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Catching up on Support through Chapter 13

January 27th, 2020 at 8:00 am

Chapter 13 gives you a powerful, reasonable, flexible, and even calm procedure for catching up on your past-due child or spousal support. 

 

The last two weeks we’ve shown how Chapter 13 can stop the collection of unpaid child and spousal support. First we talked about how this benefit is much better than Chapter 7 can provide. Then we focused on the ongoing conditions you must meet to keep up this protection.

But there’s a second benefit of Chapter 13 that deserves attention. It doesn’t just stop the collection of unpaid support. Chapter 13 provides a powerfully flexible way to catch up on that support debt.

Why This Is a Huge Benefit

Whatever child or spousal support you owe at the time of your bankruptcy filing, you can’t write off (“discharge”). It’s among the relatively few kinds of debts that bankruptcy does not discharge under any circumstances. See U.S. Bankruptcy Code Sections 523(a)(5) and 101(14A). So you have to pay it, whether you file bankruptcy or not. Whether you file Chapter 7 or 13 or any other kind of bankruptcy.

So this is a debt you have to pay. The issue is what is the easiest, most financially sensible and low-stress way to do so. 

As we discussed in our blog post 3 weeks ago, Chapter 7 doesn’t help much. It doesn’t stop the collection of unpaid support at all. You’re on your own catching up on any unpaid support.

Chapter 13 does stop the collection of unpaid support immediately, and continues to protect you as long as you meet some ongoing conditions.  What Chapter 13 also does is provide you the tool to pay off the support debt. That tool is a court-approved payment plan for all your debts, based on what you can actually afford to pay. That payment plan enables you to catch up on your support debt over time. The plan works into your budget all your other debts—especially other debts very important to you. So you can catch up on your support at a sensible pace without being hounded about it.

How the Chapter 13 Payment Plan Works

How could this possibly work in real life? Consider the following:

  1. The Chapter 13 payment plan is based on your actual income and reasonable expenses.
  2. The plan prioritizes debts in a way that’s generally in your favor.
  3. Other debts sometimes get your money ahead of the support debt, usually to your benefit.
  4. You have 3-to-5-years to catch up on all your unpaid support debt.

We’ll take these four one at a time.

1. Based on Actual Income and Expenses

The Chapter 13 payment plan usually involves a single monthly payment to all of your creditors. (Although sometimes a special debt is paid separately, like a home mortgage.) That single monthly payment is based on what you can actually afford to pay. It’s based on your actual income and reasonable expenses. The income is a projection based on your very best estimate of how much you’ll make each month. The expenses try to cover all your expenses, including ones that don’t happen every month. (For example, vehicle maintenance and repairs, and medical expenses.)

The point is to determine how much you can truly and reasonably afford to pay monthly in a sustainable way. It should not cause you anxiety. You should feel confident that you can fulfill your payment plan.

2. Prioritizing Debts

A Chapter 13 plan basically divides debts into those you must pay in full and those you pay only as much as you can afford to pay. 

The unpaid support debt is in the first category. This category may also include other such must-pay debts like recent income taxes. It can also include secured debts like vehicle or mortgage obligations.

The second category usually includes all other debts—your “general unsecured” debts. These you usually pay only as much as you can, if there’s any money left over for them at all.

So Chapter 13 lets you focus your limited financial resources on those debts that you need to pay. And it gives you an extended time to pay them, so that you can afford to do so.

3. Paying Other Debts Ahead of Support

Outside the protection of Chapter 13, arguably no debts come ahead of unpaid support. That’s because the law makes the support enforcement collection tools so powerful.

But within the protection of a Chapter 13 case and plan, those aggressive collection tools are tamed. So you don’t necessarily pay an unpaid support debt first in the plan. You may have other debts—especially a secured debt or two—that you can pay first. So if you are behind on your mortgage, or doing a cram-down on your vehicle loan, you can often pay these ahead of your support debt.   If you owe other “priority” debts like recent income taxes, your plan usually pays your support debt along with such other important debts.

With Chapter 13 you’re not at the mercy of these important creditors. Your court-approved payment plan gives you a great way to deal with them all, including the support.  

4. Pay Off Unpaid Support by Case Completion

As mentioned, you have as long as 5 years to catch up on your unpaid support. Your official plan does need to include enough money to accomplish that (and everything else that must get paid). And you do need to fulfill the terms of that plan successfully to the end. Of course if you have an ongoing support obligation you have to keep paying that. (It will be included in your monthly expenses.)

Then by the end of your payment plan you will be current on your support. You’ll have paid off or gotten current on all your other special debts. Whatever you haven’t paid on your general unsecured debts will get discharged. And you’ll be free and clear of all debts.

 

Unpaid Child and Spousal Support in Chapter 7

January 6th, 2020 at 8:00 am

Chapter 7 does not stop the collection of child or spousal support, nor provide any procedure to pay the support. It may still help enough.  


If you are behind on child or spousal support payments Chapter 7 may or may not be a good solution.

Chapter 7 “straight bankruptcy” is the most common type of consumer bankruptcy case.  It is more likely to be a sensible solution if 1) the support isn’t being collected aggressively and 2) you don’t owe terribly much. Why? Because:

1) Filing Chapter 7 does not stop collection of unpaid child or spousal support. Chapter 13 can.

2) Chapter 7 does not give you a procedure for catching up on the support. Chapter 13 “adjustment of debts” does so.

So why would you file a Chapter 7 bankruptcy if you were behind on support?

Filing Chapter 7 When Owing Support

Chapter 7 is usually the most straightforward type of bankruptcy. A case lasts only about 4 months from when your bankruptcy lawyer files it to when it’s completed. A Chapter 13 case involves a formal payment plan that almost always takes 3 to 5 years to finish.

As mentioned above Chapter 13 can stop the immediate collection of unpaid support, and give you time to catch up.

The much quicker Chapter 7 makes sense if you don’t need these kinds of help.

If you stopped paying the debts that Chapter 7 would discharge, could you quickly catch up on support? Would your ex-spouse be willing to accept monthly catch-up payments at an amount you could afford? Or if the debt is being collected by a support enforcement agency, would it accept such voluntary payments? Could you reliably make such payments, while presumably keeping current on the ongoing monthly support?

If you have a feasible way along these lines to catch up on your support obligation during and after your Chapter 7 case, then it may well be your best option.

Other Advantages and Disadvantages of Chapter 13

But you and your bankruptcy lawyer will discuss two other considerations revolving around your other debts.  Chapter 7 and Chapter 13 deal with debts quite differently.

The first consideration is about debts secured by your assets or other ones that you must pay. Secured debts include home mortgages, vehicle loans, and any others with a lien on anything you own. Debts you must pay—besides support—include recent income tax debts. Chapter 13 often handles these kinds of debts much better than Chapter 7. Without getting into the details here, Chapter 13 protects you while you pay such special debts as your budget allows. If you have such debts, how Chapter 13 helps with those may be reason enough to choose that option. Or this, along with the benefits it gives you with unpaid support, may swing you in that direction.

The second consideration is about the rest of your debts—those that are neither secured nor ones you must pay.  These are your “general unsecured” debts. Usually you can discharge (legally write off) all or most of such debts in either Chapter 7 or 13. In most Chapter 7 cases you pay nothing on your general unsecured debts. However, In a Chapter 13 case you often pay a portion of these debts. Whether and how much you pay on your general unsecured debts depend on lots of factors. The biggest factors are your income and expenses and the amount of your special debts (secured and otherwise) that you are paying in full. So you need to weigh the benefits of Chapter 13 regarding your unpaid support and other special debts against the likelihood that you would be paying something instead of nothing on your general unsecured debts.

What Happens to Your Unpaid Child/Spousal Support Debts in a No-Asset Chapter 7 Case?

A “no-asset” Chapter 7 case is one in which everything you own is covered by property exemptions. Exemptions usually allow you to keep certain dollar values of assets in various categories. Most Chapter 7 cases are “no assets” ones. If yours is, you’re able to keep everything (with the exception of collateral you decide to surrender).

In a no-asset Chapter 7 case your bankruptcy trustee does not get any of your assets to liquidate and pay to any of your creditors. (That’s why it’s called “no asset.”) Your bankruptcy lawyer will tell you if yours is expected to be.

Since the trustee doesn’t collect any money to pay your creditors anything, your support debts also receive nothing. So, a support debt gets no money directly from a no-asset Chapter 7 case. You have to deal with the support debt yourself (perhaps with the help of your lawyer), and be prepared to do so right away.

 

Chapter 13 Really Helps Delay Your Home Sale

October 14th, 2019 at 7:00 am

Chapter 13 gives you much more power over your mortgage and other home-related debts so that you can sell your home when it’s best for you. 

 

Our last blog post was about using Chapter 7 “straight bankruptcy” to buy time to sell your home.  The advantages of Chapter 7 are that it’s usually quite quick and costs less that Chapter 13. It also importantly focuses on your present income and on the present value of your home. If you expect either your income or your property’s value to increase substantially, Chapter 7 could be your better option.

Chapter 7 Disadvantages—Buys Limited Amount of Time

However, Chapter 7’s quickness can often turn into a disadvantage. If you’re behind on your mortgage, or another home-related debt, the protection Chapter 7 provides against them doesn’t last long. The “automatic stay” protection lasts—at most—only 3-4 months, because that’s how quickly most cases finish. If within that time you don’t work out payment arrangements with them, they can start or resume collections and/or foreclosure.  

So Chapter 7 often doesn’t give you much additional time to sell your home.

Chapter 7 Disadvantages—Buys Limited Leverage with Ongoing Creditors

Also, if your mortgage holder or other home-related creditor refuses to negotiate, you have almost no leverage under Chapter 7. Not only does automatic stay protection expire within just a few months, the creditor can often speed up that timetable. Chapter 7 doesn’t give you any other strong tools directly against your mortgage holder or home lienholder. Mostly what it does is discharge (write off) other debts so that you can focus on your home creditor(s). If that doesn’t buy enough time to sell your home, than Chapter 7 is probably not your best solution.

Chapter 13 Advantages—Buys Much More Time and Leverage

A Chapter 13 “adjustment of debts” case buys you time and flexibility if you want to keep your home and are behind on your mortgage and/or other home-related debts. Basically it does so by protecting you and your property while you catch up in 3 to 5 years.

These are all also true if you want to sell your home but need more time to do so. Chapter 13 can often prevent you from being rushed into selling when the market is not the best for selling. For example, instead of being forced to sell during the holiday season you could sell during the prime spring season. Or hold off on selling when doing so now would cause personal or family hardships. ln many situations you could delay selling your home for many months, or even years.

The Power of Chapter 13

The way this works is that you and your bankruptcy lawyer put together a monthly payment plan covering the next 3-to-5-years.  This plan goes through a 2-3-month bankruptcy court approval process. The plan would show how you’d make progress towards catching up on your mortgage and other especially important debts. Usually you’d pay general unsecured debts only as much as you can afford to pay them after paying other more important debts. Often these unsecured debts don’t receive much, sometimes nothing.

Your payment plan would likely refer to your intent to sell your home, if that was to happen during the 3-to-5-year period. You’d have to pay your monthly mortgage in the meantime. And usually you’d have that same length of time to catch up on a first or second mortgage. Same thing if you were behind on property taxes or anything else that was a lien on your home’s title. This can often enable you to delay selling your home for years.

What if you couldn’t afford to catch up within even the 3-to-5-year length of a Chapter 13 payment plan? Under some circumstances you wouldn’t have to pay that much. If there is enough equity in the home, you could pay less towards catching up on the mortgage (property taxes, etc.) and just pay the remaining amount out of the proceeds of the intended home sale.

Conclusion

Chapter 13 could enable you to delay selling your home until the time is right for you. If your home has a healthy equity cushion, you could catch up on some or all of the missed mortgage payments (or property tax arrearage or some other home-secured debt) until you sell the home. In the meantime as long as you fulfill the terms of the court-approved payment plan, you wouldn’t have to worry about a pending foreclosure or other collection pressures. Instead you could focus on making the regular monthly mortgage payments and Chapter 13 plan payments. And then sell your home at a time that serves you best. 

 

Avoid a Support Lien through Bankruptcy

September 23rd, 2019 at 7:00 am

Chapter 7 is very limited in helping avoid a support lien. Chapter 13 is much more powerful, as long as you precisely meet some conditions.

 

Child and Spousal Support Liens

If you fall behind on child or spousal support payments, your ex-spouse can put a lien on your home.  (Most likely a lien can be imposed on your other property, but we’re focusing here on your real estate). The procedures vary state to state, but generally the lien is filed wherever property is recorded. Most often that’s at the local county recorder’s office.

The lien gives legal notice about the support claim against you.  The lien goes onto the title to your house. It gives your ex-spouse power to make you pay when you sell or refinance the house. Sometimes the lien can force the sale of the house in order to pay the support debt. So you want to avoid a support lien whenever possible. Or at least stop its enforcement after it’s been recorded.

Does Bankruptcy Stop the Filing of a Support Lien?

“[A]ny “act to create any lien” is generally stopped by a bankruptcy filing. See Section 362(a)(4) and (5) of the U.S. Bankruptcy Code about the “automatic stay.” The filing of a support lien is an “act to create… [a] lien.” So it appears that bankruptcy might stop a support lien.

However, there’s an exception under that automatic stay statute for the collection of support. Section 362(b)2)(B) of the Bankruptcy Code. If you file a Chapter 7 “straight bankruptcy” case your ex-spouse can continue collecting unpaid and ongoing support against you. This includes filing a support lien on your house, and enforcing that lien as described above. So a Chapter 7 case filing will not stop the filing of a support lien against you and your house. And it won’t stop the enforcement of that lien.

But there’s an exception to this exception. Under the right conditions filing a Chapter 13 “adjustment of debts” case will stop a support lien. Unlike Chapter 7, Chapter 13 can stop a support lien from being filed and recorded. Chapter 13 can also stop a previously recorded lien from being enforced.

That’s because although Chapter 13 does not stop the collection of ongoing support, it does stop collection of past-due support. By its nature a support lien pertains to past-due support. So filing Chapter 13 can stop the filing and recording of a support lien.

The Conditions under Chapter 13

Above we said that Chapter 13 protects you and your home from a support lien under the right conditions. These conditions are arguably sensible. But you must meet them precisely or you’d very likely lose the special benefits of Chapter 13. Your ex-spouse could begin collecting for past-due support, including filing and enforcing a support lien.

The conditions you must meet include:

  • Staying current on your ongoing support payments
  • Arranging to catch up on your past-due support within your 3-to-5-year Chapter 13 payment plan
  • Staying current on your monthly Chapter 13 play payments (through which you’re catching up on your past-due support)

These conditions are arguably sensible because the idea is that you deserve a break on past-due support collection, as long as you are sticking with your legally approved commitment to pay off that past-due support debt. If you don’t keep your commitment, you lose the protection from collection.

Conclusion

If you’re behind on support payments, filing a Chapter 7 case will not stop your ex-spouse (or support enforcement agency) from recording a support lien against your house. Nor will Chapter 7 stop the enforcement of that support lien. But, if you’re not already behind, filing a Chapter 7 case may discharge (write-off) enough other debts so you can stay current on your support obligations.

Chapter 13 will stop the recording of a support lien for past-due support. It will also stop the enforcement of a previously recorded support lien against your house. But you must pay off the entire past due support obligation during your Chapter 13 payment plan. And you must do so precisely as agreed in that plan. Lastly, you must also keep current on any ongoing support obligation. If you do all these, you and your home will be protected from any support lien. Then at the end of your case you will be current on all support. Therefore your ex-spouse/support enforcement agency will no longer have any ability to impose a support lien.

 

Avoid Income Tax Liens with Chapter 13

September 16th, 2019 at 7:00 am

Chapter 13 can prevent income tax liens on dischargeable taxes. But the discharge takes years, and you may have to pay part of that tax.  

 

Two weeks ago we showed how the filing of a bankruptcy case stops the recording of an income tax lien.  A bankruptcy filing imposes the “automatic stay.” That law makes it illegal for the IRS or state tax agency to record a tax lien. (See Section 362(a)(4) and (5) of the U.S. Bankruptcy Code forbidding the creating or enforcing of a lien.) That’s true whether your lawyer files a “straight bankruptcy” Chapter 7 case or an “adjustment of debts” Chapter 13 one.

Then last week we showed how this works specifically in a Chapter 7 case. IF the tax meets all of the conditions for discharge (legal write-off), then your Chapter 7 filing would prevent a tax lien, discharge the tax debt, and forever avoid a tax lien on that tax.

But how about in a Chapter 13 case? We know it would also stop an income tax lien recording, but then what would happen? Which would be better, Chapter 7 or 13?

Dischargeable Tax Debts under Chapter 13 

Assume again that the tax debt at issue meets the conditions for discharge. That tax would get discharged at the end of a Chapter 13 case, like in a Chapter 7 case. But there are two big differences.

Discharge of the Tax Debt Takes Much, Much Longer

First, that discharge of the tax debt would not happened within about 4 months as it would in most Chapter 7 cases. Instead it would happen usually 3 to 5 years later, the length of most Chapter 13 cases.  The automatic stay protection usually lasts throughout that time. So the IRS/state could take no tax collection actions in the meantime, including the recording of a tax lien.

But such a long period of time may allow problems to arise preventing the completion of your case. If you don’t successfully complete a Chapter 13 case the discharge doesn’t go into effect. So there is more risk that an otherwise dischargeable tax debt ends up not discharged. If the tax doesn’t get discharged, the IRS/state could record a tax lien as soon as you were no longer in your Chapter 13 case.

You May Have to Pay on that Tax

Second, under Chapter 13 you could pay part of the dischargeable income tax debt during your case. You generally pay some of your debts through a monthly payment plan. This may include some of your dischargeable tax debt. In a Chapter 7 case, in contrast, usually you pay nothing on a dischargeable tax debt.

Whether you would pay anything on such a tax under Chapter 13, and how much, depends on many factors. These factors focus on the nature and amount of your other debts, and on your income and living expenses. Often, you actually don’t pay anything more in a Chapter 13 case if you have a dischargeable tax debt than if you don’t owe that tax. That’s because you often pay a set amount towards all your debts based on what you can afford. Whatever you may pay towards a dischargeable tax would otherwise have just gone towards your other debts. However, in general under Chapter 13 there’s some risk that you’d pay something on a tax debt instead of nothing.  

The Bottom Line

It is worth emphasizing that if you successfully complete your Chapter 13 case, a dischargeable tax will get discharged. So you would no longer owe anything on it. So the IRS/state would not be able to record a tax lien on it, just like under Chapter 7.

How about a Tax that Can’t Be Discharged?

What if the income tax at issue does not meet the conditions for discharge? A Chapter 7 or 13 filing would stop the recording of a tax lien, at least temporarily. But what happens then? Is Chapter 7 or 13 better in this situation for permanently stopping a tax lien? We’ll cover this next week.

 

Avoid Income Tax Liens with Chapter 7

September 9th, 2019 at 7:00 am

Chapter 7 can prevent future income tax lien recordings against your home, if the tax is truly dischargeable and you have a no-asset case. 


Last week’s blog post was about filing bankruptcy to prevent the IRS/state from recording income tax liens on your home. The “automatic stay”—bankruptcy’s broad freeze of creditor collection actions—stops tax lien recordings immediately when you file your case. To repeat what we said last week:

Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

But how this works is quite different under Chapter 7 “straight bankruptcy” and under Chapter 13 “adjustment of debts.” Today we talk about filing Chapter 7 to stop tax liens, next week about Chapter 13.

The Chapter 7 Advantages

The primary benefit of Chapter 7 is speed. Assume you have a tax debt that meets the qualifications for discharge (legal write-off). (See our earlier blog post titled Bankruptcy Writes Off (Some) Income Taxes.)  Most Chapter 7 cases take 3-4 months from filing to completion. Most Chapter 13 cases take 3-5 years. If you have a tax debt that you are able to discharge, doing so quickly makes lots of sense. Chapter 7 is your likely answer.

Another big benefit: Chapter 7 is much more likely to discharge the tax debt without you having to pay any of it. Most Chapter 7 cases are “no asset” ones. This means that all of your assets are “exempt”—protected from liquidation by the Chapter 7 trustee. This usually means that your “general unsecured” debts would get discharged and be paid nothing. A dischargeable income tax debt is a general unsecured debt. So Chapter 7 would usually discharge the tax debt in full, without paying anything on it. (This assumes that you filed the Chapter 7 case before the IRS/state recorded a tax lien. That recording would turn the tax debt into a secured one, which you very much want to avoid.)

Under Chapter 13, in contrast, there is a significant risk that you would have to pay something on a dischargeable tax debt.  We’ll explain how this works in the next blog post. Avoiding that risk, and discharging the tax in just a few months: these both make Chapter 7 a very tempting option.

The Chapter 7 Disadvantage

The potential downside of Chapter 7 is that the automatic stay protection only lasts a short time. You are protected from the IRS’/state’s power to record a tax lien only during the length of the Chapter 7 case. Section 362(c)(2)(A) of the Bankruptcy Code says that the automatic stay ends when the case is closed. Again, that case closure usually happens only 3 or 4 months after your bankruptcy lawyer files your case.

However, IF the tax debt at issue definitely meets all the qualifying factors for discharge, this is NOT a problem. Once bankruptcy discharges any debt, the creditor may no longer take any collection action on it. Section 524(a)(2) of the Bankruptcy Code make any “act… to collect” a discharged debt illegal. This applies to the IRS and state tax agencies just like any other creditor. So, as long as the tax debt at issue will truly be discharged in your Chapter 7 case, you don’t need to worry about any future tax lien on that discharged debt. Clearly, it’s crucial that you have a competent and conscientious bankruptcy lawyer to determine whether your tax is truly dischargeable. If so, then you can rely on Chapter 7 to prevent the recording of a tax lien, discharge that tax debt, and give you freedom forever from a tax lien on that tax.

 

Chapter 13 Gives the Most Time to Cure Your Mortgage

July 29th, 2019 at 7:00 am

Chapter 7 provides no mechanism to cure your mortgage. But Chapter 13 does provide a powerful, realistic, and practical way to do so. 

 

Chapter 7 “Straight Bankruptcy” and Chapter 13 “Adjustment of Debts”

Chapter 7 and Chapter 13 are the two main consumer bankruptcy options.

Most Chapter 7 cases only takes a few months—usually 3 to 4 months—from filing to completion. A Chapter 13 case usually takes 3 to 5 years. At first this extra length of time may seem like a disadvantage. However Chapter 13 puts this time to good use, accomplishing things that you can’t under Chapter 7.

Essentially, Chapter 13 gives you the 3-to-5-year period to cure your mortgage, while protecting your home throughout that time.

The Chapter 7 Shortcomings

Chapter 7 leaves you at the mercy of your mortgage lender if you’re behind on the mortgage.

Chapter 7 protects you from the lender for only the 4 months or so that it lasts. (The protection might even be shorter if the lender asks the bankruptcy court for permission to end the protection sooner.) During that time you may be able to work out a “forbearance agreement” with your lender. This agreement nails down the terms for curing your mortgage.

The problem is that you have precious little leverage in this negotiation. If you are not too far behind on your mortgage, your lender may be give you a few months, maybe up to a year, to catch up. But the lender has all the leverage and you have almost none. It could just begin or resume a foreclosure as soon as your Chapter 7 case is over. With that leverage it can make you try to catch up unrealistically fast, requiring huge extra catch-up payments each month. This makes more likely that you won’t succeed in always making the required payments. And at best, if you do make those large payments and do catch up, it’ll be a tough and risky experience.

The Chapter 13 Solution

In contrast, as mentioned above Chapter 13 gives you much more time, and protects your home in the meantime.

Instead of the catch-up payment amount being imposed on you, your personal realistic budget determines the amount. The payments can be stretched out over as much as 5 years. You may even be able to delay or lessen these catch-up payments if you have other even more urgent debts to pay. Also, if your circumstances change midstream, you’d likely be able to adjust the payments.

These and other advantages effectively lower the catch-up payments, making more likely that you’ll successfully cure the mortgage and keep your home.

Doing Your Part

You can rather easily lose the multi-year protection of Chapter 13 if you don’t fulfill some important obligations. To maintain the protection you have to:

1. Keep current on your court-approved Chapter 13 payment plan. Your catch-up payments are incorporated into the single monthly payment you make towards virtually all your debts. Not paying this to the Chapter 13 trustee each month gives your mortgage lender cause to ask permission to foreclose. It also gives cause for your case to be thrown out altogether. 

2. Keep current on the regular monthly mortgage payments. Chapter 13 gives you the means to slowly cure your arrearage. Falling further behind in the middle of your case seriously jeopardizes your case.

3. Pay your homeowner’s insurance on time. Don’t let your insurance lapse. That really scares your mortgage lender (and should scare you, too). Your lender would likely “force-place” its own insurance (which protects it but not you). It would then make you pay the exorbitant cost of this insurance, putting you that much further behind. This is also an independent basis for it to ask permission to foreclose.

4. Pay the property taxes. Falling behind on property taxes also gives the mortgage holder a separate basis for asking the bankruptcy court for permission to foreclose. The budget you work out with your bankruptcy lawyer will include money for these taxes, to prevent this from happening.

 

Include 2018 Income Taxes in a Chapter 13 Case Filed in 2019

January 21st, 2019 at 8:00 am

Do you expect to owe income taxes for the 2018 tax year? Starting January 1, 2019 you can wrap that tax into a new Chapter 13 payment plan. 

 

Have you been considering filing bankruptcy and now also expect to owe income taxes for 2018? If so, the start of 2019 gives you more reason to file a Chapter 13 “adjustment of debts” case.

Why? Because filing in 2019 allows you to include 2018 income taxes into your payment plan. That gives you major advantages:

  1. Saves you money on your payment of the 2018 tax
  2. Gives you some very valuable flexibility
  3. Stops tax collections and a tax lien on the 2018 tax

1. Save Money

Wrapping your 2018 income tax debt into a Chapter 13 payment plan usually allows you to pay no more interest and penalties on that tax. The savings can be much more than you think.

You’ll have to pay the 2018 base income tax itself in full, but usually not the interest or penalties. The base tax itself is a “priority” debt that you have to pay. But almost always no interest or penalties accrue on that tax (as long as you finish the case successfully).  

This especially helpful because practically speaking you’d probably not pay that 2018 tax for quite  a while:

  • If you don’t file bankruptcy your other financial pressures would likely prevent you from paying that tax quickly. You might even be tempted to put off filing the tax return, thereby aggravating the problem. The interest and penalties would accrue fast.
  • If you do file a Chapter 13 case in your payment plan you’d most likely pay other even higher priority debts ahead of the 2018 tax. There’s a good chance that tax wouldn’t get paid until near the end of your 3-to-5-year plan. A huge amount of interest and penalties would accrue in the meantime.

2. Valuable Flexibility

Wrapping your 2015 taxes into a Chapter 13 payment plan gives you tremendous flexibility in paying the tax. This can be a real game changer, especially when you have other financial obligations that can’t wait. Chapter 13 allows you to delay paying your 2018 tax debt until you can afford doing so AFTER paying, for example:

  • home mortgage arrearage to save your home
  • unpaid real property taxes, which usually accrue interest at a high rate
  • vehicle loan arrearage or “cramdown” payments to keep your vehicle
  • child or spousal support arrearage
  • other years’ income taxes, including protecting a home or other possession from previously recorded liens

3. Stop Future Tax Collection Including Liens

An important benefit of waiting until 2019 to include the 2018 income tax debt is to stop its aggressive collection. Filing a Chapter 13 case prevents the IRS and/or state from taking just about any collection actions on that tax. This protection against collection stays in effect throughout the years of the case (as long as you fulfill your obligations). Not having to worry about collection of this debt is a huge emotional and practical benefit.

It’s especially nice not have to worry about getting hit with a tax lien. Tax liens are dangerous for a number of reasons. They put your precious assets at risk, thereby giving the IRS/state tremendous leverage. Chapter 13 prevents tax liens while giving you the means to pay off the tax on a relatively flexible budget.

 

The Surprising Benefits: Chapter 13 AFTER the Recording of an Income Tax Lien

August 13th, 2018 at 7:00 am

Chapter 13 protects you from a recorded tax lien in crucial ways, and can reduce how much you pay on the underlying dischargeable tax debt. 

 

Last week’s blog post was about dealing with a recorded tax lien by filing a Chapter 7 “straight bankruptcy” case.  Usually the IRS’ or state’s recording of a tax lien against you effectively requires you to pay the underlying tax. That’s true even if that tax otherwise qualifies for total discharge—legal write-off in bankruptcy. That’s because a recorded tax lien converts that tax debt from being unsecured to being fully secured by your property and possessions. You pay the tax—sooner or later—to avoid losing what you own.

When Chapter 7 Might Help

Last week we outlined some circumstances in which Chapter 7 might satisfactorily deal with a recorded tax lien. Those circumstances were when the tax lien either failed to apply to any assets you own or the assets were worth much less than the tax debt at issue. For example, the IRS/state may record a lien on your home which in the process of getting foreclosed. If you’re letting the house go then that tax lien has no leverage over you. Your Chapter 7 case would discharge the income tax debt and the subsequent home foreclosure would undo the tax lien.

But these situations are quite rare. Usually a recorded tax lien (or more than one) covers everything you own. Usually the value of your assets encumbered by the lien(s) well exceeds the amount of the tax at issue. Or even if your assets’ value is less than the tax(es) owed, you don’t want to lose those assets. So you have no choice but to pay the tax owed. That’s true even if that tax otherwise qualified to be fully discharged.

However, if filing a Chapter 7 case takes care of all your other debts, maybe that’s okay. It would have been better to file before the tax lien’s recording so you could have just discharged the tax. But if it’s too late for that, clearing the deck of all or most of your other debts so you can concentrate on the tax debt afterwards may be your best option.

When Chapter 13 Could Be Much Better

The last paragraph assumes you could afford to pay the tax covered by the tax lien. But what if after finishing your Chapter 7 case you still didn’t have enough money each month? The protection from creditor collections (the “automatic stay”) you get from filing bankruptcy disappears when the case is over. That’s only about 3-4 months after your bankruptcy lawyer files your Chapter 7 case. With the tax lien putting your assets at risk you’d have tremendous pressure on you to pay the tax. So if you couldn’t afford to pay as fast as the IRS/state would demand you’d have a serious problem.

Filing a Chapter 13 “adjustment of debts” case could significantly help.

First, the automatic stay protection against the IRS/state usually lasts the 3 to 5 years that a Chapter 13 case takes to complete. That alone greatly reduces the constant tension of being at the mercy of the tax authorities. During the Chapter 13 case your assets that are encumbered by the lien are protected from seizure. And your income and other assets are protected from any other tax collection efforts.

Second, you usually have much more flexibility in your payoff of the underlying tax. You have much more control over the amount and timing of payments on the tax debt. Your monthly Chapter 13 plan payments are based on your realistic budget. In earmarking where the money from those payments goes you can often pay other even more urgent debts (such as catching up on a home mortgage or child suport) ahead of the tax debt. You can sometimes delay paying the tax until some future event, like the sale of your home or other asset.

When Chapter 13 Is Even Better

When the assets covered by the tax lien have no present value, Chapter 13 is particularly powerful.

Consider a tax lien on a home with no present equity beyond the prior liens. After a Chapter 7 case the IRS/state could just sit on that recorded tax lien until you built up equity in the home. You’d pay down the obligations and the property would rise in value until there was equity to cover the tax lien. The IRS/state would have huge leverage over you. But under Chapter 13 the bankruptcy judge would declare that there’s no present equity secured by the tax lien. The tax would effectively be unsecured—as if there was no tax lien. You’d lump that tax debt in with your general unsecured creditors. You would likely pay only a small portion of that tax debt. Often you would actually pay no more into your Chapter 13 payment plan as a result of that tax.

For example, assume you owed $10,000 in dischargeable income tax.  The IRS recently recorded a tax lien on your home for that tax. Your home is worth $250,000, has $5,000 in property taxes, $210,000 on a first mortgage and $40,000 on a second mortgage. Owing $255,000 you have no equity in the home. But as you pay down the property taxes and the mortgage, and assuming the property value increases, there’d soon be equity securing the tax lien. But Chapter 13 allows you to freeze the present equity situation. The tax lien presently does not cover any equity in your home, the tax debt is thus unsecured, and would be treated just like the rest of your unsecured debt. Adding the tax debt to your other unsecured debt would usually result in you paying no more than you would have otherwise.

 

The Surprising Benefits: Chapter 13 Stops the Recording of an Income Tax Lien

July 30th, 2018 at 7:00 am

Chapter 7 and 13 can both prevent the recording of a tax lien. But if the tax qualifies for discharge Chapter 7 is quicker and less risky. 

 

Last week we showed how detrimental the recording of an income tax lien can be for you. It can turn a tax that you could fully discharge (legally write off in bankruptcy) into one you’d have to fully pay. We showed how Chapter 7 “straight bankruptcy” could prevent recording of the tax lien and could discharge the tax.

How about a Chapter 13 “adjustment of debts” case? Would filing one also stop an income tax lien recording?  If so, what would happen to that tax debt?

Chapter 13’s Automatic Stay

The filing of a Chapter 13 case stops the recording of a tax lien by the IRS or state just like a Chapter 7 would. Any voluntarily filed bankruptcy case by a person entitled to file that case imposes the “automatic stay” against almost all creditor collection activities against that person and his or her property. (See Sections 301 and 362(a)  of the U.S. Bankruptcy Code.) Those “stayed” or stopped activities specifically include “any act to create, perfect, or enforce” a lien. (See Section 362(a)(4) and (5).)

So filing under Chapter 13 stops a tax lien recording just as fast and just as well a Chapter 7 would.

But Would Chapter 13 Be Better than Chapter 7?

That depends. It depends at the outset on whether the tax is one that qualifies for discharge. If it does qualify (mostly by being old enough) then a Chapter 7 is actually often better.

Under Chapter 7 the automatic stay protection lasts only the 3-4 months that the case is active.  But that’s long enough since the discharge of the tax debt would happen just before the case was closed. Once the tax debt is discharged the IRS/state could no longer do anything to collect that tax. It would certainly have no further ability to record a tax lien on that tax.

What would happen in this situation under Chapter 13, with a tax debt that qualifies for discharge? It would get discharged like under Chapter 7, but with two big differences.

First, the discharge would happened not 3-4 months after case filing but usually 3 to 5 years later.  The automatic stay protection usually lasts throughout that time, preventing tax collection, including the recording of a tax lien. But that long period of time under Chapter 13 does create more opportunities for things to go wrong. That’s all the more true because throughout that time you have various obligations, such as to make monthly Chapter 13 plan payments. If for any reason you don’t successfully complete your Chapter 13 case, the otherwise dischargeable tax debt still won’t get discharged.

Second, under Chapter 13 you may have to pay part of the tax debt before it is discharged. This is in contrast to usually paying nothing on it under Chapter 7. (This assumes that you’d have a “no-asset” Chapter 7 case—in which all of your assets would be “exempt”, protected.) Whether  you’d pay anything on a dischargeable tax debt in a Chapter 13 case, and if so how much, depends on many factors, mostly the nature and amount of your other debts and your income and expenses. But why risk paying something on a tax debt under Chapter 13 if you wouldn’t have to pay anything under Chapter 7?

So Chapter 7 Is Usually Better at Dealing with a Dischargeable Tax Debt?

The answer is likely “yes” if you focus only on this one part of your financial life.

But you may have other reasons to file a Chapter 13 case. For example, you may owe a more recent income tax debt that does not qualify for discharge, in addition to the one that does qualify. Chapter 13 provides a number of significant advantages in dealing with the nondischargeable tax. These could make Chapter 13 much better for you overall.

Or you may have considerations nothing to do with taxes, such as being behind on a home mortgage, a vehicle loan, or child support. Chapter 13 gives you huge advantages with each of these kinds of debts. Your bankruptcy lawyer and you will sort out all the advantages and disadvantages of each legal option to choose the best one.

 

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