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Archive for the ‘Chapter 13 plan’ tag

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.

 

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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