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Archive for the ‘protecting property’ tag

No Automatic Stay after Multiple Prior Bankruptcy Filings

February 5th, 2018 at 8:00 am

If you’ve had more than 1 case filed and dismissed within the last year, you’ll need to show “good faith” to get automatic stay protection. 


The Effect of ONE Prior Dismissed Bankruptcy Case

Our last blog post was about losing the automatic stay protection from debt collection, 30 days after filing bankruptcy. This loss of protection could happen as to ALL of your creditors, not just one particular one. It could happen if you had filed a bankruptcy case within 1 year before the filing of your present case, and that prior case got dismissed (thrown out and closed).

You could prevent losing this protection from debt collection by showing the new case is being filed “in good faith.” There are specific considerations laid out in the law for demonstrating “good faith.” See Section 362(c)(3) of the U.S. Bankruptcy Code.   

The Effect of TWO or More Prior Dismissed Bankruptcy Case

If within the prior year you had more than one prior bankruptcy case filed and dismissed, the consequences are worse. At the filing of your current case there would be NO automatic stay protection from the beginning. You’d have no protection for even the first 30 days, as there’d be with just ONE prior case.

The law states that, with 2 prior dismissed cases within a year, the automatic “stay shall not go into effect upon the filing of the later case.”  See Section 362(c)(4)(A)(i) of the Bankruptcy Code.

What’s the Purpose of These Rules?

About a dozen years ago Congress added the above provisions to Bankruptcy Code. At the time there was a perception that some people were abusing bankruptcy by filing multiple cases one after another. Some people would file a case to get automatic stay protection (such as to stop a home foreclosure), do nothing with the case until the court dismissed it, and then file a new bankruptcy case as soon as the creditor took some new action (such as scheduling a new foreclosure sale). Congress responded by taking away automatic stay protection in the circumstances outlined above.

How to Get the Automatic Stay into Effect?

So what do you do if somehow you’ve had two prior, dismissed bankruptcy cases within a year, and now really need to file a case again?

First, you could wait until a full year has passed after your most recent dismissed case. That would avoid this problem.

Second, you could at least wait until you had only one prior dismissed case filed within the prior year. Then the automatic stay protection would kick in right away with the new bankruptcy filing. You’d still have to demonstrate “good faith” filing of the new case to avoid losing the stay 30 days later. But at least you’d get the immediate protection.

Third, if you couldn’t wait you could file the new bankruptcy case. And at the same time you and your bankruptcy lawyer would also file a motion asking the court to “order the [automatic] stay to take effect.” Section 362(c)(4)(B).  This motion has to be filed within 30 days of the bankruptcy filing. You’d want to file it without any delay to get the automatic stay imposed as soon as possible. Again, you’d have to demonstrate that the new bankruptcy filing was done “in good faith.”                         

How to Demonstrate “Good Faith”                

What does a “good faith” filing of the new case mean?

The Bankruptcy Code lays out the requirements of demonstrating “good faith in some detail. It’s beyond the scope of the blog post to go through it all. Generally you need to show that you aren’t abusing the bankruptcy laws through your prior and present bankruptcy filings. This gets into the reason why the prior case(s) got dismissed, whether changes in personal and financial circumstances will make the present case successful when the prior one(s) wasn’t (weren’t), and whether any creditor previously asked for relief from the automatic stay and where that now stands.

Start off your first meeting with your bankruptcy lawyer by telling him or her about your prior bankruptcy filing(s). You’ll be informed about your options. Specifically, you’ll learn whether it makes more sense for you to wait to file your new case, or instead to go ahead and file the new case and the motion demonstrating “good faith.”

 

Chapter 7 vs. 13 When Your Vehicle is Worth Too Much

January 19th, 2018 at 8:00 am

Usually your car or truck is protected in bankruptcy with a vehicle exemption. Or if the vehicle is worth too much Chapter 13 can protect it.  

 

How Chapter 7 and Chapter 13 affect your vehicle and vehicle loan can determine which of these options you choose. That’s why we’ve focused the last several blog posts on the differences between these options. We’ve especially looked at reaffirming a vehicle loan in Chapter 7 vs. cramming it down in Chapter 13. Depending on your circumstances one of these is likely a safer and/or less expensive way to keep your vehicle.

But there is another consideration we don’t want to lose sight of. What if you have too much value in your car or truck? What if you either own it free and clear or else it has lots of equity? What if you’re not worried about your lender but rather with the bankruptcy trustee taking your car or truck?

Exemption for Your Vehicle

Why would a bankruptcy trustee be interested taking your vehicle?

Actually, most of the time the trustee wouldn’t be. You are allowed to keep a certain amounts of value or equity in your possessions when filing bankruptcy. These allowances are called “exemptions.” Each state has different exemption amounts for different possession or asset categories. Often their exemption systems are quite different, not just in the amounts protected but also in how they work otherwise. 

With vehicles, often you are allowed a certain exempt dollar amount per vehicle. But in some states there’s a larger catch-all exemption category that your vehicle(s) can fit into along with other assets. Sometimes that catch-all amount changes depending on whether you are exempting your home. The bottom line is usually there’s no problem because your vehicle(s) is (are) fully exempt.

A bankruptcy trustee is only interested in taking your vehicle if it’s worth more than the allowed exempt amount. Or sometimes a vehicle will not qualify for the exemption so it’s not protected at all—such as if you have more than one vehicle.

Vehicle Value or Equity

To be practical, if you owe on your vehicle most likely you don’t have too much equity in it. The part you owe on the vehicle doesn’t count. It’s subtracted from the value. If you owe $10,000 on a vehicle worth $13,500, and you have a $4,000 exemption, you’re fine. Subtract the $10,000 you owe, which leaves $3,500 of equity, which is more than covered by the allowed $4,000 exemption.

Be careful if you are close to paying off your car or truck. You’re then more likely to have too much equity.

Also make sure the debt against your vehicle is a legally valid one. Your creditor must have a “perfected security interest” on your vehicle. This means that it went through all the necessary legal steps to put a legally enforceable lien on your vehicle. Otherwise the debt does not count against the value of your vehicle. That puts it at greater risk that it’s not fully exempt.

Similarly, you need to be careful if the lien was placed on your vehicle too recently. Problems can also arise if the lien was placed too long after you incurred the loan. Under certain such circumstances the bankruptcy trustee can remove a lien from the vehicle. That could mean that the vehicle has more equity than the exemption can protect.

Chapter 7 vs. 13 If Too Much Value or Equity

Whenever your vehicle(s) has (have) too much value or equity, you can protect that otherwise non-exempt portion through Chapter 13. Sometimes you can protect it in a Chapter 7 case, too, but it’s riskier.

Here’s how these work.

Starting with Chapter 7, let’s assume your vehicle is worth $1,500 too much. Say it’s worth $5,500 and the applicable exemption is $4,000, leaving $1,500 unprotected. In a Chapter 7 case the trustee could take that vehicle, sell it, pay you the $4,000 exempt portion and use the remaining $1,500 to pay your creditors. 

But in many situations a Chapter 7 trustee would consider not taking such a vehicle but instead negotiating with you. If you agreed to pay that same $1,500 that the trustee would get, you could keep the vehicle.  You’re saving the trustee the hassle of selling your vehicle while he or she distributes the same amount of money to your creditors. It’s not unusual for trustees to even accept monthly payments. The agreed amount does need to be paid off relatively quickly, usually within several months.

If the unprotected amount is too large for you to pay quickly, then Chapter 13 gives you much more time. Let’s now assume that the vehicle is worth $5,000 too much. Say it’s worth $9,000, the applicable exemption is $4,000, leaving the difference, $5,000, unprotected. (Remember again that your state’s vehicle exemption amount will likely be different.)

You and your bankruptcy lawyer simply have to structure your Chapter 13 plan to pay an extra $5,000 over its 3-to-5-year span. Paying for that unprotected value or equity in your vehicle is spread out over that multi-year period. Also, sometimes you’re not actually paying more than you would have otherwise. That’s if some or all of that $5,000 is going to pay special debts like income taxes that you had to pay anyway.

So, with Chapter 13 you can spread your protection payments over a much longer period of time. And sometimes the extra protection money you pay goes to pay debts you’d have to pay anyway.

 

A “No Asset” Chapter 7 Case

June 12th, 2017 at 7:00 am

Most individual consumer Chapter 7 cases are “no asset” ones. This means that the Chapter 7 trustee doesn’t liquidate any debtor assets.

 

Chapter 7 Is a Liquidation Form of Bankruptcy

When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.

When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.

That is called ano asset Chapter 7 case.” The trustee does not liquidate anything.

But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”

In this blog post we’ll look at some practical aspects of “no asset” cases.

Anticipating a “No Asset Chapter 7 Case”

After deciding with your bankruptcy lawyer to file under Chapter 7, together you prepare your property and exemption schedules. See Schedule A/B and Schedule C.

In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.

In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.  

So your lawyer informs you that based on the information you’ve provided, you should have a “no asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.

The “Meeting of Creditors”

Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.

Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.

The Trustee’s “No-Asset Report”

Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”

 

Next time we’ll get into what happens when things don’t go quite as smoothly as this.

 

“Property of the Estate” Excludes Property in a Spendthrift Trust

May 29th, 2017 at 7:00 am

If you are the beneficiary in a spendthrift trust, most likely a bankruptcy trustee can’t touch whatever property is in that trust.  

 

Power of Attorney vs. Spendthrift Trust

Our last blog post focused on your rights under a power of attorney over someone else’s property. A conventional power of attorney commonly requires you to use that property only for another person’s benefit. If so, then your legal control over that property isn’t enough to make that property yours for bankruptcy purposes. So if you file a Chapter 7 case the bankruptcy trustee has no power of that property. It is not included in the property of your bankruptcy estate. (Section 541(b)(1) of the U.S. Bankruptcy Code.)

A power of attorney can be created for a million reasons. But the most common probably involves an elderly parent giving someone else, often their adult child, the power to use that parent’s property to pay the parent’s expenses when he or she no longer has the mental capacity to do so. The parent’s property does not become the adult child’s property because the child has only limited control over it.

Today we look at a somewhat similar situation, with a similar result: a spendthrift trust. As with a power of attorney, as the beneficiary of a spendthrift trust you have limited control over property in the trust.

A spendthrift trust involves someone giving property to another, but that property comes with a significant restriction. Instead of giving the property directly to the recipient, the grantor puts it into a trust. The trust holds the property on behalf of the recipient—the beneficiary of the trust. The beneficiary has tightly restricted access to and control over that property. The terms of that access and control are laid out in the trust document.

The Spendthrift Clause

A trust is a spendthrift trust if it has the right restriction to access. That restriction is contained in a legally enforceable spendthrift clause.

A spendthrift clause typically states that the beneficiary cannot voluntarily or involuntary transfer its rights to the property to anybody else. “Voluntarily” means that the beneficiary can’t get at the property within the trust except as stated in the trust’s language. “Involuntarily” means that the beneficiary’s creditors can’t get at the trust property either.

Legally Enforceable Spendthrift Clause

The Chapter 7 trustee also can’t get at the trust property either as long as the spendthrift clause is legally enforceable. How do you know whether or not it is?

The Bankruptcy Code says the following:

A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

Section 541(c)(2). The “restriction on the transfer” referred to here is the language found in the spendthrift clause. It’s saying that if the spendthrift clause found in a trust “is enforceable under applicable nonbankruptcy law,” then it is enforceable in a bankruptcy case.

Each state has its own laws on what “restriction on the transfer” in a trust is legally enforceable. So talk with your bankruptcy lawyer about whether the trust of which you are a beneficiary has an enforceable spendthrift clause. If so the property in the trust will not become property of your bankruptcy estate. It will be protected from the clutches of your Chapter 7 trustee.

 

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.

 

Dealing with Unpaid Property Taxes on Your Home

May 18th, 2016 at 7:00 am

Catching up on property taxes benefits both you and your mortgage lender. Chapter 13 helps you pull this off under much less pressure.

 

Slipping Behind on Property Taxes

If you’ve fallen behind on your mortgage payments, you’ve likely also fallen behind on your property taxes.

You may be required to pay those taxes as part of your mortgage payment. So not paying the mortgage automatically means you’re not paying the property taxes.

Or you may be supposed to pay the property taxes directly, separate from your mortgage. So you’ve not paid the property taxes because the mortgage lender is much quicker to complain and makes more noise if you don’t pay the mortgage.  So you pay that as much as you can instead of the property taxes.

Either way you fall behind on the property taxes. So how to solve this problem?

Some Help from Chapter 7 “Straight Bankruptcy”

Two blog posts ago we explained how Chapter 7 can enable people to keep their home as long as they can catch up on their unpaid mortgage payments within a few months after filing their bankruptcy case.

That’s all the harder if you are also behind on property taxes.

But in some situations, the filing of a Chapter 7 case allows a homeowner to stop paying a lot of money each month to other creditors, freeing that money to be paid towards the unpaid mortgage and property taxes.

Your Mortgage Lender’s Harsh Leverage

The problem is the impatience of your mortgage lender.

Usually a foreclosure by a property tax agency does not happen until a number of years after you don’t pay a property tax bill. So you’d think you’d have years to get current.

Maybe so if you own the property free and clear of a mortgage.

But not if you have a mortgage. In the reams of paperwork you signed when you got the mortgage you promised your mortgage lender that you would always keep current on the property taxes. So if you don’t, that’s a breach of your mortgage loan. It gives your lender a separate justification for foreclosing on your home, regardless whether or not you are current on the mortgage payments themselves.

Chapter 13 “Adjustment of Debts” Buys Much More Time

A Chapter 13 payment plan gives you time to catch up on your property taxes. And it keeps your mortgage lender off your back while you do so.

Our last blog post showed how Chapter 13 can usually give you as long as 5 years to catch up on missed mortgage payments. Same thing with back property taxes. And same thing if you are behind on both.

Stretching out the catch-up period that long reduces how much you have to pay monthly, on the property taxes or on both the property taxes and the mortgage. That makes catching up easier. If you are far behind, it may make the otherwise impossible become possible.

Chapter 13 Protects Your Home

Chapter 13 cases usually last 3 to 5 years. If you follow the payment plan that you and your lawyer propose and the bankruptcy judge approves, throughout that time you and your home are protected from foreclosure and other collection activity.

This protection applies both to the property tax creditor and to your mortgage lender. You do need to keep current on new tax years and on new mortgage payments as they come due. And you do need to make your “plan payments” so that you are making progress on the past due property taxes (and mortgage payments, if you’re behind on them, too). Or you could lose this protection and this opportunity to get current over time.

Flexibility under Chapter 13

Although Chapter 13 gives you as long as 5 years to catch up on your property taxes, often you’d be able to pay your back property taxes more quickly. That’s because in your Chapter 13 plan you can usually delay paying other creditors while you first catch up on the property taxes. That’s helpful because property taxes tend to have high interest. Besides saving you on interest, you build equity in your home, and satisfy your mortgage lender more quickly.

Chapter 13 is also a particularly good option if you have other liens against the home, such as a second mortgage, or liens for income taxes, for child or spousal support, for a judgment, or just about any other lien. More about those in our upcoming blog posts.

 

A Fresh Start with Unpaid Property Taxes on Your Home

February 3rd, 2016 at 8:00 am

Falling behind on property taxes is dangerous, and scares your mortgage lender. Bankruptcy can help you deal with both.

 

Is Chapter 7 “Straight Bankruptcy” Enough Help?

It possibly can give you enough of a fresh start with your other debts so that you can catch up on your property taxes. But doing so while keeping your mortgage lender also satisfied is difficult to pull off.

If you’ve fallen behind on your property taxes, sometimes just writing off your other debts would give you enough financial breathing space so that you could catch up on your property taxes. Tax foreclosures usually don’t happen until you’re years behind, so you may have a fair amount of time to get current.

So find out from your attorney how much time you would have to catch up. Some tax creditors will set up a monthly payment plan with you. Find out if that would be available to you and if you could afford the payments once you discharged (wrote off) your other debts.

If so, a Chapter 7 “straight bankruptcy” might give you the help you need.

Frightening Your Mortgage Lender

But the biggest practical problem in this is usually your mortgage lender. Even if losing your home from a property tax foreclosure is years away, falling behind on your property taxes gets your mortgage lender excited, in a bad way. Enough so that it threatens to or starts its own foreclosure, usually a much faster procedure for losing your home.

Your mortgage lender gets anxious if you fall behind on property taxes because:

  • The lien that the property tax creditor has on your home comes ahead of the mortgage lender’s lien. This means that your lender would lose its own rights to your home in the event of a property tax foreclosure. That’s your lender’s worst nightmare and it will do anything to prevent that.
  • Your contract with your mortgage lender requires you to keep current on the property taxes. So you are in violation of that contract by falling behind on the taxes, even if you are current on the mortgage payments.
  • Many homeowners’ monthly mortgage payment includes an additional “escrow” portion for property taxes. So you may well be behind on property taxes because you’ve also fallen behind on the mortgage payments.
  • That “escrow” extra monthly payment often also includes money for your homeowner’s insurance. Falling behind on that REALLY scares your lender because it could lose its collateral overnight in a fire or other disaster. Your lender would then pay out of its own pocket for its own version of insurance—usually much more expensive than what you were paying—and tack that insurance premium onto your bill. That puts you even further behind on your mortgage.
  • Finally, even if you are current on your insurance and your mortgage payments because you pay those separately and have managed to keep up on those, your lender considers you falling behind on property taxes as a strong sign that you are not financially responsible.

Chapter 13 “Adjustment of Debts” Buys More Time, Protects Your Home

A Chapter 13 “adjustment of debts” bankruptcy solves both your property tax problem and your mortgage lender one.

You will very likely be given as much as 5 years to catch-up on your property taxes. This reduces how much you have to pay monthly, making it more feasible. Throughout that time the tax creditor would not be able to foreclose or take any other collection activity.

Under Chapter 13, even though you’d have as long as 5 years, there’s a good chance you’d actually be able to pay your back property taxes more quickly than after a Chapter 7 case. That’s because your Chapter 13 plan can usually delay paying other important creditors, such as the IRS or a spousal support enforcement agency, while you first catch up on the property taxes. Besides saving you on interest, that will make your mortgage lender less anxious.

As for solving your mortgage lender problem, Chapter 13 forces your lender to not take any action against you as long as you catch up on the property taxes as your court-approved plan allows you to do.

And if you are also behind on your mortgage payments, Chapter 13 is a particularly good option. You are usually allowed to stretch out your mortgage catch-up payments for up to 5 years as well. If you have a second or third mortgage, you may be able to “strip” it from your home’s title, saving you money each month and long term. Other liens—for income taxes, for example—can often be dealt with favorably. And throughout the life of the Chapter 13 case, as long as you are meeting the terms of your payment plan, you and your home will be protected from foreclosure or any other collection efforts by your mortgage company.

 

Giving More Thanks for Chapter 13 “Adjustment of Debts”

December 2nd, 2015 at 8:00 am

We’re lingering in the Thanksgiving spirit by appreciating what Chapter 13 has to offer.

 

Beyond the first 3 we covered a couple days ago, here are 3 more impressive features of Chapter 13 which are completely unavailable under Chapter 7 “straight bankruptcy”:

4) The “Co-Debtor” Stay

The “co-debtor stay” enables a person filing a Chapter 13 case to immediately prevent a creditor from requiring a co-signer to pay a co-signed consumer debt. Depending on what you want, that protection can be either temporary or permanent.

The protection is temporary if the creditor asks the court for permission to pursue your co-signer and you don’t do anything to prevent that from happening.

The protection of your co-signer is permanent if you arrange in your 3-to-5-year Chapter 13 payment plan to pay the co-signed debt in full. Most of the time you are allowed to pay a co-signed debt in full through your Chapter 13 payment plan while paying less, or sometimes even nothing, to most of your other debts. That is, in most parts of the country you can completely favor your co-signed creditor to the detriment of your other creditors.

As a result, your co-signer is immediately protected upon the filing of the Chapter 13 case, he or she is protected throughout the life of the Chapter 13 case, and when the case is over you’ve paid the debt in full so that the creditor has no further recourse against your co-signer.

5) Protection beyond Property “Exemptions”

If you have an asset which you really need (or simply want to keep) but is not covered by a property exemption, under Chapter 7 the bankruptcy trustee could take and sell it, giving the proceeds to your creditors. But instead under Chapter 13 you can keep that asset by paying for the privilege during the course of your payment plan.  

You do that by paying to your creditors as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee. But you have 3 to 5 years to do that, throughout which time you are under the protection of the bankruptcy court. Your Chapter 13 payment plan is structured so that your obligation is spread out over this length of time, making it relatively easy and predictable to pay (in contrast to, for example, negotiating with a Chapter 7 trustee to pay to keep an asset).

You may even be able to keep your non-exempt asset(s) in a Chapter 13 case without paying anything more to your creditors. This tends to be more likely if are also in the Chapter 13 case because you owe taxes or back support payments. One of the biggest advantages of Chapter 13 is that it can play your financial problems—like having too much assets and owing back taxes—against each other. You may be able to pay money into your plan that both protects your assets and pays the taxes and/or support that you can’t discharge anyway. So you can get your assets protected and taxes/support paid, and finish the case free and clear of your debts.

6) Catching up on Child and Spousal Support Arrearage   

If you’re behind on support payments, only Chapter 13 can stop your ex-spouse or support enforcement agency from very aggressively pursuing you, and give you a reasonable time to cure your support arrearage, if you follow the rules.

Bankruptcy is limited in its ability to help deal with child and spousal support debts, with Chapter 7 not able to directly help at all other than to free up money so that you can pay ongoing and back support. However, Chapter 13 CAN stop the collection of any support that you are behind on as of the date the case is filed, giving you a very flexible way to catch up on what you owe without the huge pressure that your ex-spouse or the support enforcement agency usually puts on you. But this huge benefit comes with conditions and responsibilities, so be sure to fully understand and follow the rules.

Besides earmarking enough money within your plan to pay off the unpaid support payments owed, you must also:

  • Keep strictly current on your ongoing support (assuming you continue to owe it). This includes being very clear about when the first monthly support payment is due after your Chapter 13 case is filed and making sure it is paid on time. Otherwise your ex-spouse/support enforcement can immediately inform the bankruptcy court that you’ve not made the payment and get permission to start/resume collection of the back support.
  • Keep current on your monthly Chapter 13 plan payments. Those plan payments are what is paying the support arrearage (along with whatever other debts you are paying through the plan). So if you fail to make a single payment on time—at any time in your case—your ex-spouse/support enforcement can ask the court for permission to resume collection of the back support amount.

Chapter 13 gives you extraordinary power to stop collection of whatever support you owe at the time that your case is filed, as long as you are very vigilant and not squander that power. If you do it right, you’ll come out of your Chapter 13 case current on your support obligation, and, other than a home mortgage, likely completely debt-free.

 

Chapter 7 and Chapter 13–Too Much Equity in Your Home

October 26th, 2015 at 7:00 am

Most homeowners contemplating bankruptcy have their home equity protected by their homestead exemption. If not, consider Chapter 13.

 

The Homestead Exemption

Throughout the U.S. people filing bankruptcy have the equity in their homes protected by homestead exemptions.

A property exemption in general is the extent to which the law protects something you own, or protects the equity in something you own, from your creditors. Equity is the value of something beyond what you owe on it. If you own a home worth $200,000 and you owe $180,000 on a mortgage, and have no other debts which are liens on your home’s title, then you have equity of $20,000 in the home. As long as the homestead exemption applicable to you is $20,000 or more, you can file bankruptcy and your creditors will have no right to your home or your equity in that home.

Different Homestead Exemptions

Each state has a set of property exemptions, including a homestead exemption. There is also a set of federal exemptions. Whether you can use the federal exemptions or instead are required to use your state’s exemptions depends on the laws of your state.

That’s true even though bankruptcy is a federal procedure governed by federal laws. Because of a Congressional compromise each state can choose to either require its residents to use its own set of exemptions or else be allowed to use either the state exemptions or the federal ones.

The majority of states—currently 31 of them—require you to use their exemptions. The remaining 19 plus the District of Columbia allow you to choose between the state and federal exemptions, including the homestead exemption. Those 19 states in alphabetical order are Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

The amount of equity that different state laws protect can vary widely. They can also change significantly. For example, in Alabama—one of the states which require bankruptcy filers to use its state exemptions—up until June of this year the homestead exemption had been only $5,000 ($10,000 for a married couple) and had not changed for more than 30 years. It was tripled to $15,000 ($30,000 for a married couple), with future increases tied to inflation. In contrast, right next door in Florida—which also requires bankruptcy filers to use its exemptions—the homestead exemption dollar amount is unlimited. It’s only restricted by acreage—to a half-acre in urban areas and 160 acres otherwise.

The federal homestead exemption is currently $22,975.

So to use the example above of the $200,000 with $20,000 in equity, that equity would be protected in Florida or in any state where the federal exemptions can be used, but would not be fully protected in Alabama.

What Happens in Chapter 7 If There’s Too Much Equity

Simply put, if you owned a home with more equity than you were allowed and you filed a Chapter 7 “straight bankruptcy” case, the Chapter 7 trustee could take that home, sell it to pay creditors, and give you the homestead exemption amount (and possibly any left over after paying the creditors in full).

There may be ways to avoid this from happening For example, if there was really less net equity in the property than the exempt amount because what it would cost for the trustee to sell it, the trustee may not be able to take the property. Or you may be able to pay the trustee to avoid the home being sold. But under Chapter 7 a home with more equity than the homestead exemption allows is at significant risk.

What Happens in Chapter 13 If There’s Too Much Equity

Under a Chapter 13 “adjustment of debts” case if you own a home with more equity than the homestead exemption law allows you can protect it by paying to the creditors over the course of a three to five year payment plan at least as much as they would have received under a Chapter 7 case if the home were taken and sold by the trustee. That may require you to pay more to the creditors than you would have had to otherwise. But sometimes it just requires you to pay as much as you can afford to during the time period required. And sometimes it only requires you to pay creditors you would have had to pay anyway, such as income taxes and child or spousal support payments. Overall, Chapter 13 protects otherwise unprotected equity in your home usually better than Chapter 7 can.

 

Chapter 7 and Chapter 13–Resolving Your Property Tax Debt

October 19th, 2015 at 7:00 am

Bankruptcy helps with your property taxes either by writing off your other debts or by buying you more time to catch up.  

 

Discharge Your Other Debts with Chapter 7 So You Can Pay Your Property Taxes 

If you’ve fallen behind on your property taxes, presumably your income has not been enough to meet your expenses plus payments on your other debts. Sometimes just writing off your other debts would give you enough financial breathing space so that you can catch up on your property taxes.

Find out from your attorney how much time you would have to catch up on your property taxes. You often have quite a long time. But the rules can be very strict about property tax foreclosures, so be absolutely clear about what the true deadlines are.

Some tax agencies will set up a monthly payment plan with you. Find out if that would be available to you and if you could afford the payments once you discharged your other debts.

In these situations a Chapter 7 “straight bankruptcy” may give you all the help you need.

Use the Special Powers of Chapter 13 to Take Care of Property Taxes

But you may not have enough time to pay the taxes before the tax foreclosure.

Or even if the tax foreclosure isn’t right around the corner, you may need more help for the following reasons:

  • Even if your county or tax agency provides the option of an installment payment plan, you can’t afford the monthly payments even after discharging your other debts.
  • A payment plan is not offered by your tax agency.
  • The collection process has gone too far for you to be eligible for a payment plan.
  • You were already in a payment plan but could not pay it as agreed.
  • Your mortgage lender is requiring you to bring the taxes current more quickly, usually on top of initiating its own foreclosure or threatening to do so.

Under the Chapter 13 “adjustment of debts” type of bankruptcy, you can catch-up on your property taxes over a period of as long as 5 years. This reduces each month’s installment payment, making it more manageable. And during that time the tax agency would not be able to foreclose or take any other collection activity—saving you both worry and those extra costs—as long as you fulfill the terms of the court-approved Chapter 13 plan.

Chapter 13 also often can enable you to pay your back property taxes more quickly than if you were in a Chapter 7 case, saving you interest and penalties. This is possible because your plan can delay paying other important creditors, such as the IRS or a spousal support enforcement agency, while you first catch up on the property taxes.

And perhaps of greatest practical importance, Chapter 13 is usually a much better option if you are also behind on your mortgage payments. Most of the time if you are behind on property taxes that means that you are also behind on your mortgage(s). Chapter 13 can be an excellent way to catch up on your mortgage because it also allows you to stretch out your mortgage catch-up payments for up to 5 years. During this time, as long as you meet the terms of your court-approved plan, you and your home will be protected from foreclosure or any other collection efforts by your mortgage company.

 

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