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Archive for the ‘Chapter 13’ Category

Can You Incur More Debt During a Chapter 13 Repayment Plan?

December 27th, 2019 at 12:38 am

debtIf you have gotten a bankruptcy, the one thing you do not want to do is to incur more debt; being unable to pay your debt is the reason you filed for bankruptcy, right? Chapter 13 bankruptcy repayment plans usually last anywhere from three to five years, meaning you must be financially responsible during that time period or you could risk having your case dismissed and being responsible for repaying your debts in full. While it is a good rule of thumb to avoid taking on any further debts during a Chapter 13 bankruptcy, sometimes taking on more debt is unavoidable and is a necessity. Incurring new debt during your Chapter 13 repayment period is possible, but there is a certain way you must go about it.

Reasons for Incurring New Debt

Sometimes, life can be unpredictable. Even though you were probably not planning on taking on any new debts during your Chapter 13 repayment period, things can happen and can put you in a situation where there is no other option. Generally, incurring new debt during a Chapter 13 repayment period is frowned upon and is only permitted when the debt is for something that is considered a necessity. Common reasons for incurring debt during a repayment plan include:

  • Refinancing a mortgage on your current home
  • Purchasing a new home or a new vehicle
  • Financing equipment needed for necessities, such as a new water heater or furnace

Filing a Motion to Incur Debt

Before you take on any new debt, you must speak with your bankruptcy trustee about filing a motion to incur debt. If you were to take on new debt without notifying the court or your trustee, you could risk having your bankruptcy case dismissed, leaving you in an arguably worse financial situation than before. To file a motion to incur debt with the court, you will need to provide the following information:

  • Proof of income for at least the past 60 days
  • An updated list of your monthly expenses
  • Information about the loan and the financing company, including how much the loan is for, the interest rate of the loan, the length of the repayment period and how much the estimated monthly payment would be

The court will examine your motion and make a determination on whether or not the debt is necessary, whether or not you will be financially able to make the monthly payments and whether or not the new debt will interfere with your ongoing bankruptcy repayment plan.

Contact a San Antonio, TX Chapter 13 Bankruptcy Attorney For Assistance

Making the decision to file for bankruptcy can be a difficult one, but it can ultimately end up being the best financial decision you make for yourself. If you are currently in a Chapter 13 repayment plan, you likely know that there are limitations to what you can do with your money. If you need to incur debt during your repayment period, you need help from a Schertz, TX Chapter 13 bankruptcy lawyer. At the Law Offices of Chance M. McGhee, we can help you correctly file a motion with the bankruptcy court to allow you to take on more debt during your repayment period. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.carsdirect.com/auto-loans/what-s-an-authorization-to-incur-debt-with-a-chapter-13

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

 

Priority Debts in a Chapter 13 Case

December 9th, 2019 at 8:00 am

Chapter 13 gives you some huge advantages over Chapter 7 for paying your priority debts. You’re protected while you pay what you can afford.


Priority Debts under No-Asset and Asset Chapter 7

Our last two blog posts described how Chapter 7 can sometimes be a sensible way of dealing with priority debts. (Those are ones you can’t “discharge”—legally write off, the most common being recent income taxes and child/spousal support.) Our blog post two weeks ago: a no-asset Chapter 7 case discharges all or most of your other debts. So then afterwards you can better afford to pay your priority ones. Last week: in an asset Chapter 7 case your bankruptcy trustee collects your unprotected asset(s). He or she then pays part or all of your priority debt out of the proceeds from selling those asset(s).

But Chapter 7 is not well-designed to deal with priority debts in many situations. Here are the main problems:

  • You get only brief protection, or none at all, from your priority creditor(s). With income taxes, the IRS/state can resume collections when your Chapter 7 case is over. That’s only 3-4 months after you and your bankruptcy lawyer file the case. With child/spousal support, there is no protection at all: collection continues even during your Chapter 7 case.
  • Because of this lack of legal protection, you have little or no leverage about the dollar amount of payments you pay on your priority debts. You are largely at the mercy of the IRS/state or the support enforcement agencies.
  • In an asset Chapter 7 case, you have no control over the trustee’s sale of your asset(s). Plus you have to pay a significant amount for the trustee’s costs and fee. That reduces what goes to your priority debt(s).

The Benefits of Chapter 13

In contrast, Chapter 13 is well-designed for you to deal favorably with your priority debts. Here are its main benefits and advantages.

1. Ongoing Protection, for Years

The protection from creditors called the automatic stay lasts not 3-4 months but rather 3-to-5 years in Chapter 13. You can lose this protection under Chapter 13, if you don’t follow the requirements. But usually this sustained protection is a very powerful tool. It gives you tremendous peace of mind. It forces otherwise very aggressive creditors like the IRS/state and support enforcement to cooperate. It gives you an incredible and practical second chance to do what you need to do. Instead of these tough creditors having the law and the leverage on their side, Chapter 13 puts you much more in charge.

2. Pay Monthly What You Can Afford to Pay

The practical leverage Chapter 13 gives you helps where it counts. It enables you to pay your priority debts under sensible and manageable payment terms. Priority debts are ones you have to pay regardless of bankruptcy. You mostly just wish that there was a way to do so that was doable. Chapter 13 fulfills that wish.

Here’s how it works You and your bankruptcy lawyer propose, and the bankruptcy judge approves a payment plan. (This approval comes after possible input from the Chapter 13 trustee and your creditors.) This payment plan is mostly based on how much you can actually afford to pay the pool of your creditors. You have to pay all your priority debts in full, but you have 3 to 5 years to do so.

You generally pay nothing on your other unsecured debts until you pay your priority debts in full. Sometimes you don’t pay anything on those “general unsecured” debts. At the end of your case whatever you haven’t paid is forever discharged. At that point you will have paid off your priority debts in full, and usually owe nothing to anybody.

3. Avoid Interest and Penalties

You can often avoid paying any interest or penalties on your priority debt(s) under Chapter 13.

For example, with recent income taxes, interest and penalties continue to accrue after you file your case.  But as long as there no prior-recorded tax lien, and you successfully finish your case, you don’t pay these additional interest and penalties. You only pay the initial priority tax debt.

Furthermore, in most situations the penalties that accrued before your Chapter 13 filing are not a priority debt. This portion of your tax due at the time of filing is treated as “general unsecured.” This means it’s treated just like your unsecured credit cards or medical bills. You only pay it to the extent you have money available after paying the priority debts, if at all.

This combination—no accruing interest and penalties, and no penalties treated as priority—can significantly reduce how much you must pay. The less you have to pay as priority means the less you pay in your Chapter 13 payment plan. The less you have to pay usually means you finish your plan quicker. It’s more likely to last closer to 3 years rather than 5 years. And if you have to pay less there’d be less pressure to pay more per month to get it done on time.

4. Pay Priority (and Secured) Debts Ahead of (and Instead of) Other Debts

If you have secured debts you have to pay—a vehicle loan or home mortgage arrearage, for example—you often can pay these ahead of the priority debts. Your priority debts generally just have to wait, as long as you are appropriately following the payment plan.

This flexibility, and being able to essentially force priority creditors to be this flexible, can be extremely beneficial to you. You not only get to pay your important priority debts ahead of your other unsecured debts. You often get to favor debts that are very important to you—for example, to save your home and/or vehicle—ahead of the priority debts. You do have to pay the priority debts in fully before you can finish your Chapter 13 case. But often you are allowed to fit those payments in only after paying your crucial secured debts.

 

Things You Should Know Before You File for Bankruptcy

March 29th, 2019 at 4:18 pm

bankruptcy-filingMost Americans have some form of debt — mortgages, credit card debt, student loans, auto loans, and personal loans are all part of consumer debt and most Americans have a combination of them. For many people, the debt can be handled through smart budgeting and curbed spending, but some people need to use other measures. Bankruptcy is used when people can no longer pay their debt and offers a way for those in debt to get a fresh start. The decision to file for bankruptcy is a difficult one, especially since bankruptcy laws are so complex. Here are a few things you should know before you file for bankruptcy:

There Is More Than One Kind of Bankruptcy

For individuals, there are two different types of bankruptcies — Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is the type that most people associate the word bankruptcy with. In Chapter 7 bankruptcy, most of your unsecured debts can be discharged, meaning you will no longer be responsible for paying them back. In a Chapter 13 bankruptcy, you set up a repayment plan that allows you to repay your debts over three to five years. The kind you choose largely depends on your specific circumstances.

Bankruptcy Is Not Free

Though it may seem counterintuitive, filing for bankruptcy is not free. It can actually become quite expensive. Filing for bankruptcy can cost between a couple of hundred to a couple of thousands of dollars, depending on whether or not you hire an attorney and how much the filing fees end up costing.

Your Credit Will Be Affected

 

Once you have filed for bankruptcy and your case is finished, you will have to begin the process of rebuilding your credit. Getting a bankruptcy does make your credit score drop, but it does not really matter whether or not you go into the bankruptcy with a high or a low credit score. Most people end up around the same score range after they are done with bankruptcies.

A Kerrville, TX Bankruptcy Attorney Can Help

It can be difficult to make the decision to file for bankruptcy. Some people feel like bankruptcy is a failure, but in reality, it can be the best decision some people make. If you are thinking that bankruptcy may be right for you, you need to talk to an experienced New Braunfels, TX bankruptcy lawyer. Understanding what you are getting yourself into before you file for bankruptcy is crucial, which is why the Law Offices of Chance M. McGhee are here. We can help you figure out which type of bankruptcy is right for you and the most strategic plan to benefit you. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.thesimpledollar.com/what-to-expect-when-filing-for-bankruptcy/

https://www.thebalance.com/top-things-to-know-about-bankruptcy-316198

https://www.investopedia.com/articles/pf/07/bankruptcy.asp

https://www.forbes.com/sites/larrymyler/2017/10/03/filing-for-bankruptcy-3-most-important-things-you-need-to-know/#611876127fe6

Types of Debt in Chapter 13 Bankruptcies

February 8th, 2019 at 11:01 pm

TX bankruptcy lawyerThere is more than one type of bankruptcy, although Chapter 7 and Chapter 13 bankruptcies are the most common. In a Chapter 13 bankruptcy, your attorney and a team of other professionals are able to help you develop a repayment plan to pay back your debts. The repayment plan lasts for three to five years, depending on a variety of circumstances. Chapter 13 bankruptcies can be beneficial to individuals because it allows you to keep certain assets, such as your vehicle or your home. In a Chapter 13 bankruptcy, certain debts must be repaid before other debts.

Priority Debts

Priority debts are exactly what they sound like — priority over other debts. These debts must be included in any repayment plan you enter and the plan must make sure that your priority debts are paid off first and in full. Typically priority debts include:

  • Past-due child support;
  • Past-due spousal support;
  • Unpaid taxes; or
  • Unpaid wages that you owe employees within the past six months.

Secured Debts

Debts that can be secured by certain property are called secured debts. These types of debts are called secured debts because they can be attached to specific property. If you fail to repay the debts as agreed, the creditor can take back the property. The most common examples of secured debts include:

  • Home loans or mortgages; or
  • Car loans.

Unsecured Debts

Unsecured debts are basically all other debts that you may have. Unsecured debt has no property that can be attached to it, so there is nothing that the creditor can repossess if you do not pay. Common examples of unsecured debt include:

  • Medical bills;
  • Credit card debt;
  • Personal loans;
  • Utility bills; and
  • Business loans.

A Texas Chapter 13 Bankruptcy Attorney Can Help

United States bankruptcy law is extremely complex and is best handled by a professional. At the Law Offices of Chance M. McGhee, we have dealt with over 20 years worth of bankruptcy cases and we know the ins and outs of the bankruptcy process. Our skilled New Braunfels Chapter 13 bankruptcy lawyer can help you sort out your finances and come up with a repayment plan that works for you. To get started reviewing your case, call our office at 210-342-3400 to schedule a free consultation.

 

Source:

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

 

Fully Complying with Your Chapter 13 Case

March 12th, 2018 at 7:00 am

Besides fulfilling the terms of your Chapter 13 payment plan, you may need to make other payments and meet other requirements. 

 

The bankruptcy court’s approval of your payment plan (at the Confirmation Hearing) happens about 2-to-4 months after filing your case. At that point your Chapter 13 case is fully on its way. You likely have about 3 to 5 years altogether to finish the case. Having gotten to this crucial point, there are a few other crucial steps you need to fulfill to successfully finish your case.

Last time we got into three of these:

  • Do your “debtor education”
  • Avoid or defeat “nondischargeability complaints”
  • Pay your Chapter 13 plan payments

Today we lay out two other crucial steps.

Pay Any Obligations NOT Within Your Plan Payment

In many Chapter 13 cases you pay nothing to your creditors except the single plan payment each month. The trustee divides that payment among your creditors as laid out in your court-approved plan. You pay nothing else to any creditor.  

But in other cases, you pay one or more creditors directly. This may be referred to paying “outside the plan.”

To be clear, you are not paying these secretly. Your plan clearly refers to these debts and their payments. So the bankruptcy court approves these payments. They’re just not included within the single monthly plan payment, for various possible reasons. (See the explanation in paragraph 3.1 of the official Chapter 13 Plan form.)

Often these are ongoing payments on secured debts such as home mortgages or vehicle loans. Direct payments are more likely used when you’re current and are simply continuing to make the regular payments. In some jurisdictions it’s considered easier for everybody that you continue to pay such straightforward payments directly to the creditor. Paying them through the trustee is seen as causing too much delay and accounting confusion.

Naturally it’s essential that you know whether all of your creditors are being taken care of through the single plan payment, or whether there’s a creditor or two you need to pay directly. Your income and expense schedules should make that clear, as well as the plan itself. But if you have any doubt, be sure to ask your bankruptcy lawyer.

Do Anything Else Required

Two documents combined—your plan and the Order Confirming Plan signed by the judge—are the law of your case. These documents contain requirements beyond making payments. They include some standard ones that apply to just about all consumer debtors. There may also be some special requirements for you.

The standard requirements usually include:

  • providing the trustee with copies of your annual income tax returns (paragraph 2.3 of the official Chapter 13 Plan form)
  • turning over to the trustee “income tax refunds received during the plan term” (paragraph 2.3 of the official Chapter 13 Plan form)
  • avoid using credit without prior Chapter 13 trustee or bankruptcy court permission

Special requirements can include:

  • a specified deadline to sell an asset
  • permission for you to use an income tax refund for a specific expense, such as a vehicle repair
  • a requirement to report when an unemployed spouse gets employed

Notice that these special requirements often relate to anticipated changes to your income, expenses, or assets. These changes can directly affect your future obligations under your Chapter 13 case. They may well require you to adjust the payment terms of your plan in the future.

Conclusion

It does take consistent effort to complete a Chapter 13 case successfully. But that effort is worthwhile because it gains you tremendous benefits. Chapter 13 provides many tools that Chapter 7 cannot. Through those tools you can likely meet some otherwise impossible goals. Once you’ve decided that these goals are worthwhile, usually the effort will be worthwhile as well. 

 

“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.

 

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

December 6th, 2017 at 8:00 am

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


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

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

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

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

Judgment Liens

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

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

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

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

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

Homeowner Association Lien

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

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

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

Child/Spousal Support

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

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

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

 

Chapter 13 with a 2nd Mortgage, Property Taxes, or Income Tax Lien

December 4th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a second mortgage, get behind on property taxes, or have a tax lien on your home.


The last two blog posts were about situations in which a homeowner is current on the mortgage but has other debts on the home.  We showed how Chapter 7 “straight bankruptcy” can work well enough in the 6 debt situations we covered.

But Chapter 7 is often not the best option when you have a lien on your home. Chapter 13 comes with better tools for dealing with such debts against your home. Even if you’re current on the mortgage itself, these tools may make Chapter 13 highly worthwhile for you.

We’ll show how Chapter 13 helps in the same 6 debt situations covered in the last two blog posts about Chapter 7. We’ll cover the first 3 today and the other 3 in a couple days.

Here are the first 3 debt situations:

  1. Second or third mortgage
  2. Property tax
  3. Income tax lien recorded on your home

1. Second or Third Mortgage

Chapter 13 helps in two major ways with a second or third mortgage that aren’t available under Chapter 7.

First, you may have the option to “strip” a junior mortgage from your home’s title. If so, that debt would no longer be secured by your home. You would not have to pay your monthly 2nd/3rd mortgage payment. You would only pay on the 2nd/3rd mortgage balance during your Chapter 13 payment plan to the extent you had available funds to pay it, if at all. Then at the end of your case the remaining balance would be “discharged”—legally, permanently written off.

Your home qualifies for a 2nd mortgage “strip” if it is worth less than your first mortgage debt balance. Then Chapter 13 allows you to have the bankruptcy judge declare that the second mortgage debt is unsecured. After all, then there’s no remaining equity for the second mortgage. (This also works with a third mortgage if the home is worth less than the combination of the first and second mortgage debt amounts.)

The second way that Chapter 13 works better on a second or third mortgage is if you’re way behind on the monthly payments. Chapter 7 is fine if the lender will give you enough time to catch up at a reasonable pace. But second and third mortgage lenders usually have more exposure than first mortgage lenders. They have less equity protecting them. They could lose their entire debt by being foreclosed out by the first mortgage lender. So second/third mortgage lenders tend to be more demanding and less flexible about catch-up payments.

Chapter 13 is a great way to force them to give you more time—up to 5 years if needed. Plus, your Chapter 13 catch-up payments can work around other important debts that you need to pay.

2. Property Tax

If you fall behind on your home’s property taxes, your mortgage lender will become quite unhappy very quickly. Even if you’re current on your mortgage, falling behind on property taxes is a separate basis for your lender’s foreclosure. It usually takes years of being behind before your property tax authority itself would do a tax foreclosure. But your mortgage lender gets very nervous because if that were to ever happen it would lose rights to the property as well. Plus, your lender sees falling behind on property taxes as a sign you’re not financially responsible or capable. For these reasons it’s a breach of your mortgage contract.

After falling behind on property taxes it’s difficult to catch up in the midst of your other financial pressures. Chapter 13 can help tremendously through a combination of two benefits. First, you get up to 5 years to catch up, making doing so more feasible. Second, you are protected from BOTH a tax foreclosure and your lender’s foreclosure. So using Chapter 13 to bring our property taxes current is often the best way to do so.

3. Income Tax Lien

Chapter 13 can be the best way to deal with an income tax lien on your home, in various scenarios.

First, consider if there’s no equity in the home covering that tax lien and the tax itself is dischargeable. (There’s no equity because the mortgage and any other prior liens total more than the home’s value. The tax itself is discharged usually because it’s old enough.) If so, then in Chapter 13 that tax is treated as a general unsecured debt. It’s lumped in with your other general unsecured debts, usually not increasing how much you pay into your plan.

Second, if equity in your home covers the full amount of the tax lien, Chapter 13 provides a flexible and safe way to pay the tax. The IRS/state loses most of its scary leverage over you. You simply arrange to pay the tax (and interest) over the 3-to-5-year life of your Chapter 13 payment plan. You protect your home while fitting that tax obligation into your budget and around any other urgent debts.

Third, if equity in your home covers a portion of the tax lien, you only pay that portion as a secured debt. And as just stated, you pay this through your plan safely and flexibly. This is much better than being leveraged into paying the full amount at the risk of losing your home.

 

Good Timing Can Shorten Your Chapter 13 Case by 2 Years

October 11th, 2017 at 7:00 am


We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.  


Chapter 7 vs. Chapter 13

Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.

But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.

So assume you want to file a Chapter 13 case. One important question is how long you will be required to pay into your payment plan. Sometimes you’d want to have as much time as possible to stretch out and lower your plan payments. But in other circumstances you’d just want to get it over with as soon as possible. Then you can get on with life, and if you want start rebuilding your credit.

Your “Income” Dictates the Length of Your Chapter 13 Case

There is no “means test” under Chapter 13. Yet the same unusual way of calculating income in the Chapter 7 “means test” is used in Chapter 13. That same unusual calculation of income determines whether your payment plan can be 3 years long or instead must last 5 years.

So let’s look briefly again at how income is calculated.

The Chapter 13 Calculation of Income

To calculate your income for this purpose:

  • includes almost all sources of money other than from Social Security (not just taxable income)
  • total all gross amounts received precisely during the 6 FULL calendar months prior to filing your case
  • multiply this 6-month amount by 2 for the annual “income” total
  • compare that annualized amount to the “median income” for your state and family size

You may finish your Chapter 13 case in 3 years instead of 5 if your income is no larger than the applicable “median income” for your state and family size.

The “median income” amounts are adjusted regularly and are available online. You can find those state-by-state amounts for cases filed starting May 1, 2017 and for several months thereafter here. (And if you’re reading this well after this date, check here to see if this table has subsequently been updated.)

If you want you can go through each of the specific steps in this calculation right on the official bankruptcy court form. Download or print the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (effective 12/1/15).

How Smart Timing of Filing Can Make Such a Difference

See our last blog post for an example how even just a day or two difference in the date of filing a case can put you over or under your applicable “median income” amount.

This is even more crucial in Chapter 13 than in Chapter 7. In Chapter 7 the income step is just the first step of the “means test.” Even with higher-than-median income you may be able to pass the “means test” based on your expenses or other considerations. But under Chapter 13 your income as calculated above determines whether or not you’re required to be in it for 5 years.

Important Practical Notes

Even if your income ALLOWS you to finish in 3 years you can usually take longer if you want. As mentioned above, you may want to stretch out and so reduce your monthly payments. But in this situation you’d not be REQUIRED to go the full 5 years. And you generally don’t pay any more to your creditors while doing so.

Also, if you ARE required to go the full 5 years based on your income that doesn’t always hurt you. To pay everything you want and need to pay may take that long, without necessarily paying more to your creditors.

However, there ARE situations in which based on your budget you could finish your payment plan in 3 years. Or other situations in which you could finish sometime between 3 and 5 years. In these situations being required to go the full 5 years means paying more to your creditors—sometimes much more. And it delays getting to that point in time when you can actually start your fresh financial start.

 

A Sample Completed Chapter 13 Case

September 13th, 2017 at 7:00 am

What does the completion of a successful 3-to-5-year Chapter 13 case look like? What happens to your assets and debts? 

 

The Sample Chapter 13 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. We focused on the benefits you get at the tail end of your case, and on the case’s final events.

But like so many other bankruptcy procedures, Chapter 13 completion makes much more sense when tied to tangible facts.

So imagine a Chapter 13 case filed to catch up on a home mortgage, “strip” a second mortgage, catch up on some property taxes, and deal with some IRS income taxes.

Henry and Heather had been $7,500 behind on their first mortgage and so at risk of foreclosure. The situation was worsened because they were also $3,000 behind on their home’s property taxes. They hadn’t paid on a $30,000 second mortgage in months, so that mortgage holder was also threatening foreclosure.

On top of this they owed $10,000 in income taxes from several years ago when they had to close down a business. That business had started their downward financial spiral. They also owed $5,000 for last year’s income taxes, plus $90,000 in a combination of medical and credit card debts.

Their Chapter 13 Plan

Three years ago Hannah and Henry’s bankruptcy lawyer had recommended they file a Chapter 13 case. Their Chapter 13 payment plan enabled them to do the following:

  • Catch up on the $7,500 in late mortgage payments over the course of those 3 years.
  • Catch up on their $3,000 in property taxes over the same period.
  • Keep current on their ongoing mortgage and property taxes by budgeting for these obligations.
  • Prevent either their mortgage lender or the county tax collector from foreclosing or taking any other action to collect.
  • “Strip” their second mortgage from their home by establishing that all of its equity was exhausted by the first mortgage.
  • As a result they could stop paying the second mortgage and did not have to catch up on the arrearage. The entire $30,000 balance was treated as an ordinary unsecured debt.
  • Treat the older $10,000 in income taxes as an ordinary unsecured debt.
  • Pay newer $5,000 income tax debt as a “priority” debt, but without any further interest or penalties. Prevent the IRS from taking any collection action while paying it as their budget allowed.
  • Pay only 2 cents on the dollar on all $130,000 in their remaining unsecured debts: the $30,000 second mortgage, the $10,000 in older income tax, and $90,000 in medical/credit card debts. They could pay only $2,600 on this $130,000 because that is all that was available in their budget during their 3-year payment plan after paying the debts above.

The Completion of the Case

Now after 3 years Henry and Hannah have finished paying enough into their Chapter 13 plan to accomplish the above. Their Chapter 13 trustee so informs them, their lawyer, and the bankruptcy court. Then the following happens:

  • The bankruptcy judge signs a discharge order. That discharges—legally writes off—the unpaid 98%—$127,400—of the $130,000 of ordinary unsecured debt. That debt is gone.
  • Hannah and Henry are now current on their first mortgage and property taxes.  
  • Their “stripped” second mortgage is completely off their home’s title. This puts them that much closer to building equity again in their home.
  • They are current on income taxes, having discharged most of the older taxes and paid off the more recent $5,000.  
  • The court closes their Chapter 13 case.
  • Henry and Hannah are completely debt-free except for their caught-up mortgage.

 

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