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Archive for the ‘general unsecured debts’ tag

Bankruptcy May Strip Off a Junior Mortgage

August 12th, 2019 at 7:00 am

Summary

Do you have a second or third mortgage on your home? Imagine if you could stop paying that monthly mortgage payment. Imagine over the course of the next 3 to 5 years paying only as much as you could readily afford to pay on the balance of that mortgage. This is often only a small portion of the mortgage balance. Or, if over that time you could afford to pay nothing, you’d likely pay nothing on that mortgage balance. Then at the end of that time, whatever you couldn’t pay would get completely written off.  That’s what happens in a second or third mortgage strip under Chapter 13 “adjustment of debts.”

Qualifying to Strip Your Second or Third Mortgage

The economic environment that is most likely to result in stripping mortgages is one of declining or static home prices. That’s not currently the situation in most parts of the country. Yet, given the huge potential advantages, it’s still worth looking to see if you qualify.

To qualify, your home can’t be worth more than the value of the liens legally ahead of the mortgage being stripped. You want to strip your second mortgage? Your home’s value can’t be more than the sum of first mortgage’s balance plus any other senior liens. Examples of liens possibly senior to the second mortgage: unpaid property taxes, an income tax lien, a homeowner association assessment.

For example, let’s say a home is worth $200,000 and the first mortgage balance is $197,500. You have a second mortgage of $20,000. But say you are also behind on property taxes totaling $4,000. By law the lien on that property tax usually legally comes ahead of the mortgages. So the liens ahead of the second mortgage—$4,000 plus $197,500—total $202,500. That’s more than the $200,000 that the home is worth. The $20,000 second mortgage could likely be stripped.

How Mortgage Stripping Works

Procedures can vary. There is a place in your Chapter 13 plan where your bankruptcy lawyer indicates you are stripping a mortgage. See question 3.2 in the official Chapter 13 Plan form. In most bankruptcy courts your lawyer will also file a motion to strip the mortgage. He or she may instead need to file a more formal adversary proceeding—a specialized bankruptcy lawsuit. The primary issue in all of these procedures is usually the true value of the home. Other pertinent facts are the accurate balances and legal order of the prior liens.

Once those facts are determined, either by consent or the judge’s ruling based on the evidence, it becomes clear whether the mortgage at issue can be stripped. If it can, the mortgage debt turns from one secured by your home into a completely unsecured debt. That allows you to stop making the mortgage payments on the stripped (second or third) mortgage.

How Much the Stripped Unsecured Mortgage Gets Paid

Once the mortgage balance becomes unsecured, you pay it to the same extent as all your other general unsecured debts. As mentioned above, that is often not very much, and may even be nothing.

How much depends usually on what you can afford to pay on these lowest priority debts. That’s called your disposable income—your net income minus reasonable expenses.

However, often much of your disposable income goes elsewhere, not to your general unsecured debts. Other debts are considered legally more important—such as catching up on a first mortgage, vehicle loan, child or spousal support, or income taxes. These secured or priority debts usually get paid in full before anything goes to the general unsecured debts. If all of your disposable income goes to pay secured and priority debts (plus trustee and attorney fees), then there may be nothing left for the general unsecured debts. If so, you may pay nothing on your stripped mortgage balance.

Why You Usually Don’t Pay Any More on General Unsecured Debts

What if you do have some money left over during your 3-to-5-year plan to pay towards your general unsecured debts? This is important: you likely won’t end up paying any more on these unsecured debts if you strip a mortgage.  That’s because usually you have only a set amount of money available for all the general unsecured debts. Remember, that’s based on what you can afford to pay, minus what goes to higher priority debts and fees. That set amount of money just gets divided up among an additional unsecured debt—your stripped mortgage balance.

Example: You have $50,000 in general unsecured debts. You can afford to pay a total of $5,000 towards those debts during your 3-year plan. That’s a 10% payout. Now you strip a $20,000 second mortgage, so now your total general unsecured debt balance is $70,000. Your other circumstances haven’t changed, so you still can afford to pay $5,000 towards your unsecured debts. That money is just spread out over more debt (resulting in about 7% payout on them).

The result is that in this example you’d pay about 7% on your stripped mortgage, or about $1,400 of the $20,000. More importantly, you wouldn’t pay a dime more to complete your case than if you didn’t have that stripped mortgage. Then at your Chapter 13 case’s completion, the remaining mortgage balance would be wiped clean and the mortgage’s lien wiped off your home’s title.  

 

Debts You Don’t List in Your Bankruptcy Case

April 1st, 2019 at 7:00 am

If you don’t list a debt in your bankruptcy case, and don’t add it in on time, it may not be written off.  So carefully include all debts. 

 

Supposed to List All Creditors 

You can’t pick and choose which debts to include in your bankruptcy case. The U.S. Bankruptcy Code says that the first duty of a bankruptcy debtor is to provide “a list of creditors.” Section 521(a)(1) of Bankruptcy Code. That list includes secured, priority, and unsecured debts, which you put on Schedules D, E and F, respectively. As these Official Forms state clearly, you must

  • “List All Secured Claims”
  • “List All of Your Priority Unsecured Claims”
  • “List All of Your Nonpriority Unsecured Claims”

In the Declarations page you declare “Under penalty of perjury” that the “schedules filed with this declaration… are true and correct.” That page includes the very stern warning that “Making a false statement … can result in fines up to $250,000, in imprisonment for up to 20 years, or both.”

Truthfully, that is an overly stern warning because penalties like that simply don’t happen in the consumer bankruptcy context. Not for not including a debt!

The point is that it’s a federal crime to intentionally lie on your bankruptcy documents. So you need to list all your debts. Talk with you bankruptcy lawyer if you believe you have a reason for not listing a debt. There’s usually a practical solution to your concerns.

Unlisted Debts Not Written Off

Today’s blog post is not so much about intentionally not listing a debt but doing so inadvertently. If somehow you don’t include a debt in your bankruptcy schedules you risk owing that debt after your case is over.

In the last 5 weeks we’ve covered the following categories of debts not written off in bankruptcy:

  • Criminal fines and restitution
  • Income taxes
  • Child and spousal support
  • Student loans
  • Damages arising from driving intoxicated

Debts “neither listed nor scheduled” in a debtor’s bankruptcy documents are another category of debts not written off. Section 523(a)(3) of the Bankruptcy Code.

If You Forgot a Debt

If you didn’t include a debt in the schedules filed by your bankruptcy lawyer, you can often add it later. But you may need to act quickly.

Figuring out your deadline to add a missing creditor is somewhat tricky. It depends on the nature of the debt and the nature of your case.

The Deadline(s) to Add a Debt

First, if the debt is of the kind that the creditor could object to the writing off of the debt based on certain bad actions by you (for example, lying about your financial situation to acquire the debt), then there is a short, strict deadline. You have to add the debt to the case in time for the creditor to have time to object.  The objection deadline is usually about 3 months after you file your case. So you’d have to add the debt a bit before that. Section 523(a)(3)(B) of the Bankruptcy Code.

Second, if your case gives the creditors the opportunity to get paid something through your bankruptcy case, you have a different deadline to add a debt. Most Chapter 7 “straight bankruptcy” cases don’t give most creditors the right to receive anything from the case. There are no assets to distribute to creditors (when all a debtor’s assets are “exempt,” or protected). If there ARE assets to distribute (because some asset(s) are not exempt), the bankruptcy clerk sends out a notice providing a deadline for creditors to ask for a share of the assets. Creditors do so by filing a “proof of claim” documenting their debt. So in this situation you have to add a debt a bit before that deadline. Section 523(a)(3)(A) of the Bankruptcy Code.

In Chapter 13 “adjustment of debts” cases usually the debtor pays some portion of most or debts. Within a couple of weeks after you file a Chapter 13 case the clerk sends out a notice giving creditors a deadline to file proofs of claim. You have to add a debt a bit before that deadline.

Other Scenarios

What if you may owe a debt but don’t know that you may? For example, someone thinks you’ve caused them some injury or damages but hasn’t told you yet.

Or what if you’ve lost track of a debt or debts because you’ve moved and lost your records? If the debt is not on your credit report, you may have no way to recall and list the debt. Can you write off this debt?

Also, does it matter if a creditor has somehow found out about your case even though you neglected to list the debt?

Finally, what if the debt has been sold from one debt collector to another without your knowledge? How can you list a debt in order to successfully write if off if you don’t know who you owe?

We’ll cover these other scenarios next week.

 

Your Debts in Bankruptcy

February 4th, 2019 at 8:00 am

Bankruptcy is about debts. Different categories of debts are treated differently. The categories are secured, priority and general unsecured 


Your debts are the reason you are reading this. You want to know how bankruptcy would deal with your debts.

  • Will bankruptcy write off all your debts?
  • Can you keep paying some of your debts like a vehicle loan or home mortgage to keep that vehicle or home?
  • What happens to special debts that you can’t write off like child support and some income taxes?

To answer these and other similar questions we start by getting to know the 3 legally different categories of debts: 

  • secured
  • priority
  • general unsecured

Your rights and obligations, and those of the creditor, are different with each category of debt.

Secured Debts

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Sometimes you don’t know whether a debt is secured. For example, most purchases on major credit cards create a debt that is not secured by whatever you purchased. But some card purchases—such as on some retail store affiliated cards—do create a secured debt. The paperwork that came with your card (which you’ve likely thrown away!) should tell you. Your bankruptcy lawyer will also likely know, or can find out.

Occasionally, a creditor wanted the debt to be secured but it isn’t because the creditor messed up. It didn’t take the legal steps required to make that happen. This could mean that you don’t have to pay the underlying debt and still get to keep the property at issue.

A debt could also be only partially secured. If you owe $10,000 on a vehicle worth only $6,000, the debt is partially secured. It’s secured as to the $6,000 value of the vehicle and unsecured as to the remaining $4,000 of the debt. (See Section 506 of the Bankruptcy Code.) In the right circumstances you would not need to pay the full $10,000 debt and could still keep the vehicle.

Priority Debts

The law has selected some debts to be treated better than others, each for certain specific reasons. For example, child support payments are given many advantages, both inside and outside bankruptcy, because legislatures have decided that paying child support is an extremely high societal priority.

Priority debts are themselves prioritized within their different types. The higher-priority priority debts are treated better than the lower-priority one. Here’s a list of the most common priority debts for consumers or small business owners in order of priority:

  • child and spousal support
  • certain wages and other compensation owed to a debtor’s employees
  • certain (usually more recent) income taxes, and some other kinds of taxes

Priority debts are important in bankruptcy for a practical reason. Often only certain debts get paid, or get paid more than other debts. So a priority debt may get paid in full while other debts get paid little or nothing. We’ll explore how this works in Chapter 7 and Chapter 13 in our upcoming blog posts.

General Unsecured Debts

All debts that are not secured are unsecured debts.  “General” unsecured debts are just unsecured debts that are also not priority debts. So if a debt is not secured and does not fit any of the priority debt types, it’s general unsecured.  

Most people considering bankruptcy have mostly (and sometimes only) general unsecured debts. These include every possible way you can owe a debt. Examples include: most credit cards, just about all medical debts, personal loans without collateral, NSF checks, payday loans without collateral, unpaid rent and utilities, older income taxes, repossessed vehicle balances, most student loans, and other contract or legal claims against you.

Previously secured debts sometimes become general unsecured ones. One example: after a vehicle gets repossessed and sold, any remaining debt is a general unsecured one. Also, previously unsecured debts sometimes get secured. A general unsecured credit card balance can become secured by your home if the creditor sues you, gets a judgment, and records a judgment lien against your home.

 

Starting next week we’ll show how these different categories of debts are treated in bankruptcy.

 

The Surprising Benefits: Ending Your Vehicle Lease under Chapter 13

October 24th, 2018 at 7:00 am

Chapter 7 gets you out of a vehicle lease owing nothing. Chapter 13 is more complicated but can give you pretty much the same good result.

 

Ending a Vehicle Lease in Chapter 7

Our last blog post was about how a Chapter 7 “straight bankruptcy” can get you out of a vehicle lease. You can “reject” a financially bad lease, and then discharge (permanently write off) whatever you’d owe after surrendering the vehicle. Otherwise you could owe a lot of money when you get out of the lease.

So if you decide that you don’t want to keep your leased vehicle, and need bankruptcy relief, Chapter 7 is likely the cleanest solution.

Ending a Vehicle Lease in Chapter 13

But what if you have other reasons to file a Chapter 13 “adjustment of debts” case instead? Chapter 13 can be a great way to save your home, catch up on child or spousal support, deal with income tax debt, and solve many other big financial problems, much better than under Chapter 7.

So it’s good news that you can surrender your leased vehicle through Chapter 13 just like under Chapter 7. However, discharging any resulting debt from the lease contract is not as straightforward as in a Chapter 7 case. Here’s how it works.

Possible Debts from Surrendering a Leased Vehicle

First be aware that you could owe various kinds of debts when you surrender a leased vehicle. Surrendering before lease end could make you liable for contractual penalties and/or all the remaining unpaid lease payments. Surrendering the vehicle at the end of the lease could make you liable for high mileage, excessive wear and tear, and the difference between the vehicle’s originally anticipated value at the end of the lease and the actual “realized value” then. Either way the amount you would owe could be thousands of dollars.  

Rejecting the Lease under Chapter 13

Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing the lease. For today we’re assuming you no longer need or want to keep and pay for the vehicle.

The immediate benefits of rejecting the lease are just like under Chapter 7. You immediately stop paying the monthly lease payments, and then return the vehicle to the lessor after filing the case. If you’re behind on payments, you don’t have to pay them.

But under Chapter 13 there’s a complication. Your lessor can file a “proof of claim” reflecting whatever amount you would owe under the lease contract. The lessor does so in order to try to get paid part of any remaining debt. This debt is then added to the pile of all your other “general unsecured” debts.

The Category of “General Unsecured” Debts in Chapter 13

In a Chapter 13 case, your debts are divided into categories, one being your “general unsecured” debts. These are the debts that are 1) not secured by any of your property or possessions, and are also 2) not a “priority” debt (various specially-treated ones).

Often you have to pay all or most of what you owe on your secured and priority debts. But this is seldom true with general unsecured debts. Often you pay little or even nothing on your general unsecured debts in a Chapter 13 case. Whether or how much you pay depends on a lot of factors. The main factors are the amount of your secured and priority debts, and how much you can afford to pay to all of your creditors after expenses.

Often Vehicle Lease Debt Does Not Increase What You Pay

In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.

There are two circumstances where that happens, one less common and other very common.

First, in some parts of the country you are allowed to pay 0% of your “general unsecured” debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.

Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.  

For example, assume that after you pay all your secured and priority debts you have $2,000 left over to pay all your general unsecured debts over the life of your Chapter 13 plan. Your vehicle lessor files a claim saying you owe $3,000 after surrendering the vehicle. You owe $30,000 to all your other general unsecured debts. Adding the $3,000 lease debt to the other $30,000 means you owe a total of $33,000 of general unsecured debts. But you pay only the $2,000 that is available (over the life of the plan) either way. Having the $3,000 lease debt just means that the other general unsecured debts receive that much less.

 

A Creditor’s Challenge to the Automatic Stay to Pursue a Lawsuit

February 21st, 2018 at 8:00 am

A creditor may ask the bankruptcy court to let another court finish a lawsuit about liability and/or the amount of damages. 

 

“Relief from the Automatic Stay”

Our last blog post was about the possibility of a creditor asking for “relief from the automatic stay.” The automatic stay refers to the immediate protection you receive from debt collection as soon as you file bankruptcy. (See Section 362 of the U.S. Bankruptcy Code about the “Automatic stay.”)

So, a creditor’s motion for “relief” from that protection refers to a creditor’s request to the bankruptcy court for permission to pursue a debt in spite of your bankruptcy filing. In certain circumstances a creditor may have legal grounds to ask for an exception to the automatic stay protection. (See Section 362(d) of the Bankruptcy Code about “relief from the stay.”)

Last time we focused on the most common situations in which creditors ask for “relief from the automatic stay.” That’s when a creditor wants to pursue the collateral securing the debt. For example, it wants to repossess your vehicle or foreclose on your home because you aren’t current on monthly payments. Once you file bankruptcy creditors can’t take such actions until asking for and getting “relief from stay” from bankruptcy court.

Relief for Creditor for Reasons Other than Pursuing Collateral

However, there are other reasons for creditors to ask for relief from stay. The automatic stay covers more than the protection of collateral from your creditors. It also stops most lawsuits against you to collect a debt. In most cases your bankruptcy filing will permanently stop that lawsuit. But sometimes, under limited circumstances, a creditor which has sued you may ask for bankruptcy court permission to finish that lawsuit.

 We cover two of these limited circumstances today (and the rest in our next blog post).

Reasons to Ask for Relief from Stay to Finish a Lawsuit

A creditor might ask to finish a lawsuit in order to determine:

  1. whether you are at all liable on a debt—liability
  2. if you are liable on a debt, the amount you owe—the damages

1. Determining Liability Outside of Bankruptcy Court

Someone or some business may think you owe something to it, but you dispute that you do. You don’t think you owe anything. You think you have no liability at all.

If this dispute about liability is already being addressed in a lawsuit when you file your bankruptcy case, sometimes it makes sense to finish determining liability in that lawsuit. Your bankruptcy filing would almost always stop that lawsuit. The creditor would have to get the bankruptcy court’s permission to continue the lawsuit to determine whether you were liable.

For example, you may dispute any liability on a large credit card debt run up by your ex-spouse without your knowledge. If the cred card company sues you to collect the debt, you may be able to establish in that lawsuit that you owe nothing on that debt. The creditor may believe that you are liable and wants to determine that through the lawsuit. It may file a motion for relief from stay to do so in spite of your bankruptcy filing. (It would more likely do so if it could get money out of your bankruptcy case. That could happen in an asset Chapter 7 case or in a Chapter 13 case paying unsecured debts.)

2. Determining the Amount of a Claim

You may instead be in a lawsuit in which you admit that you owe something but dispute the amount owed. The creditor may ask for relief from stay to finish the lawsuit in order to determine the amount you owe.

For example, you were in an accident in which you admit some liability but dispute the amount of damages. You admit that you were at least partially at fault but dispute the damages you caused and their dollar amounts. In this situation the creditor may ask the bankruptcy court for relief from stay to finish the pending lawsuit to determine the amount of damages for which you are liable.

As in the situation above, the creditor would not bother asking for relief from stay if the debt is simply going to get discharged (written off) with nothing paid to it no matter how large the debt. It’s only worth pursuing the matter if the creditor can anticipate getting paid something. Again, this would be much more likely in an asset Chapter 7 case or a Chapter 13 case paying general unsecured debts.

Will the Creditor Get Relief from the Stay?

In both of these situations, the bankruptcy court may or may not grant relief from stay to finish the lawsuit.  It mostly depends on which court could more efficiently finish resolving the dispute—the original court or the bankruptcy court. If the liability or damages dispute has come close to being litigated in the original court, the bankruptcy court may just let the first court finish the lawsuit. That’s also more likely if that court has more experience dealing with those kinds of cases than a bankruptcy court. That’s often the situation. But it a lawsuit has just started, and the dispute is one that the bankruptcy court is experienced in handling, it may not give relief to the creditor but instead resolve the liability or damages dispute itself.

 

“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.

 

“General Unsecured Debts” in Chapter 7

December 11th, 2017 at 8:00 am

In a Chapter 7 case all or most “general unsecured debts” get “discharged”—legally written off. That’s one of the big benefits of Chapter 7.  

 

Last time we said there are two kinds of unsecured debts, “priority” and “general unsecured”:

  • “Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, by treating them much better than other unsecured debts. You can find a list of all the priority debts at Section  507 of the U.S. Bankruptcy Code.
  • “General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.”  “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”

We’ll get into “priority” debts later. Today’s post is about how “general unsecured” debts are dealt with in Chapter 7 “straight bankruptcy.

The Discharge of Debts

The main goals of a Chapter 7 case are 1) to stop creditors’ collection actions against you and then 2) to discharge as many of your debts as possible.

First, creditor collections are virtually all stopped by the “automatic stay.” This includes general unsecured debts. We discussed the automatic stay in our blog post of November 22, 2017. We compared how it works in Chapter 7 and 13. Also, see Section 362 of the Bankruptcy Code about it.

Second, in most Chapter 7 cases all “general unsecured debts” get discharged. See Section 727 of the Bankruptcy Code about the discharge of debts.

The discharge happens quite quickly. About 100 days after your bankruptcy lawyer files your case, the bankruptcy court enters a discharge order. Here is a very straightforward version of the Order of Discharge, consisting basically of this single short sentence: “A discharge under 11 U.S.C.  [the Bankruptcy Code] is granted to [Debtor].” Your assigned bankruptcy judge signs this order.

The Effect of Discharge

The effect of this discharge order is explained right on this form order, stating:

Creditors cannot collect discharged debts

This order means that no [creditor] 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.

Most General Unsecured Debts Get Discharged

“Priority” debts don’t get discharged. For example, unpaid child or spousal support can never be discharged. Nor can recent income taxes.

But most general unsecured debts do get discharged. There are some exceptions. We’ll cover those next time.

 

Unsecured Debts in Bankruptcy

December 8th, 2017 at 8:00 am

Your debts are either secured by something you own, or they are unsecured. Unsecured debts are either “priority” or “general unsecured.”  


Unsecured Debts

Debts that are unsecured are those which are not legally tied to anything you own. The creditor has no “security” attached to the debt, no “security interest” in anything. It has no right to repossess or seize anything of yours if you don’t pay the debt.  It can only pursue the debt itself.

It’s usually easier to deal with unsecured debts than secured ones in bankruptcy. Most unsecured debts can be discharged—legally written off—through either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”

An Unsecured Debt Can Sometimes Turn into a Secured One

Under some circumstances an unsecured debts can become secured if you don’t pay it.

For example, you could be sued by the creditor on a debt, resulting in a judgment against you. The creditor may be able to turn that judgment into a lien against your home and other possessions. The debt would then be secured by your home and/or other possessions. (The details of this depend on your state’s laws.)

Another example: if you get behind on income taxes the IRS can record a tax lien against your real estate and personal property. It does not need to sue you.

Filing bankruptcy can stop a lawsuit from turning into a judgment lien. It can often stop the recording of an IRS tax lien. In these and similar situations it’s much better to file bankruptcy before creditors can turn unsecured debts into secured ones.

Also, Sometimes a Secured Debts Can Turn into an Unsecured One

After a secured creditor repossesses or seizes its “security,” and sells it, any remaining debt would then be unsecured.

 A secured debt could become unsecured in various other ways. The “security” could be lost or destroyed, leaving the creditor with nothing to seize. Another secured creditor with prior rights could seize the “security,” leaving the creditor with the “junior” position no longer secured. There are various tools in bankruptcy for turning secured debts into unsecured ones.

Seemingly Secured Debts May Actually Be Unsecured

Creating a “security interest”—a creditor’s rights over its “security—takes specific legal steps. If the creditor fails to take those steps appropriately, a debt that seemed to be secured actually isn’t. Your bankruptcy lawyer may ask you (or the creditor) for documentation to find out if a certain debt is really secured.                                   

Two Kinds of Unsecured Debts

There are two kinds of unsecured debts: “priority” and “general unsecured.”

“Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, mostly by putting them ahead of other unsecured debts. Generally, “priority” debts have to be paid in full in bankruptcy before other unsecured debts receive anything.

“General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.”  “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”

Unsecured Debts in Bankruptcy

In the next blog posts we’ll look at how Chapter 7 and Chapter 13 treat “priority” and “general unsecured” debts. Depending on which kinds of debts you have, these will help you understand and choose between these two options.

 

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.

 

Treatment of Different Types of Creditors in Chapter 13

July 26th, 2017 at 7:00 am

The laws about the treatment of different types of creditors can often be used in your favor to pay who you want or need to pay. 


Your Chapter 13 payment plan has to treat debts that are legally the same type of debts essentially the same way. But your plan can and must treat different types of debts quite differently. The laws related to this can be used to your advantage in many, many ways. Today we begin showing how this works with each of the three major types of debts.

Secured Debts

A secured debt is one which is legally tied to something you own. The secured creditor has rights against that property you own. Those rights usually include to repossess or foreclose on the property if you don’t pay the debt.

For example, your home mortgage(s), unpaid property taxes, judgments with liens on your home, income tax liens can all be debts secured against your home. And your vehicle loan is secured against your vehicle.

Debts may be secured because you directly agreed to make them secured, like a vehicle loan. But debts can also be secured involuntarily by certain creditors in certain circumstances. An involuntary example is an income tax lien on your home.

Secured creditors have rights against whatever property of yours secures their debt. That gives them leverage in a Chapter 13 case if you want to keep that property. You usually have to pay part or all of the debt to keep the property.

If you want to keep the property securing the debt, and it’s something reasonably necessary for you to keep (like your primary vehicle or your home), that creditor leverage actually helps you. It usually allows you to favor that creditor over most of your other creditors.  This means that you can pay your secured debt ahead of or instead of most other debts.

For example, you would usually be allowed to catch up on a vehicle loan in your Chapter 13 plan ahead of paying your unsecured credit cards. Often as a result your vehicle loan gets paid in full while your credit cards get only partially paid. Sometimes the credit cards (and other such unsecured debts) get nothing at all.

Priority Debts

Priority debts are simply those which the law has determine are worthy of more favored treatment over other debts. Each type of priority debt has a particular reason for being treated specially.

Some of the most common and important priority debts for consumers are child and spousal support and recent income taxes. Support obligations are treated as special because of the hardship nonpayment tends to cause. Taxes are treated as special because their nonpayment hurts everyone.

In a Chapter 13 payment plan, you must pay priority debts in full before paying other unsecured creditors anything. As with secured debts, you usually want and need to pay your priority debts. You may well have decided to file a Chapter 13 case because you are protected while paying your priority debt(s).

As with secured debts, being required to pay your priority debt(s) ahead of other unsecured debts means those other debts get less, and sometimes nothing. You are essentially paying the priority debts to the detriment of your other debts.

General Unsecured Debts

This third type includes everything else. These are debts that have no rights to anything you own, and are not on the list of priority debts.

A Chapter 13 plan may pay general unsecured debts anything from 0% of what you owe them to 100%, depending on the circumstances. How much you pay your general unsecured debts depends on many factors. Broadly speaking, these debts get paid whatever is left over after you pay the secured and priority debts.

Limited Flexibility 

In Chapter 13 you and your bankruptcy lawyer have to follow a detailed set of rules about treatment of creditors. But those rules come with a certain amount of flexibility. The rules give structure to a Chapter 13 plan. The flexibility can help make it work to fit your unique personal circumstances.

We’ll show specific ways that these somewhat flexible rules can help you in our next few blog posts.

 

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