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Archive for the ‘divorce proceedings’ tag

The Option of Severing Your Chapter 13 Case from Your Spouse

August 30th, 2017 at 7:00 am

When deciding to file a Chapter 13 jointly with your spouse, realize that you can split that case later into two cases if you get divorced. 

 

A Chapter 13 “adjustment of debts” case usually lasts three to five years, and a lot can happen in that time. It is not likely worth filing jointly with your spouse if you already believe your marriage won’t last that long. Chapter 13 provides much relief. It can even help your marriage because of the financial pressure it can relieve. But the two of you still very much need to be on the same page to make it work.

You can believe in the stability of your marriage but you’d still be wise to want to know what happens to your Chapter 13 case if things don’t work out between the two of you.

Dismissal and Converting to Chapter 7

In the last two blog posts we’ve covered voluntarily dismissing your case, and converting it into a Chapter 7 one. Those two ways to end a Chapter 13 case may be appropriate if your marriage is ending.

You can almost always dismiss a Chapter 13 case, including a jointly filed one.

Bankruptcy law recognizes that a Chapter 13 case is a big commitment. To encourage you to make this commitment, the law allows you to freely leave it if you want to later.

So if the two of you get to the brink of divorce, your bankruptcy lawyer can file a simple motion for the dismissal of the case. It will almost certainly be granted quickly.

Once your joint Chapter 13 case is dismissed each person can decide what is best for him or her. Each can separately decide whether to file a new individual Chapter 13 case, a Chapter 7 “straight bankruptcy” case, or neither.

Or instead your joint Chapter 13 case can usually be converted into a joint Chapter 7 case.  With a separation or divorce on the horizon the reasons that Chapter 13 made sense earlier may no longer. For example, saving the family home from foreclosure may be both less important and less financially feasible. Converting the case into a Chapter 7 one can get it completed within another three or four months. That timing may work better with your changed circumstances. And Chapter 7 results in a discharge (legal write-off) of all or most of your debts. That would not happen with a dismissal of the Chapter 13 case.

Severing a Chapter 13 Case into Two Separate Cases

Your joint Chapter 13 case can also be “severed” into two separate Chapter 13 cases. This is routinely allowed by the bankruptcy court, especially if you and your spouse are separating or divorcing.

Once the case is severed into a separate case for each person, then each can independently do whatever is in his or her best interest.

One or both of you may have a good reason to continue under Chapter 13. One of you may have a vehicle being paid through favorable cramdown terms. Or there may be personal income taxes that one or both of you are paying through the plan without additional interest, penalties, or threat of collections by the IRS or the state. So either person could file a new amended Chapter 13 plan in his or her own case incorporating the changed personal and financial circumstances.

One or both of you may instead convert your half of the case into a Chapter 7 one. You’d do this if there’s no more reason for being in Chapter 13.

Or, after the case is severed into two, either person can dismiss his or her case. That might make sense if that person no longer needs bankruptcy protection.

 

The Chapter 13 “Super-Discharge” of Divorce Decree Debts

July 18th, 2016 at 7:00 am

Chapter 7 doesn’t write off any divorce-based debts. But Chapter 13 DOES write off non-support divorce debts.  

 

In our July 1 blog post we introduced a list of 10 ways that a Chapter 13 “adjustment of debts” can help you keep your home. Today we get into the 6th of those 10 ways. Here’s how we introduced this earlier:

6. The Chapter 13 “Super-Discharge” of Divorce Decree Debts

You can “discharge” (permanently write off) CERTAIN obligations arising out of a divorce decree in a Chapter 13 case.  You can discharge debts dealing with the division of property and the division of debt. These are debts that you cannot discharge in a Chapter 7 “straight bankruptcy” case. You CANNOT discharge child or spousal support—under either Chapter 7 or 13.

So if you owe a significant amount of non-support divorce decree debt, AND there isn’t already a lien on your home securing that debt, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt. You’d prevent liens against your home. You’d not owe any non-support debt to your ex-spouse.

Here’s how this works in practice.

The Example

Assume that you own a home. You owned it before you got married and so you were awarded it in your recent divorce. During the last year of emotional and financial turmoil you fell 5 months behind on the $1,500 monthly mortgage. So you’re $7,500 behind and also did not pay the $2,000 property tax for this year.

On top of that the divorce decree ordered you to pay two things: 1) $10,000 to your ex-spouse for his or her share of the equity built up in the house during the marriage; and 2) two credit card accounts with a combined balance of $8,500, as your share of the joint debts. You do not have to pay any child or spousal support.

Assume also that you have $35,000 in other unsecured personal debts.

Given your current steady income, you could afford the $1,500 monthly mortgage payment, but not while paying everybody else. And you don’t have any means to catch up on that mortgage or the property taxes, considering the other debts that you owe. Paying the two joint credit cards would be extremely challenging, and the $10,000 completely impossible.

Chapter 7 Not Much Help

A Chapter 7 case does not directly help with the home mortgage or property taxes arrearage. It may still provide some practical benefit. If it discharges enough other debts you may be able to somehow afford to catch up on the mortgage and property taxes. But you are at the mercy of those two creditors as to how much time you’ll have to catch up.

Furthermore, Chapter 7 does not help at all on your two divorce debts.

First, it does not discharge the $10,000 debt to your ex-spouse. You would continue to owe it in full after a Chapter 7 case would be completed. Your ex-spouse would be able to place a lien on your home to force payment of that debt (assuming that he or she does not already have a lien on the home already).

Second, a Chapter 7 does discharge your personal liability to the two joint credit card creditors (totaling $8,500 in debt). But it does NOT discharge the separate obligation you have to your ex-spouse to pay those two cards. In other words, the credit card creditors themselves would not be able to sue you to make you pay. In fact they would be forbidden to do so. However, your ex-spouse would be able to make you pay based on the divorce decree. If you didn’t pay, he or she could sue you for payment, and put a lien on your home for your non-payment.

So, Chapter 7 may help only very modestly with the mortgage and property taxes, and not at all with the divorce debts. It does not help protect your home.

The Chapter 13 Solution

Chapter 13 helps infinitely more on the both the home debts and the divorce ones.

With the unpaid mortgage and property taxes, as long as you followed some reasonable rules you could have 3 years, or even as much as 5 years, to catch up. Throughout that time your home is protected from foreclosure and other collection efforts.

Even more impressive, the $10,000 debt to your ex-spouse is forever discharged at the successful completion of the case. Same thing with your obligation to your ex-spouse to pay the $8,500 in the joint credit cards—discharged.

More precisely, those $10,000 and $8,500 obligations would be lumped in with your $35,000 in other unsecured debts. You would only need to pay that combined $53,500 if and to the extent you could afford to do so.

Let’s say your Chapter 13 case is required to go 36 months. (Its length is largely based on your income). Let’s also say that beyond paying your regular monthly mortgage you could afford to pay $300 per month towards all of your other debts and obligations. That would only be enough to catch up on the mortgage and property taxes in 36 months. (Some would also go towards trustee and attorney fees).

This would leave no money available for the $53,500 in other debts, including for the divorce debts. That generally means that you would not have to pay anything towards all those other debts. And again, at the end of the Chapter 13 case those debts would all be permanently discharged.

Under other facts you may have to pay something towards these divorce debts and the other unsecured debts. But usually that ends up being only pennies on the dollar. And again, sometimes nothing at all.

So, under Chapter 13 you’d stop your ex-spouse from putting a lien on your home for non-support obligations. You’d be able to catch up on your home payments with payment terms based on your budget.  And after that, after paying only as much as you could afford, if any, towards your non-support divorce debts, you would owe nothing more. Your home would have avoided any liens from those divorce debts. And those debts would be history.

 

Making Sense of Bankruptcy: Important Exceptions to the Protections of the “Automatic Stay”

August 19th, 2015 at 7:00 am

Almost all attempts by creditors to collect debts are immediately stopped when you file bankruptcy. But here are some special exceptions. 

 

Here’s a one-sentence summary of today’s blog post:

The “automatic stay” gives you crucial protection from creditor collections as soon as your bankruptcy case is filed, with some limited exceptions in 1) criminal matters, 2) certain domestic relations (family court) procedures, 3) child and spousal support obligations and procedures, and 4) certain income and business tax collection.

The “Automatic Stay”

The immediate stopping of collections—called the “automatic stay”—is one of the most important benefits of filing bankruptcy.

It’s automatic in that it‘s put into full effect by the act of filing bankruptcy itself. The automatic stay doesn’t need any action by a bankruptcy judge or any other procedure to become effective.

Its purpose is to stay, or stop, all collections, to give you a break and to even the playing field among your creditors.

Because the automatic stay is a benefit that you count on so much, you need to understand its exceptions—situations in which a creditor can continue to act in spite of your bankruptcy filing.

The Exceptions

Rarely, the automatic stay can be canceled as to ALL creditors 30 days after the case is filed, or the automatic stay may not go into effect at all when the case is filed.  These can occur if you filed a prior bankruptcy case, or more than one in the latter situation, and it was/they were dismissed (thrown out) within a year before the new case you’re filing.

Also, any creditor can challenge the appropriateness of the automatic stay as to any action that it would like to take, if it has grounds to do so.

But these are not the kind of exceptions we’re talking about here. Instead there are certain kinds of creditors with certain actions that a bankruptcy filing’s automatic stay does not stop at all.

1. Criminal Matters:

A district attorney or other governmental authority can start or continue a criminal case against you without any regard to your bankruptcy case. This includes all steps of a criminal case against you: indictment, trial, sentencing, and any penalties including fines and incarceration.

Realize that this exception doesn’t just apply to more serious crimes like misdemeanors and felonies. It can also apply to relatively minor matters that you might not consider “criminal,” such as traffic infractions. Whether these are considered “civil” or “criminal” violations can depend on the laws that create them, so it might not be clear whether the automatic stay applies to a particular low level illegal behavior.

The line between criminal and civil proceedings, between criminal and civil debts, and thus whether the automatic stay applies, can be unclear when one behavior can have both criminal and civil elements. Consider an employee’s embezzlement, a business’ illegal disposal of its hazardous waste, or a bar fight. Each of these could result in either criminal charges or civil claims, or both, with one not covered by the automatic stay and the other covered.

2. Domestic Relations Procedures:

The automatic stay does not apply to your ex-spouse, or about-to-be ex-spouse, or someone on his or her behalf starting or continuing these kinds of proceedings:

  • establish the paternity of a child
  • determining or changing the amount of child or spousal support to be paid
  • resolving child custody or visitation issues
  • addressing domestic violence disputes
  • dissolving a marriage (but not to determine how assets or debts are to be divided between the spouses)

3. Collection of Child or Spousal Support:

Ongoing monthly support payments can be collected by the ex-spouse, directly or through support enforcement agencies, regardless of the bankruptcy stay of any kind of bankruptcy filing. 

Past due support payments can also start or continue to be collected, regardless of a Chapter 7 filing. This collection can include paycheck withholdings, garnishment of bank accounts, seizure of a tax refunds, suspension of a driver’s licenses (both regular and commercial), and often even the suspension of virtually all other licenses issued by the government, including suspension of occupational and professional licenses.

In contrast, a Chapter 13 filing CAN stop these aggressive methods of collecting past due support payments as long as you strictly follow a number of steps. Most importantly, you must start making the regular support payments that become due after you case is filed, arrange to pay the past due support in full through the Chapter 13 payment plan, and then actually pay everything as proposed.

4. Taxes:

The automatic stay does not stop the taxing authorities from:

  • starting or finishing a tax audit
  • sending you a notice that you owe taxes
  • demanding that you file your tax returns (but not that you pay any tax owed)
  • assessing your taxes and sending a notice of the tax owed (but doing no more to collect)

 

Remember: the automatic stay stops almost all actions against you by almost all creditors. But if you are involved in court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse or support enforcement agency, be sure to talk with your attorney about whether any of the exceptions apply.

 

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