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Archive for the ‘garnishment’ tag

Protecting Your Pandemic Relief Payment from Creditors

April 27th, 2020 at 7:00 am

Your $1,200 or so coronavirus relief payment is subject to seizure by your creditors, if they have a garnishment order on your bank account.  

 

Our blog post four weeks ago was about the $1,200 pandemic relief payments going out to most U.S. adults. The CARES Act explicitly protected these payments from seizure for certain governmental debts. Generally, the payments can’t be reduced or taken to pay past-due federal taxes and student loans. They can be for past-due child support obligations.

But the CARES Act made no mention of protection from debts owed to non-governmental creditors. So the relief payments are generally subject to possible seizure by your creditors. Today we address this concern about private creditors’ access to these payments.

There are two classes of creditors at play:

1)      Setoffs by your own bank or credit union for a debt you owe to it

2)      Garnishment by other creditors which have a judgment against you

Next week we address setoffs by for fees or other debts owed to your own financial institution. Today is about protecting your relief payment from other creditors.

Judgments and Garnishment Orders

Generally a non-governmental creditor can’t take money from your bank account without a court’s garnishment order. And to get a garnishment order a creditor virtually always must first sue you and get a judgment. (This assumes that the creditor isn’t a governmental agency or the bank/credit union itself.) If a creditor has an active garnishment order on your bank/credit union account, your relief payment would arrive there and go to pay the debt instead of giving you the financial relief you need.

Do You have a Garnishment Order on Your Bank/Credit Union Account?

This question is not necessarily so easy to answer, for a number of reasons.

First, although most of the time you’d know that you received lawsuit papers, not necessarily. You may have not noticed it in the mail.  It may not have looked much different from other collections paperwork. If you’ve moved a lot, it’s possible you didn’t even get the lawsuit papers.

Second, you may not know that the lawsuit resulted in a judgment. If you didn’t respond within a very short time to the lawsuit papers, you probably lost the lawsuit by default. That almost always immediately turns into a judgment—a court decision that you owe the debt. The judgment gives the creditor power to—among other things—garnish your bank account.  

Third, you may not know about the garnishment order, or the pertinent details about it. For example, you may think it only applies to your paycheck, not your bank account. Or the bank garnishment order may have happened a while ago and you don’t realize that it’s still active.   

Fourth, the laws about lawsuits, judgments, and garnishments are detailed, complicated, and different in every state. And they change (sometimes in a good way, as we show below.)  So what you may have heard in one situation may not apply at all to you regarding these relief payments.

Finding Out If You Have a Bank Garnishment Order

Some common sense questions you should ask yourself. Have you:

  • ever received lawsuit papers and then did not fully resolve the debt?
  • had any kind of creditor garnishment or seizure, even if unrelated to your bank/credit union account?
  • had anything repossessed, especially a vehicle, where you may still owe a balance?
  • gone through a real estate foreclosure in which you may still owe a money to junior mortgage or other lienholder?
  • moved from another state and thought you left unresolved debts behind?

In these and similar situations you may have a judgment against you and a garnishment on your bank/credit union account. So your relief money would likely go to pay the judgment before you’d get any of it.

Is there any more direct way of finding out if there’s a garnishment order? Yes, you could contact your bank/credit union and ask. The problem is that in the midst of the pandemic you may well have trouble getting anyone to answer. More to the point, you’d likely have trouble getting through to somebody who could accurately and reliably answer this question.

A debtors’ rights or bankruptcy lawyer could help. He or she likely knows the right people to call at your financial institution, including that institution’s lawyers.

 What To Do If You Do Have a Garnishment Order

First, every state has exemptions that you may be able to claim to protect the relief money from garnishment. Each state has different procedures for claiming those exemptions. An extra challenge during the pandemic is getting access the courts to assert your exemption rights. Many courts are physically closed, you may be subject to a stay-at-home order, and contacting a lawyer may be harder. But if you don’t want to lose your relief money, you’ll likely need to assert your exemption protections.

Second, you may want to consider some other tactical steps:

  • If a garnishment order has expired and the creditor needs to renew it, you may have time to take the money out of the account immediately after it arrives.
  • Has the IRS has not yet direct-deposited your payment? Then you may be able to redirect it to an account at a different (non-garnished) financial institution. Go to the Get My Payment webpage to provide new bank account routing information (if it’s not too late).
  • Are you currently waiting to receive the relief payment in paper checks? Consider NOT providing the IRS direct deposit information even though that may delay the payment. (Here’s an article with the dates that the IRS is mailing out paper checks, based on income.)

Third, a number of states are issuing orders to prevent garnishments of bank accounts:

California Governor’s Executive Order N-57-20District of Columbia Act 23-286

Illinois Governor’s Executive Order 2020-25

• Indiana Supreme Court Order in case nos. 20S-MS-258 and 20S-CB-123

Massachusetts emergency regulation 940 C.M.R. 35.00

Nebraska Attorney General Warning

• New York Attorney General Guidance on CARES Act Payments

• Oregon Governor’s Executive Order 20-18

• Texas Supreme Court Tenth Emergency Order Regarding the Covid-19 State of Disaster

Virginia Supreme Court Order Extending Declaration of Judicial Emergency

• Washington State Governor’s Proclamation 20-49 Garnishments and Accrual of Interest

This list is expanding all the time. So if your state isn’t listed here it may have acted after this writing (4/27/20).

This IS Complicated

Garnishment law is detailed and not at all straightforward. And that was before all the legal and serious practical complications caused by the pandemic. So if at all possible, get through to a debtor’s rights or bankruptcy lawyer. We have spent our professional lives helping people deal with garnishments and protect their assets from creditors. This is just another twist on what we do all day every day.

 

Surprising Bankruptcy Benefits: Make Creditors Return Your Money

March 26th, 2018 at 7:00 am

Bankruptcy doesn’t just stop garnishments and other collections. Sometimes you can make a creditor return money it recently took from you.

 

Bankruptcy’s “automatic stay” is one of the most immediate and powerful benefits of bankruptcy. It immediately stops almost all creditor collection actions against you, your income, and your assets. See Section 362 of the U.S. Bankruptcy Code.  

But it does not go into effect until the moment you file your bankruptcy case. What if a creditor garnishes or otherwise gets your money right BEFORE you file bankruptcy?

Sometimes the creditor can be forced to give up such recently received money as well.

The Law of Preferences

This happens through the surprising and easily misunderstood law of “preferences.”

This law says that if a creditor takes money (or some other asset) from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. It has to do so if keeping that money results in that creditor receiving a greater share of its debt than the rest of your creditors would get out of your bankruptcy case. See Section 547(b) of the Bankruptcy Code.

That second condition would often be met, especially in a consumer Chapter 7 “straight bankruptcy case.” So, most money grabbed by an unsecured creditor within 90 days before your bankruptcy filing can be “avoided.” The creditor can be forced to return it.

For example, let’s say an aggressive unsecured medical debt collector garnishes your checking account. You’ve just deposited your paycheck and the creditor grabs $2,000. You owed $5,000 so this creditor just got paid 40% of its debt. Then you file your Chapter 7 case a day after the creditor garnished your money. Assume you owe a total of $75,000 in general unsecured debts. If in that Chapter 7 case—as in most—all your assets were “exempt” (protected), those debts would receive nothing. So, the garnished $2,000 would be a preferential payment that could be reversed. That’s because it happened within 90 days before filing and resulted in the creditor getting 40% instead of nothing.

(There are a number of other conditions and exceptions to a preference, but they often don’t apply to consumer cases. However, preference law can sometimes get quite complicated. You need to talk with your bankruptcy lawyer to find out if you really have an avoidable “preferential payment.”)

The Principles behind Preference Law

Preference law serves two principles important to bankruptcy.

First, bankruptcy law tries to discourage overaggressive creditors. The risk that a creditor would have to return money grabbed just before the debtor files bankruptcy is supposed to be a disincentive for such a money grab.

Second, a lot of bankruptcy law focuses on maintaining fairness among creditors. Similarly situated creditors should be treated the same. No playing favorites unless there is a legally appropriate reason to do so.  (On such reason would be if the debt is secured by collateral).

This fairness means that legally similar creditors need to be treated the same not just during your bankruptcy case but also shortly before the filing of your case. The period of fairness extends a bit before the bankruptcy filing so that overly aggressive creditors aren’t favored. Any available money or assets are spread among all the creditors more evenly and thus more fairly.

A Preference Benefitting You

It’s all well and good to punish a creditor for grabbing money from you shortly before you file bankruptcy. But what good does it do you if that money just goes to your Chapter 7 trustee?  The trustee would just distribute that money among your other creditors, right?

Generally, yes. But in many circumstances this preference money helps you very directly. Next time we’ll show you how.

 

Stop Student Loan Collections to Discharge or Deal with the Loan

January 31st, 2018 at 8:00 am

Filing Chapter 7 stops a student loan garnishment and other collection activities. Then use “undue hardship” or focus on the student loan.  

 

Our last blog post was about a Chapter 7 bankruptcy stopping a tax garnishment only temporarily. In that situation this was OK because it gave time to set up a payment program with the IRS/state. With the bankruptcy discharging (writing off) all or most other debts, the taxpayer could afford a reasonable monthly payment to pay off the tax debt over time.  

Today we deal with a somewhat similar situation. Assume you owe a student loan that you don’t have the cash flow to make payments on. Here’s how this situation can be greatly helped through a Chapter 7 filing.

Student Loan Collection and the Chapter 7 Filing

Similar to the tax authorities, student loan creditors and collectors have extraordinary collection powers. In most situations they don’t need to sue and get a legal judgment against you to begin aggressive collection procedures. These can include wage garnishment, tax refund setoff, and Social Security benefit capture. (This is true of federal student loans; private student loan lenders must first sue you and get a judgment.)

Also like income tax debts, student loan collection is immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter if the student loan would not be discharged in the Chapter 7 case. During the 3-4 months that most consumer Chapter 7 cases last, you get a break from student loan collections.

The automatic stay statute stops “any act to collect, assess, or recover a claim against the debtor.” (See Section 362(a)(6) of the U.S. Bankruptcy Code.) More specifically it stops “the commencement or continuation…  of a[n]..  .   administrative…  proceeding against the debtor. (Section 362(a)(1).) This covers the non-judicial collection actions mentioned above that are administrative in nature. The Chapter 7 filing also specifically stops “the setoff of any debt,” such as a tax refund or Social Security setoff. (Section 362(a)(7).)                             

Dischargeability of Student Loans

Somewhat similar to income tax debts, student loans can be permanently discharged under certain circumstances. An income tax is almost always discharged as long as it meets certain timing conditions. (These are based on how long ago the pertinent tax return was due and was actually submitted.)

In contrast, the condition that almost all student loans must meet for discharge is much more ambiguous. And the condition, called “undue hardship,” is often quite difficult to meet. You can’t discharge most student loans unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8) of the Bankruptcy Code.)

While it may very much feel like your student loan(s) is (are) causing you a huge financial hardship, the federal courts have interpreted this phrase very narrowly.  So “undue hardship” is, as we said, a difficult condition to meet to discharge your student loan(s).

What You Can Accomplish During the Chapter 7 Pause in Collection      

The goal during the 3-4 months of no collection is to make that pause permanent. This can happen three ways.

First, IF you believe you do meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” soon after filing the Chapter 7 case in order to persuade your bankruptcy judge that you qualify for “undue hardship.” If you’d be completely successful then the pause in collection would become permanent because you’d no longer owe the debt(s).

Second, sometimes in this situation the judge gives only a partial discharge of your student loan(s). In effect the judge decides that repaying all of the loan(s) would be an “undue hardship” but paying back a portion would not be. In this situation you’d make arrangements to pay the student loans at a reduced monthly payment. Your student loan creditor(s) would agree to no further collection action against you as long as you made those payments.

Third, if you don’t qualify for “undue hardship” your Chapter 7 case would discharge your other debts. That should leave you better able to pay the remaining student loans. You’d make arrangements to make payments, maybe through one of the various payment-reduction programs potentially available to you. Assuming you’d do so, they by the end of your Chapter 7 case when the automatic stay would expire your situation would be resolved and you wouldn’t be facing student loan collection actions.

Avoiding Default and Preserving Options

Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely important for student loans. Again, there are various programs that help you deal with student loans, depending on exactly what type(s) you have. Some of these programs can be extremely helpful.

However, most of these programs require you to apply for them before you are too far behind on payments. So filing a Chapter 7 case sooner could enable you to take advantage of these programs. Whereas if you waited and filed later you may very well miss out because you’d no longer qualify.

Conclusion

Talk with an experienced bankruptcy lawyer about all this. Candidly, student loans are challenging to deal with, both outside and inside bankruptcy. You need a seasoned lawyer who understands the interplay between bankruptcy law and student loans, in detail.

 

Preventing Wage Garnishment through Bankruptcy

January 26th, 2018 at 8:00 am

Filing bankruptcy protects your paycheck. It does so because federal bankruptcy prevents a state court wage garnishment order.

 

Last time we got into how hiring a lawyer can stop a creditor from suing you. Sometimes it can also stop a creditor which has already sued from getting a judgment against you.

But these work mostly for practical reasons, not legal ones. A creditor may not sue when you are about to file bankruptcy because it’s often a waste of time and effort to do so. It may hold off on taking a lawsuit to judgment when your lawyer is on the scene to oppose it. However, there is usually no legal reason stopping a creditor from proceeding.

So a creditor can, and sometimes will, sue you even if you’ve hired a bankruptcy lawyer. It can try to proceed with its lawsuit and get a judgment against you. One of the main reasons it would do so it that it wants to start garnishing your paycheck.

Filing bankruptcy virtually always prevents a garnishment from happening. That’s because your bankruptcy filing does make it illegal for your creditor to keep collecting the debt. 

Bankruptcy Prevents Wage Garnishments

Filing either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” imposes the “automatic stay” on your creditors. The “automatic stay” forbids further collection of almost all your debts. (Some rare exceptions are criminal fines and restitution, and most child and spousal support.) This stopping of debt collection goes into effect the moment you file bankruptcy.

In particular, the automatic stay stops “the commencement or continuation” of a lawsuit against you on a debt. Section 362(a)(1) of the U.S. Bankruptcy Code. That means that once you file bankruptcy, creditors can’t start a lawsuit against you. A lawsuit that a creditor already filed can’t continue. 

Almost always creditors can’t garnish your paycheck until after first finishing and winning a lawsuit against you, getting a judgment in its favor, and then getting a wage garnishment court order for the purpose of collecting the judgment. So the bankruptcy prevents the lawsuit from turning into a judgment. And without a judgment the creditor can’t garnish your wages.

Bankruptcy Prevents Most Wage Garnishments Permanently

In preventing upcoming wage garnishments, bankruptcy does so permanently with the vast majority of debts. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, an injunction is imposed against the collection of that debt ever again. That includes collection by any means, including garnishment. Section 524(a)(2) of the Bankruptcy Code. So the bankruptcy filing prevents wage garnishment on most debts, forever.

There are relatively rare situations when wage garnishment is only prevented temporarily. There are also some very limited situations when a wage garnishment is not prevented at all. We’ll get into these in the next couple blog posts.

 

Using “Preference” Law to Your Advantage

April 19th, 2017 at 7:00 am

Make your bankruptcy trustee work for you by retrieving your recent payments to, or garnishments by, creditors–to your benefit.   

 

Our last 4 blog posts have been about “preferences” in bankruptcy. The last two have focused on how your trustee’s “preference” claim could cause significant problems, and how to avoid them. But you can also use “preference” law to your advantage. Today we get into how to do so.

The Big Picture

Imagine that you are under serious financial pressure, maybe thinking of filing bankruptcy, maybe trying hard to avoid doing so. Then you get threatened with a lawsuit by a debt collector if you don’t start making payments on its debt. So you somehow squeeze some precious money out of your way-overstretched budget and pay a chunk of the debt. Or instead you were sued earlier and the creditor just grabbed a big part of your paycheck or checking account. Maybe you’ve had to suffer through a number of these payments or garnishments.

Wouldn’t it be nice if, after being forced into bankruptcy anyway, you were able to get that money back? Wouldn’t it be nice to be able to put that money to better use?

Under certain circumstances bankruptcy’s preference law can accomplish this.

You actually need two sets of circumstances. First, the money paid to the creditor has to qualify as a “preference.” Second, you need to owe a particular kind of debt that you want or need to get paid.

Payment(s) Qualifying as a “Preference”

A “preference” is an extraordinary aspect of the bankruptcy system. In general, filing a bankruptcy case creates a bright line between what happened before that moment and what happens afterwards.  Between “pre-petition” events and “post-petition” ones. So, generally the assets that your bankruptcy case deals with are those in existence at the time of filing. And to a very limited extent, bankruptcy also pays attention to post-petition assets. But for most purposes what you owned before filing isn’t part of the bankruptcy picture.

However, in a few limited situations the bankruptcy system is allowed, indeed required, to look backwards from the filing date. “Preference” payments are one such situation. Under certain circumstances, payments you made, voluntarily or involuntarily, during the 90 days BEFORE filing can be undone. They are “undone” not by you but by your bankruptcy trustee.

The trustee’s job is to gather assets to distribute to creditors. If a payment a creditor received during the 90 days before filing qualifies as a “preference,” the creditor is forced to pay that money back, handing it over to the trustee. The trustee then takes that money and distributes it to your creditors under a legally prescribed priority system.

(The preference look-back period goes back a full year as to certain special creditors. Basically this includes creditors with whom you have a close personal or business relationship. But we are focusing today only on the 90-day look-back period. That’s because those are the creditors whose “preference” payments you’d more likely want undone.)

The Elements of a Preference

In order for the trustee to get back a payment you paid to the creditor in the 90 days before the bankruptcy filing that payment must meet a number of elements. Two of those elements tend to be the most important:

These two elements are often quite easy to meet.

First, “insolvent” is defined in the Bankruptcy Code (Section 101(32)) as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property.” Most consumers contemplating bankruptcy are likely insolvent under this definition. (The biggest likely exception if for homeowners who have a meaningful amount of equity in their homes.) If your combined debts are greater than your combined assets, you meet this “insolvent” element.

The second element is even more likely met. It involves a comparison between the amount of the payment made to the creditor and the amount the creditor would have received in a bankruptcy liquidation. In most consumer bankruptcy “liquidation” cases creditors receive nothing for two reasons. First, everything or near everything the consumer owns is “exempt,” protected from bankruptcy liquidation. So there is nothing to distribute, no liquidation. Second, even if there are some assets to liquidate and distribute it all goes towards administrative costs and “priority” debts. So nothing trickles down to the creditor in question. Since the creditor would have gotten nothing in a bankruptcy liquation, the entire amount it received in payment qualifies as “preferential.”

For Example

Imagine that Creditor X garnished $1,000 out of your checking account right after you deposited your tax refund. You file bankruptcy case a month later.

You are a consumer debtor whose debts have exceeded the amount of your assets for at least the past two year. So you were insolvent at the time of the garnishment.

The assets that you do have are all covered by the property exemptions available to those filing bankruptcy within your state. Therefore Creditor X would have received nothing in a Chapter 7 distribution.

Since both of those elements are met, the full $1,000 garnishment received by Creditor X is a “preference.” Your bankruptcy trustee could require Creditor X to send that $1,000 to him or her.  If this creditor would fail to send it voluntarily, the trustee could sue to require the creditor to pay the $1,000.

The $600 Safe Haven for Creditors

There’s one last twist if your debts are “primarily consumer debts.” Then your bankruptcy trustee may not require a creditor to pay back a payment if “the aggregate value” of the payment(s) “is less than $600.” See Section 547(c)(8).

The Preference Doing You Some Good

At the beginning we referred to two things necessary for a preference to do you some good. First, the payment has to qualify as a “preference.” We’ve covered that.

And second, you need to owe a particular kind of debt that you want the trustee to pay, a debt that you’d otherwise have to pay out of your own pocket. It’s a lot better to have the trustee pay it out of money you’d already paid to another creditor, and put it to good use.

We’ll cover how this second part works in our next post (this coming Friday).

Understanding “Preferences”

April 10th, 2017 at 7:00 am

Your trustee might be able to require a creditor to pay the trustee money you’d paid the creditor. Sometimes that’s good; sometimes not. 


What’s a Preference in Bankruptcy?

Preference law allows a bankruptcy trustee to require a creditor that you paid during a certain period of time before you file bankruptcy, under certain conditions, to pay that money “back” to the trustee. The creditor you paid, voluntarily or not, would have to give up that money. The trustee would then take and divvy up the money among all the creditors. Your creditor may or may not get any of that distributed money. It would usually get either none or just a small percentage of what it had to give up.

Section 547(b) of the U.S. Bankruptcy Code lays out the 5 elements of a preference. It’s a payment paid or asset transferred:

  1. to a creditor
  2. for a debt owed before that payment was paid or transfer was made
  3. made while the debtor was insolvent
  4. during the 90 days before filing bankruptcy—or during the year before filing for special creditors
  5. that gave the creditor more that it would have received in a distribution in a Chapter 7 liquidation at the time of the payment or transfer.

More about these elements in the next couple of blog posts.

The Purpose of Preference Law

What could be the point of all this? Why make a creditor who you paid before filing bankruptcy have to pay that same amount of money back, but to your trustee, after you file bankruptcy?

First, it’s supposed to discourage creditors from being overly aggressive in collecting debts. Instead of fighting to get the last dollar out of a debtor, they may work more cooperatively. Otherwise if they force a debtor into bankruptcy they could lose the money collected. Less aggressive creditors may result in less debtors being pushed into bankruptcy. Creditors have a disincentive to pushing debtors into bankruptcy if they know that any money they get on the brink of bankruptcy may have to be turned over the bankruptcy trustee.

Second, preference law is supposed to discourage debtors in financial trouble from paying only one special creditor to the detriment of their remaining creditors. You may hesitate to pay a favorite creditor before bankruptcy if that creditor would just have to “return” it to your trustee later.

Both of these are designed to promote one of the most important principles of bankruptcy law. That’s the fair and equal treatment of creditors—no favoritism for any particular creditor(s). Preference law is intended to discourage behaviors favoring a select creditor or two shortly before a bankruptcy filing. Both an aggressive creditor and a favorite-paying debtor result in a debtor’s very limited money going to a select creditor.

How Can Money Paid BEFORE Filing Bankruptcy Be Affected?

How can bankruptcy law unwind payments that were made before the bankruptcy case was filed? Bankruptcy does mostly focuses on your financial condition at the time your case is filed. (As well as after your case is filed in the case of Chapter 13.) But it also does have the power to look backwards in time to address certain perceived abuses that may occur. This preference law is one example.

Good and Bad Preferences

In our first sentence above we said that a preference is sometimes good and sometimes not. Having your bankruptcy trustee get back a payment you made to a creditor may be good. It would be good if you don’t mind that creditor’s payment being undone and perhaps be put to better use. It would be bad if the trustee was making a creditor return a payment that you’d prefer that creditor to keep.

Let’s look at these two kinds of preferences in our next two blog posts. We’ll start in a couple days with the kind you want to avoid.

 

The Automatic Stay

October 5th, 2016 at 7:00 am

Chapter 7 gives you immediate protection against creditor collection actions. Chapter 13 protects you longer, if needed.

 

The automatic stay is the very strong legal protection from your creditors you receive when you file a bankruptcy case. The automatic stay stops virtually all attempts by creditors to collect their debts against you, your money, and your property. It goes into effect at the moment you or your lawyer files your bankruptcy case.

A “Stay”

To “stay” means to stop or suspend. As in a stay of execution. In bankruptcy it refers to the stopping of almost all collection activity against a debtor. (See the list of types of all the kinds of actions that the automatic stay stops at U.S. Bankruptcy Code Section 362(a).)

It’s Automatic

In our last blog post we showed that a voluntary bankruptcy case is begun by the filing of a “petition.” That filing itself “constitutes an order for relief.” (See Section 301(b).)

A filed bankruptcy petition itself “operates as a stay.” You don’t need to get a separate court order or injunction because the filing initiates the stay. (Section 362(a).)

The stay is enforced against everyone who claims you it owe a debt. The automatic stay is “applicable to all entities”—to all creditors, whether they are individuals, corporations, or partnerships. (Section 362(a) and Sections 101(15) and 101(41).)

Applies to All Bankruptcy Chapters

The automatic stay stops creditors largely the same whether you file a Chapter 7, 11, 12, or 13 case.  Chapter 11s are rarely filed by consumers and small business. Chapter 12s are for certain family farmers and fisherman, and are even more rare. So we’ll focus here on Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.

The big difference between Chapter 7 and 13 is how long the automatic stay protection lasts.

In Chapter 7

The automatic stay protection usually lasts in Chapter 7 as long as your Chapter 7 case lasts. That’s usually three to four months.

As to most debts, that’s just long enough. By that time the debts that you want to discharge (legally write off) are discharged.  The bankruptcy judge signs the order discharging your debts just before the end of the case.  After that those creditors can’t take any further collection action on the debts since you no longer owe the debts. So you no longer need the automatic stay for your protection.

However, you may have some other debts which you would continue to owe after you finish your case. You generally owe those debts for one of two reasons.

1) You want to pay it. For example, you want to keep a vehicle on which a creditor is the lienholder, and so you “reaffirm” the debt.

2) You are legally required to pay it. For example, a recent unpaid income tax obligation can’t be discharged (unless it meets a set of conditions). 

Often you don’t need automatic stay protection for debts that survive a Chapter 7 case.

With a vehicle loan, you could enter into a “reaffirmation agreement” with the vehicle creditor. That would exclude that debt from the discharge of your other debts. You’d keep the vehicle, and continue making the payments on that one debt.

With an income tax debt, before your Chapter 7 case is finished you or your bankruptcy lawyer would negotiate a reasonable monthly installment payment plan with the IRS or state tax authority.

Either way you wouldn’t need further protection from the creditor as long as you did whatever you agreed to do.

In Chapter 13

The automatic stay protection under Chapter 13 usually lasts much, much longer than under Chapter 7. That’s because a Chapter 13 case lasts so much longer—3 to 5 years instead of about 3 months. This much longer protection can give you much more time to pay certain kinds of debts that you must pay or want to pay. And the automatic stay protects you during that length of time.

We’ll show how this works with the two examples above—the vehicle loan and the recent tax debt.

With a vehicle loan, you’d be in trouble under Chapter 7 if you’d fallen behind and could not get current within a month or two after filing the case. Most creditors would not allow you to keep the vehicle. In contrast, under Chapter 13 you’d likely have several years to bring the account current. The creditor has only limited grounds for objecting to this. As long as you made your payments as required by your court-approved plan, you’d be protected from the creditor throughout this time.

As for a recent income tax debt, you would have to pay it under either Chapter 7 or Chapter 13. But Chapter 13 would likely give you more time and more flexibility to pay it. You would likely be able to delay paying anything on the tax for a number of months. That would enable you to pay other debts that were even more time-pressing, like a home mortgage arrearage. You would just have to pay it off (along with the rest of the payment plan) within 5 years. Most of the time you would not pay any ongoing tax penalties or interest, saving you more money. Throughout this time you’d be protected from any collection action by the IRS/state because of the automatic stay.

Chapter 7 vs. 13 Summary

So, the automatic stay stops creditor collections immediately when either a Chapter 7 or Chapter 13 case is filed. The relatively short-lived automatic stay in Chapter 7 works well enough if all your debts get discharged. Or if you do still owe any debts when the case is done, you’re able to make reasonable arrangements to pay what you still owe. However, if you need the automatic stay protection to last longer, then Chapter 13 often gives you that extra protection. Then you’ll have much more time and more flexibility to deal with special creditors.

 

Mistakes to Avoid–Prevent Judgment Liens against Your Home

September 4th, 2015 at 7:00 am

Don’t let a creditor get a judgment against you. File a bankruptcy case before that can happen.

 

It’s All Too Easy for a Creditor to Get a Judgment against You

If you are seriously behind on payments to a creditor, you can end up with a court judgment against you and a judgment lien against your home even if you act with what seems like common sense.

Let’s say you’ve fallen behind on a debt because you simply didn’t have the money to pay it. You get some papers in the mail or handed to you saying that you are being sued and that you need to pay the entire balance. You don’t have the money to pay hardly anything and certainly not the full amount. You know you do owe the debt so you see no reason to dispute that you do. So you don’t see any point to paying an attorney to fight the lawsuit. And you don’t see any good coming from contacting the creditor’s attorney yourself or to trying to file any kind of response to the lawsuit.

Then when you don’t do anything by the deadline stated on the papers, a judgment is entered against you. You may well not even know that it’s happened because often you’re not told.

So what? A judgment is just a court document saying you owe the money the creditor says you owe, right?

A Judgment Means a Judgment Lien on Your Home and Any Other Real Estate

A judgment is much more than that. First, it entitles the creditor to take a set of actions against you, your income, and your assets, such as to garnish your wages and bank accounts, and to force you to go to court to answer questions about your income and assets.

Second, a judgment generally results in a judgment lien against any real estate that you own—including your home. Depending on local laws, the amount of the judgment, and other factors, such a judgment lien can result in the forced sale of your home to pay the judgment amount.

We’re focusing today on this second result of judgments, the judgment lien.

Does a Judgment Lien Mean Your Home Must Be Sold to Pay the Lien?

Again, that depends on various factors. In some states your home can’t be sold at all or only if the judgment is of at least a certain amount. But even if your home isn’t sold by the creditor to pay off the judgment lien, if you ever wanted to sell or refinance your home or other real estate, the lien would usually have to be paid off.

That could jeopardize the sale or refinance altogether—because you thought you had a certain amount of equity in your home but find out that you had less as a result of the judgment lien.

Or even if the sale or refinance could still go through in spite of the judgment lien, paying off that judgment lien would reduce the money that would otherwise come to you, or that would pay other liens you really wanted to be paid (such as income tax or child support liens).

The Judgment Lien Can Attach to Your Real Estate Anywhere

Even if you do not own any real estate in the county or state where you were sued, but do somewhere else, the creditor can likely transfer the judgment to wherever your real estate is located. Then the creditor can force payment of the judgment amount through whatever means permitted by the local laws of wherever the real estate is located.

So no matter where you own real estate—your home or any other kind of real estate—a judgment anywhere would likely turn into a judgment lien attached to that real estate.

This Can Hurt You Even If You Don’t Own Any Real Estate

You may figure this this is no problem for you because you don’t own a home, and certainly no other real estate. But be careful. If a parent or grandparent dies, and you and your siblings inherit some real estate, a judgment lien could immediately attach to your share in that real estate. Or if you get married to someone with real estate (including such a partial share), a judgment lien could unexpectedly attach to it.

Preventing a Judgment Lien from Attaching to Your Real Estate

If you are sued by a creditor your filing of a bankruptcy case before your deadline to respond, that will stop the lawsuit before a judgment is entered. Then the creditor cannot continue the lawsuit or enter a judgment without the bankruptcy court’s permission. Usually the creditor cannot get that permission. So no judgment is entered, and no judgment lien is created. Usually the debt that was the purpose of the lawsuit is discharged (legally written off) through the bankruptcy case, which ends the entire problem.

So, by filing bankruptcy you usually avoid having to pay any or at least most of the underlying debt. You avoid having to deal with the judgment lien if you try to sell or refinance the real estate. And you avoid the risk of losing your real estate from its forced sale upon enforcement of the judgment.

 

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