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Archive for the ‘Chapter 13 plan’ tag

If You Owe Both 2018 AND Earlier Income Taxes

January 28th, 2019 at 8:00 am

Do you owe income taxes for the 2018 tax year AND already owe for one or more tax years? Chapter 13 may be an especially good tool for you. 


Last week we got into a big advantage of filing a Chapter 13 “adjustment of debts” case in early 2019. It enables you to include 2018 income taxes into your Chapter 13 payment plan. That would:

  1. Save you money on payment of your 2018 tax
  2. Give you invaluable financial flexibility
  3. Stop any present and future tax collections and the recording and enforcement of a tax lien on the 2018 tax

So Chapter 13 is a helpful tool for dealing with taxes you owe for the 2018 tax year. Sometimes it’s even absolutely indispensable—it solves a debt dilemma that appeared otherwise insolvable.

When You Also Owe Income Taxes for Earlier Years

However, Chapter 13 is a particularly powerful tool if you owe not just for 2018 but for other tax years (or year) as well. This is true wherever you stand with the earlier tax debt, whether:

  1. the IRS/state is now aggressively collecting the taxes
  2. you are currently paying them through an agreed monthly payment plan
  3. you haven’t yet filed the tax returns for the prior years 

1. Dealing with Aggressive Collection of Earlier Tax Debt

Is the IRS/state is currently collecting the earlier taxes through garnishment or some other collection procedures?  Then Chapter 13 would very likely greatly help you with both those earlier taxes and the new 2018 one.

The minute your bankruptcy lawyer files the Chapter 13 case for you all the aggressive tax collection actions will stop. That is the power of bankruptcy’s “automatic stay.” You will have 3 to 5 years to deal with ALL of your debts through a payment plan. This includes all your income taxes. The Chapter 13 payment plan will be based on what you can genuinely afford to pay. You may well not need to pay some of your earlier taxes. You will likely not need to pay any more accruing interest and penalties on ANY of the income taxes. You will not need to worry about tax collections throughout the time you’re in the case—including the recording of tax liens. At the completion of your case you will owe no income taxes. Indeed, you will be debt-free altogether, except for voluntary debt such as a home mortgage.

2. In a Monthly Payment Plan

Are you already in a payment plan with the IRS/state for the prior tax debt? If so, finding out that you owe even more for 2018 can be really frightening.

Those monthly installment payments likely contributed to the fact that you owe for 2018. You know that you have to keep up those monthly payments perfectly to avoid the IRS/state from starting or restarting collection actions against you. So you do everything you can to pay them, including not having enough withheld from your paycheck or not paying enough in quarterly estimated payments for the next year’s taxes. As a result you now owe another bunch of taxes for 2018.

Furthermore, you know that you’ll violate your installment agreement if you don’t stay current in future income taxes. As stated in IRS Form 9465, the Installment Agreement Request form, “you agree to meet all your future tax obligations.” So you know you’ll be in trouble when the IRS/state finds out that you owe for 2018.

Chapter 13 avoids this trouble. As mentioned above, the “automatic stay” immediately protects you from the IRS/state. Your monthly installment plan is cancelled right away. You make no further payments on it once you file you file your Chapter 13 case. All your prior income taxes AND your 2018 one(s) are handled through your Chapter 13 payment plan. You get the financial advantages and the peace-of-mind referenced in the above section. When you successfully complete your Chapter 13 case you’ll be totally free of any tax debt.

3. Not Filing Tax Returns

You may be in the scary situation that you can’t pay your taxes so you don’t file your tax returns.

Sometimes this happens because the tax authorities are already actively trying to collect on earlier tax debt. You can’t pay the earlier debt so you figure what’s the use of adding to the amount you already can’t pay.

Or you may be in an installment payment plan and you don’t want to violate it by admitting you owe more for 2018. You know you’ll be in violation of it upon filing the 2018 tax return, so you simply don’t do so.

Or finally, you haven’t filed a tax return for several years, and you know or guess you owe a lot. Now it’s time to file for 2018 and you figure you’ll owe again. You think, why file for 2018 and bring the wrath of the tax authorities onto yourself?

But you know that not filing your 2018 tax return (and any prior unfiled ones) only delays the inevitable. Because of the advantages listed in our last blog post and in the above two sections, Chapter 13 may well be the tool you need.

You’re in a vicious cycle in which you may well be falling further behind instead of getting ahead.

Chapter 13 can likely enable you to break out of that cycle. Not only do you deal with all of your taxes and other debts in a single package. Not only to you often not have to pay all of your taxes. The vicious cycle is broken because your Chapter 13 budget will also address your 2019 and future income tax situation. It does so because your new budget will include enough withholding or quarterly estimated payments so you can stay current for 2019 and thereafter. Again, you should end the Chapter 13 plan being completely tax-debt free.

 

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.

 

Filing Chapter 13 in 2019 to Write Off More Income Taxes

January 14th, 2019 at 8:00 am

Chapter 13 is a riskier, longer, and maybe more expensive way to escape a dischargeable income tax debt—but may still be your best option. 


Last week we showed how to permanently write off (“discharge”) more of your tax debts through Chapter 7 “straight bankruptcy.” Today we show how to do this with Chapter 13 “adjustment of debts.”

Why Use Chapter 13 If Chapter 7 is Faster and Cleaner?

Chapter 7 is a very fast way to discharge an income tax debt that qualifies for discharge. You would very likely no longer owe the tax only about 4 months after filing a Chapter 7 case.

But Chapter 13 case could be much better for you than Chapter 7 for other reasons. Those other reasons may outweigh the benefit of discharging your dischargeable tax debt quickly.

You may owe some other income tax debt(s) which do not meet the conditions for discharge. These other taxes that may be too large to pay off reasonably through a monthly payment plan with the IRS/state.  The other taxes may not qualify for an Offer in Compromise or other settlement. You may well save money and avoid significant risks by handling all of your taxes in a Chapter 13 case.

There are also many other reasons that Chapter 13 would be worthwhile for you, reasons not involving income taxes. It may save your home from foreclosure or your vehicle(s) from repossession. Chapter 13 can deal with a child or spousal support arrearage much better than Chapter 7. There are many other situations where Chapter 13 gives you extraordinary and unique powers. So it can be worthwhile overall in spite of its disadvantages in dealing with a dischargeable tax debt.

How Does Chapter 13 Deal with Dischargeable Income Taxes?

Determining whether a particular income tax debt can be discharged in Chapter 13 is the same as in Chapter 7. Please see our last blog post for the conditions of discharge. These conditions mostly involve how long it’s been since the tax return for the tax at issue was due and when the return was actually submitted to the IRS/state. Sometimes there are other pertinent conditions, but usually it’s just a matter of timing.

Because of how the timing works, there are certain points of time in 2019 when a tax that hadn’t earlier qualified for discharge would then qualify. Again, see our last blog post about those crucial times happening this year.

If your tax does meet the conditions for discharge, it can get discharged in your Chapter 13 case. But this works quite differently than under Chapter 7.

One key difference is that under Chapter 13 there’s a good chance that you would pay something on your dischargeable tax debt.

Under Chapter 13 dischargeable income tax debts is treated like the rest of your “general unsecured” debts. Under your payment plan all such debts get paid the same percentage of their total amounts. That percentage may be any amount from 0% to 100% of their amount, depending on your budget and other factors.

Consider two situations: First, if you have a “0% plan” then you’d pay nothing on the dischargeable tax just like in a straightforward Chapter 7 case. Second, even if you do pay some percentage, often that actually doesn’t increase the amount you pay into your payment. We’ll explain these two situations.

A 0% Payment Plan

In some Chapter 13 cases all the money that the debtor can afford to pay goes to special creditors. All the money going into the Chapter 13 payment plan goes either to secured or to “priority” debts. These would include home mortgages, vehicle loans, nondischargeable taxes, child and spousal support, and such. These usually have to be paid in full before the “general unsecured” debts receive anything.  So during the 3-to-5-year payment plan no money goes to the dischargeable income taxes. That’s a 0% Chapter 13 plan.

Assuming the bankruptcy approves the plan, and you successfully complete it, at its conclusion the dischargeable taxes get discharged, without you having to pay any of it.

Payment Plans Which Do Not Increase the Amount You Pay

In many Chapter 13 plans the amount available for the pool of the “general unsecured” debts is a fixed amount. That amount is based on what you can afford to pay over the required length of the plan. (That required length is usually 3 or 5 years.) That fixed amount does not change regardless how much in “general unsecured” debts you owe. The amount just gets distributed to all those debts pro rata. The more you owe in “general unsecured” debts the lower the percent of the debts that fixed amount can pay.

For example, assume you can afford to pay the pool of “general unsecured” debts a total of $2,000 during the course of the payment plan. All the rest of the money you pay into the plan is earmarked for secured and “priority” debts. Assume also that you have $20,000 in unsecured credit card and medical debts and $5,000 of dischargeable income tax. Without the income tax, the $2,000 would be paid towards the $20,000 in “general unsecured” debts, resulting in a 10% plan. ($2,000 is 10% of $20,000.) Now when you add in the $5,000 tax, there’s a total of $25,000 of “general unsecured” debt. $2,000 is 8% of $25,000, resulting in an 8% plan.

You would be paying no more—the fixed amount of $2,000—over the length of your plan. The fact that you owe the $5,000 in dischargeable tax would not increase the amount you would pay. Then at the successful completion of the case all remaining “general unsecured” debts, including whatever was remaining on the dischargeable tax, would be forever discharged.

Conclusion

So you see that Chapter 13 is a slower and somewhat riskier way to discharge an income tax debt. Plus you may have to pay a portion of the tax instead of quickly discharging all of it under Chapter 7. But then again you may not have to pay anything on it, as described above. In any event, the delay and risks may well be worthwhile. Your bankruptcy lawyer will help you weigh all the advantages and disadvantages so that you can make the right choice.

 

Disadvantages of a Badly-Timed 5-Year Chapter 13 Case

December 31st, 2018 at 8:00 am

Following up on last week’s scenario, here are the financial, credit record, and other disadvantages of a forced 5-year Chapter 13 plan.   

 

Our last two blog posts were about how the last 6 calendar months of income of a person filing a Chapter 13 case can determine whether his or her Chapter 13 payment plan lasts only 3 years or instead a full 5 years. We showed how even relatively small shifts in income can cause this huge difference.

The last blog post gave a scenario illustrating how this would work in a real-life situation. It showed how under certain circumstances one person would have a 3-year payment plan if he or she filed a Chapter 13 case in January but a 5-year plan if filed in February.  Today we look at the financial and other consequences of this difference, and some other practical considerations.

Filing a Chapter 13 Case in January vs. February 2019

Our scenario involved a person receiving an extra $2,500 in income in January 2019 from a temporary holiday job. (That’s in addition to the $3,000 every month from the person’s regular job.) Because of the way income is calculated, that $2,500 would push this person over the median family income threshold, but only IF that income is counted. Filing the Chapter 13 case in January would result in that extra $2,500 NOT being counted. That’s because you count only the last 6 FULL CALENDAR MONTHS’ income (and double that for the annual amount). Those 6 months with a January filing are July through December 2018. You DON’T count the income of the month you’re filing the case—in this situation, January.

When filing the Chapter 13 case in February you DO COUNT the extra $2,500 in determining the plan’s length. That’s because the last 6 full calendar months are then August 2018 through January 2019, including the $2,500.

Financial Consequences

Our scenario assumed that your budget requires you to pay $300 per month into your Chapter 13 plan. If you have to pay that for 5 years instead of 3, that’s 2 more years of payments. 24 months of $300 payments totals $7,200. That’s a lot of extra money to pay just because you happened to file your Chapter 13 case in February instead of January.

That could potentially include filing the case just one day later—February 1 instead of January 31. Again, that’s because when filing on February 1 you must include January’s income—including the extra $2,500. When filing on January 31 you don’t include January’s income, avoiding that very troublesome $2,500.

Of course if your monthly Chapter 13 plan payment would be larger than $300, the extra money you pay will be that much more. For example, a $500 monthly plan payment would mean an extra $6,000 paid during the extra two years.

In addition, the longer your case lasts the more likely that your income would increase during your case. That may well require you to increase your monthly plan payment. That would result in you paying that much more during the final two years.

For example, assume you’re paying $500 per month into your payment plan from the beginning of your case. After 3 years you get a new job or a promotion increasing your income by $300 per month. If you had a 3-year plan (based on your initial income calculation) you’d be finishing your Chapter 13 case then. You’d pay nothing more into the payment plan; you’d get to keep all your income, including the pay increase.

Instead, if you’re in a 5-year plan you’d have two more years to go. You may well have to increase your $500 plan payments by $300 to $800 monthly. $800 per month for the final two years would mean an additional $19,200 paid to your creditors. And this could happen merely by filing your case with unwise timing!

Credit Record Consequences

These financial consequences of a longer case are bad enough. But the intangible consequences could be pretty bad as well.

Having your case last 2 years longer means 2 more years before you can really rebuild your credit. To some extent you may be able to build some positive credit history DURING a Chapter 13 case. That can happen if as part of the case you’re making regular contractual payments on your home or vehicle. But you’re still in the midst of a bankruptcy case, which harms your credit record. The sooner you complete your Chapter 13 case the better for credit purposes.

Two extra years in your case means that much longer before you’re free of the Chapter 13 trustee’s supervision. That likely means two more years that the trustee can take your income tax refunds to benefit your creditors. And, as described above, that’s two more years that increases in income could go, partly or fully, to your creditors.

Also, it’s 2 more years of the risk that you won’t finish your case successfully. To get some of the most important benefits of a Chapter 13 case you must complete it.  The longer a case lasts the more opportunities for things to happen that jeopardize a successful completion.

Lastly, being in a Chapter 13 case can be emotionally challenging. You wouldn’t be in it unless it was providing you significant financial benefits. (For example, saving your home and/or your vehicle(s), paying your income taxes or child support while protected from these creditors.) But you are in a sort of financial limbo. It feels very good to finish it and get it over with. You definitely want to do so in 3 years instead of 5 if you can.

 “Three-Year Plans” that Last Longer

One last thing: a Chapter 13 plan that is allowed to be finished in 3 years may last longer. Your income may allow you to have a 3-year plan but you can chose to have it last longer. The law provides that the bankruptcy “court, for cause,” may approve a length up to 5 years.

Many things that could push your allowed-to-be-3-year plan to be longer. You may want to pay for something—a home mortgage arrearage or priority income taxes, for example—and need more time to do so within a reasonable budget. So your plan may last up to 5 years in order for it to accomplish what you need it to.

IF this applies to you, being required to pay for 5 years because of your income may not be a practical disadvantage. On the other hand, you certainly don’t want to stumble into a 5-year Chapter 13 case simply because you didn’t time it well.

Talk with an experienced and conscientious bankruptcy lawyer to learn where your own unique circumstances puts you in all this.

 

Scenario: Filing Chapter 13 Now Shortens a Case by Two Years

December 24th, 2018 at 8:00 am

Here’s a scenario showing how the timing of your Chapter 13 filing can shorten your payment plan from 5 years to only 3. 

 

In our last blog post we explained how your last 6 calendar months of income can determine whether your Chapter 13 payment plan lasts 3 years or instead 5 years. We showed how even relatively small shifts in the money you receive can cause this huge difference.

How this can happen will make more sense after reading through the following scenario.

Our Facts about “Income”

Remember from last time that your “income” includes money from just about all sources, except Social Security. Also, the only money that counts is that which you received during the 6 FULL CALENDAR months before filing. This means that money received DURING the calendar month of filing DOESN’T count. For example, if you file your Chapter 13 case on January 31 you count the income from the previous July 1 through December 31. You don’t count any income received in January.

In our scenario assume you worked a second job during the holidays. Your monthly paycheck for December from this job is arriving on January 4, 2019. The anticipated gross income amount is $2,500. This money could also come from just about any other source. For example, your ex-spouse may be able to catching up on some unpaid child support owed because he/she received an annual bonus. It could be from just about any source. The point is that there’s an extra $2,500 arriving in early January.

In addition you receive $3,600 gross income every month from your regular job.

You received no money from any sources other than your regular job from July 1, 2018 through December 31, 2018. You expect to receive no money in January 2019 other than the $3,600 gross income and the additional $2,500.

So, assume that your bankruptcy lawyer files your Chapter 13 case between January 1 and January 31, 2019. The income that counts is what you received during the 6 prior full calendar months. That’s from July 1 through December 31, 2018. That is $3,600 per month times 6 months, or $21,600, or $43,200 for the annualized amount.

Our Facts about “Median Family Income”

Your income, as just discussed, determines whether your minimum payment plan length is 3 vs. 5 years. If your income is less than the designated “median family income,” your minimum plan length is 3 years. If your income is the same as or more than “median family income,” your minimum plan length is 5 years. Section 1322(d) of the U.S. Bankruptcy Code.

The “median family income” amounts (Section 39A of the Bankruptcy Code) come from the U.S. Census Bureau. This source data is adjusted annually, and is also adjusted more often to reflect changes in the Consumer Price Index. (The CPI comes from the U.S. Bureau of Labor Statistics.) The U.S. Trustee conveniently gathers this information at this webpage. From there the most recent median family income amounts (as of this writing) are compiled in this table.

For our scenario assume that you are single and live in Kentucky. According to the above table the median family income for a single person in Kentucky is $44,552. (You can find your own median family income by finding your state and family size in the table.)

Filing a Chapter 13 Case in January 2019

Under the facts outlined above, if you filed a Chapter 13 case during January 2019, your case could last 2 years less than if you filed the case in February, conceivably just a few days later.

Why? Because if you file in January you don’t count the income from that month. That means that you don’t count the $2,500 in income from the holiday job. You only count the $3,600 per month you received July through December from your regular job. As calculated above, that means an annualized income of $43,200. That is less than the applicable median family income amount of $44,552. So you’d be allowed to have a Chapter 13 payment plan that lasts only 3 years, and not be required to pay for 5 years.

Filing a Chapter 13 Case after January 2019

But if you file in February 2019 (or any of the following 5 months) your Chapter 13 plan would be required to last 5 years.

Why? Because if you file in February (or during the next 5 months) you do count the income from that month. That includes the $2,500 in income from the holiday job. When filing in February, for example, you count the income from August 1, 2018 through January 31, 2019. That includes the $3,600 per month from your regular job, plus the $2,500 from the holiday job. Six times $3,600 is $21,600, plus $2,500 equals $24,100. Multiply this by 2 gives you an annualized income of $48,200.

That is more than the applicable median family income amount of $44,552. So you’d be required to pay into your Chapter 13 plan for a full 5 years.

Next week we’ll discuss the financial and other consequences of this, and some other very important considerations.


Filing Chapter 13 in December (or January!) May Greatly Shorten Your Case

December 17th, 2018 at 8:00 am

Do you need a Chapter 13 case? WHEN you file it can mean the difference between a payment plan that takes 3 years and one that takes 5.  

 

In two blog posts last month (November 12 and 19) we showed how filing bankruptcy by the end of December 31 might allow you to file a Chapter 7 “straight bankruptcy” case instead of being forced into a Chapter 13 “adjustment of debts” one. You could have your debts discharged (legally written off) within just 3 or 4 months under Chapter 7. Otherwise you may have to go through a 3-to-5-year payment plan under Chapter 13. Besides likely costing much more, you’d only discharge your remaining debts if you successfully completed your payment plan.

But What If You Need a Chapter 13 Case?

The benefits of Chapter 7 won’t matter much to you if you need a Chapter 13 case in the first place.

Yes, Chapter 13 takes so much longer than Chapter 7.

And Chapter 13 is much riskier. Most Chapter 7 cases—especially one in which the debtor has a bankruptcy lawyer—get completed successfully. Chapter 13 comes with longer odds. A lot can happen in the 3 to 5 years that they usually take. Chapter 13 is a flexible tool, one that you can often adjust to changing circumstances. But the truth is that a significant percentage of them do NOT get completed successfully.

Notwithstanding the extra time and risks, Chapter 13 could still be by far the best tool for you.  That’s simply because it can accomplish many things that Chapter 7 can’t. For example, Chapter 13 can:

  • give you time to catch up on home mortgage and/or property taxes
  • buy you time and save you money if you owe lots of income taxes, especially if you owe on more than one tax year
  • give you time to catch up on child or spousal support while protecting your income, assets, and license(s) from suspension while doing so
  • allow you to keep assets that are otherwise not protected in a Chapter 7 case
  • lower your monthly vehicle payments and reduce the total amount on the loan
  • hold off on student loan payments and collection until you qualify for an “undue hardship”

And these are just some of the ways that Chapter 13 can deal with your creditors more powerfully than Chapter 7.

A Shorter Chapter 13 Payment Plan

So, what if you’ve learned that you really need a Chapter 13 case? What if you also learned that filing your Chapter 13 case in December instead of January would allow you to finish your case in 3 years instead of 5 years? Or what if that was true if you filed your case in January instead of February?

Paying into a Chapter 13 payment plan for 2 years less could save you many thousands of dollars. Plus, that would get you out of bankruptcy 2 years sooner. You’d be that much ahead of the game in rebuilding your credit.  You’d have the emotional relief of finishing and getting on with life sooner

Here could filing a Chapter case a month sooner shorten the case so much? Here’s how.

Your Last-6-Full Months of Income Determines How Long Your Chapter 13 Lasts  

Our blog post of November 12 described an unusual way of calculating your income for the Chapter 7 “means test.” (That’s a test to qualify for filing a Chapter 7 case.)   That way of calculating income also determines whether your Chapter 13 plan lasts a minimum of 3 years or 5.

Income is calculated as follows:

1) Consider almost all sources of money coming to you in just about any form as income…. .  Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case.

The 6-month amount is multiplied by 2 for the annual “income” total to be compared to the “median income” for your state and family size.

When you combine the above two considerations, monthly changes in your “income” can make a big difference.  That’s especially true if your money coming in is more than usual in either December or January.  (That would most often be from more overtime, a seasonal job, a monetary gift from family, and/or an employer’s bonus.)

Because of the way “income” is calculated there’s a higher risk that it would be larger than the “median income” for your state and family size. If it is larger, then you must pay your Chapter 13 case for 5 years instead of 3 years.

What’s My Applicable “Median income”?

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. Here’s a table showing the “median family income” amounts for cases filed on or after November 1, 2018. It shows the amount for each state, by family size. (The amounts are adjusted about three times a year; see this webpage to see if there has been an update.)

(For the actual steps used in this calculation, see the official form, Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period.)

So if your “income” as calculated above is larger than your applicable “median family income” than your Chapter 13 case gets pushed to 5 years.  If it’s smaller, your case can last as short as 3 years. (That 3 or 5 years is the “commitment period” referred to in the official form in the paragraph above.)

If your “income” is larger because of unusual money you received in December and/or January, it may make sense to file your Chapter 13 case in either December or January so that the income of that month would not count. (Remember, that’s because you only count income of the PRIOR 6 FULL calendar months before the filing date.)

In next week’s blog post we’ll put all this into an example to make better sense of it for you.

 

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 13

November 5th, 2018 at 8:00 am

You can keep your leased vehicle under Chapter 7 if you’re current. If not, or have other reasons to do a Chapter 13 case, that’s works too.


Lease Assumption under Chapter 7

Our last blog post showed how to keep a leased vehicle by “assuming” the lease in a Chapter 7 case. This means you keep making the lease payments. You also continue being legally bound by all the other terms of the lease contract.

Problems under Chapter 7

But what if you’re behind on your lease payments, and can’t catch up right away? Very likely the lessor would not allow you to assume the lease. And even if you could you’d be in default on the lease immediately and subject to repossession. You could easily end up owing a substantial amount of damages, and still be without a vehicle.

The Solution under Chapter 13

Filing a Chapter 13 “adjustment of debts” case solves this problem by giving much you more time to catch up on late payments.

A Chapter 13 case revolves around a formal court-approved payment plan that you and your bankruptcy lawyer put together. Your Chapter 13 plan will have a provision stating that you are assuming the unexpired vehicle lease. See Part 6 of the Bankruptcy Court’s official Chapter 13 Plan form. Besides listing the name of the lessor, a short description of the leased vehicle, and the monthly payment, you state the “Amount of arrearage to be paid” and the terms by which it will be paid through the plan. Usually you can catch up on the arrearage under terms that would fit within your budget.  

There is an opportunity for objection to such terms, particularly by the lessor. But usually the lessor is happy that you are choosing to continue being liable on the lease contract. Unless your payment history is terrible, or you’ve violated the lease agreement in other ways (such as not keeping insurance in effect) you’re mostly not going to get any objection. If there’s no objection, or any objection is resolved, the bankruptcy judge will approve or “confirm” the plan. (This assumes that the plan is otherwise ready for confirmation.)

This gives your proposed way of dealing with the lease, including the missed payments, the force of a court order. As long as you comply with those terms you’ll be able to keep your leased vehicle.

Limited Benefit on Leased Vehicles with Chapter 13

Chapter 13 gives you less possible advantages with a vehicle lease than if you had a vehicle loan. There is no opportunity for a Chapter 13 “cramdown” with a lease. A loan cramdown potentially reduces the loan’s monthly payments and the total amount paid to own the vehicle free and clear. Chapter 13 does not enable you to reduce your monthly lease payment. It does not take a penny off what you have to pay over the life of the lease.

Chapter 13 merely allows you to keep a leased vehicle through its lease term. The only real advantage it gives you over Chapter 7 is giving you more time to catch up on any unpaid lease payments. That may be an important advantage if you are desperate to keep the vehicle and are behind.

But be careful. Be aware that if you assume the lease under Chapter 13 you continue being liable on the other terms of the lease. For example, at the end of the lease you could owe money for high mileage or extra wear and tear. You could even lose the vehicle if you didn’t keep up the monthly lease payments. On top of that you could owe additional penalties for early termination of the lease.

Conclusion

Do you need a Chapter 13 case for any of the many other advantages it can give you? Then you will likely also be able to keep your leased vehicle as you’re dealing with those other issues.

Are you behind on your leased vehicle and absolutely want to keep it? Are you fully aware of the possible disadvantages of staying in your lease (partially outlined above)? If so, then Chapter 13 provides a way to keep your leased vehicle by catching up on the missed payments over time while you are protected from repossession.

 

The Surprising Benefits: Ending Your Vehicle Lease under Chapter 13

October 24th, 2018 at 7:00 am

Chapter 7 gets you out of a vehicle lease owing nothing. Chapter 13 is more complicated but can give you pretty much the same good result.

 

Ending a Vehicle Lease in Chapter 7

Our last blog post was about how a Chapter 7 “straight bankruptcy” can get you out of a vehicle lease. You can “reject” a financially bad lease, and then discharge (permanently write off) whatever you’d owe after surrendering the vehicle. Otherwise you could owe a lot of money when you get out of the lease.

So if you decide that you don’t want to keep your leased vehicle, and need bankruptcy relief, Chapter 7 is likely the cleanest solution.

Ending a Vehicle Lease in Chapter 13

But what if you have other reasons to file a Chapter 13 “adjustment of debts” case instead? Chapter 13 can be a great way to save your home, catch up on child or spousal support, deal with income tax debt, and solve many other big financial problems, much better than under Chapter 7.

So it’s good news that you can surrender your leased vehicle through Chapter 13 just like under Chapter 7. However, discharging any resulting debt from the lease contract is not as straightforward as in a Chapter 7 case. Here’s how it works.

Possible Debts from Surrendering a Leased Vehicle

First be aware that you could owe various kinds of debts when you surrender a leased vehicle. Surrendering before lease end could make you liable for contractual penalties and/or all the remaining unpaid lease payments. Surrendering the vehicle at the end of the lease could make you liable for high mileage, excessive wear and tear, and the difference between the vehicle’s originally anticipated value at the end of the lease and the actual “realized value” then. Either way the amount you would owe could be thousands of dollars.  

Rejecting the Lease under Chapter 13

Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing the lease. For today we’re assuming you no longer need or want to keep and pay for the vehicle.

The immediate benefits of rejecting the lease are just like under Chapter 7. You immediately stop paying the monthly lease payments, and then return the vehicle to the lessor after filing the case. If you’re behind on payments, you don’t have to pay them.

But under Chapter 13 there’s a complication. Your lessor can file a “proof of claim” reflecting whatever amount you would owe under the lease contract. The lessor does so in order to try to get paid part of any remaining debt. This debt is then added to the pile of all your other “general unsecured” debts.

The Category of “General Unsecured” Debts in Chapter 13

In a Chapter 13 case, your debts are divided into categories, one being your “general unsecured” debts. These are the debts that are 1) not secured by any of your property or possessions, and are also 2) not a “priority” debt (various specially-treated ones).

Often you have to pay all or most of what you owe on your secured and priority debts. But this is seldom true with general unsecured debts. Often you pay little or even nothing on your general unsecured debts in a Chapter 13 case. Whether or how much you pay depends on a lot of factors. The main factors are the amount of your secured and priority debts, and how much you can afford to pay to all of your creditors after expenses.

Often Vehicle Lease Debt Does Not Increase What You Pay

In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.

There are two circumstances where that happens, one less common and other very common.

First, in some parts of the country you are allowed to pay 0% of your “general unsecured” debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.

Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.  

For example, assume that after you pay all your secured and priority debts you have $2,000 left over to pay all your general unsecured debts over the life of your Chapter 13 plan. Your vehicle lessor files a claim saying you owe $3,000 after surrendering the vehicle. You owe $30,000 to all your other general unsecured debts. Adding the $3,000 lease debt to the other $30,000 means you owe a total of $33,000 of general unsecured debts. But you pay only the $2,000 that is available (over the life of the plan) either way. Having the $3,000 lease debt just means that the other general unsecured debts receive that much less.

 

The Surprising Benefits: Chapter 13 Potentially Discharges Divorce Property Settlement Debts

September 10th, 2018 at 7:00 am

Chapter 13 can write off some or all of the non-support debts included in your divorce. But it comes with some potential disadvantages. 


Last week we explained how Chapter 7 cannot write off non-support divorce debts, but Chapter 13 can. We said if you owe a significant debt created by your divorce decree (for other than child or spousal support) you should talk with a bankruptcy lawyer. Don’t necessarily think that Chapter 13 is your best option with this kind of debt. Chapter 13 has advantages and disadvantages. We get into these now so you can start to see which option is best for you.

Non-Support Divorce Debts

Support debts are not discharged (written off) under either Chapter 7 or 13. Only non-support debts can be discharged under Chapter 13 (and not Chapter 7). So we need a quick, practical reminder what we mean by non-support debts.

We said last week:

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

… often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support divorce debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

… . This obligation by you to your ex-spouse to pay the debt is a non-support divorce debt.

Disadvantages of Chapter 13

The main advantage of Chapter 13 for this kind of debt is that you could avoid paying most or even all of it. Also, Chapter 13 has many other potential advantages over Chapter 7, some of which may well apply to your situation. These are beyond the scope of today’s blog post.

Let’s focus instead on three main potential disadvantages of Chapter 13 for this kind of debt. These are: 1) delay in discharge, 2) risk of no discharge, and 3) likely partial payment of the nonsupport divorce debt.

Delay in Discharge

A Chapter 13 case takes a lot, lot longer than a Chapter 7 one. It takes years instead of months. That is, a Chapter 13 case usually doesn’t finish for 3 full years, and often goes as long as 5 years. Contrast that with a Chapter 7 case, which usually takes less than 4 months from filing date until completion.

And you don’t get a discharge of your debts—including the non-support divorce debt(s)—until the end of the case.  Again, that’s 3 to 5 years.

Usually your ex-spouse can’t do anything to collect on that debt in the meantime. So the delay may not be much of a practical problem. But you’re still living in a sort of limbo in the meantime.

If you have other reasons to be in a Chapter 13 case the delay may well be worthwhile. Or if the amount of you non-support divorce debt is very large that alone may make the delay worthwhile. Just be aware of this downside.

Risk of No Discharge

Almost all Chapter 7 cases, especially those in which the person is represented by a lawyer, get successfully completed. But Chapter 13s are riskier. That’s because they involve a monthly payment plan that you and your lawyer put together, it gets court-approved, and then you pay on it for 3-to-5 years. In the right situations a Chapter 13 case can accomplish much more than Chapter 7. But there are more things that can go wrong.

As we said above, you don’t get the discharge of debts until the end of the case. So you have to get to the end successfully to discharge the non-support divorce debt. There’s a risk that you would not get to the discharge.           

Likely Partial Payment of the Non-Support Divorce Debt

The Chapter 13 payment plan referred to above very seldom results in all debts being paid in full. In fact, in some cases you’d pay certain debts nothing before they get permanently discharged. In the majority of cases a non-support divorce debt would get paid in part, but often only a small percentage.

Non-support debts would be treated like all your other “general unsecured” debts. These are all debts that are not secured by collateral and are not “priority” debts (such as recent income taxes) which must be paid in full. All of your “general unsecured” debts are put together into a single pool of debt. The extent to which you’d pay that pool of debt would be based on a bunch of factors, such as:

  • how much you can afford to pay all your creditors per month throughout the length of the case
  • the length of your Chapter 13 plan, generally 3 years or 5, determined by your income
  • the amount of your priority debts, which you paid in full before the “general unsecured” debts get paid anything
  • how much your plan must pay in administrative expenses—the Chapter 13 trustee fees and the attorney fees you did not pay before your case was filed—all paid before paying any of the “general unsecured” debts

As a result sometimes the “general unsecured debts, including your non-support divorce debts, get paid nothing at all. All of your available money is exhausted elsewhere. (This assumes your local bankruptcy court allows such “0% plans”). On the other hand, in rare cases the “general unsecured” debts get paid in full. This is more common when you have little or no priority debts and the general unsecured debts are relatively small. Most of the time your non-support divorce debts get paid a relatively small portion of the total you owe. It depends on all these factors.

 

The Surprising Benefits: Chapter 13 Handles an Income Tax Lien on a Tax that Can’t Be Discharged

August 28th, 2018 at 7:00 am

Chapter 13 can be the best way to deal with a nondischargeable tax debt with a recorded lien: it buys more time, protection, and flexibility.

Last week we discussed how Chapter 7 handles a recorded tax lien on a tax that bankruptcy CAN’T discharge. The tax debt already can’t be discharged (legally written off in bankruptcy). So you can’t get out of paying it. The prior recording of a tax lien just adds another reason you have to pay the tax. If you fail to pay the IRS/state can take your assets that are subject to the recorded tax lien.

Filing a Chapter 13 “adjustment of debts” case can be a better way to handle such a tax debt than a Chapter 7 “straight bankruptcy” one.

Buys Time  

Whether you file under Chapter 13 or Chapter 7 does not affect whether you must pay this tax. But filing a Chapter 13 case can often buy you more time.

After completing a Chapter 7 case you must pay the not-dischargeable tax as fast as the IRS/state demands. Otherwise all the powerful tax collection tools can be used against you. With a recorded tax lien already on your real and/or personal property, the IRS/state has even more leverage against you.

What if you can’t pay the tax as fast as demanded? Among other things the IRS/state could garnish your wages and/or bank accounts, and seize your property.

Chapter 13 could prevent all of that because you’d be given as much as 5 years to pay the tax. You and your bankruptcy lawyer would incorporate that tax debt into your Chapter 13 payment plan. You’d pay the IRS/state along with any other special debts that you must pay. Often, you’d pay only a small portion of your remaining debts. Sometimes you’d pay nothing on such debts. As a result you can focus your financial energies for 5 years on your tax debt.

Buys Protection

During that 5 years (which can be as short as 3 years), your paycheck, your checking/savings and other financial accounts, and your property are protected. Bankruptcy’s valuable “automatic stay” protection from collection lasts only 3-4 months in a Chapter 7 case. But this protection lasts the full 3-to-5 years of your Chapter 13 case. The peace of mind that comes from this extended protection is often invaluable.

Buys Flexibility

Sometimes what you need more than time is flexibility in how you pay a tax debt.

You may have some other even higher-priority debt that your financial future depends on. If you’re behind on a vehicle loan you may need to catch up so you’ll have transportation to your job. Or, if you’re late on child support catching up may be crucial to avoiding wage garnishment. Chapter 13 can let you pay some debts ahead of taxes, even nondischargeable taxes with a recorded tax lien.

Or if you can’t pay the taxes until some event in the future, Chapter 13 can buy you that flexibility. The event can even be a few years into the future. For example, if you plan on selling your house and moving away in two years, say, after a child graduates from high school, you may well be able to delay paying all or most of the tax debt until that house sale.

Conclusion

Chapter 13 can be a much better way to deal with a nondischargeable tax debt with a recorded lien. It often gives you more time to pay it, protects you many times longer than Chapter 7, and gives you flexibility that could be crucial in your unique circumstances.

 

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