Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘discharge of debts’ tag

Bankruptcy Writes Off (Some) Income Taxes

March 4th, 2019 at 8:00 am

Bankruptcy permanently writes off income taxes, as long as the tax meets certain conditions. For some taxes the conditions are easy to meet. 

 

Bankruptcy DOES Write Off Income Taxes

There are certain very special debts that bankruptcy never writes off. Child and spousal support is a good example. See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code.

Income taxes are different. Income taxes CAN be written off, as long as you meet a few conditions. These conditions mostly tie in to timing—when the tax was due and when (and whether) you filed its tax return.

The Two Timing Conditions

In most people meeting these conditions is straightforward. You essentially have to file your tax returns and wait long enough to comply with for the following two conditions:

  1. You submitted the pertinent tax return to the IRS/state and did so more than 2 years before filing your bankruptcy case. Section 523(a)(1)(B)(ii) of the Bankruptcy Code.
  2. The legal due date for that tax return was more than 3 years before filing your bankruptcy case. Section 507(a)(8) of the Bankruptcy Code.

For example, assume you owe the IRS $5,000 for the 2014 tax year, and you submitted its tax return a full year late—in April 2016. It’s been more than 2 years since that so you meet the first condition. The legal due date for that tax return was in April 2015, which is more than 3 years ago. So you also meet the second condition. So in most situations bankruptcy would write off that 2014 income tax debt of $5,000.

A Few Important Twists about the Timing

Keep three practical considerations in mind about these two time periods:

  1. The 3-year period only starts to run when the tax return was “last due, including extensions.” Section 523(a)(1)(B)(ii). The 3 years only begins at the extended due date. It’s absolutely crucial that your bankruptcy lawyer gets the correct information from you about whether you got an extension that year.
  2. If you’re cutting it close (because you’re in a big hurry to file), the precise tax return due date can be crucial. Remember that taxes are not always due on April 15 and October 15 (for extensions). Weekends and holidays can push the due date out even several days. That means you may have to wait some extra days to file your bankruptcy case to be able to write off that tax debt.
  3. Careful about making a mistake about whether and when you actually submitted your tax return. It may be worth finding out directly from the IRS/state to avoid getting a rude surprise after filing your bankruptcy case.

Other Uncommon Conditions

There are two other conditions that might possibly apply, in more complicated situations.

  1. More than 240 days must pass from when the IRS/state assessed the income tax to when filing your bankruptcy case. Assessment usually happens within a few weeks after you get your tax returns in to the IRS/state. So usually this condition is easily met. It only tends to apply if assessment gets delayed with a tax audit, litigation in Tax Court, a tax appeal, offer in compromise, and other complications.
  2. Regardless of all these timing rules, you can never write off an income tax based on a fraudulent tax return or if you intentionally evade a tax. This is uncommon. It tends to only come up if you were significantly dishonest with the tax authorities.

Conclusion

In most situations you can write off the tax if you filed your pertinent tax return and both the 2-year and 3-year periods have passed. But the intersection between bankruptcy and income taxes is definitely complicated. Be sure to see a competent bankruptcy lawyer if you owe taxes so that you get the full benefit of the law.

 

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.

Fully Complying with Your Chapter 13 Case

March 12th, 2018 at 7:00 am

Besides fulfilling the terms of your Chapter 13 payment plan, you may need to make other payments and meet other requirements. 

 

The bankruptcy court’s approval of your payment plan (at the Confirmation Hearing) happens about 2-to-4 months after filing your case. At that point your Chapter 13 case is fully on its way. You likely have about 3 to 5 years altogether to finish the case. Having gotten to this crucial point, there are a few other crucial steps you need to fulfill to successfully finish your case.

Last time we got into three of these:

  • Do your “debtor education”
  • Avoid or defeat “nondischargeability complaints”
  • Pay your Chapter 13 plan payments

Today we lay out two other crucial steps.

Pay Any Obligations NOT Within Your Plan Payment

In many Chapter 13 cases you pay nothing to your creditors except the single plan payment each month. The trustee divides that payment among your creditors as laid out in your court-approved plan. You pay nothing else to any creditor.  

But in other cases, you pay one or more creditors directly. This may be referred to paying “outside the plan.”

To be clear, you are not paying these secretly. Your plan clearly refers to these debts and their payments. So the bankruptcy court approves these payments. They’re just not included within the single monthly plan payment, for various possible reasons. (See the explanation in paragraph 3.1 of the official Chapter 13 Plan form.)

Often these are ongoing payments on secured debts such as home mortgages or vehicle loans. Direct payments are more likely used when you’re current and are simply continuing to make the regular payments. In some jurisdictions it’s considered easier for everybody that you continue to pay such straightforward payments directly to the creditor. Paying them through the trustee is seen as causing too much delay and accounting confusion.

Naturally it’s essential that you know whether all of your creditors are being taken care of through the single plan payment, or whether there’s a creditor or two you need to pay directly. Your income and expense schedules should make that clear, as well as the plan itself. But if you have any doubt, be sure to ask your bankruptcy lawyer.

Do Anything Else Required

Two documents combined—your plan and the Order Confirming Plan signed by the judge—are the law of your case. These documents contain requirements beyond making payments. They include some standard ones that apply to just about all consumer debtors. There may also be some special requirements for you.

The standard requirements usually include:

  • providing the trustee with copies of your annual income tax returns (paragraph 2.3 of the official Chapter 13 Plan form)
  • turning over to the trustee “income tax refunds received during the plan term” (paragraph 2.3 of the official Chapter 13 Plan form)
  • avoid using credit without prior Chapter 13 trustee or bankruptcy court permission

Special requirements can include:

  • a specified deadline to sell an asset
  • permission for you to use an income tax refund for a specific expense, such as a vehicle repair
  • a requirement to report when an unemployed spouse gets employed

Notice that these special requirements often relate to anticipated changes to your income, expenses, or assets. These changes can directly affect your future obligations under your Chapter 13 case. They may well require you to adjust the payment terms of your plan in the future.

Conclusion

It does take consistent effort to complete a Chapter 13 case successfully. But that effort is worthwhile because it gains you tremendous benefits. Chapter 13 provides many tools that Chapter 7 cannot. Through those tools you can likely meet some otherwise impossible goals. Once you’ve decided that these goals are worthwhile, usually the effort will be worthwhile as well. 

 

“General Unsecured Debts” in Chapter 13

December 13th, 2017 at 8:00 am

You pay your general unsecured debts only as much as you can afford during a Chapter 13 plan, with the rest then legally written off forever.  

 

Our last blog post was about how Chapter 7 “straight bankruptcy” deals with “general unsecured debts.” Mostly, they are discharged—legally, permanently written off. There are some exceptions. At the end of the last blog post we said we’d talk next about those exceptions. But before we do, today we want to give the Chapter 13 “adjustment of debts” side. What happens to “general unsecured debts” in a Chapter 13 case?

“Priority” and “General Unsecured” Debts

First, let’s remind you about the difference between these two kinds of unsecured debts. The difference is crucial because of how they completely differently they are treated in a Chapter 13 case.

Remember that priority debts are specific categories of debts that the law says must be treated very specially. They are all on a list at Section 507 of the U.S. Bankruptcy Code. The main “priority” debts in consumer Chapter 13 cases are past-due child and spousal support and certain recent income tax debts.

If an unsecured debt is not on the list of priority debts then it’s a general unsecured debt. They are by far the most common kind of debt.

The Difference in Treatment under Chapter 13

You must pay priority debts in full during the course of the 3-to-5-year Chapter 13 payment plan. You usually only have to pay general unsecured debts to the extent you have money available to pay them.

So, priority debts have to be paid 100%. General unsecured debts are often paid only a small percent, often only 5-10%, sometimes maybe even 0%.

In most situations the result is that during your Chapter 13 payment period you must pay your priority debts in full before paying your general unsecured debts anything.

General Unsecured Debts during a Chapter 13 Case

So during a Chapter 13 case you pay your general unsecured debts as much as you can pay them. But that’s after paying your living expenses, and your secured and priority debts. You usually even get to pay the costs of your case (your bankruptcy lawyer’s fees) and trustee fees ahead of your general unsecured debts.  

In fact, if your income goes down or expenses go up during your case, you may even be able to amend your payment plan to reduce what the general unsecured debts get paid because you can no longer afford to pay them as much as you originally expected.

General Unsecured Debts at the End of a Chapter 13 Case

After all this, what happens to your general unsecured debts at your successful completion of a Chapter 13 case? After paying these debts as much as you can afford to pay them (as specified in your court-approved payment plan), the remaining balance, no matter how much, is discharged—legally written off.

At that point you’ve paid your priority debts in full. To the extent you are taking care of secured debts (home mortgage, vehicle loan, furniture debt, etc.), you’ve paid all you need to pay them, leaving them current or paid off. You’ve paid the general unsecured debts whatever percentage (if any) your plan provides, with the rest discharged. You are now current on one or two long-term secured debts you’ve chosen to keep (if you had any), and otherwise you’re completely debt-free.

 

Using Time to Your Advantage in Chapter 7 and 13

November 20th, 2017 at 8:00 am

Chapter 7’s big advantage is that it’s quick. Chapter 13’s big advantage is that it buys you more time to do what you want or need to do.


A Key Distinction-Treatment of Time

We’re starting a series of blog posts about the practical differences between Chapter 7 and Chapter 13 bankruptcy. Before getting down into the details let’s look at a difference that affects just about everything else—time. These two options deal with time very differently.

Sometimes getting something done quickly is to your advantage. Sometimes getting more time to get something done is to your advantage. Here’s how these play out with Chapter 7 and 13.

Chapter 7—In and Out Fast

If you’re like most people thinking about bankruptcy, you’ve been hurting financially for a long time. Understandably you want to get a fresh financial start fast.

With any kind of bankruptcy you get relief from almost all creditor collection actions the minute you file your case. Then with Chapter 7 “straight bankruptcy” your debts are discharged less than 4 months from the day you file the case. All or most of your creditors can never again attempt to collect on the debts.

So, you get immediate relief, your creditors are put on hold, and then just a few months later you’re done. You have your fresh start.

Chapter 7—One Point in Time

Chapter 7 bases just about everything on that moment in time when your case is filed. It particularly focuses in on your assets as of that moment. Generally your future assets are not relevant, unless they derive from assets owned as of the date of filing. (Rental income from property you own now would be an exception.)  Future income doesn’t count as present assets, unless it was for work done before filing.

Chapter 7—Short-Lived Automatic Stay

One problem with Chapter 7 is it can be TOO quick, when it comes to protecting you from certain creditors. The “automatic stay” is the name of the protection that kicks in the moment you file a bankruptcy case. That protection lasts only as long as the case is open. In a Chapter 7 case that means only 3-4 months, at the most.

Chapter 7 also gives you no enforceable mechanism for making payments on debts that you want or need to pay. For example, if you’re behind on a mortgage and want to catch up you have to bring it current by whatever terms and timetable the mortgage holder demands. There is nothing in Chapter 7 that compels the mortgage holder to give you more time. It’s the same if you’re behind on a vehicle loan, child or spousal support, or recent income taxes. You have little or no protection, and no power to compel these kinds of creditors to be more flexible.

(Chapter 7 does allow for “reaffirming” secured debts like vehicle loans. But “reaffirmation” doesn’t usually help if you’re behind on payments. It just makes you liable as if you hadn’t filed bankruptcy. And it doesn’t apply to other kinds of not-discharged debts like child/spousal support or income taxes.)

Chapter 13—Stretching Out Time in Your Favor

A quick bankruptcy procedure isn’t always in your favor. So getting in and out of bankruptcy quickly isn’t good if you’re left with ongoing special debts.

That’s not a problem if the surviving debt is one you can readily handle. You may have had trouble keeping up with payments on your vehicle loan. But after discharging all or most of your other debts under chapter 7 you may have no trouble making them. Same thing may be true if you still owe a relatively small amount of nondischarged income tax. You may well be able to pay it off conveniently through a negotiated monthly payment agreement.

Problems occur when the debt that would survive a Chapter 7 case is too large to handle on your own. It’s not at all unusual to have more than one such debt. Then you need the substantial additional time that Chapter 13 “adjustment of debts” gives you.

With Chapter 13 you’re not effectively being left on your own to deal with these special debts as under Chapter 7. Instead Chapter 13 can give you up to 5 years of time and protection. You have up to that much time to bring a debt current or to pay it off.

Chapter 13—Flexible Time

Chapter 13 doesn’t just buy you time to deal with those other problems. It buys you flexible time. It does so in three ways.

First, the amount of time it buys flexibly depends mostly on your budget. If your income qualifies you for a 3-year plan, you’re usually allowed to stretch it out longer. If you just need an extra 3 months, or the full 5 years, or anything in between, your personal budget is often the main determinant.

Second, if you have more than one important debt you need to pay, you often have flexibility about that. For example, let’s say you owe back home property taxes and child support, and recent income tax. All of them have to be paid in full before the end of your Chapter 13 case. But the property taxes accrue high interest. The child support you feel morally obligated to catch up fast. The income tax is not accruing interest. Your Chapter 13 payment plan could likely get the property tax and child support caught up before paying anything on the income taxes.

Third, Chapter 13 flexibly keeps your options open. For example, if you’re considering selling your home at some point, your payment plan could schedule that for 3 years into your case. You could keep your plan payments lower until paying a lump sum out of those later home sale proceeds. Or you may be able to leave that potential home sale open-ended, depending on what happens in the meantime.

Conclusion

As you can see, Chapter 7 and 13 each turn time in your favor, depending on what you need. If you don’t have a lot of debt that would not be discharged in a Chapter 7 case, then its quickness can be a big advantage. If you do have debt that would survive, Chapter 13’s length can be a great advantage. It not only buys you time but gives your protection and flexibility for dealing with these special debts.

 

Timing: Writing Off Recent Credit Card Debt

September 25th, 2017 at 7:00 am

Using a credit card shortly before filing bankruptcy doesn’t seem right. The law agrees. Writing off this kind of debt can be a problem. 


Our last blog post was about writing off—“discharging”—income taxes.  The conditions you have to meet to discharge a tax debt are mostly very clear. These conditions are based on rather straightforward calculations of time. If you don’t meet those time-based conditions the tax does not get discharged; you still owe it.

Credit card debts are completely different. First, they’re almost always discharged. Second, there are some timing rules but those rules don’t necessarily decide whether or not the credit card debt is discharged or not. We’ll explain all this in today’s blog post.

The Point of the Timing Rules

With income tax debts, they’re NOT discharged unless you meet the timing rules. With credit card debts they ARE discharged unless you meet the timing rules.

With income taxes the debt is not discharged unless it’s been long enough since the pertinent tax return was due and since that tax return was actually submitted to the IRS/state. The point of the rules is the give the IRS/state a chunk of time to try to collect the tax.

With credit cards the debt is discharged unless it’s been too short of a time since the credit card charge. The point of the rules is to make it harder to discharge a charge incurred after deciding to file bankruptcy.

A Mere Presumption

As we just said, the timing rules with credit cards merely make it harder to discharge a credit card debt.  If you run afoul of the timing rules with income taxes, you absolutely still owe the tax. With credit cards, if you run afoul of the timing rule there’s only a bigger chance that you would owe it. It just gives the creditor an easier time of making you pay it—a presumption that it can’t be discharged. But that creditor still needs to act or else it loses that advantage. The entire credit card debt could still get discharged.

For example, if you owed $7,500 on a credit card, of which you incurred $1,000 recently, the entire debt would be discharged in bankruptcy if the creditor did not timely object.

 Only a Portion of the Credit Card Debt is at Risk

With income taxes the entire tax is either discharged or it’s not. With credit card debts, most of the debt could be discharged while only the portion that violates the timing rules is not.

In the above example, only the $1,000 incurred recently, in violation of the timing rules, would usually be at risk of not being discharged.

In Rare Circumstances the Entire Credit Card Debt Could Be at Risk

The following may be confusing in light of what we said so far. If a creditor has evidence that you incurred the entire credit card debt without the intent to pay it, the creditor can challenge the discharge of the entire debt. The timing rules do not need to apply (although if they would that may make the creditor’s argument easier).

In the above example, if the creditor somehow had evidence that you didn’t intend to repay any of the $7,500 at the time you incurred the debt, the creditor could object to any of the $7,500 debt being discharged. It doesn’t matter how long ago that $7,500 debt was incurred.

The Timing Rules

So here are the timing rules.

If you buy more than $675 in “luxury goods or services” (essentially, any non-necessity) from any single creditor during the 90-day period before your bankruptcy is filed, that specific debt is presumed not to be discharged. Also, if you make a cash advance of more than $950 from any single creditor during the 70-day period before your bankruptcy is filed, the debt from that cash advance is presumed not to be discharged.  See Section 523(a)(2)(C) of the U.S. Bankruptcy Code.

The Presumption Is Only a Presumption

Just because a purchase/cash advance meets these conditions do not necessarily mean you can’t discharge that part of the debt. You can defeat the presumption with evidence that you did actually intend to pay the debt when you incurred it. You can still win by persuading the court of your honest intent. You and your bankruptcy lawyer can do this through your own testimony. You can also provide evidence of other relevant facts, such as of you making payments after incurring the debt, or the subsequent event(s) in your life that induced you to file bankruptcy (and not pay the debt after all).

Two Examples of Bankruptcy Timing with Medical Debts

September 20th, 2017 at 7:00 am

How to know whether to delay filing bankruptcy when you’re expecting new medical services and their medical debts?  Here are two examples.   


Our last blog post was about the importance of timing your bankruptcy filing to include more of your debts.

One example we used was of a person with unresolved medical issues requiring ongoing medical care. That person could be overwhelmed by medical and other debts already owed. But he or she may wonder whether it would be wise to hold off on filing bankruptcy until the anticipated medical debts were incurred and so could be included.

We’ll now present two examples of this situation, each with different facts. We’ll show how these different facts resulted in these two people getting quite different legal advice.

Jeremy’s Facts

Jeremy is 30 years old, and single. He was in a car accident a year ago, resulting in serious injuries and huge medical bills. He’s not yet medically stable. He was underinsured, so that a big chunk of his medical expenses were covered but a lot were not. Because he’s maxed out his vehicle insurance coverage he’ll be liable for most of his future medical expenses.

Jeremy currently owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. In the next year or so he expects to add on another $30,000 to $40,000 in medical bills.

Jeremy does not have much in assets. His current income is low, as are his immediate prospects. That’s largely because he’s working a limited schedule as a result of his injuries, medical appointments and surgeries. He was in the military and so didn’t finish college until a couple of years ago. His future income prospects are quite good.

Should Jeremy File Bankruptcy Now or Wait?

If Jeremy would file bankruptcy now, it wouldn’t write off (“discharge”) his upcoming $30-40,000 in medical bills. A year from now he’ll be back in the hole that much.

He could then try to negotiate his way to paying reduced amounts. And if his income increases he may end up being able to pay off his debts, eventually. But that is not a satisfactory solution.

His bankruptcy lawyer instead advises that he wait to file a Chapter 7 “straight bankruptcy” until he became medically stable and had incurred most or all of his medical debts.

Jeremy has limited exposure to harm by his creditors in the meantime. All of his assets are “exempt”—worth little enough to be fully protected from his creditors, even outside bankruptcy. His income is sporadic and low enough that he’d lose little if his wages were garnished. Jeremy hasn’t been sued yet. That may be in part because his creditors don’t see him as a good prospect for forced collection.

So Jeremy does wait, finishes his surgeries and other medical procedures, racking up another $35,000 in medical bills, and then files a Chapter 7 case to discharge all of his debts.

Mary’s Facts

Mary is 65 years old, also single. She had a heart attack two years ago. Like Jeremy she owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. Her heart ailment is a chronic condition which will definitely require medical attention the rest of Mary’s life.

She works full time in the same job she’s had for a decade. Her income is modest but high enough so that if her wages were garnished she would lose a significant amount.

Indeed she just got served with a lawsuit by her largest medical creditor for $10,000. This creditor likely sued knowing that it could likely get paid through wage garnishments.

Should Mary File Bankruptcy Now or Wait?

Because Mary just turned 65 years old she now qualifies for Medicare. She expects to have both Medicare Part A (hospital insurance) and Part B (medical insurance). She understands that these will pay for most of her anticipated medical costs.

So with her future medical expenses largely taken care of, there is no reason for Mary to wait to file bankruptcy. The just-filed lawsuit for $10,000 is good reason not to wait. If she files a Chapter 7 case through her bankruptcy lawyer before her deadline to respond to the lawsuit, she will prevent it from turning into a judgment and then a garnishment.

So Mary does just that. She files the Chapter 7 case, stops the lawsuit in its tracks, and within about 100 days discharges that $10,000 and all the rest of her debts. She gets a fresh financial start heading into her retirement years.

A Moral and Legal Note

Note that incurring a debt, medical or otherwise, when you intend not to pay it is questionable, legally and morally.

The moral question is a personal one. If it’s a matter of your life and death, or even just of your health more broadly, it’s likely defensible to have a surgery or other medical procedure done even if you knew you couldn’t pay for it and intended to discharge the resulting debt in bankruptcy.

The legal question is clearer but still murky. The law does not approve of incurring a debt when you don’t intend to pay it. That can be considered fraud on the creditor. It may turn on the facts of the case. If you’re in the midst of a medical emergency you may not be conscious and able to give your consent for medical services.  Also, most medical creditors don’t raise objections base on issues of fraud in bankruptcy. And when they don’t raise this issue by a quick deadline, they lose the opportunity to do so in the future. So this legal problem usually resolves itself in this practical way.

Talk with your bankruptcy lawyer about these moral and legal issues if you are considering delaying your bankruptcy filing in order to include future debts.

 

A Sample Completed Chapter 13 Case

September 13th, 2017 at 7:00 am

What does the completion of a successful 3-to-5-year Chapter 13 case look like? What happens to your assets and debts? 

 

The Sample Chapter 13 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. We focused on the benefits you get at the tail end of your case, and on the case’s final events.

But like so many other bankruptcy procedures, Chapter 13 completion makes much more sense when tied to tangible facts.

So imagine a Chapter 13 case filed to catch up on a home mortgage, “strip” a second mortgage, catch up on some property taxes, and deal with some IRS income taxes.

Henry and Heather had been $7,500 behind on their first mortgage and so at risk of foreclosure. The situation was worsened because they were also $3,000 behind on their home’s property taxes. They hadn’t paid on a $30,000 second mortgage in months, so that mortgage holder was also threatening foreclosure.

On top of this they owed $10,000 in income taxes from several years ago when they had to close down a business. That business had started their downward financial spiral. They also owed $5,000 for last year’s income taxes, plus $90,000 in a combination of medical and credit card debts.

Their Chapter 13 Plan

Three years ago Hannah and Henry’s bankruptcy lawyer had recommended they file a Chapter 13 case. Their Chapter 13 payment plan enabled them to do the following:

  • Catch up on the $7,500 in late mortgage payments over the course of those 3 years.
  • Catch up on their $3,000 in property taxes over the same period.
  • Keep current on their ongoing mortgage and property taxes by budgeting for these obligations.
  • Prevent either their mortgage lender or the county tax collector from foreclosing or taking any other action to collect.
  • “Strip” their second mortgage from their home by establishing that all of its equity was exhausted by the first mortgage.
  • As a result they could stop paying the second mortgage and did not have to catch up on the arrearage. The entire $30,000 balance was treated as an ordinary unsecured debt.
  • Treat the older $10,000 in income taxes as an ordinary unsecured debt.
  • Pay newer $5,000 income tax debt as a “priority” debt, but without any further interest or penalties. Prevent the IRS from taking any collection action while paying it as their budget allowed.
  • Pay only 2 cents on the dollar on all $130,000 in their remaining unsecured debts: the $30,000 second mortgage, the $10,000 in older income tax, and $90,000 in medical/credit card debts. They could pay only $2,600 on this $130,000 because that is all that was available in their budget during their 3-year payment plan after paying the debts above.

The Completion of the Case

Now after 3 years Henry and Hannah have finished paying enough into their Chapter 13 plan to accomplish the above. Their Chapter 13 trustee so informs them, their lawyer, and the bankruptcy court. Then the following happens:

  • The bankruptcy judge signs a discharge order. That discharges—legally writes off—the unpaid 98%—$127,400—of the $130,000 of ordinary unsecured debt. That debt is gone.
  • Hannah and Henry are now current on their first mortgage and property taxes.  
  • Their “stripped” second mortgage is completely off their home’s title. This puts them that much closer to building equity again in their home.
  • They are current on income taxes, having discharged most of the older taxes and paid off the more recent $5,000.  
  • The court closes their Chapter 13 case.
  • Henry and Hannah are completely debt-free except for their caught-up mortgage.

 

Getting Ready to Finish a Chapter 13 Case

September 11th, 2017 at 7:00 am

Finishing a Chapter 13 case successfully is a big deal. It’s rewarding financially and emotionally. Here’s how it happens.  


The End-of-Chapter 13 Benefits

Just because of the way Chapter 13 works, a lot of its benefit comes near or at its very end. For example:

  • “General unsecured debts”: In most cases most of the debts are neither secured nor “priority,” meaning they are “general unsecured” ones. Also, in most cases a major portion of those debts are not paid through your Chapter 13 plan but rather discharged—legally written off forever. But that doesn’t happen until you successfully finish the case.
  •  “Priority” income tax debts: You have to pay these taxes (usually because they too new to discharge) through your Chapter 13 plan. But you usually don’t have to pay interest or any ongoing penalties on these taxes. However, if you don’t successfully finish your case that interest and those penalties would be imposed again. Once you finish the case, that interest and those penalties disappear.
  • “Stripped” second/third mortgage:  Chapter 13 may give you the power to turn a second or third mortgage into an unsecured debt. This “stripping” of the mortgage from your home gives you tremendous immediate and long-term financial savings.  But this “stripping” requires you to successfully finish the case.
  • Curing first mortgage arrearage: If you are using Chapter 13 to stretch out your payments for catching up on your mortgage, you may well not catch up until close to the end of your payment plan. Under Chapter 13 your mortgage lender is prevented from foreclosing while you are under bankruptcy protection. But if your case gets dismissed before you completely catch up on the mortgage, your lender could start/resume foreclosure. You need to finish your case to ensure that you get current on your mortgage.

How Do You Know How Much Longer Your Case Needs to Go?

In some Chapter 13 cases you know exactly how many months it is supposed to take. Other cases are less clear. That’s because cases can be affected by events that unfold during the years that a case is active.

For example, your Chapter 13 plan may require you to catch up on your “priority” taxes or unpaid child support. You may not know precisely how much you owe in taxes or support at the time your bankruptcy lawyer calculates the length of your plan. Once the exact amount becomes known that may extend or shorten your case. That may be true of certain other kinds of debts, like the arrearage on a home mortgage that you’re curing.

Also, changes in your income and/or expenses can result in a plan “modification,” again potentially extending or shortening it.

So how do you know how long your case has to go while you are in the midst of it?

Your lawyer likely has the information to either very closely estimate or tell you exactly how long you have. He and she could also ask the Chapter 13 trustee to run this calculation. The trustee is likely set up to do that efficiently. (See our most recent blog post about the roles of this trustee.)

Case Completion Events

Once you’ve finished paying all you are required to pay into your Chapter 13 plan, the trustee tells you and your lawyer that you have done so. Your lawyer gets the opportunity for a final review of your case, to verify that everything went as it should.

Once the trustee is satisfied that you’re done, he or she informs the bankruptcy court. Then the court enters a discharge order. That discharges all (or virtually) all the debts that you have not paid through your payment plan. If your plan says you were to pay 20% of your “general unsecured debts,” the remaining 80% would be discharged. Unpaid income tax interest and penalties would be discharged. These creditors could never chase you for these debts. All of the other benefits of Chapter 13 would get finalized.

Simultaneous with the discharge order, the court would order the closure of your case.

You’d be done. It would make perfect sense for you to have a quiet little party to reward yourself for having successfully completed your case!

 

A Caution about Severing Your Chapter 13 Case from Your Spouse

September 1st, 2017 at 7:00 am

If getting separated or divorced while in a Chapter 13 case, you’ll likely each need a new lawyer for independent advice about what to do.   

 

Last time we explained an important option for spouses filing a Chapter 13 together: “severing” their case into two if they later separate or divorce. That allows each spouse to do whatever they want to do with their side of the case. Each person can either continue in the Chapter 13 case, convert to Chapter 7, or dismiss out of bankruptcy altogether.

You should know about this severing possibility before filing your case because it’s good to know your future options. You need to know how much flexibility Chapter 13 has if your circumstances change. And you need to know the limits on that flexibility.

With this in mind there’s a practical consideration about case severing that we didn’t have room to discuss last time. That’s the fact that your bankruptcy lawyer may not be able to advise either of you once you’re getting divorced.

Conflict of Interest

Lawyers are not allowed to simultaneously represent two people who have interests that are in conflict with each other. Only if your interests are quite closely aligned so that the same legal solution (such as filing a Chapter 13 case) is the best for you both can one lawyer represent both.

That’s true even if the two of you are in somewhat different circumstances. Most of the time two spouses have at least slightly different circumstances. For example, each of you may have some debts that you individually owe, and other debts you jointly owe. You may own some assets individually and the rest own jointly with your spouse.

If your circumstances are very different from your spouse’s, one lawyer may not be able to represent you both. Just being married does not automatically mean there isn’t a conflict of interest between you. This might prevent joint representation by one lawyer even if you have the best marriage in the world.

For example, one spouse may have come into the marriage with a significant asset. The other spouse may owe multiple years of income tax debt predating the marriage. His tax debt and overall situation may by far be best handled in a Chapter 13 case. She may not need any bankruptcy, or a Chapter 7 case if her asset can be protected through an exemption. Because her primary interest may be to save her asset while his may be to get his taxes paid or written off through, their interests may be in conflict. Especially if he is pressuring to do something she’s reluctant to do, she may need her own lawyer to determine what is in her own best interest.

Conflict of Interest from Coming Divorce

Let’s assume the two spouses’ interests were aligned enough so that they filed a Chapter 13 together. They got independent legal advice if that was needed, but in any event they filed the case jointly. But now, a year or two into their 3-year case they’re getting divorced. Up until now throughout their Chapter 13 case one bankruptcy lawyer has been representing them.

At this point that single lawyer likely cannot keep representing both of them. That’s because almost for certain they have become each other’s legal adversaries. Their individual interests have come into conflict in two ways.

First, as to their prior debts, they are likely in conflict there. In the example above, to the extent his income taxes have not yet been paid off or written off through the Chapter 13 payment plan, he’ll want to take care of them. He’d likely want to finish the Chapter 13 case, presumably with some amendments to account for post-divorce finances. She’ll have no interest in those taxes since she is not liable on them. Her interest will be on protecting her significant asset, maybe by dismissing her side of the Chapter 13 case.

Second, divorce almost always generates its own new liabilities, one ex-spouse liable to the other. These may include child or spousal support, debt from division of assets, and obligations to pay certain joint or separate debts. A bankruptcy lawyer absolutely cannot give either person any advice about such matters because that would advance the interest of one spouse to the direct detriment of the other spouse.

Lawyer’s Advice about Severing the Case into Two

In practical terms, most couples getting divorced while in a Chapter 13 case will need to sever their case into two cases. Then each spouse can do what is appropriate for themselves in their separate cases.

When a case is very close to completion it may be appropriate to just finish the case.  In the above example, if the payment plan is just a month or two to completion it may serve both spouses to get the discharge of debts this would provide them.

Or similarly, it may make sense to convert the Chapter 13 case into a joint Chapter 7 case. That may be in each party’s best interest. The reason they filed a Chapter 13 case—such as to save the family home—may well no longer apply. So getting the relatively quick closure provided by Chapter 7 may serve both of them best.

But whether to sever the case into two, finish off the Chapter 13 case, or convert to Chapter 7, the original Chapter 13 lawyer cannot advise the spouses about these options. That’s because he or she owes a duty of loyalty to both individuals. And the lawyer can’t be loyal to two people who now have opposing interests.

The lawyer can’t advise them about the effect of these options on an asset owned or a debt owed by one of them. That’s because they now have opposing interests about that asset or debt.

Same thing is true with advice about the effect of their bankruptcy options on their upcoming divorce. Obviously the two have directly opposing interests about all aspects of their divorce. Their lawyer can say nothing whatsoever to them about how their bankruptcy options may affect their divorce.

The Lawyer Needs to Either Withdraw or Require Independent Advice

The bottom line is that in most cases the Chapter 13 lawyer has to withdraw from representing the spouses. Or at the least the spouses have to meet with and get advice from their own separate lawyers. Those two lawyers could very well then agree that both spouses would be served by the case being severed. They would authorize the original lawyer to file a motion to sever and then withdraw from representation. The two lawyers would then each take over representation in those two severed cases.

 In some limited situations those two lawyers might agree that both of the spouses would be best served by either completing the Chapter 13 case or converting it into a Chapter 7 case. They may authorize the original lawyer to take that action. But they would continue being available to provide their individual clients with independent advice as the Chapter 7 or  Chapter 13 case was completed.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top