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Archive for the ‘co-signed debt’ tag

Protect Yourself from Your Co-Signer

August 7th, 2017 at 7:00 am

If you can’t or won’t pay a co-signed debt, or pay a co-signer, you need to protect yourself from that debt and from your co-signer. 

 

What if you owe a co-signed debt and need bankruptcy relief from all your debts?

In the last two blog posts we explained how bankruptcy helps you pay a co-signed debt and protect your co-signer. A Chapter 7 “straight bankruptcy” may free up enough cash flow so you can afford to pay the co-signed debt. Or the special “co-debtor stay” may protect your co-signer as you catch up on and pay off the co-signed debt over a longer span of time.

But what if—even with the help of bankruptcy:

  • you can’t afford to pay the co-signed debt now or at any time in the foreseeable future?
  • you no longer want to pay your co-signer because your relationship has changed?
  • your co-signer got the money or other benefit of the debt and so should pay it back?
  • you still want pay it eventually but have no idea when you’ll be able to?

In all these situations you need legal protection from your co-signer.

Your Legal Obligations to the Co-Signer

You need legal protection from your co-signer because you have a legal obligation to the person or may have one. You either have a clear obligation, or at least a significant risk of one. This actual or possible obligation means you should cover it in your bankruptcy case.

You likely have an actual legal obligation to your co-signer if the two of you were clear about its terms. You wrote it down, or maybe just talked about it but clearly agreed on the main terms.  Those basic terms would include who would pay the debt and what would happen if that person did not pay. For example, you agreed that you would pay the debt, and would pay back the co-signer if he or she had to pay any part of it.

Or sometimes when two people jointly sign on a debt they are not clear about the obligations between them. The terms of that obligation are not made clear. Then the co-signer less likely has a legally enforceable claim against the other, but may still try to assert one.

Include Your Co-Signer in Your Bankruptcy

Either way, cover yourself in your bankruptcy case. Whether or not your obligation to your co-signer is legally enforceable, you should act to discharge (permanently write off) whatever obligation to that person you may have. You do this by listing your co-signer as a potential creditor in your bankruptcy schedules.

Do this even if you think you don’t really owe the co-signer anything. You may remember the co-signer agreeing to make the payments if you couldn’t. You may remember the co-signer treating the whole arrangement as a gift. But now he or she may remember it differently. So err on the side of caution and cover whatever legal liability you may have to the co-signer.

How You’re Protected from Your Co-Signer

If you list your co-signer when you file bankruptcy, he or she can’t contact you to collect the debt. The “automatic stay” that prevents virtually all creditors from collecting on their debts applies to your co-signer. He or she can’t pressure you to pay the co-signed debt, or to pay him or her directly.  

If your co-signer violates the “automatic stay” by trying to make you pay, he or she could be punished. Similarly, once your debts have been discharged (including your obligation to your co-signer), his or her attempt to make you pay would be illegal, a violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.

You CAN Still Pay

Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. But then it’s still totally up to you whether to pay anything to the co-signer. The advantage is that if you do pay your co-signer or the co-signed debt, you do so without legal pressure. You pay whenever and as much as you can or want to.

Conclusion

Talk with your bankruptcy lawyer about how you would like to deal with your co-signer. To the extent that you have a sense of personal obligation, there are safe ways to satisfy it.

 

Using the Co-Debtor Stay of Chapter 13

August 4th, 2017 at 8:04 am

If protecting your co-debtor from having to pay your debt is a high priority, Chapter 13 has a remarkable tool for doing that.  

 

Chapter 7 Doesn’t Always Help

Our last blog post was about helping your co-signer through a Chapter 7 “straight bankruptcy” case. You discharge (legally write off) most or all your other debts. Then you may be able to afford to make payments on your co-signed debt.

But that doesn’t always work. What if:

  • discharging your other debts still does not leave you enough money to make the monthly payments on the co-signed debt?
  • you have other debts that you would continue to owe after a Chapter 7 bankruptcy—recent taxes, child support arrearage, non-support divorce debt, student loans—leaving you unable to pay your co-signed debt?
  • you are behind on the co-signed debt and can’t afford to catch up on the missed payments right away?
  • the creditor says it will start or continue to pursue your co-signer in spite of you filing bankruptcy?

Chapter 7 does not solve any of these problems. However, Chapter 13’s special co-debtor stay is a powerful and flexible tool that can cut through these problems in many situations.

Assumes You Want to Pay the Co-Signed Debt

All of this assumes that you are willing to pay the co-signed debt to protect your co-signer.

If you don’t want to for whatever reason then you don’t need the benefits of the co-debtor stay. Your relationship with your co-signer may not motivate you to pay the debt. Or your co-signer may have agreed to take care of the debt without your help. If so, then you don’t need the co-debtor stay. You can stop reading here. But check out our next blog post about protecting yourself in those situations.

The Special Chapter 13 Co-Debtor Stay

When you file either a Chapter 7 or a Chapter 13 case you get the “automatic stay.” That protects you and your assets from virtually all the collection efforts of your creditors. It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, vehicle repossessions, calls and letters from creditors, and such.

With Chapter 13 you also get the “co-debtor stay. “ This can protect your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt.  It acts somewhat like the automatic stay for your co-signer although in a more limited way.  So when you file a Chapter 13 case, there’s some immediate protection for your co-signer. Chapter 7 does not have a co-debtor stay.

How the Co-Debtor Stay Works

Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan. Its crucial advantage is that throughout this time your co-signer is protected from collection by the creditor.  

Your Chapter 13 payment plan must show you’ll pay the co-signed debt in full during the course of your case.

This can often be easier than you think because in most parts of the country you can favor a co-signed debt in a Chapter 13 plan. That means you can arrange to pay it in full while your other general unsecured creditors receive little, or maybe nothing. Focusing your financial resources on paying off that co-signed debt makes paying off the co-signed debt much easier.

You have to have your Chapter 13 plan show the co-signed debt is being paid in full. That’s because to whatever extent your plan does NOT show that the debt will be paid in full, the creditor can ask for permission to pursue your co-signer DURING the Chapter 13 case.

Also, you need to make sure that you comply with your Chapter 13 plan, actually paying off the co-signed debt.  To whatever extent the co-signed debt is not paid in full during the case, the creditor can pursue your co-signer AFTER the case. It can do so then without asking anybody’s permission.

So you simply have to make sure that your Chapter 13 plan is put together to pay that co-signed debt in full. And then make sure you make your plan payments so that actually gets accomplished.

Two Important Conditions

First, the co-debtor stay helps you only with co-signed CONSUMER debts, not business debts.

For this purpose tax debts are NOT considered to be consumer debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner.  The co-debtor stay does not work so the other person has to file his or her own bankruptcy case.  Or file jointly with you, in the case of a spouse.

Second, the creditor can challenge the co-debtor stay if YOU didn’t receive the benefit of the debt (either the cash borrowed or the item(s) purchased), but rather your CO-SIGNER did. The co-debtor stay still goes into effect at the filing of your Chapter 13 case to protect the co-signer. But then the creditor could ask the bankruptcy court for permission to pursue the co-signer. The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt.  If so, the co-debtor stay would not apply and the creditor could chase the co-signer for the full debt.

Conclusion

Look to Chapter 13’s co-debtor stay if protecting your co-signer from collection is a very high priority. It protects much better than Chapter 7 can.

Chapter 13 allows you to pay that co-signed debt in your plan on terms consistent with your budget. And it does so while fitting it in among other special debts like recent income taxes, back child support, or mortgage payments. Chapter 13 is a powerful and flexible way to satisfy your co-signed creditor and protect your co-signer.

 

Protecting Your Co-Signer in Bankruptcy

August 2nd, 2017 at 7:00 am

Don’t be afraid to file bankruptcy because of how it would affect a co-signer. Your bankruptcy often actually helps that co-signer.

 

Practical Protection for Your Co-Signer

You may not want to file bankruptcy because you don’t want to hurt a co-signer. You may not want to write off your obligation on the debt and leave your co-signer owing it alone.

If so you’ll be relieved to hear that by filing bankruptcy you can often get both financial relief for yourself and the best practical protection for your co-signer.

Today we’ll show how filing a Chapter 7 “straight bankruptcy” case could provide that relief and that protection. Next time we’ll show how a Chapter 13 “adjustment of debts” case could protect your co-signer when Chapter 7 cannot.

Assumptions

We’re making a couple assumptions here:

  • Between you and your co-signer, you were the one who benefitted from the co-signed credit. (You co-signer was helping you out, not the other way around.)
  • You care enough about your co-signer and feel responsible enough that you’d be willing to pay the debt if you were able to.

Protect Your Co-Signer from Having to Pay Your Debt

Here is how filing Chapter 7 can protect your co-signer.

“Discharging” (legally writing off) all or most of your other debts may enable you to pay the co-signed debt. It may free up enough of your monthly cash flow so that you could afford its monthly payments. That would of course prevent your co-signer from being required to make those payments.

But what if your co-signer has already paid the debt in part or in full? Discharging your other debts would make it easier to pay back your co-signer, if you want to do so.

Allowed to Pay the Co-Signed Debt, Allowed to Pay the Co-Signer

Filing a Chapter 7 case would legally allow you to stop paying all or most of your debts immediately. This includes the co-signed debt. Then about 3 or 4 months later your legal obligation to pay that co-signed debt would likely be forever discharged. In addition any legal obligation to your co-signer would very likely also be discharged.

However, bankruptcy law clearly allows you to pay any debt afterwards if you want to. This is a way that the law respects you feelings of moral obligation towards a debt. So, you could decide to pay the co-signed debt even if you’d have no legal obligation to pay it.

Similarly, if your co-signer already paid all or part of a debt, you could decide to pay the co-signer back.

Get Your Lawyer’s Advice

Is it really wise to pay the co-signed debt, or to reimburse the co-signer? Are you acting out of an oversized sense of guilt that maybe you should just let go? Are there better places to put your after-bankruptcy resources?

Talk these questions and concerns over very carefully with your bankruptcy lawyer. He or she will not make these kinds of decisions for you, or take them away from you. But it’s likely healthy for you to express your intentions to someone who’s not personally involved. It’s wise to at least listen to the counsel of someone who is legally and ethically bound to serve you.

Plus there’s a very concrete purpose for discussing this with your lawyer. As part of the bankruptcy documentation, the two of you would have prepared a monthly budget. Relatedly, you’d have been informed about the debts that’ll likely be discharged and those that you’ll continue to pay. (These would be your mortgage, vehicle loan, recent income taxes, and such, if applicable.)

From this information you’ll be able to make a better decision about your co-signed obligation. You’ll see whether you could realistically start making the payments on a co-signed debt, or to the co-signor.

Why This Is Better for Your Co-signer than Not Filing Bankruptcy

You’ve got to be very practical about your alternatives. If you are in serious financial hurt, how likely is it that you are going to be able to reliably pay the co-signed debt without some bankruptcy help? So, not filing bankruptcy may be the worst thing for your co-signer. And if you want to protect that person, your Chapter 7 bankruptcy may be the best thing for him or her.

 

A Fresh Start against Your Co-Signer

February 19th, 2016 at 8:00 am

Through bankruptcy, you may be able to and want to pay a co-signed debt. If not, you need protection from that debt and from your co-signer.

 

A friend or relative may have helped you earlier by co-signing a debt for you. But now you find yourself needing relief from all or most of your debts through either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.”

So what happens to your co-signed debt? And what happens to whatever responsibility you may feel towards your co-signer?

In the last two blog posts we explained how either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” may help you be able to pay the co-signed debt. These two kinds of bankruptcy provide a certain amount of indirect or direct protection for your co-signer.

But what if—even with the help of bankruptcy—you simply can’t afford to pay the co-signed debt now or at any time in the foreseeable future? You may no longer want to pay your co-signer because your relationship has soured. Your co-signer may be the one who received the benefit of the debt and should pay it back. Or you may still want pay it eventually but have no idea when. In all these situations you need legal protection against your co-signer.

Your Legal Obligations to the Co-Signer

You need legal protection from your co-signer when you file a bankruptcy case because you either have a clear legal obligation to him or her, or at least a significant risk of such an obligation. Either way you should take care of it within your bankruptcy case.

You have a clear legal obligation to your co-signer if the two of you formalized the terms of that obligation, perhaps in writing but orally may be enough. The basic terms would include who was supposed to pay the debt and what would happen if that person did not pay it.

For example, you and your co-signer may have explicitly agreed that you would be responsible for making all the payments on the debt, and that if you did not make any payment on time so that your co-signer had to pay it, then you would owe him or her however much he or she paid.

Unclear Obligations

Practically speaking often when two people jointly share a debt, the obligations between them are often not clearly agreed upon and are seldom put into writing. But even then, legal obligations could arise between them based on their common understanding.

For example, assume you needed a co-signer on a loan for your business, and your sister agreed to co-sign it. You and your business received all the benefits of the loan. Then when later you didn’t pay the loan and your sister had to pay it off, she would likely have legal grounds to come after you for the amount she paid.

Including Your Co-Signer in Your Bankruptcy

Either way, whether your obligation to your co-signer is legally clear or not, if you are filing bankruptcy and not paying the co-signed debt you need to discharge (permanently write off) whatever obligation you do have to that other person. You do this by listing your co-signer as a creditor in your bankruptcy schedules.

To emphasize, you should do this even if you think you don’t really have legal liability. For example, you may remember the co-signer telling you that if you can’t make the payments he or she would do so, and wouldn’t come after you for those payments. Well, he or she may remember it differently. It’s better to err on the side of caution and cover whatever legal liability there may be.

Protection against Your Co-Signer

Once you file bankruptcy, your co-signer—just like all the rest of your creditors—is legally prevented from contacting you to collect the debt. He or she can’t try to make you pay the underlying co-signed debt (which you’ve also included as a debt in your bankruptcy documents). The co-signer also can’t pressure you to pay him or her directly.  

If your co-signer tries to do either of these, he or she would be violating the “automatic stay,” the law that prevents creditors from trying to collect during a bankruptcy case. And if you were pursued by your co-signer after the bankruptcy is completed and your obligations legally discharged, he or she would be in violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.

Paying Your Co-Signer without Legal Obligation

Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. It is totally up to you whether you continue to have a moral or any other kind of obligation to the co-signer. The benefit to you is that if you do decide to pay your co-signer or the co-signed debt, it will be done without legal pressure. You will instead be able to pay whenever and to whatever degree your sense of moral or personal obligation tells you to.

Conclusion

Talk with your attorney about your intentions with your co-signer. He or she can show you the safest ways to fulfill whatever sense of obligation you may have.

 

A Fresh Start at Protecting Your Co-Signer Better

February 17th, 2016 at 8:00 am

The “co-debtor” stay, available only under Chapter 13, is a creative tool for protecting your co-signer from being forced to pay your debt.

 

The last blog post was about filing a Chapter 7 “straight bankruptcy” case to “discharge” (legally write off) all or most of your other debts so that you could better afford to pay your co-signed debt. Today we get into how a Chapter 13 “adjustment of debts” gives you much more time to pay a co-signed debt if Chapter 7 doesn’t free up enough money to let you do so.

And if you don’t want to pay the co-signed debt, Chapter 7 and Chapter 13 can protect you from both your co-signed creditor AND your co-signer.

But first, today: if you want to, how can you protect your co-signer even better with a Chapter 13 case?

Chapter 7 Shortcomings

The Chapter 13 procedure doesn’t just give you more time to pay a co-signed debt—up to as long as 5 years. It also protects the co-signer throughout that time from the creditor. And during that time it also protects you from both the co-signed creditor and from your co-signer.

These are all practical shortcomings under Chapter 7.

First, under Chapter 7 you may well not have enough money each month, even after discharging your other debts, to make the payments on your co-signed debt. The situation is even harder if you’re already behind on the payments and have to catch up.

Second, Chapter 7 provides no protection for your co-signer at any point during the 3-4 months that it generally lasts, and none afterwards.

And third, because of the lack of protection for your co-signer under Chapter 7, together with your desire for him or her to not be hurt by that debt, you may well feel constant pressure to take care of the debt even when doing so is very difficult.

Chapter 13’s powerful and flexible “co-debtor stay” solves all these problem.

The “Co-Debtor Stay”

When you file either a Chapter 7 or a Chapter 13 case, you are protecting yourself and your assets from virtually all the collection efforts of all of your creditors through the “automatic stay.” It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, and all the rest against you.

Chapter 13—and only Chapter 13—also gives you the “co-debtor stay. “ It protects your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt. So when you file a Chapter 13 case, your co-signer is immediately protected from that creditor, not just you.

You Protect Your Co-Signer by Paying the Debt through Your Chapter 13 Plan

Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan, throughout which time your co-signer is protected.  

The co-signed creditor can pursue you co-signer only if your Chapter 13 payment plan does NOT show that the debt will be paid in full by the end of your case.

So, you and your attorney can protect your co-signer by just earmarking enough money in your Chapter 13 plan to eventually pay that co-signed debt in full. And then you have to actually make your plan payments so that you successfully complete your case and pay-off that co-signed debt by that time.

Being Allowed to Favor the Co-Signed Debt

Accomplishing this is often easier than you think. That’s because in most parts of the country you can favor a co-signed debt in a Chapter 13 plan over most of your other creditors. You can often arrange to pay that one debt in full while your other “general unsecured” creditors receive little, or maybe even nothing at all. Since you are focusing your financial resources on paying off that co-signed debt, paying it off often becomes much more doable.

Crucial Flexibility

Your Chapter 13 payment plan is structured so that the co-signed debt is paid over time usually not under the usual payment terms of that creditor. Rather you can change the payment timing and amounts to fit within your budget. As part of that flexibility, you can fit paying off the co-signed debt within any other ongoing debt obligations, such as recent income taxes, child or spousal support arrearages, and/or catch-up mortgage payments.

You can see how Chapter 13’s flexibility can solve an otherwise impossible co-signer dilemma.

Caution: Two Conditions to the Co-Debtor Stay

Careful because, first, the co-debtor stay applies only to co-signed consumer debts, not business debts. Importantly, it does not apply to income tax debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner if you file a Chapter 13 case and the other person does not file his or her own bankruptcy case (or does not file jointly with you in the case of a spouse).

Second, the co-debtor stay can be successfully challenged if YOU did not receive the benefit of the co-signed debt (either the cash borrowed or whatever was purchased), but rather your CO-SIGNER did. (In other words, you co-signed on his or her behalf not the other way around.) In this situation the co-debtor stay would still go into immediate effect at the filing of your Chapter 13 case. But then the creditor could ask the bankruptcy court for permission to pursue the co-signer by getting “relief from the co-debtor stay.” The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt.  

Summary

As long as these two exceptions don’t apply, and you meet the conditions outlined above, the Chapter 13’s “co-debtor stay” gives you a fresh start with you co-signer by:

  • giving you the whole 3-to-5-year life of the payment plan to pay off the co-signed debt, within your budget and as you take care of other important obligations
  • immediately stopping the creditor’s collection efforts against your co-signer as soon as you file your case, and protects the co-signer throughout the Chapter 13 case
  • protecting you both from the creditor and from your co-signer as you fulfill your sense of obligation to your co-signer

 

A Fresh Start at Protecting Your Co-Signer

February 15th, 2016 at 8:00 am

Bankruptcy may give a fresh start not just to you, but also to your relationship with your co-signer.

 

Bankruptcy Can Be the Best Way to Help Your Co-Signer

Even if you think that filing bankruptcy would give you the financial relief you need, you may not want to do it because you don’t want to hurt a co-signer. If so, we commend you.  

And if don’t want to hurt your co-signer (or anyone otherwise obligated with you on a debt), you will be happy to hear that by filing bankruptcy you can often get both financial relief for yourself and the best practical protection for your co-signer.

Before showing you how, let’s look more closely at the two distinct ways that you might want to protect your co-signer. Then we’ll show how you filing a Chapter 7 “straight bankruptcy” case could provide that protection. And then in our next blog post we’ll show how a Chapter 13 “adjustment of debts” case could deal protect your co-signer in different situations.

Two Ways to Protect Your Co-Signer

First, if you could, you likely want to protect your co-signer from having to pay the co-signed debt. Assuming you are the one who benefitted from her or her co-signing, you don’t want your co-signer to have to pay back your debt.

And second, if possible, you would also like to protect the co-signer’s credit record, so that he or she is not hurt this way either.

Protect Your Co-Signer from Being Forced to Pay Your Debt

We’re assuming that you care enough about your co-signer and feel responsible enough about protecting him or her that you would be willing to pay the debt if only you were able to do so.

Filing Chapter 7 may enable you to do so. “Discharging” (legally writing off) all or most of your other debts may free up enough money so that you could afford to pay the co-signed debt. Or if your co-signer has already paid the debt in part or in full, Chapter 7 may enable you to pay back your co-signer.

Most likely, filing a Chapter 7 case would legally allow you to stop paying all or most of your debts, including the co-signed debt, immediately (if you were paying it beforehand). Then usually within 3 or 4 months your legal obligation to pay that co-signed debt would likely be forever discharged. Indeed, your legal obligation to pay your co-signer would very likely also be discharged.

However, bankruptcy law clearly allows you to pay any debt afterwards if you want to. So, you can decide that even though you don’t have a legal obligation to pay the co-signed debt you still want to pay it.

To determine whether taking on this not-legally-required commitment is appropriate, talk it over very carefully with your attorney. When you review your options with him or her, the two of you will prepare a monthly budget. You’ll be informed about the debts that will likely be discharged and those that you will likely need to and/or want to continue paying (your mortgage, vehicle loan, recent income taxes, and such). From this you’ll be able to make a good estimate about whether you would be able to reliably continue or start making the payments on a co-signed debt.

Protect Your Co-Signer’s Credit Record

If you have not yet fallen behind in payments on your co-signed debt, and if (as just described) a Chapter 7 filing would enable you to keep current on those payments, you could likely prevent hurting your co-signer’s credit record.

But on the other hand if you’ve already hurt your co-signer’s credit record because of failed or late payments, what’s happened in the past cannot be undone. The passage of time will heal his or her credit record, as long as you prevent any further hits on it. You do that by quickly catching up on the back payments right after filing your Chapter 7 case, and then keeping current going forward.

So in looking closely at your after-filing-bankruptcy budget with your attorney, figure out how fast you can realistically come up with the money to bring the co-signed debt current.

If you can’t catch up within a month or two, you’re going to be hurting your co-signer’s credit until you do. So consider the following possibility: if you are in good relations with your co-signer, and can convince him or her that you want to protect his or her credit record, see if he or she is willing and able to pay the creditor the amount needed to catch up to protect his or her credit going forward. In return you’d commit to making the regular monthly payments until the debt is paid off, as well as paying back whatever he or she paid. (But see the caution below.)

Caution: Making New Promises to Your Co-Signer

As stated above, you legal obligation to the co-signed creditor would very likely be discharged in a Chapter 7 bankruptcy. You likely also have separate legal obligation to your co-signer for you to pay that debt so that he or she does not need to, and to pay back any amount that he or she has already paid. That separate obligation to the co-signer will also very likely be discharged in your Chapter 7 case.

If however you decide to continue paying the debt to the creditor to protect your co-signer, or to pay back your co-signer, you are doing so to fulfill a moral or some similar sense of duty. It is not to fulfill a legal duty because that duty is discharged in bankruptcy.

Since you would not be legally obligated to keep paying that co-signed debt, or to pay back your co-signer, if at any point you stopped paying it usually neither the creditor nor your co-signer would have any legal recourse against you.

But you do need to be careful. Discuss the situation thoroughly with your attorney so that you are clear what your legal obligations are, and so that you do not create an unintended legal obligation for yourself.

 

Giving More Thanks for Chapter 13 “Adjustment of Debts”

December 2nd, 2015 at 8:00 am

We’re lingering in the Thanksgiving spirit by appreciating what Chapter 13 has to offer.

 

Beyond the first 3 we covered a couple days ago, here are 3 more impressive features of Chapter 13 which are completely unavailable under Chapter 7 “straight bankruptcy”:

4) The “Co-Debtor” Stay

The “co-debtor stay” enables a person filing a Chapter 13 case to immediately prevent a creditor from requiring a co-signer to pay a co-signed consumer debt. Depending on what you want, that protection can be either temporary or permanent.

The protection is temporary if the creditor asks the court for permission to pursue your co-signer and you don’t do anything to prevent that from happening.

The protection of your co-signer is permanent if you arrange in your 3-to-5-year Chapter 13 payment plan to pay the co-signed debt in full. Most of the time you are allowed to pay a co-signed debt in full through your Chapter 13 payment plan while paying less, or sometimes even nothing, to most of your other debts. That is, in most parts of the country you can completely favor your co-signed creditor to the detriment of your other creditors.

As a result, your co-signer is immediately protected upon the filing of the Chapter 13 case, he or she is protected throughout the life of the Chapter 13 case, and when the case is over you’ve paid the debt in full so that the creditor has no further recourse against your co-signer.

5) Protection beyond Property “Exemptions”

If you have an asset which you really need (or simply want to keep) but is not covered by a property exemption, under Chapter 7 the bankruptcy trustee could take and sell it, giving the proceeds to your creditors. But instead under Chapter 13 you can keep that asset by paying for the privilege during the course of your payment plan.  

You do that by paying to your creditors as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee. But you have 3 to 5 years to do that, throughout which time you are under the protection of the bankruptcy court. Your Chapter 13 payment plan is structured so that your obligation is spread out over this length of time, making it relatively easy and predictable to pay (in contrast to, for example, negotiating with a Chapter 7 trustee to pay to keep an asset).

You may even be able to keep your non-exempt asset(s) in a Chapter 13 case without paying anything more to your creditors. This tends to be more likely if are also in the Chapter 13 case because you owe taxes or back support payments. One of the biggest advantages of Chapter 13 is that it can play your financial problems—like having too much assets and owing back taxes—against each other. You may be able to pay money into your plan that both protects your assets and pays the taxes and/or support that you can’t discharge anyway. So you can get your assets protected and taxes/support paid, and finish the case free and clear of your debts.

6) Catching up on Child and Spousal Support Arrearage   

If you’re behind on support payments, only Chapter 13 can stop your ex-spouse or support enforcement agency from very aggressively pursuing you, and give you a reasonable time to cure your support arrearage, if you follow the rules.

Bankruptcy is limited in its ability to help deal with child and spousal support debts, with Chapter 7 not able to directly help at all other than to free up money so that you can pay ongoing and back support. However, Chapter 13 CAN stop the collection of any support that you are behind on as of the date the case is filed, giving you a very flexible way to catch up on what you owe without the huge pressure that your ex-spouse or the support enforcement agency usually puts on you. But this huge benefit comes with conditions and responsibilities, so be sure to fully understand and follow the rules.

Besides earmarking enough money within your plan to pay off the unpaid support payments owed, you must also:

  • Keep strictly current on your ongoing support (assuming you continue to owe it). This includes being very clear about when the first monthly support payment is due after your Chapter 13 case is filed and making sure it is paid on time. Otherwise your ex-spouse/support enforcement can immediately inform the bankruptcy court that you’ve not made the payment and get permission to start/resume collection of the back support.
  • Keep current on your monthly Chapter 13 plan payments. Those plan payments are what is paying the support arrearage (along with whatever other debts you are paying through the plan). So if you fail to make a single payment on time—at any time in your case—your ex-spouse/support enforcement can ask the court for permission to resume collection of the back support amount.

Chapter 13 gives you extraordinary power to stop collection of whatever support you owe at the time that your case is filed, as long as you are very vigilant and not squander that power. If you do it right, you’ll come out of your Chapter 13 case current on your support obligation, and, other than a home mortgage, likely completely debt-free.

 

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