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Archive for the ‘Chapter 7 discharge’ tag

Writing Off Debts with Bankruptcy

February 11th, 2019 at 8:00 am

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


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

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

In Chapter 7

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

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

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

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

In Chapter 13

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

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

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

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

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

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

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

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

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

Creditors cannot collect discharged debts

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

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

 

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

The Surprising Benefits: Stop Income Tax Collection

June 25th, 2018 at 7:00 am

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

 

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

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

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

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

The Expiring Automatic Stay and Nondischargeable Income Taxes

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

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

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

The Chapter 7 Solution

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

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

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

The Chapter 13 Solution

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

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

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

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

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

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

 

Debts Voluntarily Paid in Chapter 7

December 18th, 2017 at 8:00 am

Chapter 7 is usually much better if one of your high priorities is to favor a debt by paying it. You can do so more easily and flexibly. 

 

Our last blog post was about debts that you still pay after a Chapter 7 “straight bankruptcy” case. These included debts you might WANT to pay as well as those that you are legally REQUIRED to pay.

Today we focus on debts you might want to pay for no reason other than a sense of moral or personal obligation. That is, you’re not paying in order to be allowed to keep some collateral. You’re not “reaffirming” a mortgage or vehicle loan to keep the home or vehicle. (We’ll get into “reaffirmations” next time.)

One reason we’re looking at debts paid out of personal obligation is because how different this is in Chapter 7 vs. Chapter 13. For reasons we’ll show, it’s legally easy to favor such a debt in Chapter 7. But it’s not practical to do so in Chapter 13.

The Myth about Not Favoring a Debt after Bankruptcy

People have many fears about filing bankruptcy that are based on myths. One myth is that they think they won’t be allowed to pay a debt that they really want to pay.

Like most persistent myths this one is based on something that’s true only in certain limited circumstances. But then people assume it applies to them when it likely doesn’t.

It’s true that in certain circumstances in bankruptcy, debts within the same legal category must be treated the same. Similarly, in a Chapter 13 payment plan all unsecured debts that are not “priority” debts are paid the same percentage.

However, after a Chapter 7 case (by far the most common type) you are completely free to pay any debt that you feel like paying. The Bankruptcy Code is very direct about this: “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 524(f) of the U.S. Bankruptcy Code.

Don’t Avoid Filing Bankruptcy Because You Want to Pay a Debt

So being concerned about wanting to pay a debt for personal reasons is not a reason to not file bankruptcy.

And it’s certainly not a reason to put off seeing a competent bankruptcy lawyer about your options. The job of your lawyer is to listen to your concerns and help you solve them. If one of your priorities is to pay a debt for whatever personal reason, your lawyer will explain your options for meeting this priority. There are usually sensible ways to meet all of your concerns.

Scenarios for Wanting to Pay a Debt

In our experience there are three basic reasons people want to pay a debt they aren’t legally required to pay.

First, they think something bad will happen—legal or personal—if they don’t pay. For example, they want to pay a doctor bill because they think the doctor otherwise won’t be willing to see them anymore. (That is often not be true, so it’s worth asking the doctor’s staff.)

Second, they don’t want the creditor to know about their bankruptcy filing. For example, they’ve borrowed from their father and don’t want him to be disappointed in them.

Third, they simply feel some kind of deep personal obligation to make good on their promise to pay. For example, they want to repay a grandmother because she really needs the money.

If you filed a Chapter 7 case, in each of these types of situations you would likely be allowed to pay that debt while paying nothing on other debts.

Easier to Pay a Personal Debt after Chapter 7

If it isn’t obvious, paying such a personal debt should be much easier after filing a Chapter 7 bankruptcy case. You don’t have the financial pressure of your other debts, hopefully giving you more cash flow.  So, filing a Chapter 7 case actually helps you pay a debt or two that you really want to pay.

Discharge of the Personal Debt Gives You More Flexibility

Assume that the debt you want to pay is a legally enforceable debt. (It may be a gift or not legally enforceable on some other basis.) If it is a legal debt you’ll need to list it as a debt in your Chapter 7 case. And in all likelihood it will be discharged—you will no longer owe the debt, legally speaking. The choice whether or not to pay it then becomes completely yours. Your creditor cannot legally compel you to pay it.  

This means that you can pay it as slow or as fast as you want. You can pay for a while and then decide that it wasn’t such as good idea to pay it after all. You can pay only if the creditor treats you right—whatever. It’s up to you and whatever is motivating you to pay the debt.

Realize that your creditor should be doubly impressed if you do pay the debt. Not only are you going through bankruptcy in part to be able to pay this particular debt. You are also paying it in spite of no longer having any legal obligation to do so. You might want to tell these things to your creditor to get points for being so good!

Chapter 7 vs. 13 on a Voluntary Debt

We mentioned earlier that you have to pay all regular unsecured debts the same percentage of their debts in a Chapter 13 payment plan. You can’t favor one over the others except for very limited reasons. Feeling a greater moral or personal obligation toward one debt does not count.

AFTER your Chapter 13 case is over you CAN pay anybody as much as you want. If paid everyone 10% of what you owed them, you can arrange to pay one the remaining 90%.

But that’s not very practical in most situations because a Chapter 13 case usually lasts 3 to 5 years. Most creditors aren’t going to want to wait that long to be made whole. A commitment to begin finishing paying a debt so long from now is not going to impress most people. And who knows how you’ll feel that far down the line.

That’s why Chapter 7 makes more sense if one of your high priorities is to favor one of your debts.  Of course you have to weigh that against other reasons to file a Chapter 7 vs. Chapter 13. This is where you really need your bankruptcy lawyer to help you sort out your priorities so that you choose the best option.

 

Permanently Write Off Debts in Bankruptcy

December 14th, 2016 at 8:00 am

The main goal of bankruptcy is often to write off—“discharge”—your debts. Here’s how it works in Chapter 7 “straight bankruptcy.” 


When you file bankruptcy, especially Chapter 7 “straight bankruptcy,” the relief you want is to be free of your debts. Chapter 7 accomplishes this by giving you a “discharge” of all or most of your debts. A discharged debt is permanently written off. It’s explicitly illegal for your creditors to take any further collection action on them.

A Bit of Eye-Opening History

You might think, well of course bankruptcy discharges debt—that’s what it’s supposed to do.

So you may be surprised to learn that for much of the history of bankruptcy there was no discharge of debts. In England, where we get much of our law, back in the 1500s debtors were called “offenders.” Only creditors could file bankruptcy, in order to have the assets of the “offender” seized and sold to pay creditors. After the bankruptcy the creditors could continue chasing the “offender” for any remaining balance owed.  In the 1700s the discharge of debts was added, but only if the creditors agreed to allow it!

Chapter 7 Discharge

Contrast that with what now happens in most consumer Chapter 7 cases. They finish in less than 4 months with a court order discharging all or most of the debtor’s debts. Occasionally the debtor has to give up some asset(s) in return, but not most of the time.

You “Shall” Get a Discharge

Federal law makes clear that under Chapter 7 the “court shall grant a discharge.” (Section 727(a) of the Bankruptcy Code.)  Sure, there are exceptions, which we’ll cover in upcoming blog posts. But the law starts with the strong assumption that you are entitled to a discharge of your debts through bankruptcy.

When Debts are Discharged

Just before the end of a Chapter 7 case the bankruptcy judge signs a court order discharging your debts. The main legal effect of that discharge order is described in Section 524(a)(2) of the Bankruptcy Code as follows:

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

This means that your creditors can’t do anything whatsoever to collect the debt. They can’t contact you, can’t start or continue a lawsuit against you; they can’t do anything. This injunction against all collection actions lasts forever.

Enforcing This Injunction

This discharge-of-debts law has some teeth. It’s illegal for a creditor to try to collect a debt discharged in bankruptcy. It’s a violation of a federal injunction, and therefore a violation of federal law. As a result creditors very seldom try to collect a debt once it’s been discharged.  

If a creditor nevertheless does try to collect a discharged debt, a bankruptcy judge can hold it in contempt of court for breaking the law and violating its injunction. Section 105(a) of the Bankruptcy Code. The court could require the creditor to pay you punitive damages, your attorney fees, and impose other sanctions. Again, creditors don’t usually invite this kind of hassle and potential punishment.

 

Voluntary and Involuntary, Individual and Joint Bankruptcy Cases

September 26th, 2016 at 7:00 am

Almost all consumer bankruptcies are voluntary. Involuntary ones are mostly for businesses. Joint cases with your spouse save time and money.

 

Voluntary Bankruptcy Filing

People who need bankruptcy relief usually file voluntarily. This is the overwhelming way that bankruptcy cases are filed.

A voluntary case starts by your filing of a petition at the bankruptcy court. (See Section 301 of the United States Bankruptcy Code.) This is usually done electronically by your bankruptcy lawyer without anyone physically going to the court.

Your voluntary petition states which Chapter under which you are filing. You have to qualify to be a debtor in the Chapter you designate. If you are an individual (instead of a corporation or other business entity) you can file under Chapter 7, 11 or 13. (See our most recent blog post for a description of each of these options.)

Involuntary Bankruptcy Filing

Involuntary bankruptcy cases are rare, and those filing against individuals (instead of businesses) are even rarer. We mention them here mostly to show that they are a possibility.

Involuntary bankruptcies are filed not by the person or business that owes money but rather by its creditors. Creditors push a business into bankruptcy when it is not paying its debts but has assets out of which the creditors could likely get paid. (See Section 303 of the Bankruptcy Code.)

Individual Bankruptcy Filing

Bankruptcy cases can be filed individually or jointly. You can file individually even if you are married.

Joint Bankruptcy Filing

A joint bankruptcy case is filed by a person who qualifies to file under the Chapter being filed, together with that person’s spouse. (See Section 302.)

If you’re married you can save time and money by filing jointly. But again, you’re not required to file jointly. In some situations only one spouse needs to file. Or sometimes one should file now, with the possibility that the other spouse may need to file later. Or, one spouse may need to file under one Chapter and the other under another Chapter.

When filing a joint case, you and your spouse file one joint petition, and one set of all required documents. On the documents you put down all the assets, debts, income, and expense the two of you have.

As for your debts, you include the debts you owe individually and those you owe jointly. All debts that can be discharged (legally written off) are discharged no matter which of you owe them. However, if all or most of the debts are owed by only one spouse, maybe only that spouse needs to file bankruptcy.

As for your assets, each of your separate assets and your joint assets are all part of your joint bankruptcy. In most bankruptcy cases assets are not a problem because you are allowed to use “exemptions” to protect your assets from creditors. But the available exemptions differ state by state. Plus, there’s a federal set of exemptions and a separate set for each state, with only some states allowing you to choose between its set of exemptions and the federal one. Some exemptions allow debtors in joint cases to double the usual exemption amounts and some don’t. You can’t double the exemption amount on a particular asset unless you and your spouse jointly own it.

Individual vs. Joint Filing

Generally, the advantage of filing jointly is saving time and effort, as you address all your debts in one package.  But you need to discuss any potential disadvantages carefully with your bankruptcy lawyer. Be especially cautious if one spouse has little or no debt, particularly if that spouse has any substantial assets that would not be fully covered by the applicable exemptions.

Are “Priority Income Tax Debts Discharged in Chapter 7 Bankruptcy?

September 12th, 2016 at 7:00 am

Income tax debt may be discharged—legally written off—in a Chapter 7 case. It just needs to meet some conditions.

 

Our last blog posts have been about “priority” debts, such as child/spousal support and income taxes. A key point has been that your Chapter 7 trustee pays priority debts ahead of your other debts. But that’s irrelevant if the trustee doesn’t have any money to pay ANY of your debts. And that’s what happens in most Chapter 7 cases. That’s because in most cases everything the debtor owns is protected through property exemptions.

But some of the priority debts are also “nondischargeable”—they cannot be written off in bankruptcy. That’s always relevant—you definitely want to know whether a debt will be discharged or instead you will still need to pay it.

Priority vs. Dischargeable Debts

Because some priority debts are not dischargeable but some are, this can get confusing. For example, a child/spousal support debt is always a priority debt and simultaneously is always not dischargeable. But an income tax debt is a priority debt only under certain conditions. That very same debt would not be discharged under similar but not exactly the same conditions. Yes, it’s confounding!

Luckily, all we care about here is whether an income tax can be discharged or not. So we’ll give you the main rules, and a practical example to make sense of this.

The Main Rules for Discharge of Income Taxes

We’ve got to emphasize that there is more to this than what we’re about to say. But the following is a good start.

To discharge an income tax in bankruptcy, that tax must meet both of 2 conditions:

  • More than 2 years must have passed between the date that you submitted the tax return to the IRS or state tax agency and the date you file your bankruptcy case.
  • More than 3 years must have passed between the legal due date for that tax return and the date you file your bankruptcy case.

There are other conditions but they seldom come into play. (Your bankruptcy lawyer will review them with you to make sure, but they’re not worth getting into here.)

Example

Assume that you are considering whether to file bankruptcy in mid-September 2016 when this blog post is being written. You owe federal income taxes for the 2011, 2012, and 2013 tax years, $5,000 each year, a total of $15,000. You filed all three years of tax returns on April 15, 2014 (the due date for the 2013 income tax, which was late for the other 2 earlier years of taxes). Are these three years of taxes dischargeable now or not?

You meet the 2-year rule for all three tax years—April 15, 2014 is more than 2 years ago.

You meet the 3-year rule for 2011 and 2012—their tax returns were due in April 2012 and April 2013, respectively, more than 3 years ago.

So those two years of taxes, totaling $10,000, would very likely be discharged in a Chapter 7 bankruptcy. They meet both the 2-year and 3-year rules.

However, the 2013 tax return was due on April 15, 2014 (regardless when it was filed). Since that’s less than 3 years ago, the 2013 tax debt does not meet this necessary condition. So that $5,000 debt would NOT be discharged in a Chapter 7 case.

At least not yet. It may or may not be worth waiting to file bankruptcy long enough until that final $5,000 tax debt could be discharged. But DON’T act on this without having an experienced bankruptcy lawyer review this carefully with you. As mentioned above, there might be some other conditions that could come into play. You would hate to incur the risks and disadvantages of waiting only to find out that waiting didn’t do you any good.

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