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Archive for the ‘Chapter 13 discharge’ tag

Writing Off Debts with Bankruptcy

February 11th, 2019 at 8:00 am

Bankruptcy is about writing off or “discharging” debts. The timing of discharge is quite different in Chapter 7 and 13; both are permanent.  


The main goal of most consumer bankruptcy cases is to get a fresh financial start through writing off debts.  In bankruptcy the legal term for write-off is “discharge.”

In virtually all successful Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” cases there will be a discharge of some or all of your debt.

In Chapter 7

People file Chapter 7 cases mostly to get a quick discharge of their debts. That is, the discharge of those debts that can be discharged, and that they want discharged.

Most debts qualify for discharge. We’ll dig into those that don’t next week.  In the meantime Section 523 of the U.S. Bankruptcy Code covers “Exceptions to discharge.”

You may not want to discharge certain select debts that are secured by something you want to keep. Possible examples are your vehicle loan and home mortgage. You may want to formally “reaffirm” such debts—agree to continue to be liable in return for keeping the collateral. See Section 524(c) of the Bankruptcy Code. You definitely want to discuss thoroughly whether you should reaffirm any of your debts with your bankruptcy lawyer.

The big benefit of Chapter 7 is speed. Most cases finish within 4 months of filing, and do so with a court order discharging your debts. Rarely, the debtor has to give up some asset(s) to get the discharge. Here is an official Chapter 7 Order of Discharge that would come at the end of the case.

In Chapter 13

The road to discharge is much longer under Chapter 13. Plus most, though not all, cases require paying something to your creditors before discharge.

Whether and how much you pay depends on a bunch of circumstances. Chapter 13 involves proposing and getting bankruptcy court approval of an official plan of payments. That plan usually gives you 3 to 5 years to do what you need to do. Often that includes paying special debts such as “secured” and “priority” ones that handles for you much better than under Chapter 7. The “general unsecured” debts usually only get paid any money that’s left over. (See our last blog post for descriptions of these 3 main categories of debt.)

Only after your successful completion of this payment plan do you get a discharge of all or most of your remaining debts. Here is an official Chapter 13 Order of Discharge that would come at the end of the case.

What Is the Exact Legal Effect of the Discharge of Debts?

If you look at either the Chapter 7 or Chapter 13 Order of Discharge linked to above you’ll notice in both the pertinent language is extremely short and sweet:

IT IS ORDERED: A discharge under [the pertinent section of the Bankruptcy Code] is granted to [the debtor].

The legal effect of this discharge is described in Section 524(a)(2) of the Bankruptcy Code as follows:

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

What does this mean? There’s a short Explanation of Bankruptcy Discharge in the two Orders of Discharge linked to above, with both containing the following language:

Creditors cannot collect discharged debts

This order means that no one may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.

The discharge court order is permanent, and the injunction that flows from it is permanent. Because of the penalties, most creditors are careful to comply. If you have any indication that any of your creditors is not complying, tell your bankruptcy lawyer.

 

Our next blog post will get into the special kinds of debts that may not get discharged.

The Surprising Benefits: Stop Income Tax Collection

June 25th, 2018 at 7:00 am

Income tax debts can be handled in bankruptcy more than you think. This is true even with those taxes that are too new to be discharged. 

 

The Automatic Staying, and the Discharge, of Income Tax Debts

Sometimes people are surprised to learn that filing bankruptcy gives you power over income taxes. It does so in two big ways. First, filing bankruptcy stops the IRS and state from collecting your tax debts—either temporarily or permanently. This is the “automatic stay” applicable to pretty much all of your creditors. Second, bankruptcy permanently writes off (“discharges”) some income tax debts—generally older taxes.

If all the income taxes you owe qualify for discharge, then your situation is quite straightforward. You file a Chapter 7 “straight bankruptcy” case, which stops any ongoing tax collection during the case. Then 3-4 months later, near the end of the Chapter 7 case, your tax debt is discharged. The “automatic stay” protection against tax collection ends. But you no longer need to worry about tax collection because you no long owe any taxes.

Or if instead you file a Chapter 13 “adjustment of debts” case (for reasons other than the tax debt), there’s a similar result. The dischargeable income taxes are treated just like your other “general unsecured” debts. They only get paid to the extent you can afford to do so, if at all, during your case. Often, during the 3-5-year Chapter 13 payment plan most or all of your available money goes elsewhere. It goes towards priority debts like child/spousal support or more recent taxes. Or it goes to catch up on a home mortgage or vehicle loan payments. Regardless how much, if any, you pay on the dischargeable taxes, at the end of your case the rest is discharged. So, as with Chapter 7, you then owe no more on those taxes so you don’t need to worry about any more tax collection.

The Expiring Automatic Stay and Nondischargeable Income Taxes

But what happens if some or all of your income tax debts do not qualify for discharge?  The “automatic stay” does still go into effect as to those nondischargeable taxes. Your filing of a Chapter 7 case gives you a break from most collection actions of the IRS and/or state. If you are being garnished, that would stop. If the IRS/state was about to record a tax lien against your home, that would be prevented. If you are being pressured to enter into a monthly tax payment plan, that pressure would stop.

But this break from collection would not last long.  The “automatic stay” expires in a Chapter 7 case at “the time a discharge is granted.” (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code about the expiration of the “automatic stay.”) In just about all consumer Chapter 7 cases the bankruptcy court grants the discharge only 3-4 months after case filing. So you get a break but not much of one.

So what do you do if you have income taxes that would not be discharged in a Chapter 7 case?

The Chapter 7 Solution

If you filed a Chapter 7 case, it may discharge enough of your other debts that you could afford to enter into a monthly installment payment plan with the IRS/state for the remaining tax debts. The discharged debts may include some older, dischargeable income taxes, leaving you with less tax liability to still pay.

If discharging other debts leaves you in a position to pay your remaining tax debts over time, you (or your lawyer) should contact the tax authority immediately after the discharge to make payment arrangements. It may make sense to make contact even earlier so that the IRS/state knows your intentions. Ask your bankruptcy lawyer about the best timing.

You might also qualify for a reduction in the surviving tax debt amount. The IRS has a procedure for “offers in compromise” to settle a tax debt by paying less than the full balance. Most states have similar procedures. These are somewhat complicated to go through. You should not enter into such an attempt without getting solid legal advice about your chances of being successful.  

The Chapter 13 Solution

Your financial situation after a Chapter 7 discharge may not allow you to pay off the remaining income tax debts through a tax payment plan. You may not have enough cash flow to pay it off fast enough to qualify. Furthermore, interest and tax penalties will continue to accrue, requiring you to pay substantially more over time.

You may also not be a good candidate for getting a reduction in the tax amount through a “compromise.”

So if instead you file a Chapter 13 case, the protection of the “automatic stay” remains in effect throughout the 3-to-5-year length of the case. This gives you up to 5 years to pay off the nondischargeable income taxes without any tax collections against you. This allows you to pay off those taxes under very flexible terms. You can often pay other even more urgent debts—like child support or home mortgage arrearages—ahead of the taxes.

Usually you don’t have to pay any additional interest and penalties. That alone could save you a significant amount, enabling you to pay off the tax faster and easier.

Also, the IRS/state can’t record a tax lien against you during the Chapter 13 case. That takes significant leverage away from the taxing authority. And if a tax lien had already been recorded against you, Chapter 13 usually can deal with it very favorably.

Overall, if a Chapter 7 would leave you too much at the mercy of the IRS/state, Chapter 13 is often a good alternative.

 

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. 

 

Potentially Pay Nothing to Most Creditors in Chapter 13

December 21st, 2016 at 8:00 am

In some jurisdictions you can pay nothing to your “general unsecured” creditors, if all your money goes to paying higher priority ones. 

 

We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13.  We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.

A Conventional Chapter 13 Plan

The U.S. Bankruptcy Code’s official name for Chapter 13  is “Adjustment of Debts of an Individual with Regular Income.” In most cases that “adjustment” means you must pay something to all or most of your creditors.

Here’s the way it usually works.  You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining “disposable income.” That remaining amount is usually what you pay into your Chapter 13 plan each month.

In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your “general unsecured” debts get what’s left over.

The “general unsecured” debts are all your debts that are neither secured nor “priority.” Secured debts are those with a lien on something you own. “Priority” debts are special ones that you must pay in full before paying anything on the “general unsecured” debts.

You pay your monthly plan payment to the Chapter 13 trustee as long as you’re required to. That’s usually either 3 or 5 years, depending on your income at the time of filing.  (Sometimes you qualify for the shorter 3 years but can stretch it longer simply to lower your monthly plan payments. You don’t pay any more than if you paid more per month for 3 years.)  From your plan payments the trustee pays your creditors according to the terms of your Chapter 13 plan.

Partial Payments on Your “General Unsecured” Debts

So, the total amount of money you pay your “general unsecured” debts is the amount you pay into your plan throughout the life of your case beyond what goes to pay off secured and “priority” debts (plus “administrative expenses” like trustee and attorney fees). When your “general unsecured” debts get enough to pay them 50 cents on the dollar, that’s called a “50% plan.” If those debts receive 2 cents on the dollar, that’s a 2% plan. Keep in mind that this is usually after your plan pays other debts—the secured and “priority” ones—in full.

The 0% Plan

So what happens if you only have enough “disposable income” to pay your secured and “priority” debts? What if there’s nothing left over for your “general unsecured” debts? You pay all you are required to pay each month and do so for as long are you are required to do so, but your secured and/or “priority” debts are so large compared to your “disposable income” that there is nothing at all left over for your “general unsecured” debts.

That’s called a “0% plan.” Your “general unsecured” debts get nothing out of the plan—0% of what you owe them.

Let’s be clear what that means. Assume you owe $10,000 in recent “priority” income taxes and are $8,000 behind on your mortgage. You also owe $100,000 in “general unsecured” debts—credit cards, medical bills, personal loans, older (non-priority) income taxes, and such. Your income qualifies you for a 3-year plan. Your budget says your monthly “disposable income” is $500. You pay 36 months of $500 Chapter 13 plan payments, a total of $18,000. (Let’s disregard “administrative expenses” like the trustee’s fee to make the math easier here.)

That $18,000 paid into your plan is enough to pay off the $10,000 “priority” income tax and to fully catch up on your $8,000 mortgage arrearage. But it leaves nothing for the $100,000 in “general unsecured” debts. With a 0% plan, you would pay nothing at all on that $100,000. Then at the end of your 36-month Chapter 13 plan all those debts would be discharged, permanently written off.

The Best of Both Chapter 7 and 13

With 0% Chapter 13 plans you get the benefit of discharging your “general unsecured” debts without paying anything on them. That’s what usually happens in a Chapter 7 case. But you get to deal with your secured and “priority” debts with the numerous advantages of Chapter 13. In our example, the tax creditor(s) and mortgage lender must let you catch up based on a sensible budget. Tax interest and penalties stop accruing, tax liens can’t be recorded, and you likely won’t have to pay prior penalties. There are many other Chapter 13 advantages in other situations.

0% Plans Not Accepted Always or Everywhere

But there are also some situations where you aren’t allowed to pay nothing on your “general unsecured” debts. For example, if you are keeping an asset that does not fit within a property “exemption,” usually in return you are required to pay a certain minimum to your pool of “general unsecured” debts. There are other situations like that.

There are also some jurisdictions where the bankruptcy judges frown upon or simply do not allow 0% Chapter 13 plans. Your bankruptcy lawyer will tell you what limitations there are along these lines in your bankruptcy court.

 

Potentially Pay Nothing to Most Creditors in Chapter 13

 [for 12/21/16]

 

In some jurisdictions you can pay nothing to your “general unsecured” creditors, if all your money goes to paying higher priority ones. [135] 

W&Th:  Discharge of Debts under Chapter 13

The discharge of debts in Chapter 13 works differently than in Chapter 7. It’s just one of many tools for achieving your financial goals.  [137 characters and spaces]

Schoenbohm Chapter 13 Also Discharges Your Debts 

Under Chapter 13 the discharge of debts is just one of many tools for achieving your financial goals.    [101 characters and spaces]

We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13.  We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.

A Conventional Chapter 13 Plan

The U.S. Bankruptcy Code’s official name for Chapter 13  is “Adjustment of Debts of an Individual with Regular Income.” In most cases that “adjustment” means you must pay something to all or most of your creditors.

Here’s the way it usually works.  You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining “disposable income.” That remaining amount is usually what you pay into your Chapter 13 plan each month.

In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your “general unsecured” debts get what’s left over.

The “general unsecured” debts are all your debts that are neither secured nor “priority.” Secured debts are those with a lien on something you own. “Priority” debts are special ones that you must pay in full before paying anything on the “general unsecured” debts.

You pay your monthly plan payment to the Chapter 13 trustee as long as you’re required to. That’s usually either 3 or 5 years, depending on your income at the time of filing.  (Sometimes you qualify for the shorter 3 years but can stretch it longer simply to lower your monthly plan payments. You don’t pay any more than if you paid more per month for 3 years.)  From your plan payments the trustee pays your creditors according to the terms of your Chapter 13 plan.

Partial Payments on Your “General Unsecured” Debts

So, the total amount of money you pay your “general unsecured” debts is the amount you pay into your plan throughout the life of your case beyond what goes to pay off secured and “priority” debts (plus “administrative expenses” like trustee and attorney fees). When your “general unsecured” debts get enough to pay them 50 cents on the dollar, that’s called a “50% plan.” If those debts receive 2 cents on the dollar, that’s a 2% plan. Keep in mind that this is usually after your plan pays other debts—the secured and “priority” ones—in full.

The 0% Plan

So what happens if you only have enough “disposable income” to pay your secured and “priority” debts? What if there’s nothing left over for your “general unsecured” debts? You pay all you are required to pay each month and do so for as long are you are required to do so, but your secured and/or “priority” debts are so large compared to your “disposable income” that there is nothing at all left over for your “general unsecured” debts.

That’s called a “0% plan.” Your “general unsecured” debts get nothing out of the plan—0% of what you owe them.

Let’s be clear what that means. Assume you owe $10,000 in recent “priority” income taxes and are $8,000 behind on your mortgage. You also owe $100,000 in “general unsecured” debts—credit cards, medical bills, personal loans, older (non-priority) income taxes, and such. Your income qualifies you for a 3-year plan. Your budget says your monthly “disposable income” is $500. You pay 36 months of $500 Chapter 13 plan payments, a total of $18,000. (Let’s disregard “administrative expenses” like the trustee’s fee to make the math easier here.)

That $18,000 paid into your plan is enough to pay off the $10,000 “priority” income tax and to fully catch up on your $8,000 mortgage arrearage. But it leaves nothing for the $100,000 in “general unsecured” debts. With a 0% plan, you would pay nothing at all on that $100,000. Then at the end of your 36-month Chapter 13 plan all those debts would be discharged, permanently written off.

The Best of Both Chapter 7 and 13

With 0% Chapter 13 plans you get the benefit of discharging your “general unsecured” debts without paying anything on them. That’s what usually happens in a Chapter 7 case. But you get to deal with your secured and “priority” debts with the numerous advantages of Chapter 13. In our example, the tax creditor(s) and mortgage lender must let you catch up based on a sensible budget. Tax interest and penalties stop accruing, tax liens can’t be recorded, and you likely won’t have to pay prior penalties. There are many other Chapter 13 advantages in other situations.

0% Plans Not Accepted Always or Everywhere

But there are also some situations where you aren’t allowed to pay nothing on your “general unsecured” debts. For example, if you are keeping an asset that does not fit within a property “exemption,” usually in return you are required to pay a certain minimum to your pool of “general unsecured” debts. There are other situations like that.

There are also some jurisdictions where the bankruptcy judges frown upon or simply do not allow 0% Chapter 13 plans. Your bankruptcy lawyer will tell you what limitations there are along these lines in your bankruptcy court. 

The Financial Effect of Surrendering Collateral in Chapter 13

November 25th, 2016 at 8:00 am

If you are concerned that in a Chapter 13 case a debt resulting from surrendered collateral will cost you more, often it won’t.

 

Secured Debts in Chapter 13

In a Chapter 13 “adjustment of debts” case you have the option of keeping or surrendering collateral.

Whether it’s your home, your vehicle, or any other collateral, Chapter 13 gives you powerful tools for keeping that collateral.

But in spite of that, sometimes the best option is still to surrender that collateral. You may have overextended yourself buying a vehicle whose payments and insurance you can no longer afford. Or you’ve learned that it’s a lemon and not worth the constant repair costs. Or you bought a home that you’re so far behind on that it’s not worth the cost and effort to catch up, even if Chapter 13 gives you a lot of time to do so.

Secured Debts Turned into Unsecured Ones

So Chapter 13 gives you the option of just surrendering the vehicle or home or other collateral to the creditor. That has the effect of turning that debt from a secured debt into an unsecured one. The creditor usually accepts possession of the vehicle or home, sells it, and, if the sale proceeds do not satisfy the debt, you may owe the remaining balance.

Outside of bankruptcy, if you are liable on that “deficiency balance,” you’d have to pay it. You’d be sued for payment if you didn’t pay. In a Chapter 7 “straight bankruptcy,” that remaining unsecured debt would usually simply be discharged—legally written off. But what happens to that remaining debt under Chapter 13?

Dealing with the Remaining Unsecured Debt under Chapter 13

A Chapter 13 case usually involves a 3-to-5-year payment plan. At the end of the payment period, there’s a discharge of all or virtually all of your remaining debts.

In many Chapter 13 plans, much of the money paid out to creditors goes to special debts. Those special debts are either secured and priority debts. Secured debts are payments to creditors with liens on collateral you want to keep, as mentioned above. Priority debts are ones—usually unpaid income taxes and/or child or spousal support—that would not be discharged in bankruptcy and so need to be paid. In many Chapter 13 cases, most of the debtors’ disposable income goes to pay these secured and priority debts.

This often leaves relatively little money for the rest of the debts—the unsecured, non-priority ones. Sometimes, it leaves no money at all for these other debts—0% of the amounts owed.

But there are also some Chapter 13 cases—usually ones with relatively little secured and priority debts—in which the plan provides for paying a large percentage of the other debts. There are even cases which require paying 100% of the unsecured debts.

But these are rare. Much more common are plans paying a low percentage of the unsecured debts. Chapter 13 requires payment of all disposable income to creditors during the course of the 3-to-5-year case. Often that simply doesn’t leave much left for the unsecured debts.

Surrendering Collateral Seldom a Financial Disadvantage

Without understanding how Chapter 13 really works, it may seem like a disadvantageous way to surrender collateral. Why pay even just part of the remaining unsecured debt after surrendering collateral when you can just discharge that debt in a Chapter 7 case without paying anything?

There are in fact good reasons not to mind surrendering collateral in a Chapter 13 case:

  • You wouldn’t be in a Chapter 13 case unless it gave you a big advantage for other reasons. For example, you may be willing to surrender a vehicle you really didn’t need if Chapter 13 gave you great way to save your home. There are many, many reasons that Chapter 13 is better than Chapter 7. Paying a small part of the unsecured debt on the surrendered collateral may be well worth the other benefits.  
  • But in probably the majority of cases you would NOT be paying ANY more into your Chapter 13 plan because of a surrendered vehicle, home or other collateral. Why not?
    • If you have a 0% plan as mentioned above, you’re not paying anything to any general unsecured debts. So adding the debt from the surrendered vehicle, home, etc. makes no difference. Paying nothing on a somewhat larger pile of debt is still nothing.
    • Even if your plan IS scheduled to pay a certain percent of your general unsecured debts, it STILL doesn’t usually cost you more. That’s because in most cases you only have a certain amount of money available for the pool of all these debts. Adding another debt to that pool only spreads that same available money out among more debts. When you add the debt from the surrendered collateral, the other debts are just paid less.

Conclusion

Before you shy away from surrendering collateral in a Chapter 13, ask you bankruptcy lawyer if it will cost you any more to do so. In most cases it does not.

 

Secured Creditors’ Proofs of Claim in Chapter 13

November 23rd, 2016 at 8:00 am

If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan. 

 

Secured Debts

A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.

Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)

Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien.  Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.

(With “cramdown” you can pay less than the full debt, based on the value of the vehicle. But you still have to satisfy the lien. “Cramdown” only applies to loans at least 2 and a half years old,)

Chapter 13 Plan

Let’s say you bought a used vehicle two years ago (so no “cramdown”). Because of other financial pressures you’d recently fallen two payments behind, totaling $850. Part of the reason you filed a Chapter 13 case is to stop the vehicle from being repossessed. Keeping it is a huge priority for you. You definitely need the vehicle to commute to work and to get your kids everywhere—to keep your life together.  

Assume your Chapter 13 payment plan says that you’ll resume regular monthly payments and will catch up on the $850 through 10 monthly payments of $85. Almost for sure your lender would not allow you that much time to catch up otherwise. Chapter 13 law usually requires them to give you this amount of time. As a result you have more money to live on and maybe to pay other urgent creditors.

The Crucial Role of the “Proof of Claim”

Your Chapter 13 plan could explicitly state that your vehicle lender is going to be paid. The bankruptcy judge could formally order that the plan is approved (“confirmed”). You could pay the plan payments perfectly to the Chapter 13 trustee. But your lender still would not receive anything from the trustee without one more step. The lender must file a “proof of claim” with the bankruptcy court.

A “proof of claim” is a rather simple form on which your lender states how much you owe and usually provides some documentation showing the basis for the debt. (Section 501 of the Bankruptcy Code)

Lenders want to be paid and so would normally file proofs of claim to have that happen. But they sometimes mess up. They usually have 90 days from the date of your “meeting of creditors” to file proofs of claim. Since that “meeting” is about a month after your bankruptcy lawyer files your case, the deadline is a specified date about four months into your case.

You get a formal notice—as do your creditors—giving that exact deadline. Your lawyer should review the filed proofs of claim right after that deadline. Be in touch with the lawyer to find out if your auto lender filed an appropriate proof of claim. (At the same time you can discuss the proofs of claim filed or not filed by other important creditors.)

You have 30 days after the creditors’ deadline to file a proof of claim on behalf of any creditor that messed up and did not file one on time. Your Chapter 13 trustee has the same right. Different trustees have different practices about whether not they file proofs of claim for creditors, and if so when, so talk with your lawyer about this.

Conclusion

To keep a vehicle, you have to satisfy the vehicle lender’s lien on that vehicle. That means you have to arrange to pay that lien. Your Chapter 13 trustee cannot pay the lender under the terms of your court-approved payment plan without a proof of claim. If the lender neglected to file one on time, make sure that either you or the trustee files a proof of claim for the lender.

 

Unsecured Creditors’ Proofs of Claim in Chapter 13

November 18th, 2016 at 8:00 am

Often creditors’ proofs of claim do not affect the amount you have to pay in a Chapter 13 case. But sometimes they make a huge difference.

 

In our last blog post we introduced “proofs of claim.” A creditor files a proof of claim in your bankruptcy case to say how much it thinks you owe. The proof of claim says why you owe the money, often backed up with some documentation.

In that blog post we got into some practical sides to proofs of claim in Chapter 7 “straight bankruptcy” cases. Today we start the same with Chapter 13 “adjustment of debts” cases. Because there’s a lot more to this in Chapter 13, we’ll start today on proofs of claim for just one kind of debts, “general unsecured” ones.

General Unsecured Debts

An unsecured debt is simply one that is not backed up, or secured, by a lien on something you own.

There are two kinds of unsecured debts: “priority unsecured” and “general unsecured.” “Priority” debts are special categories of debts that are treated better—much better—in bankruptcy. For example, generally they get paid in full through the bankruptcy process before general unsecured debts get anything at all.

Examples of priority debts are unpaid child and spousal support, and recent income taxes. General unsecured debts are all the remaining unsecured debts that don’t fit within the different priority debt categories.

Proofs of Claim in Chapter 13 Cases

Filing a Chapter 13 case helps an overextended person reorganize, and often greatly reduce, their debts. You keep your assets while you use your present and future income to repay some portion of your debts (or rarely, all of your debts) over the course of a three-to-five-year plan.

For a creditor to get paid it has to file a valid proof of claim with the bankruptcy court. Then it can receive whatever the court-approved payment plan has earmarked for it. If a creditor doesn’t file a proof of claim, either you or the Chapter 13 trustee can do so on its behalf. That tends to happen when that debt is important to pay.

There is a strict deadline for creditors to file proofs of claim. And that deadline is quite short, within 90 days after the “meeting of creditors, which is usually about a month after the Chapter 13 case is filed. As long as the creditor was mailed notice of the case, a late proof of claim gets rejected—as if it was never filed.

What Difference Do General Unsecured Proofs of Claim Make in Chapter 13 Cases?

You and your bankruptcy lawyer should review all proofs of claim filed in your case, including the general unsecured ones. But be aware that often who files proofs of claim and the amounts on them make no practical difference.  Sometimes they make a big difference. Sometimes that difference is in your favor. Sometimes it’s not.

When the General Unsecured Proofs of Claim Make No Difference

The amount of money you pay to all your creditors in a Chapter 13 case does not change by one penny in the following circumstance:

  • 0% payment plans on your general unsecured debts: Many bankruptcy courts allow you, in the right circumstances, to pay nothing on these debts. That’s usually because all of your available income going into your payment plan is going to secured and/or priority debts. There’s no money available to go towards the debts that are lowest on the totem pole—the general unsecured debts. Since those debts are being paid 0%–nothing—it doesn’t matter how much money those proofs of claim represent.
  • Payment plans that pay whatever money is left over to your general unsecured debts: Most Chapter 13 cases pay a certain amount of money to the secured and priority debts. Then whatever amount is left over throughout the life of the plan goes to the general unsecured debts. The amount of money owed in that pool of debts does not change the amount that gets paid to them. They’re just getting the leftovers. So the total amount of money in the general unsecured proofs of claims makes no difference.
  • Plans that require you to pay a certain set amount to the general unsecured debts: For various reasons, you may need to pay a specific amount to these creditors before you can complete the case. For example, you may be required to do so to be allowed to keep an asset that you would otherwise lose in a Chapter 7 case. Again, the amount of total general unsecured debts doesn’t matter—you must just pay that specified amount regardless.

When the General Unsecured Proofs of Claim Can Make a Lot of Difference

The amount of money you pay to your creditors in a Chapter 13 case can change a lot in the following situation:

  • 100% payment plans on your general unsecured debts: Not often, but sometimes, you are required to pay your general unsecured debts in full.  That may be because you have relatively high income compared to your debt. So, during the period of time you are in the Chapter 13 case you have enough disposable income to pay off all the unsecured debts. In this situation, every dollar more among the general unsecured proofs of claim adds a dollar to the amount you must pay. But in the same way, every dollar less among those proofs of claim is a dollar less that you need to pay before finishing the case.

You and your bankruptcy lawyer need to review all proofs of claim particularly carefully in this situation. Creditors’ proofs of claim are by no means always accurate. Proofs of claim are sometimes even filed in the wrong cases! They can be invalid for being filed late. The claim may be legally stale and uncollectable. Your lawyer needs to object to those proofs of claim, which often gets rid of them without much of a fight.

Occasionally a major creditor or two fails to file an expected proof of claim. Or they do not file one until after the legal deadline. With a 100% plan, that could reduce the amount you have to pay in your Chapter 13 plan. That would let you finish your case sooner—sometimes much, much sooner—than originally expected.

 

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