapter 13 does not discharge child and spousal support, many student loans, and recent income taxes. (Again, you may well get some major advantages under Chapter 13 in dealing with these special debts.)

However, there IS a significant kind of debt which Chapter 7 does not discharge but Chapter 13 does. These are non-support divorce debts. As a result you should consider Chapter 13 instead of Chapter 7 if you have this kind of debt. This is especially true if you owe a significant amount of non-support divorce debt. Chapter 13 would likely enable you to pay little or even none of your non-support divorce debts. If you either didn’t file bankruptcy or filed under Chapter 7 you’d be required to pay them in full.

What Are Non-Support Divorce Debts?

What we’re calling divorce debts are those financial legal obligations that arose out of your marital divorce. These can also come through separation decrees and other family court proceedings.

Non-support divorce debts are simply divorce debts not involving the payment of spousal or child support.

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

Your divorce decree may divide the marital assets in a very straightforward way. At the end of the divorce both of you could be in possession of what you’ve been awarded—all done.

But 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 marital 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 provision in the decree creates a new and separate obligation by you to your ex-spouse to pay that debt. This is over and beyond whatever obligation you may have had (or not had) already directly to the creditor.

This obligation to your ex-spouse to pay the debt is a non-support marital debt.

Discharged Only Under Chapter 13

Chapter 7 case simply does not discharge these non-support debts.

You’d continue to owe any obligation to pay your ex-spouse money for division of marital property. You would continue to owe any obligation stated in the divorce decree to pay a marital debt. This would be true even if you could discharge the debt to the direct creditor.

However, both division-of-property and division-of-debts obligations to your ex-spouse (and any other non-support divorce debts) could be discharged in a Chapter 13 case. So, again, if you owe non-support divorce debts you should look into Chapter 13 with your bankruptcy lawyer.

But Chapter 13 isn’t necessarily your best option if you have a non-support divorce debt. Chapter 13 has disadvantages, both of itself and in how it treats non-support obligations in particular. We’ll get into these next week. Then you’ll begin to see whether Chapter 13 really is the better solution for you.

 

Stop Student Loan Collections to Discharge or Deal with the Loan

January 31st, 2018 at 8:00 am

Filing Chapter 7 stops a student loan garnishment and other collection activities. Then use “undue hardship” or focus on the student loan.  

 

Our last blog post was about a Chapter 7 bankruptcy stopping a tax garnishment only temporarily. In that situation this was OK because it gave time to set up a payment program with the IRS/state. With the bankruptcy discharging (writing off) all or most other debts, the taxpayer could afford a reasonable monthly payment to pay off the tax debt over time.  

Today we deal with a somewhat similar situation. Assume you owe a student loan that you don’t have the cash flow to make payments on. Here’s how this situation can be greatly helped through a Chapter 7 filing.

Student Loan Collection and the Chapter 7 Filing

Similar to the tax authorities, student loan creditors and collectors have extraordinary collection powers. In most situations they don’t need to sue and get a legal judgment against you to begin aggressive collection procedures. These can include wage garnishment, tax refund setoff, and Social Security benefit capture. (This is true of federal student loans; private student loan lenders must first sue you and get a judgment.)

Also like income tax debts, student loan collection is immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter if the student loan would not be discharged in the Chapter 7 case. During the 3-4 months that most consumer Chapter 7 cases last, you get a break from student loan collections.

The automatic stay statute stops “any act to collect, assess, or recover a claim against the debtor.” (See Section 362(a)(6) of the U.S. Bankruptcy Code.) More specifically it stops “the commencement or continuation…  of a[n]..  .   administrative…  proceeding against the debtor. (Section 362(a)(1).) This covers the non-judicial collection actions mentioned above that are administrative in nature. The Chapter 7 filing also specifically stops “the setoff of any debt,” such as a tax refund or Social Security setoff. (Section 362(a)(7).)                             

Dischargeability of Student Loans

Somewhat similar to income tax debts, student loans can be permanently discharged under certain circumstances. An income tax is almost always discharged as long as it meets certain timing conditions. (These are based on how long ago the pertinent tax return was due and was actually submitted.)

In contrast, the condition that almost all student loans must meet for discharge is much more ambiguous. And the condition, called “undue hardship,” is often quite difficult to meet. You can’t discharge most student loans unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8) of the Bankruptcy Code.)

While it may very much feel like your student loan(s) is (are) causing you a huge financial hardship, the federal courts have interpreted this phrase very narrowly.  So “undue hardship” is, as we said, a difficult condition to meet to discharge your student loan(s).

What You Can Accomplish During the Chapter 7 Pause in Collection      

The goal during the 3-4 months of no collection is to make that pause permanent. This can happen three ways.

First, IF you believe you do meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” soon after filing the Chapter 7 case in order to persuade your bankruptcy judge that you qualify for “undue hardship.” If you’d be completely successful then the pause in collection would become permanent because you’d no longer owe the debt(s).

Second, sometimes in this situation the judge gives only a partial discharge of your student loan(s). In effect the judge decides that repaying all of the loan(s) would be an “undue hardship” but paying back a portion would not be. In this situation you’d make arrangements to pay the student loans at a reduced monthly payment. Your student loan creditor(s) would agree to no further collection action against you as long as you made those payments.

Third, if you don’t qualify for “undue hardship” your Chapter 7 case would discharge your other debts. That should leave you better able to pay the remaining student loans. You’d make arrangements to make payments, maybe through one of the various payment-reduction programs potentially available to you. Assuming you’d do so, they by the end of your Chapter 7 case when the automatic stay would expire your situation would be resolved and you wouldn’t be facing student loan collection actions.

Avoiding Default and Preserving Options

Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely important for student loans. Again, there are various programs that help you deal with student loans, depending on exactly what type(s) you have. Some of these programs can be extremely helpful.

However, most of these programs require you to apply for them before you are too far behind on payments. So filing a Chapter 7 case sooner could enable you to take advantage of these programs. Whereas if you waited and filed later you may very well miss out because you’d no longer qualify.

Conclusion

Talk with an experienced bankruptcy lawyer about all this. Candidly, student loans are challenging to deal with, both outside and inside bankruptcy. You need a seasoned lawyer who understands the interplay between bankruptcy law and student loans, in detail.

 

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.

 

“General Unsecured Debts” in Chapter 7

December 11th, 2017 at 8:00 am

In a Chapter 7 case all or most “general unsecured debts” get “discharged”—legally written off. That’s one of the big benefits of Chapter 7.  

 

Last time we said 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, by treating them much better than other unsecured debts. You can find a list of all the priority debts at Section  507 of the U.S. Bankruptcy Code.
  • “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.”

We’ll get into “priority” debts later. Today’s post is about how “general unsecured” debts are dealt with in Chapter 7 “straight bankruptcy.

The Discharge of Debts

The main goals of a Chapter 7 case are 1) to stop creditors’ collection actions against you and then 2) to discharge as many of your debts as possible.

First, creditor collections are virtually all stopped by the “automatic stay.” This includes general unsecured debts. We discussed the automatic stay in our blog post of November 22, 2017. We compared how it works in Chapter 7 and 13. Also, see Section 362 of the Bankruptcy Code about it.

Second, in most Chapter 7 cases all “general unsecured debts” get discharged. See Section 727 of the Bankruptcy Code about the discharge of debts.

The discharge happens quite quickly. About 100 days after your bankruptcy lawyer files your case, the bankruptcy court enters a discharge order. Here is a very straightforward version of the Order of Discharge, consisting basically of this single short sentence: “A discharge under 11 U.S.C.  [the Bankruptcy Code] is granted to [Debtor].” Your assigned bankruptcy judge signs this order.

The Effect of Discharge

The effect of this discharge order is explained right on this form order, stating:

Creditors cannot collect discharged debts

This order means that no [creditor] may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.

Most General Unsecured Debts Get Discharged

“Priority” debts don’t get discharged. For example, unpaid child or spousal support can never be discharged. Nor can recent income taxes.

But most general unsecured debts do get discharged. There are some exceptions. We’ll cover those next time.

 

Timing: Writing Off Recent Credit Card Debt

September 25th, 2017 at 7:00 am

Using a credit card shortly before filing bankruptcy doesn’t seem right. The law agrees. Writing off this kind of debt can be a problem. 


Our last blog post was about writing off—“discharging”—income taxes.  The conditions you have to meet to discharge a tax debt are mostly very clear. These conditions are based on rather straightforward calculations of time. If you don’t meet those time-based conditions the tax does not get discharged; you still owe it.

Credit card debts are completely different. First, they’re almost always discharged. Second, there are some timing rules but those rules don’t necessarily decide whether or not the credit card debt is discharged or not. We’ll explain all this in today’s blog post.

The Point of the Timing Rules

With income tax debts, they’re NOT discharged unless you meet the timing rules. With credit card debts they ARE discharged unless you meet the timing rules.

With income taxes the debt is not discharged unless it’s been long enough since the pertinent tax return was due and since that tax return was actually submitted to the IRS/state. The point of the rules is the give the IRS/state a chunk of time to try to collect the tax.

With credit cards the debt is discharged unless it’s been too short of a time since the credit card charge. The point of the rules is to make it harder to discharge a charge incurred after deciding to file bankruptcy.

A Mere Presumption

As we just said, the timing rules with credit cards merely make it harder to discharge a credit card debt.  If you run afoul of the timing rules with income taxes, you absolutely still owe the tax. With credit cards, if you run afoul of the timing rule there’s only a bigger chance that you would owe it. It just gives the creditor an easier time of making you pay it—a presumption that it can’t be discharged. But that creditor still needs to act or else it loses that advantage. The entire credit card debt could still get discharged.

For example, if you owed $7,500 on a credit card, of which you incurred $1,000 recently, the entire debt would be discharged in bankruptcy if the creditor did not timely object.

 Only a Portion of the Credit Card Debt is at Risk

With income taxes the entire tax is either discharged or it’s not. With credit card debts, most of the debt could be discharged while only the portion that violates the timing rules is not.

In the above example, only the $1,000 incurred recently, in violation of the timing rules, would usually be at risk of not being discharged.

In Rare Circumstances the Entire Credit Card Debt Could Be at Risk

The following may be confusing in light of what we said so far. If a creditor has evidence that you incurred the entire credit card debt without the intent to pay it, the creditor can challenge the discharge of the entire debt. The timing rules do not need to apply (although if they would that may make the creditor’s argument easier).

In the above example, if the creditor somehow had evidence that you didn’t intend to repay any of the $7,500 at the time you incurred the debt, the creditor could object to any of the $7,500 debt being discharged. It doesn’t matter how long ago that $7,500 debt was incurred.

The Timing Rules

So here are the timing rules.

If you buy more than $675 in “luxury goods or services” (essentially, any non-necessity) from any single creditor during the 90-day period before your bankruptcy is filed, that specific debt is presumed not to be discharged. Also, if you make a cash advance of more than $950 from any single creditor during the 70-day period before your bankruptcy is filed, the debt from that cash advance is presumed not to be discharged.  See Section 523(a)(2)(C) of the U.S. Bankruptcy Code.

The Presumption Is Only a Presumption

Just because a purchase/cash advance meets these conditions do not necessarily mean you can’t discharge that part of the debt. You can defeat the presumption with evidence that you did actually intend to pay the debt when you incurred it. You can still win by persuading the court of your honest intent. You and your bankruptcy lawyer can do this through your own testimony. You can also provide evidence of other relevant facts, such as of you making payments after incurring the debt, or the subsequent event(s) in your life that induced you to file bankruptcy (and not pay the debt after all).

Two Examples of Bankruptcy Timing with Medical Debts

September 20th, 2017 at 7:00 am

How to know whether to delay filing bankruptcy when you’re expecting new medical services and their medical debts?  Here are two examples.   


Our last blog post was about the importance of timing your bankruptcy filing to include more of your debts.

One example we used was of a person with unresolved medical issues requiring ongoing medical care. That person could be overwhelmed by medical and other debts already owed. But he or she may wonder whether it would be wise to hold off on filing bankruptcy until the anticipated medical debts were incurred and so could be included.

We’ll now present two examples of this situation, each with different facts. We’ll show how these different facts resulted in these two people getting quite different legal advice.

Jeremy’s Facts

Jeremy is 30 years old, and single. He was in a car accident a year ago, resulting in serious injuries and huge medical bills. He’s not yet medically stable. He was underinsured, so that a big chunk of his medical expenses were covered but a lot were not. Because he’s maxed out his vehicle insurance coverage he’ll be liable for most of his future medical expenses.

Jeremy currently owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. In the next year or so he expects to add on another $30,000 to $40,000 in medical bills.

Jeremy does not have much in assets. His current income is low, as are his immediate prospects. That’s largely because he’s working a limited schedule as a result of his injuries, medical appointments and surgeries. He was in the military and so didn’t finish college until a couple of years ago. His future income prospects are quite good.

Should Jeremy File Bankruptcy Now or Wait?

If Jeremy would file bankruptcy now, it wouldn’t write off (“discharge”) his upcoming $30-40,000 in medical bills. A year from now he’ll be back in the hole that much.

He could then try to negotiate his way to paying reduced amounts. And if his income increases he may end up being able to pay off his debts, eventually. But that is not a satisfactory solution.

His bankruptcy lawyer instead advises that he wait to file a Chapter 7 “straight bankruptcy” until he became medically stable and had incurred most or all of his medical debts.

Jeremy has limited exposure to harm by his creditors in the meantime. All of his assets are “exempt”—worth little enough to be fully protected from his creditors, even outside bankruptcy. His income is sporadic and low enough that he’d lose little if his wages were garnished. Jeremy hasn’t been sued yet. That may be in part because his creditors don’t see him as a good prospect for forced collection.

So Jeremy does wait, finishes his surgeries and other medical procedures, racking up another $35,000 in medical bills, and then files a Chapter 7 case to discharge all of his debts.

Mary’s Facts

Mary is 65 years old, also single. She had a heart attack two years ago. Like Jeremy she owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. Her heart ailment is a chronic condition which will definitely require medical attention the rest of Mary’s life.

She works full time in the same job she’s had for a decade. Her income is modest but high enough so that if her wages were garnished she would lose a significant amount.

Indeed she just got served with a lawsuit by her largest medical creditor for $10,000. This creditor likely sued knowing that it could likely get paid through wage garnishments.

Should Mary File Bankruptcy Now or Wait?

Because Mary just turned 65 years old she now qualifies for Medicare. She expects to have both Medicare Part A (hospital insurance) and Part B (medical insurance). She understands that these will pay for most of her anticipated medical costs.

So with her future medical expenses largely taken care of, there is no reason for Mary to wait to file bankruptcy. The just-filed lawsuit for $10,000 is good reason not to wait. If she files a Chapter 7 case through her bankruptcy lawyer before her deadline to respond to the lawsuit, she will prevent it from turning into a judgment and then a garnishment.

So Mary does just that. She files the Chapter 7 case, stops the lawsuit in its tracks, and within about 100 days discharges that $10,000 and all the rest of her debts. She gets a fresh financial start heading into her retirement years.

A Moral and Legal Note

Note that incurring a debt, medical or otherwise, when you intend not to pay it is questionable, legally and morally.

The moral question is a personal one. If it’s a matter of your life and death, or even just of your health more broadly, it’s likely defensible to have a surgery or other medical procedure done even if you knew you couldn’t pay for it and intended to discharge the resulting debt in bankruptcy.

The legal question is clearer but still murky. The law does not approve of incurring a debt when you don’t intend to pay it. That can be considered fraud on the creditor. It may turn on the facts of the case. If you’re in the midst of a medical emergency you may not be conscious and able to give your consent for medical services.  Also, most medical creditors don’t raise objections base on issues of fraud in bankruptcy. And when they don’t raise this issue by a quick deadline, they lose the opportunity to do so in the future. So this legal problem usually resolves itself in this practical way.

Talk with your bankruptcy lawyer about these moral and legal issues if you are considering delaying your bankruptcy filing in order to include future debts.

 

Timing: Including Debts in Bankruptcy

September 18th, 2017 at 7:00 am

A bankruptcy covers the debts that exist as of the time your case is filed, not future debts. So how do you know when to file your case? 

 

If you’re feeling overwhelmed by your present debts so much that you’re considering bankruptcy, you’re not likely worrying much about future debts.

Or maybe you are.

Maybe you’re dealing with a medical issue and are very concerned about how you’re going to pay for future medical expenses. You’re already feeling overwhelmed by your present debts. But you’re wondering if you should wait to file bankruptcy until after you’ve finished incurring new medical debts.

Or maybe you’ve been relying on credit cards, cash advances, or other credit to get by day to day. You owe a lot of money and don’t see how you could ever pay it all. So you know you need some relief from these debts. But right now you’re afraid of being cut off from these sources of credit. So you wonder whether and when you should file bankruptcy.

Bankruptcy Only Includes Present Debts

In these and many other situations a good starting point is to recognize that the timing of your bankruptcy case is crucial. Debts that legally exist at the time you and your lawyer file your bankruptcy case are included in that case. Future debts are not. So in a Chapter 7 “straight bankruptcy” case, only the existing debts can be discharged (legally written off). In a Chapter 13 “adjustment of debts” case usually only those existing debts can be included in your payment plan.

The Best Advice? Get Some Good Advice

The two situations mentioned above—the medical and relying-on-credit ones—are not easy to resolve.

Sometimes knowing when to file bankruptcy IS pretty straightforward. Somebody needs relief from a lawsuit or wage garnishment or vehicle repo or home foreclosure, and needs it now.  

But it’s not so simple in these two situations. If you can’t pay your present medical and other debts, but want to wait to file bankruptcy to include those upcoming medical debts, what do you do about the debt collectors in the meantime? If you can’t pay your living expenses without using new credit, how do you get out of that vicious cycle?

The honest truth is that it depends on your unique situation. Because you are unique, the solution will be unique to you.

There is no cookie-cutter answer because you’re not a cookie, a gingerbread man. You’re an individual with individual circumstances needing individual advice.

For that advice to be worthwhile it needs to come from someone who understands you and your situation, who is competent about your legal options, and who can sensibly match your unique situation to the best option.

That “someone” is your bankruptcy lawyer. He or she is legally and ethically required to strictly serve only you and your interests. Your lawyer has likely helped hundreds if not thousands of people, with everything from relatively simple to extremely complicated situations. He or she has not seen a situation exactly like yours but has seen many very similar ones. Your lawyer has spent a career wrestling through tough situations like yours.

Thorough Knowledge and Good Judgment

A competent lawyer gives you not just knowledge about legal options; you should also get the benefit of good judgment. You need somebody who will help you find the best way out what may feel like an impossible situation. In fact you may have a serious Catch-22. Maybe (as in the medical example above) you simultaneously need bankruptcy protection now AND need to wait to file later. It takes someone who knows the law intimately and understands your situation fully to craft that unique best path forward for you.

In our next blog post we’ll demonstrate some good judgment by a bankruptcy lawyer. We’ll show how two similar medical-debt timing situations result in very different legal advice.

 

A Sample Completed Chapter 7 Case

September 15th, 2017 at 7:00 am

What does the completion of a successful Chapter 7 “straight bankruptcy” case look like? What happens to your debts?

 

A Sample Chapter 7 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. Today we’re doing the same thing with a Chapter 7 case.

And like last time we’ll show what a finished Chapter 7 case looks like through tangible facts.

So imagine Jennifer filing a Chapter 7 case through the help of her bankruptcy lawyer to stop a lawsuit by a collection company, write off some old income taxes she’d been struggling to make monthly payments on, hang onto a vehicle whose loan she’d started falling behind on, and write off a bunch of medical, credit card and other personal debts.

The Facts

Jennifer had fallen behind on virtually all of her debts 18 months ago. She’d lost her job and it took her 3 months to find a new one.

She couldn’t pay a $1,200 medical bill, so a few months later it was sent to collections. For 12 months Jennifer disregarded collection letter and phone calls because she had absolutely no money to pay this debt. Then the collector sued her. She was justifiably very concerned about getting her paycheck garnished. She’s a bookkeeper. Her employer made clear that employees in her position better not have their wages garnished. Stopping that lawsuit from turning into a judgment pushed her into filing a Chapter 7 case.

In 2012 she’d started a side business to try to get ahead in life. It made some money for a while but then the income fell off and she had to close it down. She couldn’t afford to pay federal income taxes on that income, so she owed $8,000. In 2015 she’d arranged with the IRS to make $150 monthly payments, and struggled to pay those. She was really afraid what would happen if she stopped paying. She still owed $5,000 in income taxes, interest and penalties.

In the midst of all these financial pressures she struggled to pay her $390 vehicle loan payments. She was often late on the payments, racking up late charges. The last month or two before filing bankruptcy she’d gotten right to the brink of getting her car repossessed. She had absolutely no way to get to work or doctor appointments without her car. So being able to pay for her car was another big reason for filing bankruptcy.

The Filing of Her Case

When Jennifer’s case was filed that immediately stopped the collection lawsuit. She could also stop paying the $150 monthly installments on her income tax debt. That’s because the tax was old enough and otherwise qualified for discharge—legal write-off. She no longer had to pay on any of the $75,000 in other unsecured debts—other medical bills, credit cards, and various other obligations. So she was able to quickly catch up on her car loan and be able to pay it without distress.

The End of the Chapter 7 Case

Jennifer filed her case 100 days ago. That’s about how long most consumer Chapter 7 cases take to finish. Completing her case successfully is crucial because otherwise she’d lose the benefits of her case.

Regarding her vehicle loan, a few weeks earlier she had entered into a reaffirmation agreement with her lender. That agreement formally excluded the loan from the discharge of the rest of her debts. She agreed to remain liable on that loan in return for being able to keep her car. She was happy to continue owing on this debt, now that she had no trouble making the payments. Reaffirming the debt also allowed her to quickly start re-establishing her credit.

So now Jennifer receives a copy of a Discharge Order from the bankruptcy court. Her creditors all also receive copies. This court order prevents any of her creditors—other than the vehicle lender—from pursuing her or her assets. From the time her Chapter 7 case was filed until now the debts were on hold. The “automatic stay” prevented any of her creditors from taking any collection action against her. But Jennifer still owed the debts. Now the Discharge Order makes her debts permanently uncollectible.

All of her creditors—again with the exception of the vehicle lender lender—now each write off her debt from their books. This includes the IRS. It becomes illegal for any of these creditors to do anything to collect its debt. They must report to credit reporting agencies that the debt has been written off and is no longer owed.

Conclusion

So Jennifer can get on with her life in financial peace. She doesn’t worry about lawsuits and garnishments. She doesn’t fear what the IRS will do to her if she misses an installment payment. And she can comfortably pay her vehicle loan payment and looks forward to paying it off. Other than that manageable single payment she is debt-free, and appreciating her fresh financial start.

 

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