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Archive for the ‘discharge’ tag

Buy Time to Deal with Multiple Years of Income Tax Debts

October 25th, 2017 at 7:00 am

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

 

Tax Liens under Chapter 7 

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

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

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

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

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

When Chapter 7 is Appropriate

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

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

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

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

An Example

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

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

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

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

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

Other Considerations

 But what if you:

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

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

 

Chapter 13 Buys Time

July 21st, 2017 at 7:00 am

Chapter 13 is very different from Chapter 7 “straight bankruptcy.” It buys you time to deal effectively with your special debts. 


The Main Overall Benefit of Chapter 13

The main benefit of Chapter 7 “straight bankruptcy” is the discharge—legal write off—of your debts.

You also get a discharge in Chapter 13 “adjustment of debts.” But a more immediate and often more important benefit is that you’re protected from collection action by creditors while you pay all or a portion of certain special debts. Those special debts are usually ones that Chapter 7 does not discharge, or does not help in a meaningful way.

Buying Time

Here are some examples of the kinds of debts that buying time under Chapter 13 helps you with.

  • Home Mortgage: If you’re behind on your first mortgage Chapter 13, can give you as much as 5 years to catch up. An ongoing foreclosure is stopped. Future ones can be prevented. This buying of time gives you a much more practical way to save your home. And a much more peaceful one.
  • Recent Income Tax Debts: Taxes that don’t qualify for discharge (usually because they are too recent) are subject to immediate collection as soon as a Chapter 7 is completed. Interest and penalties continue to accrue. In contrast, under Chapter 13 the tax creditors must stop collections throughout the 3 to 5-year payment plan. And generally interest and penalties both stop accruing.
  • Child or Spousal Support: Chapter 7 does not buy you ANY time if you’re behind on support. Chapter 13 stops collection on the arrearage (although ongoing monthly support can continue being collected). You then have time to catch on the support over time, based on what you can afford.
  • Vehicle Loans: If you’re behind on your car or truck, in Chapter 7 you have to catch up in a matter of weeks. Chapter 13 gives you years. And if the debt is more than the value of the vehicle, through “cramdown” you would probably not need to catch up at all. Plus the monthly payment can often be reduced. The term of payments may be stretch out over a longer period of time. These all buy you time. The end result is that you can keep the vehicle less expensively and with less worry.
  • Unpaid Property Taxes: If you’ve fallen behind, just like a mortgage you get years to catch up. And you don’t have to worry about a property tax foreclosure in the meantime. Also, your mortgage lender can’t use your being behind on property taxes as a reason to foreclose on the mortgage.
  • Student Loans: Generally you can stop paying on your student loan during your Chapter 13 case. This is especially beneficial if you do not currently qualify for an “undue hardship” discharge but expect to more likely do so later in your case. Ask your bankruptcy lawyer about how the law is enforced because it varies by region.

 

The Closing Arguments in a Dischargeability Proceeding: an Example

April 5th, 2017 at 7:00 am

In our example about the adversary proceeding about whether a debt gets discharged, here are the creditor’s and debtor’s closing arguments. 

 

Here’s the fifth blog post in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last four posts about the different steps in the “adversary proceeding” so far, including the trial itself. Now it’s time for the two sides to give their closing arguments to the bankruptcy judge.

The Creditor’s Closing Argument

The lawyer for the creditor says the following to the bankruptcy judge:

As the U.S. Supreme Court said way back in 1934, bankruptcy law “gives to the honest but unfortunate debtor… a new opportunity in life… unhampered by the pressure and discouragement of preexisting debt.”

As the debtor here fully admits, he was NOT honest with his creditor, Heather, his aunt. Marshall admitted that he purposely did not include his debt to another aunt on his loan application to Heather. He admitted that he did this because he was afraid that otherwise Heather would not give him the loan. He desperately wanted that loan. It was the only way he could start his business. So he stooped to lying, and put his lie in writing. He then signed the loan application, dishonestly asserting that what he wrote was truthful.

Marshall’s omission was not insignificant or immaterial.

The outstanding loan balance was $7,500. This amount was enough that, had Heather known about it, that outstanding loan likely would have given Heather pause about providing her own loan.

The existence of the prior loan was a material fact and his omission of it was a material omission. That prior loan was another family loan. Had Heather known about it, she could well have figured that if money got tight for Marshall down the line and he had to choose, he’d pay the earlier loan ahead of hers. So Heather definitely deserved to know about that loan balance before she made her decision about giving Marshall a new loan.

The Creditor Lawyer’s Conclusion

Marshall says now that he believed at the time that Heather would not base her decision on the loan application. He tells us his impression at the time was that this documents wasn’t all that important. And yet Heather told him directly that she had her lawyer prepare the application and other loan documents because she wanted the loan to be legally enforceable. He had every reason to know that the loan application was a meaningful document. He knew he needed to take it seriously, that he had every obligation to complete it truthfully. He can’t now use the excuse that he didn’t have to be honest because Heather wouldn’t treat the application seriously in making her decision.

Marshall materially lied on the one and only document that he presented to Heather to have her decide whether or not to give him a loan. He cannot now claim to be an “honest but unfortunate debtor” deserving to write off his debt to Heather. This court must therefore exclude this one debt from the discharge Marshall is getting of his other debts.

The Debtor’s Closing Argument

Then the lawyer for Marshall, the debtor, says the following to the judge:

The creditor here, Heather, has failed to establish three different elements of her case. If she fails to establish even JUST ONE of these elements, the debt must be discharged.

First, while Marshall’s omission was admittedly false, it was not materially false. What’s crucial to the omission being material is not the amount of the prior loan. Nor is it that this prior loan was a family loan like Heather’s. What is crucial under the law is whether Heather would have made the loan to Marshall if he would have included the other aunt’s prior loan in Heather’s loan application. An omission is material if it would have made a difference in the creditor’s decision to make the loan.

The evidence is quite clear that not including the prior loan was not a material omission. Heather admitted she didn’t even look at the completed loan application, nor discuss its contents with her lawyer.  Heather testified here that she based her lending decision on family considerations, not on Marshall’s finances. Whether one particular debt was or was not included in the loan application had no bearing on Heather’s decision. The omission was immaterial.

Second, Marshall did not omit the prior debt “with intent to deceive” Heather. He completed the application with the understanding that what he wrote on it was not important to Heather. He was reasonable in this understanding because that was what he had heard, albeit indirectly, from Heather. She signaled strongly to him that her decision was being made primarily or even exclusively because of their relationship. This included both their family and personal relationship.

Marshall admitted that he intentionally did not include the prior debt, but for a very specific reason. He knew that at the time Heather was having a quarrel with his other aunt who’d made that prior loan. Marshall knew Heather could be impulsive, erratic, and even irrational. So Marshall was justifiably concerned that Heather would somehow let some irrelevant irritation cause her to deny him the loan. He imagined her telling him to instead just go back to that other aunt for more money. He already knew the other aunt was unable to lend him what he needed. His only intent in not listing the prior loan on the application was to avoid having Heather hit an emotional tripwire that would distract her from her decision to make the loan.

The Debtor Lawyer’s Conclusion

Third and most clearly, Heather did not rely on, much less reasonably rely on, on the loan application in her decision. She particularly didn’t rely on Marshall’s omission of the other loan. She never read the application, didn’t discuss the contents with her lawyer, and nothing about the application entered into her loan-making decision.

This creditor bases her entire argument on Section 523(a)(2)(B) of the Bankruptcy Code. That requires the use of a materially false “statement in writing” on which the creditor “reasonably relied.” It’s perfectly clear from the evidence presented at this trial that the creditor here does not meet this element of reasonable reliance. So just as perfectly clearly the debt at issue here should be discharged in this bankruptcy case.

The Judge’s Decision

Our next blog post in a couple days will give, and then explain, the judge’s decision about whether or not this debt will be discharged in bankruptcy.

 

Options for Dealing with a Nondischargeability Complaint

March 17th, 2017 at 7:00 am

If a creditor objects to you writing off —discharging—a debt in a Chapter 7 bankruptcy on grounds of fraud, here are your practical options. 

Adversary Proceedings and the Discharge of Debts

Two weeks ago we introduced adversary proceedings—lawsuits in bankruptcy court. We focused on adversary proceedings in which a creditor objects to the discharge—write-off—of one of your debts.

This does not happen in most cases. That’s because the law makes some debts clearly dischargeable and other debts clearly not dischargeable. Recent income taxes, all criminal fines and restitution, and all child and spousal support are simply not dischargeable. On the other hand, most debts ARE simply dischargeable. There’s usually no dispute so it doesn’t take litigation to determine whether the debt will be discharged or not.

The big area where disputes can arise is when a debt was allegedly incurred through a debtor’s fraud, misrepresentation, or other similar bad behavior. Even these happen less than you might think. But they CAN happen, and sometimes when you don’t expect it. So let’s look practically at what happens in these situations.

Potentially Nondischargeable Debts

There are two main circumstances in which creditors can object to the discharge of a debt that would otherwise qualify for discharge.

First, you’re accused of incurred the debt through misrepresentation or fraud. Basically, you got the debt by lying about something important related to the debt. The classic example is providing false or incomplete information on a loan application. But this can also include debts from bounced checks or from using a credit card without intending to pay it. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)

Second, you’re accused of intentionally and maliciously hurting someone or their property, causing bodily or financial harm. For example, you had an altercation with an ex-spouse resulting in some bodily harm. Someone accuses you of slashing their tires. (Section 523(a)(6).)

It’s these somewhat unusual kinds of behavior that open you up to dischargeability challenges.

If Creditor Doesn’t Complain on Time

If you are concerned about any of this, make it the first thing you talk about with your bankruptcy lawyer. You may have little or nothing to worry about. If you do have some valid concerns, it’s crucial for your lawyer to know about it. Certain steps may be taken to reduce your risks. You and your lawyer need to get prepared for dealing with the anticipated objection.

The objection will not necessarily come. Creditors have a very limited time to raise these objections. The deadline is 60 days after your “meeting of creditors,” so about 3 months after filing your bankruptcy case. As long as you give appropriate notice of your bankruptcy case, if the creditor does not formally file an objection in the form of an adversary proceeding in your case by the deadline date, the debt is discharged. That’s true even if the creditor really did have grounds upon which discharge could have been denied. A creditor may simply blow it. Or it may decide to not throw good money after bad, spending lawyer fees on a case that it may lose.

Your Options If a Creditor Does Complain

If a creditor does file a nondischargeability complaint on time, you have three basic options. You can:

  • defend yourself vigorously so that you end up not having to pay the debt after all
  • accept that you would lose the dispute and settle right away
  • push back for a time until the facts induce you to settle by paying part of the debt

Fighting to the Death

Just because a creditor believes that your actions disqualify you from discharging the debt does not mean it is correct.  The creditor may be irrationally angry at you and wants you to pay the debt no matter what. He, she, or it may not have an especially strong case but just wants you to pay. There may be enough money at stake that it is worth fighting back with everything you have. When dealing with an irrational foe, with facts in your favor, and with a lot at stake, you might have to fight back until you win.

Settle Right Away

Sometimes the opposite is true. The creditor has a strong case against you. You wrote a string of bad checks when you should have known there wasn’t enough money in your account. Your lawyer looks at the facts and advises you that you would lose the adversary proceeding. It’s time to settle the case. Avoid the cost and aggravation of fighting a losing fight and still having to pay the debt.  

Fight Back but Expect to Settle

Most dischargeability challenges are somewhere in between. The creditor seems to have some valid grounds. You have some sensible reasons why the debt should still be discharged.

But frankly it’s expensive to fight back. Once a creditor has decided to spend the money on its lawyer to file the nondischargeability case against you, it usually expects to get some money out of you. It can almost for sure more easily afford the lawyer fees than you can.

So usually what happens is that right after the creditor files its complaint, there’s some informal fact-gathering. To the extent you haven’t already done so, you tell your lawyer your side of the story. He or she exchanges information about the allegations with the creditor’s lawyer. Your lawyer advises you about any strengths and weaknesses of your case, and discusses settlement options. The lawyers hammer out a reasonable settlement, usually for you to pay a portion of the debt over time. Given that you’ve discharged all or most of your other debts, it’s something that you can afford. It’s a sensible resolution of the dispute.

 

Suing a Creditor in Bankruptcy

March 10th, 2017 at 8:00 am

Sue a creditor to confirm that a debt will be discharged, or to punish the creditor for violating the automatic stay or the discharge order. 

 

Last time we got into the advantages of using bankruptcy court to sue your creditor. Some of the advantages are:

  • The issues that can be raised by a debtor in bankruptcy court are narrow. This makes for simpler litigation, and a less expense way to resolve a dispute. That’s crucial when money’s tight.
  • Bankruptcy court is usually much faster and more efficient than state courts. This saves you both aggravation and money.
  • You already have your bankruptcy attorney in your corner, familiar with you and your circumstances, and likely very experienced in the narrow legal issue in dispute.

So what are the specific issues that you can sue a creditor for in bankruptcy court? We introduce three of the main ones today.

1) Discharging a Questionable Debt

Most debts are clearly either discharged—legally written off in bankruptcy—or they are not. A medical debt is virtually always dischargeable. A criminal fine is never.

But sometimes it’s not so clear, for one of two sets of reasons.

First, sometimes it’s not clear whether the debt in question fits that category of not dischargeable debts.

In our last blog post we gave an example of a dispute about spousal support. Genuine spousal support is never discharged in bankruptcy. Neither is a debt that the divorce court may not call spousal support but might be considered “in the nature of support.” (See Section 101(14A)(B) of the U.S. Bankruptcy Code.) But property settlement debts can be discharged under Chapter 13. Our recent example referred to a debtor’s obligation in a divorce to sign over a vehicle to the ex-spouse in return for a reduction in support payments for one year. Would that obligation to sign over the vehicle be “in the nature of support” or not? It may be worth getting your bankruptcy court to decide that it is not, so that the obligation can be discharged and you can keep the vehicle.

Second, and much more common, there are certain kinds of debts that may or may not be discharged depending on the circumstances. Income taxes are a good example. An income tax debt can be discharge just like any straightforward debt under certain circumstances. Most of those circumstances are relatively easy to determine if they apply, dealing with fixed events like how long ago the pertinent tax return was filed. But they can involve more ambiguous considerations such as whether the taxpayer “willfully attempted in any manner to evade or defeat such tax.” (Section 523(a)(1)(C).) It may be worth litigating that to discharge a large tax debt.

2) Punishing a Creditor for Violating the Automatic Stay

The automatic stay is one of the most immediate and important benefits of filing bankruptcy. It’s the law that stops creditors from pursuing you and your assets the moment you file. (See Section 362.) It lets you catch your breath, and protects you throughout your case. The automatic stay enables the bankruptcy process to work by making everyone play by the same rules.

Creditors generally respect the automatic stay and comply with it. That’s in part because they can be punished quite strongly if they don’t. (Section 362(k).) Every once in a while a creditor keeps garnishing wages or takes some other action in spite of knowing about your bankruptcy case.

If you get harmed by such illegal behavior you can sue the creditor for violating the automatic stay. Your overly aggressive creditor may not only have to pay back your damages. It would likely have to pay your lawyer’s fees in this “adversary proceeding.” It may have to pay you significant “punitive damages” to punish it for its illegal action. The bankruptcy system relies on creditors’ compliance with the law and sometimes has to slap them into playing fair.

If a creditor takes any collection action against you after you file your case, immediately tell your bankruptcy lawyer. You may end up benefitting from your creditors misdeeds.

3) Punishing a Creditor for Violating the Discharge

Similarly, creditors usually, but not absolutely always, comply with the discharge of your debts. That is the court order at the end of your Chapter 7 or Chapter 13 case stating that your debts are discharged—forever legally gone. Among other things the discharge

operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor

(Section 524(a)(2).)

Naturally, it’s illegal for creditors to pursue you for a debt after it’s been discharged. Most never do. But there are some unscrupulous collection companies that do, often many years later. This is not something to lose sleep about because most people aren’t affected. But it’s something to keep in the back of your mind as you regularly monitor your credit reports in the years after you finish your bankruptcy case.

 

Creditors Paid Nothing under Chapter 13

December 19th, 2016 at 8:00 am

Chapter 13 payment plans usually have you pay something to all of your creditors. But not necessarily. Certain creditors may get nothing. 

 

Our last blog post was about the “discharge”—the permanent write-off—of debts through a Chapter 13 “adjustment of debts.” This discharge happens at the end of a successful case, which usually takes 3 to 5 years.

Misconceptions about Chapter 13

Although 3 to 5 years may sound like a long time, the length can actually be a big advantage. You have more time to catch up on or pay off debts that you either want to or must pay. So what seems like a disadvantage could actually be an advantage. 

There are lots of other misconceptions about how Chapter 13 works. That’s partly because it is such a flexible option. Chapter 13 cases can be very different from each another, with each addressing the unique circumstances of each person. So that leads to some confusion, as you hear about something in one case that may have little or nothing to do with how Chapter 13 would work for you.

One misconception is related to an objection often raised about Chapter 13: why pay my creditors all or part of what I owe them when I could just discharge those debts entirely in a Chapter 7 “straight bankruptcy” case?

Actually, often in Chapter 13 you pay some creditors nothing at all. Sometimes even all of your creditors receive nothing, expect those you want or need to pay.

A Standard Chapter 13 Case

In maybe the most standard kind of Chapter 13 case (if there is such a thing!), you pay certain special debts in full and you pay other more ordinary debts only a percentage of what you owe, and often only a small percentage. The special debts you pay are often those secured by collateral you want to keep. So you may be catching up on a home mortgage arrearage or “cramming down” a vehicle loan. Oher special debts are ones that can’t be discharged in Chapter 7. Examples include recent income tax debt or unpaid child or spousal support.

Then your remaining “disposable income” goes towards the rest of your debts. Usually you pay those “general unsecured” debts only whatever’s left over. If the special debts you are paying in full are relatively small and your “disposable income” left over each month is relatively large, you could pay a relatively high percentage of what you owe on the “general unsecured” debts. But more often you don’t have much money left over and so you end up paying just a drop in the bucket of what you owe on those debts.

Debts Paid Nothing

So how could you pay nothing at all on certain debts in a Chapter 13 case? Here are four circumstances that would happen:

  1. No money available for “general unsecured” debts because ALL of your “disposable income” is spent on your special debts.
  2. A creditor does not file a proof of claim on the debt, or does not do so on time. So you don’t pay anything on that debt.
  3. Your bankruptcy lawyer objects to a creditor’s proof of claim. Then the creditor either fails to respond on time or you prevail on that objection.
  4. At some point in your Chapter 13 case your circumstances significantly change. So your lawyer converts your case into a Chapter 7 one, discharging all or most of your debts in full.

We’ll cover each one of these in our next 4 blog posts. This will give you a better idea how Chapter 13 really works.

 

Shared Assets

November 30th, 2016 at 8:00 am

Property and possessions that you have a shared interest in can be the kind you don’t think of as yours for bankruptcy purposes.

 

Our last blog post a couple days ago was about a special kind of asset—property received by inheritance. Today is about another, maybe more common kind of asset that can slip under your radar, those you own with someone else.

Assets in Bankruptcy

Consumer bankruptcy gives you a fresh financial start. Under Chapter 7 “straight bankruptcy” this is done by discharging (legally writing off) all of most of your debts. Under Chapter 13 “adjustment of debts” this is mostly done by greatly reducing how much you pay on your debts.

Your assets come into play in getting you that fresh start. In most cases you don’t have to give up any of your assets. That’s because for most people everything they own is protected in various ways, mostly by being “exempt,” legally beyond the reach of creditors. But sometimes getting to that point can be a lot more involved than may at first appear.

When you file bankruptcy, everything you own at that time comes under the jurisdiction of the bankruptcy court. This includes not just all your tangible, physical stuff, but absolutely all your “legal or equitable interests” in property. That includes property that you share ownership in, including ones you may not think of as yours.

Do You Have Any Shared Assets?

Most people don’t have any shared assets, other than those they own with their spouse. If you are not married, you may very well not have any shared assets. And if you are married, most likely you would be filing a bankruptcy with your spouse. So assets you share with your spouse would not likely be an issue.

But if you do share in the ownership of some asset with other than your spouse, it may well be the kind of property or possession you wouldn’t think about when making a list of what you own. You may not have possession of it. You may not have any practical control over it—you may never have had possession or control over it. So it may not come to mind as something that belongs to you. It may not be tangible, something you can physically see. So you may not even think of it as being an asset at all, much less one that is partially yours.

To help make sense of this, here are some examples.

Jointly Held Assets, or Assets Held in Common

Consider a vacation home that’s been in your parent’s family for a generation or two. Assume that your parents have legally handed it down to you and your siblings. So it’s held jointly or in common (depending on how it was deeded to you and your siblings). Your parents may still think of it and act as if it was theirs even though they legally gifted it to the next generation a while ago. You may not even know that you are legally a part owner of the place.

One of your siblings may manage the financial details of the property so you don’t consider it as partly yours. You may not have been able to contribute financially to its upkeep for years. You and your siblings may even informally assume that whatever legal interest you may have had earlier is gone. You may even genuinely not know if you do have any rights in the property and, if so, exactly what those rights would be, or what they would be worth. And honestly, you may rather not even think about the situation. So you put it out of your mind and don’t mention it to your bankruptcy lawyer.  

Marital Assets When You File without Your Spouse

Spouses usually file bankruptcy together but not always. It can make sense for only one to do so. In those situations it’s often not easy to determine one spouse share of the jointly owned assets. Coming up with values for your share of them can be challenging. This is especially so when that property is owned jointly with each spouse having a right of survivorship, or if you live in a community property state.

This alone could easily be the topic for an entire blog post. For now, if you are considering filing bankruptcy without your spouse thoroughly discuss its potential effects on your marital assets with your lawyer.

Shared Business Interests

If you’ve owned any kind of business involving someone else, be aware of your ownership share in that business. Of course in most cases it would be a prime topic to discuss with your lawyer. But there are less obvious situations, such as if you were only passively involved. Consider all possible past business and investment involvements.

Jointly Held Claims

Consider a claim you may hold against someone for injuring you or your property, in which one or more other people share that claim along with you. Consider vehicle accidents involving multiple parties. Or, are you in a class action lawsuit for potential injuries from a defective drug? If you are not actively involved in the lawsuit you may not think of your claim as an asset.

Conclusion

The important thing to keep in mind about shared assets is to tell your lawyer about them. In most situations, assets can be protected in bankruptcy, but only if your lawyer knows about them.

 

“General Unsecured” Debts Discharged in Chapter 7

August 3rd, 2016 at 7:00 am

In most straightforward Chapter 7 cases all debts not secured by any collateral are discharged–forever written off. You pay nothing on them.

 

Most of our blog posts of the past couple months have been about how bankruptcy deals with secured debts. These are debts that are secured by a lien on some asset(s) of yours. We especially focused on debts secured by a vehicle or home because of their importance.

But how about unsecured debts? How are they treated?

“Priority” and “General Unsecured” Debts

How an unsecured debt is treated depends on which kind it is. There are two kinds of unsecured debts, “priority” and “general unsecured” ones. All unsecured debts are either one or the other of these.

Like the name implies, “priority” debts are special. They are categories of debts that Congress has decided are to be treated specially.

The “priority” debts are all on a list in the Bankruptcy Code. If a debt is not one of the kinds on that list, then it’s a “general unsecured” debt.

We’ll address “priority” debts later. Today we’re talking about the “general unsecured” ones.

The Discharge of Debts

The main goal of a Chapter 7 “straight bankruptcy” case is to “discharge” all or most of your debts. To discharge a debt means for a bankruptcy judge to order the debt to be legally written off.

Most “general unsecured” debts ARE discharged in a successfully completed Chapter 7 case. Most Chapter 7 cases ARE completed successfully.  So, in most cases the court discharges all “general unsecured” debts. (We discussed the major exceptions to discharge in a series of blog posts in mid-April.)

A Simple Example

Assume that you qualify for Chapter 7 bankruptcy. You have $85,000 in a combination of credit cards, medical bills, and personal loans. As long as there is no collateral tied to any of those debts, they are very likely “general unsecured” debts. Assume you have no other debts.

Through your bankruptcy lawyer you file a Chapter 7 case. From that moment on, your creditors cannot pursue you, your income, or your assets to pay its debt. Then, as long as you disclosed everything accurately to your lawyer, and follow the required procedure, it’s extremely likely that about 3 or 4 months later the bankruptcy judge assigned to your case will sign an order declaring that your debts are discharged.

As of that point you would legally no longer owe any of that $85,000 in debt. You would be debt-free.

 

Special Debts that Can’t Be “Discharged” under Chapter 13

July 22nd, 2016 at 7:00 am

Bankruptcy can’t write off certain kinds of debts. Chapter 13 enables you to prevent liens hitting your home from those debts.

 

Our last blog post was about how Chapter 7 “straight bankruptcy” helps prevent liens on your home arising from special debts. These are debts that can’t be discharged—written off in bankruptcy. Examples of these special debts include recent income taxes and unpaid child or spousal support.

But Chapter 7 has serious practical limitations on how much it can prevent those liens on your home. Chapter 13 “adjustment of debts” is often a much better tool for dealing with income taxes and support. Here’s how we introduced this earlier, focusing now on the Chapter 13 side of this.  

Preventing Liens on Your Home from Debts that Can’t Be Discharged

A Chapter 13 case protects your home from liens much better than Chapter 7. It doesn’t leave you on your own to deal with any remaining debts. Chapter 13 protects you and your home throughout the time that you are paying off those debts through a flexible 3-to-5-year payment plan.

You and your bankruptcy lawyer put together that payment plan based on how much you can afford to pay. The plan is then reviewed and approved by the bankruptcy judge assigned to your case. Creditors have some say about this, but are limited in the arguments they can raise.

Throughout the course of the payment plan, all of your creditors are prevented from putting liens on your home. That includes the especially aggressive creditors like the IRS, state tax entities, ex-spouses, and support enforcement agencies. Then by the time your Chapter 13 case is completed, those special debts have been paid in full or paid current. As a result they can’t threaten you or your home any more.

Here’s how this works in practice.

The Example

Assume that you own a home with some equity—for example a $250,000 home with a $225,000 mortgage. You have no liens on the home’s title so your home has about $25,000 in equity.

Now also assume that you are entitled to a homestead exemption of $25,000. So, all of the $25,000 in your home’s equity is protected by this homestead exemption. This means that all of this home equity is protected from your creditors and from a bankruptcy trustee.

You want to keep your home and preserve the equity you have in it. But you have serious financial problems. You have a whole bunch of credit cards and other debts amounting to $60,000 that are past due. Plus you’ve fallen behind on your $1,000 per month child support payments by 5 months, or $5,000. And you owe $12,000 in income taxes to the IRS for last year and the year before.

The credit cards and miscellaneous debts can be discharged in bankruptcy, but the recent tax and support debts can’t be. So if you file a Chapter 7 case you’re on your own dealing with the surviving tax and support debts.

The Chapter 13 Solution

You’re not on your own with these debts under a Chapter 13 case. You and your home are protected. Here’s how this option would work in this scenario.

  • As to the $12,000 income tax debt that you must pay, you have up to 5 years to do so. During that time the IRS or state can’t take any collection action against you, or your income or assets. That includes not recording any tax liens against your home.
  • In most situations no ongoing interest or penalties would accrue on that $12,000 tax debt during the case. That could save you a fair amount of money, enabling you to pay off the taxes that much faster.
  • You’d have huge flexibility in the payment terms. The payment amounts would be based on what you could afford. Certain other debts could be paid ahead of the taxes, such as the child support, or to catch up on a vehicle loan or home mortgage. Also, the timing of the tax payments could change if your circumstances changed during the course of the case.  
  • As to the $5,000 child support arrearage, you are required to catch up on this, and again you have up to 5 years to do so. Your ex-spouse and support enforcement agency cannot take any collection action against you during this time. That is, they can’t as long as you meet certain strict conditions. You must keep current on any ongoing support payments, and on your Chapter 13 plan payments. But if you just meet these conditions, you and your home are protected.
  • As to the $60,000 in credit cards and other miscellaneous debts, in most cases you would only need to pay those if and to the extent you had money left over to do so. That means that your available funds would first go to pay the tax and support debts. And that’s after you are allowed to spend a reasonable amount of money on living expenses.
  • At the completion of your Chapter 13 payment plan whatever part of that $60,000 in general debts that had not been paid would be discharged—written off forever. Those creditors would never be able to sue you and get a judgment lien on your home.
  • At the point when your Chapter 13 case is finished, you will have paid the taxes and support arrearage in full. So you’d not owe anything to those creditors. They’d have no debt upon which to record a lien on your home.
  • You would have successfully and permanently prevented the IRS/state and ex-spouse/support enforcement from placing a lien on your home.

 

How to Discharge a Student Loan in Bankruptcy

April 20th, 2016 at 7:00 am

Writing off a student loan in bankruptcy requires showing “undue hardship.” What is that?

 

Student Loans CAN Sometimes Be Discharged

You may have heard that student loans can never be “discharged”—written off in bankruptcy. Untrue.

Some other kinds of debts can’t ever be discharged, such as child and spousal support. But student loans are more like income taxes. Both can be discharged under certain conditions. (See our blog post of last Friday about discharging income taxes.)

However, income taxes are usually easier to discharge than student loans. Most of the time you just have to file your tax return and wait a certain amount of time. The requirements for discharging a tax debt are quite clear. They are much less clear and more rigorous with student loans.

“Undue Hardship”

The Bankruptcy Code says that a student loan is not discharged unless making you pay it “would impose an undue hardship on [you or your] dependents.” See Section 523(a)(8).

 So, if you can show that paying a student loan causes you “undue hardship,” bankruptcy can forever discharge that debt.

But What Does “Undue Hardship” Mean?

For decades the bankruptcy and federal appeals courts have been trying to figure out how to interpret those two words used by Congress when it wrote this law.  In practical terms how does a court decide whether or not a debt creates a hardship?  

And what more beyond ordinary “hardship” is needed to create an “undue hardship”?

Over time, judges have come to generally agree that to show that a student loan creates an “undue hardship” you have to meet three requirements:

1. You must currently be unable to maintain even a minimal standard of living for yourself and any dependents if you had to make the required payments on the student loan.

2. Your current inability to maintain that a minimal standard of living must be expected to continue over all or most of the student loan’s repayment period.

3. You must have earlier acted responsibly at making a real effort to pay on the student loan, and/or to try to qualify for any available forbearances, debt consolidations, and administrative payment-reduction programs.

Notice that these three conditions refer to the past, present, and future. You have to meet all three conditions, which is a lot to satisfy.

Your Burden to Prove “Undue Hardship”

In bankruptcy, some kinds of debts are discharged unless the creditor affirmatively and formally raises an objection. If the creditor fails to object and do so before a quick deadline, the debt is legally forever gone.

With student loans, in contrast, the burden is on you to convince the bankruptcy judge that you qualify for “undue hardship.” Generally you must do that during the bankruptcy case. Otherwise that debt survives your bankruptcy.

Timing Issues

The fact that you have to establish that you are currently unable to maintain a minimal standard of living if you had to make your student loan payments raises some timing issues.

If you believe you meet this requirement right now (as well as the other two conditions), you could file a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case now, whichever is better for you as to the rest of your debts. Your attorney would then formally ask the bankruptcy court for an “undue hardship” determination to discharge the student loan. A separate legal proceeding would determine whether you qualify. If the student loan creditor objects to your request, there could be court trial focusing on whether you meet the required conditions.

If you don’t believe you qualify yet for “undue hardship” now but expect to in the future, filing a Chapter 13 case now may be the best choice. (For example, you may have a worsening medical condition which you know will cause a reduction in your income in the near future.) You may need relief from your creditors now, including the student loan creditor(s). A Chapter 13 filing would give you that relief. It would likely allow you to avoid making any ongoing student loan payments for the next few years while you focus on other more pressing expenses and special debts. And then you would have the opportunity to try to qualify for “undue hardship” between now and the end of your Chapter 13 case 3 to 5 years later.

In some situations, if you don’t qualify for “undue hardship” during the course of either your Chapter 7 or Chapter 13 case, you may be able to reopen your bankruptcy case later. That way the bankruptcy court could make that determination at a time when you do qualify.

Conclusion

“Undue hardship” is a tough standard to meet. Bankruptcy law does not provide an easy way to get out of student loans. But more and more people in financial distress have student loans as a major part of their problem. More of them are getting older, closer to disability, illness, and retirement.  As the courts continuously deal with the issues, the law will continue to evolve. All are good reasons for you to get solid legal advice about your student loans and about your whole financial situation, to be able to figure out your best way forward.

 

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210-342-3400

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