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Archive for the ‘priority debts’ tag

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

April 2nd, 2018 at 7:00 am

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


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

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

Chapter 7 Trustee’s Collection of Bankruptcy Assets

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

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

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

Chapter 7 Trustee’s Distribution of Bankruptcy Assets

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

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

When an “Avoided Preference” Directly Benefits You

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

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

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

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

Conclusion

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

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

Limited Automatic Stay Protection for Unpaid Child/Spousal Support

February 7th, 2018 at 8:00 am

Chapter 7 doesn’t stop collection of unpaid support, but may enable you to catch up. Chapter 13 does stop this collection, conditionally.   

 

Our recent blog posts have been about situations when creditor collection actions are not stopped by a bankruptcy filing.  An example is a criminal fine or restitution. A bankruptcy filing has no effect on your obligation to pay criminal debts or on the collection of those debts.

We’ve also gotten into situations when collections are stopped only temporarily, including when that’s long enough to solve your problem. An example is a recent income tax debt. A Chapter 7 bankruptcy filing stops tax collections only for a few months. But that should be long enough to start a monthly payment plan, especially one that you can now afford after getting rid of all or most of your other debts.

So today we get into one special kind of debt for which the debt collection either doesn’t stop at all, is stopped only temporarily, or is stopped permanently. If you are behind on child or spousal support, you have three options in bankruptcy.

  • Filing a Chapter 7 “straight bankruptcy” does not stop collections on unpaid support at all. But it may write off enough other debts so that you can catch up on support.
  • Filing a Chapter 13 “adjustment of debts” can stop collections on unpaid support. But that can easily become only temporary.
  • A Chapter 13 case can stop such collections IF you act very proactively and consistently.

We explain these today.

The “Automatic Stay” on Support Collections

Unpaid child and spousal support is a very special kind of debt. It is treated as an almost sacredly among debt. Without cataloging all the differences, you can never discharge (legally write off) a support debt. (See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code). It is the highest priority of the many so-called priority debts—meaning it must be paid ahead of all other debts. (See Section 507(a)(1) of the Bankruptcy Code.)

Unpaid support is special also in that you’re helped by the automatic stay only in to a limited extent. However that limited extent may nevertheless be extremely helpful.

Some Limited Help in Chapter 7

As we said above, the automatic stay does not even come into play under Chapter 7 as to unpaid support. But in the right situations Chapter 7 still helps by discharging all or most of your other debts so that you can afford to catch up on your unpaid support.

You or your attorney would negotiate terms for catching up with your ex-spouse or with the support enforcement agency. If getting rid of your other debts gives you the financial ability to catch up quickly on support, Chapter 7 could be a practical solution.

The Practical Problem

The problem is that your spouse or support enforcement may no longer accept terms that would work for you.  Since Chapter 7 does nothing to stop your ex-spouse or support enforcement from continuing or starting collection efforts against you, you have no leverage and no protection.

Temporary Help in Chapter 13

Filing a Chapter 13 case DOES stop support collections at least temporarily. But your ex-spouse or the support agency can quickly file a motion asking to resume collections. The bankruptcy court would likely grant this motion unless you meet a set of requirements, and do so timely and extremely consistently. If you don’t, actions to collect on the unpaid support could resume quickly.

Permanent Help in Chapter 13

However, IF you DO strictly follow the requirement, the collection of unpaid support obligations IS stopped under Chapter 13. And this collection continues being on hold throughout the 3-to-5-year course of the Chapter 13 case as long as you continue meeting those requirements.

Here are those crucial requirements:

  • Your Chapter 13 payment PLAN shows how you will pay all the upaid support debt during the plan period.
  • You pay any future ONGOING monthly support payments on time. It’s especially important that you’re on time with the payments due shortly after you file the Chapter 13 case.
  • You actually DO pay your monthly Chapter 13 plan payments on time throughout the case. Otherwise you’re not paying the unpaid support debt as you committed to do in your plan.

If you follow these requirements to the letter your ex-spouse/support enforcement agency would not be able to get court permission to take any collection actions against you throughout the Chapter 13 case. Then by the end of the payment plan you’d be current on the support. Your problems on this front would be fully resolved.

 

“General Unsecured Debts” in Chapter 13

December 13th, 2017 at 8:00 am

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

 

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

“Priority” and “General Unsecured” Debts

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

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

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

The Difference in Treatment under Chapter 13

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

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

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

General Unsecured Debts during a Chapter 13 Case

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

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

General Unsecured Debts at the End of a Chapter 13 Case

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

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

 

“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.

 

Unsecured Debts in Bankruptcy

December 8th, 2017 at 8:00 am

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


Unsecured Debts

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

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

An Unsecured Debt Can Sometimes Turn into a Secured One

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

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

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

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

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

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

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

Seemingly Secured Debts May Actually Be Unsecured

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

Two Kinds of Unsecured Debts

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

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

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

Unsecured Debts in Bankruptcy

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

 

Chapter 7 or 13? You May Be Surprised

November 15th, 2017 at 8:00 am

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

 

Chapter 7 and Chapter 13

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

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

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

Be Flexible When You Meet with your Lawyer

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

Sometime Easy, Sometimes Difficult Choice

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

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

To Help You Be Informed

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

 

Treatment of Different Types of Creditors in Chapter 13

July 26th, 2017 at 7:00 am

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


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

Secured Debts

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

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

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

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

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

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

Priority Debts

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

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

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

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

General Unsecured Debts

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

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

Limited Flexibility 

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

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

 

Using “Preference” Law to Pay a Necessary Debt

April 21st, 2017 at 7:00 am

You can put a “preferential payment” to work for you if you owe a “priority” debt—back child or spousal support, or recent income taxes. 

 

Our last blog post was about how you can benefit from a “preference” in your bankruptcy case. A “preference” is a payment you made to a creditor (voluntarily or involuntarily) during the 90-day period before filing (or sometimes the 1-year period), which, under certain circumstances, your trustee can force the creditor to repay. The creditor doesn’t pay the preferential payment back to you but rather to your bankruptcy trustee. The trustee then distributes that money among your creditors. The way you benefit is when most of that money going to a debt that you need and want to be paid.

Last time our focus was on how a payment to a creditor qualifies to be a “preference.” That is, what it takes for the trustee to be able to force that creditor to give back the payment. Today is about how that money goes to where you want it to go.

“Priority” Debts

All debts are not created equal under the law. Not by a long shot. There is a short list of debts that are treated especially well in bankruptcy law. They are the “priority” debts. (See Section 507 of the U.S. Bankruptcy Code.)

There are ten types of “priority” debts, but only two that are common in consumer bankruptcy cases:

  • “domestic support obligations”—essentially unpaid child and spousal support
  • newer income tax debts—must meet certain conditions

A Chapter 7 bankruptcy trustee must pay all “priority” debts in full before paying anything on the ordinary debts. Also, the trustee pays a higher-priority “priority” debt in full before paying anything on another, lower, “priority” debt.

For example, assume you owe $2,500 in back child support, $3,000 in recent income taxes, and $100,000 in credit cards and medical debts. If the trustee would have $4,500 to distribute (after trustee fees), this is where it would go:

  • $2,500 back child support paid in full
  • the remaining $2,000 would go towards the income taxes, leaving $1,000 still owing
  • nothing would be available for the $100,000 in credit cards and medical debts

“Preference” Money Going to “Priority” Debt(s)

Simply put, any preference funds that your trustee receives will first go to your “priority” debt(s). Since back child/spousal support and recent income taxes are debts you would otherwise have to pay out on your own, you directly benefit from the trustee chasing down the preference money.

What could be better that having one of your creditors pay the debt owed to another creditor?! Even better, a creditor whose debt you are writing off, in effect pays all or part of a debt that you would have to pay yourself.

The Trustee’s Discretion

However, be aware that you have no real say about whether your bankruptcy trustee will pursue a preferential payment. The trustee has a lot of discretion about this. It’s not always easy to make a creditor disgorge a preferential payment. The trustee may decide that the costs of attempting to do so are too high compared to the anticipated benefit.

The Trustee’s Costs and Fees

Speaking of costs, the trustee usually gets to pay his or her costs of pursuing the preferential payment(s) out of the preference money recovered. That of course reduces the money available for the “priority” debt you want paid.

Also, as mentioned in passing above, the trustee gets a fee for his or her efforts (beyond the out-of-pocket costs). That fee is usually (unless the bankruptcy court disapproves):

  • 25% of the first $5,000 collected
  • 10% of the amount collected larger than $5,000 and up to $50,000
  • 5% of the amounts collected larger than $50,000 and up to $1,000,000

This fee also reduces the amount available to pay the “priority” debt(s).

Added to Funds from Non-Exempt Assets

Creditor-reimbursed preferential payments are just one potential source of money that a bankruptcy trustee distributes to “priority” and other debts. In some consumer bankruptcy cases the debtor has one or more assets that are not “exempt” (protected from the trustee). The proceeds of the trustee’s liquidation of such assets also get distributed to the creditors, “priority” and otherwise. Again, this is only after the trustee pays his or her own costs and fees.

Conclusion

If you have a “priority” debt, the trustee’s pursuit of a “preferential” payment may result in that “priority” debt being paid so that you don’t have to pay it. But there are hurdles to this working out to your benefit. Your trustee may or may not decide to pursue the “preference.” And if the trustee does pursue and get the preference money back, his or her costs and fees will reduce any amount going to your “priority” debt. On the other hand, the trustee may also be distributing the liquidation proceeds of any non-exempt assets.

In any event, it’s a good thing if as a result some or all of a support or tax obligation gets paid for you.

 

When It’s Worth Objecting to a Proof of Claim

December 28th, 2016 at 8:00 am

If a creditor’s proof of claim on a “priority” or secured debt is too high, object to it to avoid paying too much in your Chapter 13 case.

 

Our last blog post was about circumstances when it’s NOT worth objecting to a creditor’s proof of claim. Often in a Chapter 13 “adjustment of debts” case the amount of money you pay towards all your “general unsecured” debts is a fixed amount. That amount could shift based on changes in your income and/or expenses. But in the end you pay a fixed amount to the pool of your “general unsecured” debts. The total amount of debts in that pool often does not affect how much you pay.  So, since it makes no monetary difference to you, in these situations it’s not worth fighting with these creditors about how much you owe.

But there definitely are other situations when it IS worth objecting to a creditor’s proof of claim. The objectionable claim can directly affect how much you must pay into your Chapter 13 payment plan before you finish it. Examples when this can happen include situations in which the proof of claim is for a higher-than-expected “priority” debt, or a higher-than-expected secured debt.

“Priority” Debts

“Priority” debts are special categories of debts that the law says you must fully pay within your Chapter 13 plan. The most common examples are unpaid child/spousal support obligations and income taxes.  Because you have to pay them in full before you can finish your case, a creditor’s proof of claim on a “priority” debt that’s more than you expected results in you having to pay that much more during your case. So if you have good grounds for objecting, it’s probably worthwhile to do so.

For example, a support enforcement agency’s proof of claim may not take into account payments you made directly to your ex-spouse. So your bankruptcy lawyer would object in order to get the proof of claim down to the right amount.

Besides objecting to a proof of claim’s amount, you may want to object to its “priority” status. Whether a debt is a “priority” one depends on whether it meets certain conditions. For example, an income tax debt may be a “general unsecured” one instead if it’s old enough. If it’s not a “priority” debt, almost always you would not have to pay it in full. You might not even have to pay any of it. Taxing authorities are usually pretty good at following the “priority” designation laws. But it’s worth making sure, and then objecting to a proof of claim’s “priority” status when appropriate.

Secured Debts

You have to pay some secured debts in full during your Chapter 13 case.

For example, if you are $8,000 behind on your first mortgage, if you want to keep your home you have to bring that mortgage completely current. Mortgage lenders are notoriously inaccurate in their arrearage accounting. This is especially true when it comes to tracking payments you’ve made vs. those held in “suspense,” and questionable tacked-on late fees and attorney fees. Do not trust the amounts on their proofs of claim to be accurate.

Discuss with your lawyer the local bankruptcy court’s procedures for determining the accurate mortgage arrearage amounts. Make sure you don’t pay more than you should.

Other Proofs of Claim Worthy of Objection

Our next blog post will cover other creditor proofs of claim potentially worth objecting to.

 

Objecting to a Creditor’s Proof of Claim in Chapter 13

December 26th, 2016 at 8:00 am

If you object to a creditor’s proof of claim in your Chapter 13 case, and prevail in that dispute, you pay nothing on that debt.

 

Our last blog post was about what happens to creditors who fail to file a proof of claim on time in a Chapter 13 “adjustment of debts” case. The creditor’s debt receives no payment through your Chapter 13 plan, and the debt is discharged—written off.

There’s another way to achieve this same result. Your bankruptcy lawyer can object to a creditor’s proof of claim if you don’t owe the debt as stated.

If the Creditor Does Not Respond to the Objection

Creditors sometimes file proofs of claim that are clearly not legally valid. Your debt may no longer be collectable because the statute of limitation has expired. An ex-spouse may owe the debt on which you’re not liable. Someone with the same name as you may owe the debt instead of you.

In these and similar situations your lawyer would likely file an objection to the proof of claim. Otherwise the legally invalid debt would be treated as a legitimate one. That illegitimate claim could share in whatever you are paying other similar debts under your Chapter 13 payment plan.

When there’s a clearly invalid proof of claim, the creditor would likely not even respond to your lawyer’s formal objection. Or if the creditor does respond, there’s a good chance it can be convinced to withdraw its proof of claim. Creditors can be penalized for legally pursuing a clearly invalid debt.

So the creditor may not respond to your lawyer’s objection or may respond but be quickly convinced that the debt’s not valid. Either way, the objection prevails and the bankruptcy judge throws out the proof of claim. You pay nothing on that debt through your Chapter 13 plan.

Even if a creditor believes that you owe the debt, it may still not respond to the objection. Depending on the terms of your Chapter 13 plan, the creditor may decide that the cost of fighting the objection is not worth what you would pay it under the plan. Or the creditor may just mess up and not get around to responding by the deadline. For whatever reason, if a creditor fails to respond timely to your objection, its proof of claim is thrown out. Again, you pay nothing on that alleged debt.

If the Creditor Responds to the Objection

However, if you and your lawyer file an objection to a creditor’s proof of claim, and the creditor responds and appears committed to fighting this fight, then you and your lawyer need to decide whether the fight is worth fighting.

It may not be worth fighting if allowing that proof of claim won’t make any practical difference in your case. Or it may not be worth fighting if the likely practical difference is less than the costs of fighting it.

When Liability on a Debt is a Big Deal

This whole discussion makes more sense if we explain the following. With most debts it’s clear whether or not you owe the debt, and its amount. But with some debts either your liability or the amount you owe, or both, can be very unclear. Indeed, people are often pushed into bankruptcy because of a contentious legal dispute about an alleged debt. Examples include:

  • liability disputes in a multi-vehicle accident with insufficient insurance
  • family fights about a deceased relative’s assets
  • litigation among or between a business’ owners and investors about the operation or closure of the business

So, a complicated dispute or litigation that was raging before the bankruptcy was filed could well just continue on in the bankruptcy court. Both sides’ decisions about whether to continue that fight turns on financial practicalities of the Chapter 13 case.

If you’re in this situation, assume the creditor files a proof of claim showing what it thinks it’s owed.  Presumably you disagree either as to owing anything, or the amount claimed, or both. But you need to decide whether it’s worth objecting to it and bringing that fight to the bankruptcy court. If it doesn’t make any or enough financial difference in your Chapter 13 case, it’s probably not worth objecting. Or it may be worth objecting just to see if the creditor responds. But then if it does, letting the creditor win on its claim.

May Not Be Worth Objecting

There are Chapter 13 payment plans—maybe the majority of them in most jurisdictions—in which most creditors’ proofs of claim makes no difference in what the debtor pays. These are cases in which the debtor basically pays what the debtor can afford during a set period of time. That stream of payments pays certain amounts to any secured and “priority” debts, then whatever’s left over goes to the “general unsecured” debts. Assuming that the disputed debt is a “general unsecured” one—as is usually the case—its amount likely won’t matter.

That’s because the total amount of all “general unsecured” proofs of claim often has no effect on the dollar amount the debtor pays. The pool of “general unsecured” debts gets paid the same amount regardless. The larger total amount of debt in that pools simply shifts around who shares in that amount. The percentage of the debts paid is just reduced to account for more debt in that pool.

Consider This Example

Assume that, as is often the case, you are paying much of your Chapter 13 plan payments to secured and/or “priority” debts. You are catching up on and then paying a vehicle loan, catching up on child support arrearage, and/or paying an income tax debt. Let’s say that over the life of your Chapter 13 case you are paying a total of $15,000 to all your “general unsecured” debts. This is based on what you can afford to pay over your case’s 3-to-5-year life. (The required length is based mostly on your pre-filing income.)

Assume further that you have 10 undisputed “general unsecured” debts totaling $75,000. There’s one more disputed debt, one you don’t believe you owe but the alleged creditor asserts you owe $30,000, on top of the $75,000 you don’t dispute. Without that $30,000 debt, you’d be paying 20% of your “general unsecured” debts—$15,000 paid out of $75,000 owed. With that additional $30,000 claim allowed, you’d be paying about 14% of your “general unsecured” debts–$15,000 of $105,000.

But in most situations, the amount you are paying into your Chapter 13 plan to your “general unsecured” debts—the $15,000 here—would not change. Your other “general unsecured” debts would simply receive somewhat less to make up for the amount the disputed debt receives. In most situations like this you wouldn’t invest the time and attorney fees to dispute that proof of claim. It simply wouldn’t affect you financially.

Sometimes Very Worth Objecting

But there are definitely situations where allowing a disputable proof of claim to stand unopposed would cost you.  It could dramatically increase how much you would have to pay into your Chapter 13 plan before completing it. Such a proof of claim could even jeopardize your ability to complete your Chapter 13 case successfully.

In our next blog post will get into situations when you’d want to object strenuously to an objectionable proof of claim.

 

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