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Archive for the ‘general unsecured debts’ tag

Objecting to a Proof of Claim to Defeat a Creditor

January 2nd, 2017 at 8:00 am

If your liability dispute with your creditor spills into your Chapter 13 case, the bankruptcy court may be a good forum to fight it out.

 

Our last three blog posts were about objecting to a creditor’s proof of claim in a Chapter 13 case. Today we look at situations when this is the most important part of your case.

Bringing a Liability Dispute to the Bankruptcy Court

It’s not unusual that a dispute with a single creditor forces a person into bankruptcy. Often it’s just one otherwise ordinary creditor which is more aggressive than the others, suing you ahead of the others, and then garnishing your paycheck or bank account.

Sometimes it’s not just any extra-pushy creditor, but rather one that you’ve been fighting for quite a while. The fight you are having with that creditor may be the main reason why you filed bankruptcy.

Maybe you were in a serious vehicle accident, and did not have enough insurance coverage. You are being accused of causing the accident but don’t believe you were its primary cause. Because of major injuries to others you potentially owe hundreds of thousands of dollars.

Or you operated a business that looked promising for a while but then failed. You were accused of mismanagement by a partner or investor and were sued. Fighting this lawsuit has drained you financially.

Or perhaps you were accused of unduly influencing a parent or other family member to change his or her will. That turned into a contentious lawsuit against you.

The attorney fees and other costs of fighting the dispute have pushed you over the financial edge.

You’re in a Chapter 13 Case

Assume you either didn’t qualify for Chapter 7, or you needed the special tools of Chapter 13 to deal with special debts like your home mortgage or income taxes. So you’re in a Chapter 13 “adjustment of debts” case.

When a Single Creditors’ Proof of Claim Amount Makes All the Difference

As we discussed in recent blog posts, sometimes the amount of debts you have does not change how much you need to pay into a successful Chapter 13 case. But often it does matter. Your main adversary before you filed the Chapter 13 case may still try to make you pay too much to it through your payment plan. Or that adversary may even jeopardize your ability to have a successful case.

For example, your financial circumstances may require you to pay 100% of your debts in a Chapter 13 plan. If so your liability on a large claim could substantially increase how much and/or how long you’d have to pay. Assume you could otherwise finish your plan in 36 months by paying $750 monthly into your plan. An additional $18,000 proof of claim by your adversary could force you to pay that $750 monthly for two additional years. An even larger claim could force you to pay more than you could reasonably pay each month. If that proof of claim resulted in more debt than you could pay in 5 years, Chapter 13 would cease to be an option.

One way to solve these problems is to object to this adversary’s proof of claim.

Failure to File a Proof of Claim on Time

If you believe you don’t owe an adversary anything, you’d still list the disputed claim in your schedule of creditors. Otherwise you lose the opportunity to discharge (write off) that disputed claim.

Your adversary has a limited time to file a proof of claim with the bankruptcy court. If it fails to do so on time, you don’t have to pay it anything in your Chapter 13 case. The claim is then discharged without any payment at the successful completion of your case.

But it’s not likely that your adversary would mess up like this.

Objection to a Proof of Claim

More likely, your adversary would file a timely proof of claim. That claim would stand and you’d have to pay it under the terms of you plan unless somebody—usually you—objects to it.

If you object, and your adversary doesn’t respond, the claim would be paid according how you state in your objection. So if your objection states that you owe nothing at all on the claim, again you would pay nothing.

It’s not unheard of that your adversary would simply not respond to your objection. Just like you, it may be tired of paying attorney fees, likely now also to a bankruptcy specialist. Your bankruptcy documents filed under oath may reveal to your adversary better than ever before that you have no pot of gold and so it’s wasting its time and money chasing you.

Responding to Your Objection

If your adversary does respond to your objection, the bankruptcy court could potentially decide whether you have any liability on the claim, and/or its amount. If a lawsuit on this was already pending in another court when you filed bankruptcy, the bankruptcy court may require the liability dispute to go back to that prior court to determine your liability.

Even so, for the reasons mentioned above there’s usually less incentive for your adversary to keep fighting you as aggressively as before.

Conclusion

If you are in a Chapter 13 case which is affected by how much debt you owe, your main adversary may mess up and fail to file a proof of claim. Or if it does file a proof of claim but you object to it, your adversary may fail to respond. Even if this adversary does jump through all the procedural hoops, its prospect of paying additional costs and a receiving a limited payoff usually forces it to be more pragmatic and settle the dispute.

 

Potentially Pay Nothing to Most Creditors in Chapter 13

December 21st, 2016 at 8:00 am

In some jurisdictions you can pay nothing to your “general unsecured” creditors, if all your money goes to paying higher priority ones. 

 

We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13.  We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.

A Conventional Chapter 13 Plan

The U.S. Bankruptcy Code’s official name for Chapter 13  is “Adjustment of Debts of an Individual with Regular Income.” In most cases that “adjustment” means you must pay something to all or most of your creditors.

Here’s the way it usually works.  You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining “disposable income.” That remaining amount is usually what you pay into your Chapter 13 plan each month.

In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your “general unsecured” debts get what’s left over.

The “general unsecured” debts are all your debts that are neither secured nor “priority.” Secured debts are those with a lien on something you own. “Priority” debts are special ones that you must pay in full before paying anything on the “general unsecured” debts.

You pay your monthly plan payment to the Chapter 13 trustee as long as you’re required to. That’s usually either 3 or 5 years, depending on your income at the time of filing.  (Sometimes you qualify for the shorter 3 years but can stretch it longer simply to lower your monthly plan payments. You don’t pay any more than if you paid more per month for 3 years.)  From your plan payments the trustee pays your creditors according to the terms of your Chapter 13 plan.

Partial Payments on Your “General Unsecured” Debts

So, the total amount of money you pay your “general unsecured” debts is the amount you pay into your plan throughout the life of your case beyond what goes to pay off secured and “priority” debts (plus “administrative expenses” like trustee and attorney fees). When your “general unsecured” debts get enough to pay them 50 cents on the dollar, that’s called a “50% plan.” If those debts receive 2 cents on the dollar, that’s a 2% plan. Keep in mind that this is usually after your plan pays other debts—the secured and “priority” ones—in full.

The 0% Plan

So what happens if you only have enough “disposable income” to pay your secured and “priority” debts? What if there’s nothing left over for your “general unsecured” debts? You pay all you are required to pay each month and do so for as long are you are required to do so, but your secured and/or “priority” debts are so large compared to your “disposable income” that there is nothing at all left over for your “general unsecured” debts.

That’s called a “0% plan.” Your “general unsecured” debts get nothing out of the plan—0% of what you owe them.

Let’s be clear what that means. Assume you owe $10,000 in recent “priority” income taxes and are $8,000 behind on your mortgage. You also owe $100,000 in “general unsecured” debts—credit cards, medical bills, personal loans, older (non-priority) income taxes, and such. Your income qualifies you for a 3-year plan. Your budget says your monthly “disposable income” is $500. You pay 36 months of $500 Chapter 13 plan payments, a total of $18,000. (Let’s disregard “administrative expenses” like the trustee’s fee to make the math easier here.)

That $18,000 paid into your plan is enough to pay off the $10,000 “priority” income tax and to fully catch up on your $8,000 mortgage arrearage. But it leaves nothing for the $100,000 in “general unsecured” debts. With a 0% plan, you would pay nothing at all on that $100,000. Then at the end of your 36-month Chapter 13 plan all those debts would be discharged, permanently written off.

The Best of Both Chapter 7 and 13

With 0% Chapter 13 plans you get the benefit of discharging your “general unsecured” debts without paying anything on them. That’s what usually happens in a Chapter 7 case. But you get to deal with your secured and “priority” debts with the numerous advantages of Chapter 13. In our example, the tax creditor(s) and mortgage lender must let you catch up based on a sensible budget. Tax interest and penalties stop accruing, tax liens can’t be recorded, and you likely won’t have to pay prior penalties. There are many other Chapter 13 advantages in other situations.

0% Plans Not Accepted Always or Everywhere

But there are also some situations where you aren’t allowed to pay nothing on your “general unsecured” debts. For example, if you are keeping an asset that does not fit within a property “exemption,” usually in return you are required to pay a certain minimum to your pool of “general unsecured” debts. There are other situations like that.

There are also some jurisdictions where the bankruptcy judges frown upon or simply do not allow 0% Chapter 13 plans. Your bankruptcy lawyer will tell you what limitations there are along these lines in your bankruptcy court.

 

Potentially Pay Nothing to Most Creditors in Chapter 13

 [for 12/21/16]

 

In some jurisdictions you can pay nothing to your “general unsecured” creditors, if all your money goes to paying higher priority ones. [135] 

W&Th:  Discharge of Debts under Chapter 13

The discharge of debts in Chapter 13 works differently than in Chapter 7. It’s just one of many tools for achieving your financial goals.  [137 characters and spaces]

Schoenbohm Chapter 13 Also Discharges Your Debts 

Under Chapter 13 the discharge of debts is just one of many tools for achieving your financial goals.    [101 characters and spaces]

We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13.  We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.

A Conventional Chapter 13 Plan

The U.S. Bankruptcy Code’s official name for Chapter 13  is “Adjustment of Debts of an Individual with Regular Income.” In most cases that “adjustment” means you must pay something to all or most of your creditors.

Here’s the way it usually works.  You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining “disposable income.” That remaining amount is usually what you pay into your Chapter 13 plan each month.

In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your “general unsecured” debts get what’s left over.

The “general unsecured” debts are all your debts that are neither secured nor “priority.” Secured debts are those with a lien on something you own. “Priority” debts are special ones that you must pay in full before paying anything on the “general unsecured” debts.

You pay your monthly plan payment to the Chapter 13 trustee as long as you’re required to. That’s usually either 3 or 5 years, depending on your income at the time of filing.  (Sometimes you qualify for the shorter 3 years but can stretch it longer simply to lower your monthly plan payments. You don’t pay any more than if you paid more per month for 3 years.)  From your plan payments the trustee pays your creditors according to the terms of your Chapter 13 plan.

Partial Payments on Your “General Unsecured” Debts

So, the total amount of money you pay your “general unsecured” debts is the amount you pay into your plan throughout the life of your case beyond what goes to pay off secured and “priority” debts (plus “administrative expenses” like trustee and attorney fees). When your “general unsecured” debts get enough to pay them 50 cents on the dollar, that’s called a “50% plan.” If those debts receive 2 cents on the dollar, that’s a 2% plan. Keep in mind that this is usually after your plan pays other debts—the secured and “priority” ones—in full.

The 0% Plan

So what happens if you only have enough “disposable income” to pay your secured and “priority” debts? What if there’s nothing left over for your “general unsecured” debts? You pay all you are required to pay each month and do so for as long are you are required to do so, but your secured and/or “priority” debts are so large compared to your “disposable income” that there is nothing at all left over for your “general unsecured” debts.

That’s called a “0% plan.” Your “general unsecured” debts get nothing out of the plan—0% of what you owe them.

Let’s be clear what that means. Assume you owe $10,000 in recent “priority” income taxes and are $8,000 behind on your mortgage. You also owe $100,000 in “general unsecured” debts—credit cards, medical bills, personal loans, older (non-priority) income taxes, and such. Your income qualifies you for a 3-year plan. Your budget says your monthly “disposable income” is $500. You pay 36 months of $500 Chapter 13 plan payments, a total of $18,000. (Let’s disregard “administrative expenses” like the trustee’s fee to make the math easier here.)

That $18,000 paid into your plan is enough to pay off the $10,000 “priority” income tax and to fully catch up on your $8,000 mortgage arrearage. But it leaves nothing for the $100,000 in “general unsecured” debts. With a 0% plan, you would pay nothing at all on that $100,000. Then at the end of your 36-month Chapter 13 plan all those debts would be discharged, permanently written off.

The Best of Both Chapter 7 and 13

With 0% Chapter 13 plans you get the benefit of discharging your “general unsecured” debts without paying anything on them. That’s what usually happens in a Chapter 7 case. But you get to deal with your secured and “priority” debts with the numerous advantages of Chapter 13. In our example, the tax creditor(s) and mortgage lender must let you catch up based on a sensible budget. Tax interest and penalties stop accruing, tax liens can’t be recorded, and you likely won’t have to pay prior penalties. There are many other Chapter 13 advantages in other situations.

0% Plans Not Accepted Always or Everywhere

But there are also some situations where you aren’t allowed to pay nothing on your “general unsecured” debts. For example, if you are keeping an asset that does not fit within a property “exemption,” usually in return you are required to pay a certain minimum to your pool of “general unsecured” debts. There are other situations like that.

There are also some jurisdictions where the bankruptcy judges frown upon or simply do not allow 0% Chapter 13 plans. Your bankruptcy lawyer will tell you what limitations there are along these lines in your bankruptcy court. 

Creditors Paid Nothing under Chapter 13

December 19th, 2016 at 8:00 am

Chapter 13 payment plans usually have you pay something to all of your creditors. But not necessarily. Certain creditors may get nothing. 

 

Our last blog post was about the “discharge”—the permanent write-off—of debts through a Chapter 13 “adjustment of debts.” This discharge happens at the end of a successful case, which usually takes 3 to 5 years.

Misconceptions about Chapter 13

Although 3 to 5 years may sound like a long time, the length can actually be a big advantage. You have more time to catch up on or pay off debts that you either want to or must pay. So what seems like a disadvantage could actually be an advantage. 

There are lots of other misconceptions about how Chapter 13 works. That’s partly because it is such a flexible option. Chapter 13 cases can be very different from each another, with each addressing the unique circumstances of each person. So that leads to some confusion, as you hear about something in one case that may have little or nothing to do with how Chapter 13 would work for you.

One misconception is related to an objection often raised about Chapter 13: why pay my creditors all or part of what I owe them when I could just discharge those debts entirely in a Chapter 7 “straight bankruptcy” case?

Actually, often in Chapter 13 you pay some creditors nothing at all. Sometimes even all of your creditors receive nothing, expect those you want or need to pay.

A Standard Chapter 13 Case

In maybe the most standard kind of Chapter 13 case (if there is such a thing!), you pay certain special debts in full and you pay other more ordinary debts only a percentage of what you owe, and often only a small percentage. The special debts you pay are often those secured by collateral you want to keep. So you may be catching up on a home mortgage arrearage or “cramming down” a vehicle loan. Oher special debts are ones that can’t be discharged in Chapter 7. Examples include recent income tax debt or unpaid child or spousal support.

Then your remaining “disposable income” goes towards the rest of your debts. Usually you pay those “general unsecured” debts only whatever’s left over. If the special debts you are paying in full are relatively small and your “disposable income” left over each month is relatively large, you could pay a relatively high percentage of what you owe on the “general unsecured” debts. But more often you don’t have much money left over and so you end up paying just a drop in the bucket of what you owe on those debts.

Debts Paid Nothing

So how could you pay nothing at all on certain debts in a Chapter 13 case? Here are four circumstances that would happen:

  1. No money available for “general unsecured” debts because ALL of your “disposable income” is spent on your special debts.
  2. A creditor does not file a proof of claim on the debt, or does not do so on time. So you don’t pay anything on that debt.
  3. Your bankruptcy lawyer objects to a creditor’s proof of claim. Then the creditor either fails to respond on time or you prevail on that objection.
  4. At some point in your Chapter 13 case your circumstances significantly change. So your lawyer converts your case into a Chapter 7 one, discharging all or most of your debts in full.

We’ll cover each one of these in our next 4 blog posts. This will give you a better idea how Chapter 13 really works.

 

Unsecured Creditors’ Proofs of Claim in Chapter 13

November 18th, 2016 at 8:00 am

Often creditors’ proofs of claim do not affect the amount you have to pay in a Chapter 13 case. But sometimes they make a huge difference.

 

In our last blog post we introduced “proofs of claim.” A creditor files a proof of claim in your bankruptcy case to say how much it thinks you owe. The proof of claim says why you owe the money, often backed up with some documentation.

In that blog post we got into some practical sides to proofs of claim in Chapter 7 “straight bankruptcy” cases. Today we start the same with Chapter 13 “adjustment of debts” cases. Because there’s a lot more to this in Chapter 13, we’ll start today on proofs of claim for just one kind of debts, “general unsecured” ones.

General Unsecured Debts

An unsecured debt is simply one that is not backed up, or secured, by a lien on something you own.

There are two kinds of unsecured debts: “priority unsecured” and “general unsecured.” “Priority” debts are special categories of debts that are treated better—much better—in bankruptcy. For example, generally they get paid in full through the bankruptcy process before general unsecured debts get anything at all.

Examples of priority debts are unpaid child and spousal support, and recent income taxes. General unsecured debts are all the remaining unsecured debts that don’t fit within the different priority debt categories.

Proofs of Claim in Chapter 13 Cases

Filing a Chapter 13 case helps an overextended person reorganize, and often greatly reduce, their debts. You keep your assets while you use your present and future income to repay some portion of your debts (or rarely, all of your debts) over the course of a three-to-five-year plan.

For a creditor to get paid it has to file a valid proof of claim with the bankruptcy court. Then it can receive whatever the court-approved payment plan has earmarked for it. If a creditor doesn’t file a proof of claim, either you or the Chapter 13 trustee can do so on its behalf. That tends to happen when that debt is important to pay.

There is a strict deadline for creditors to file proofs of claim. And that deadline is quite short, within 90 days after the “meeting of creditors, which is usually about a month after the Chapter 13 case is filed. As long as the creditor was mailed notice of the case, a late proof of claim gets rejected—as if it was never filed.

What Difference Do General Unsecured Proofs of Claim Make in Chapter 13 Cases?

You and your bankruptcy lawyer should review all proofs of claim filed in your case, including the general unsecured ones. But be aware that often who files proofs of claim and the amounts on them make no practical difference.  Sometimes they make a big difference. Sometimes that difference is in your favor. Sometimes it’s not.

When the General Unsecured Proofs of Claim Make No Difference

The amount of money you pay to all your creditors in a Chapter 13 case does not change by one penny in the following circumstance:

  • 0% payment plans on your general unsecured debts: Many bankruptcy courts allow you, in the right circumstances, to pay nothing on these debts. That’s usually because all of your available income going into your payment plan is going to secured and/or priority debts. There’s no money available to go towards the debts that are lowest on the totem pole—the general unsecured debts. Since those debts are being paid 0%–nothing—it doesn’t matter how much money those proofs of claim represent.
  • Payment plans that pay whatever money is left over to your general unsecured debts: Most Chapter 13 cases pay a certain amount of money to the secured and priority debts. Then whatever amount is left over throughout the life of the plan goes to the general unsecured debts. The amount of money owed in that pool of debts does not change the amount that gets paid to them. They’re just getting the leftovers. So the total amount of money in the general unsecured proofs of claims makes no difference.
  • Plans that require you to pay a certain set amount to the general unsecured debts: For various reasons, you may need to pay a specific amount to these creditors before you can complete the case. For example, you may be required to do so to be allowed to keep an asset that you would otherwise lose in a Chapter 7 case. Again, the amount of total general unsecured debts doesn’t matter—you must just pay that specified amount regardless.

When the General Unsecured Proofs of Claim Can Make a Lot of Difference

The amount of money you pay to your creditors in a Chapter 13 case can change a lot in the following situation:

  • 100% payment plans on your general unsecured debts: Not often, but sometimes, you are required to pay your general unsecured debts in full.  That may be because you have relatively high income compared to your debt. So, during the period of time you are in the Chapter 13 case you have enough disposable income to pay off all the unsecured debts. In this situation, every dollar more among the general unsecured proofs of claim adds a dollar to the amount you must pay. But in the same way, every dollar less among those proofs of claim is a dollar less that you need to pay before finishing the case.

You and your bankruptcy lawyer need to review all proofs of claim particularly carefully in this situation. Creditors’ proofs of claim are by no means always accurate. Proofs of claim are sometimes even filed in the wrong cases! They can be invalid for being filed late. The claim may be legally stale and uncollectable. Your lawyer needs to object to those proofs of claim, which often gets rid of them without much of a fight.

Occasionally a major creditor or two fails to file an expected proof of claim. Or they do not file one until after the legal deadline. With a 100% plan, that could reduce the amount you have to pay in your Chapter 13 plan. That would let you finish your case sooner—sometimes much, much sooner—than originally expected.

 

“General Unsecured” Debts Discharged in Chapter 13

August 8th, 2016 at 7:00 am

To the extent you do not pay off your debts during a Chapter 13 payment plan, the remaining balance is usually legally written off forever.

 

Our last two blog posts were about how Chapter 7 “straight bankruptcy” deals with “general unsecured” debts. But how about Chapter 13 “adjustment of debts”?  What happens to those simple debts, which are neither secured by a lien on something you own nor are not a “priority” debt?   

“Priority” and “General Unsecured” Debts

Let’s go back and distinguish these two kinds of debts. The distinction is crucial because of how they are treated under Chapter 13. You have to pay “priority” debts in full during the course of the 3-to-5-year payment plan. You generally only have to pay “general unsecured” debts to the extent you have money to pay them.

So what’s the difference? Simply, “priority” debts are specific categories of debts that Congress has decided must be treated specially. They are debts that the law says that in a Chapter 13 case you must pay in full before paying the “general  unsecured” debts anything.

The “priority” debts are all on a list in the Bankruptcy Code. If a debt is not one of the kinds on that list, then it’s a “general unsecured” debt. The main “priority” debts in consumer Chapter 13 cases are recent income taxes and past-due child and spousal support.

The Discharge of “General Unsecured” Debts

People file Chapter 13 usually not because of their “general unsecured” debts. Chapter 13 provides extremely helpful tools for dealing with secured debts like home mortgages and vehicle loans. And it gives you time to pay “priority” debts while being protected from creditors like the IRS or state tax department, and from your ex-spouse or the support enforcement agency.  

Still, what happens to your “general unsecured” debts in a successful Chapter 13 case? What happens is that after paying these debts as much as your budget allow you to pay them (after paying any secured and “priority” debts), the remaining balance, no matter how little or how much, is discharged—legally written off.

Here’s how this works in practice.

An Example

Assume that, based on your income from a steady job, you qualify for a 3-year Chapter 13 bankruptcy. You have $110,000 in a combination of credit cards, medical bills, and personal loans. As long as there is no collateral tied to any of those debts, they are very likely “general unsecured” debts.

You are also $8,000 behind on your home mortgage on a home you want to keep. That’s a secured debt you must pay. Under Chapter 13, the home mortgage lender is usually required to let you catch up on the mortgage over the 3-year life of the payment plan.

And you owe $6,000 in income taxes for the last two tax years. That’s a “priority” debt you must pay. The IRS/state is required to give you that time to pay the “priority” debt. Plus, as long as the IRS/state has not recorded a tax lien, you don’t pay any ongoing interest or penalties.

In this example, based on your budget, after paying your monthly mortgage and all other reasonable living expenses, you can afford to pay $450 per month to all your creditors.

$450 per month for 36 months totals $16,200 paid into your Chapter 13 payment plan. That is enough to catch up on the $8,000 mortgage arrearage and pay off the $6,000 tax debt. There’s $2,200 left over.

(The Chapter 13 trustee (who administers the distribution of money to the creditors and otherwise oversees the case) gets paid a certain percentage. And if you didn’t originally pay your bankruptcy lawyer in full you can pay the balance through the plan payments. But to simplify the math here, let’s exclude these “administrative fees.”)

The End Result

So what happens to the $2,200 left over after you catch up on the mortgage and pay off the taxes? It’s paid on your “general unsecured” debts, distributed pro rata based on the amount of each debt. Overall you would pay $2,200 of the $110,000 owed on these debts, or 2% of the “general unsecured” debts.

And what would happen to the remaining 98% of those debts? After you successfully complete the 36-month payment plan, the bankruptcy judge enters a court order legally discharging those debts.

You’d have caught up on your mortgage, paid off the tax debt, and paid 2% of the “general unsecured” debts. Other than the regular payments on your mortgage, you’d be debt-free.

 

“General Unsecured” Debts Discharged in Chapter 7

August 3rd, 2016 at 7:00 am

In most straightforward Chapter 7 cases all debts not secured by any collateral are discharged–forever written off. You pay nothing on them.

 

Most of our blog posts of the past couple months have been about how bankruptcy deals with secured debts. These are debts that are secured by a lien on some asset(s) of yours. We especially focused on debts secured by a vehicle or home because of their importance.

But how about unsecured debts? How are they treated?

“Priority” and “General Unsecured” Debts

How an unsecured debt is treated depends on which kind it is. There are two kinds of unsecured debts, “priority” and “general unsecured” ones. All unsecured debts are either one or the other of these.

Like the name implies, “priority” debts are special. They are categories of debts that Congress has decided are to be treated specially.

The “priority” debts are all on a list in the Bankruptcy Code. If a debt is not one of the kinds on that list, then it’s a “general unsecured” debt.

We’ll address “priority” debts later. Today we’re talking about the “general unsecured” ones.

The Discharge of Debts

The main goal of a Chapter 7 “straight bankruptcy” case is to “discharge” all or most of your debts. To discharge a debt means for a bankruptcy judge to order the debt to be legally written off.

Most “general unsecured” debts ARE discharged in a successfully completed Chapter 7 case. Most Chapter 7 cases ARE completed successfully.  So, in most cases the court discharges all “general unsecured” debts. (We discussed the major exceptions to discharge in a series of blog posts in mid-April.)

A Simple Example

Assume that you qualify for Chapter 7 bankruptcy. You have $85,000 in a combination of credit cards, medical bills, and personal loans. As long as there is no collateral tied to any of those debts, they are very likely “general unsecured” debts. Assume you have no other debts.

Through your bankruptcy lawyer you file a Chapter 7 case. From that moment on, your creditors cannot pursue you, your income, or your assets to pay its debt. Then, as long as you disclosed everything accurately to your lawyer, and follow the required procedure, it’s extremely likely that about 3 or 4 months later the bankruptcy judge assigned to your case will sign an order declaring that your debts are discharged.

As of that point you would legally no longer owe any of that $85,000 in debt. You would be debt-free.

 

A Second Mortgage “Strip” through Chapter 13

July 8th, 2016 at 7:00 am

“Stripping” off a second mortgage has major immediate and long-term benefits.

 

In a blog post last week we listed 10 ways Chapter 13 helps you keep your home. Here’s the second one of those:

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. However, Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. This could potentially save you hundreds of dollars monthly. You could also end up paying just a fraction of the entire balance, or sometimes paying none of it all. That could save you many thousands or even tens of thousands of dollars in the long run.

How do you qualify for this junior mortgage lien “stripping”? The key factor is your home’s value. The second mortgage can be “stripped” from the home’s title if the entire value of the home is fully encumbered by liens legally superior to the second mortgage lien. “Legally superior” liens are those liens ahead of the second mortgage lien on the title.  All of the home’s equity is fully absorbed by liens ahead of it on the title. So the second mortgage debt is declared to be an unsecured debt, and is treated accordingly.

To bring this explanation to life let’s show how this incredible tool works by example.

An Example

Assume that your home is worth $200,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it back yet. You owe a first mortgage of $210,000 and a second mortgage of $18,000. The second mortgage has monthly payments of $250, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Also assume that you were unemployed for a spell and so fell behind on both mortgages, as well as on other debts. You have a new job but it doesn’t pay as well as the earlier one, so you need help.

You very much want to keep your home. You’ve had it forever and it’s close to your new job. Home and apartment rents are rising in your area. You know that mortgage qualifying standards are tighter now than they were before the Great Recession. So for good reason you’re afraid that it would be a long time before you could buy a home again.

So you need a Chapter 13 “adjustment of debts” to catch up on your home obligations and to deal with your other debts.

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $18,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file special papers in the bankruptcy court to do so. Those papers would show that the home’s value—$200,000—is less than the amount of the first mortgage—$210,000. So all of the home’s equity is fully absorbed by the lien legally ahead of the second mortgage. As long as the bankruptcy judge accepts this to be true, he or she would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $18,000—would be treated as an unsecured debt.

The Great Benefits

A number of very good consequences would flow from this.

  • You could immediately stop making the $250 monthly payments. This would make it easier for you to pay the first mortgage’s monthly payments.
  • To the extent you were behind on the second mortgage, you would not need to catch up. This means that during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $250 on your second mortgage, that’s $1,500 you would not have to pay.
  • Your now-unsecured $18,000 second mortgage balance is treated in your Chapter 13 payment plan just like any other unsecured debt. That is, you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So adding the second mortgage balance often doesn’t increase what you pay into your payment plan. It’s not unusual for the second mortgage balance to be paid only a few pennies on the dollar. In fact, sometimes you pay NOTHING on that second mortgage balance (and on your other general unsecured debts).
  • At the end of your successful Chapter 13 case the entire unpaid second mortgage balance is “discharged”—legally written off. Assume for a moment that your payment plan allowed you to pay nothing on this second mortgage balance. Realize that the resulting savings would be substantially more than the $18,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying. The $18,000 balance at 8% with $250 payments would take a little more than 8 years to pay off, thus including about $6,600 in interest you’d also avoid paying.
  • Lastly, “stripping” the second mortgage off your home’s title would greatly improve your potential equity picture. Instead of owing $228,000 ($210,000 first mortgage + $18,000 on the second mortgage), you’d owe only $210,000. You’d be that much closer to building equity in your home as you paid down the first mortgage and as the home increases in value.

 

The 3 Kinds of Debts

April 6th, 2016 at 7:00 am

Your debts can be “secured,” “priority” or “general unsecured.” How bankruptcy treats your debts depends on which kind they are.

 

The purpose of bankruptcy is to deal with your debts. You want to know:

  • Will you still owe anything to anybody after filing bankruptcy?
  • What happens to debts you want to keep like a vehicle loan or home mortgage?
  • How about special debts like income taxes and child support?

To answer these you have to know the 3 kinds of debts:

  • secured
  • priority
  • general unsecured

Secured Debts

All of your debts are either secured by something you own or are not.

Usually it’s quite straightforward. If you have a vehicle loan, the vehicle’s title shows your lender as the lienholder. That lien on the title, plus what you agreed to in the documents you signed with that lender, makes the loan secured by the vehicle. So the lender has certain rights as a secured creditor related to your vehicle. It has the right to repossess your vehicle if you fail to make payments. It can likely “force-place” insurance and make you pay for it if you let your insurance lapse.

But sometimes you may not know whether a debt is secured or not. For example, you may have a credit card with a national retail chain but not know whether its balance is or is not secured by what you bought on that card. You’d have to look closely at the fine print on your card contract to know one way or other.

Sometimes a debt is intended to be secured but the creditor does not do what the law requires, and so the debt ends up being completely unsecured. The creditor would lose its rights to repossess whatever of yours it could have otherwise.  

A debt could be fully secured or only partially secured. If you owe $12,000 on a vehicle worth only $9,000, the debt is only partially secured. It’s secured as to the $9,000 value of the vehicle and unsecured as to the remaining $3,000 of the debt.

A debt could be voluntarily or involuntarily secured. Involuntarily secured debts include a judgment lien on your home, an income tax lien on everything you own, and a mechanic’s or repairman’s lien for an unpaid bill on a repaired vehicle.

Priority Debts

Just like the word sounds, priority debts are particular ones that the law has selected to be treated better than other debts. For each type of priority debt there are reasons why it is treated special.

The different types of priority debts are themselves prioritized, as the following list shows. The most common priority debts for consumers or small business owners are the following, from the highest priority on down:

  • child and spousal support—the amount owed as of the time of the filing of your bankruptcy case
  • the administrative costs of the bankruptcy case—trustee fees and costs, and sometimes attorney fees
  • wages and other compensation owed to employees, including employee benefits—maximum of $12,850 per employee, for work done in the final 180 days before the bankruptcy filing or close of business, whichever was first
  • certain income taxes, and some other kinds of taxes—they are priority only if they meet certain conditions

In bankruptcy a lot turns on which debts get paid ahead of other debts. That often determines which debts get paid anything, and if so how much. This comes up differently under Chapter 7 “straight bankruptcy” and under Chapter 13 “adjustment of debts.”

In most Chapter 7 cases the trustee does not get any of your assets to distribe to your creditors. But in those cases where there are unprotected assets for the trustee to liquidate, the priority creditors are paid in full before the general unsecured ones receive anything. And the higher priority creditors are paid in full before the lower priority ones receive anything.

In Chapter 13 cases, the payment plan proposed by you as the debtor and approved by the court must show that you will pay all priority debts before the completion of your case. And then you have to in fact do so before you can finish the case and get a discharge (legal write-off) of your unpaid debts.

General Unsecured Debts

All debts that are not legally secured are considered unsecured debts.  And “general” unsecured debts simply refer to those unsecured debts which are not priority debts. So general unsecured debts are the default category—if a debt is not secured and is not a priority debt, it’s a general unsecured one.  

These include every imaginable type of debt or claim. The most common ones are most credit cards, virtually all medical bills, personal loans without any collateral, bounced checks, most payday loans (although those sometimes are secured), unpaid rent and utilities, older income taxes, balances left over after a vehicle is repossessed, most student loans, and uninsured or underinsured vehicle accident claims against you.

Sometimes debts which were previously secured become general unsecured ones, and vice versa. For example, once you’ve surrendered the vehicle on a vehicle loan, any remaining debt owed is a general unsecured debt. Or in the opposite direction, a general unsecured medical bill can become secured after a lawsuit is filed against you and a judgment entered, resulting in a judgment lien attached to your home.

 

In the next blog post we’ll get more into how debts in each category are treated under Chapter 7 and Chapter 13.

 

A Fresh Start on Your Vehicle Loan through Chapter 13 “Cramdown”

January 13th, 2016 at 2:00 am

If your vehicle is worth less than you owe, Chapter 13 “cramdown” can reduce your monthly vehicle payment and the total you pay on the loan.

 

You could get a fresh start on your vehicle loan by:

  • Paying a smaller monthly payment immediately
  • Reducing the interest rate
  • Not needing to catch up on payments if you’re behind
  • Reducing the total amount you pay before the vehicle is yours free and clear

If you owe on your vehicle loan more than your vehicle is worth, and your loan is more than 910 days old (about 2 and a half years), you can very likely do some or all of the above through a Chapter 13 “cramdown” of the vehicle loan.

The Chapter 7 Vehicle Loan Dilemma

In the last two blog posts we described how to keep your vehicle under a Chapter 7 “straight bankruptcy” case through either “reaffirming” the vehicle loan or “redeeming” it. Both can cause problems.

With reaffirmation you agree to continue being legally liable on the full amount of the loan. The reaffirmation agreement excludes the vehicle loan from the discharge (legal write-off) of the debt, giving back to your vehicle lender all the rights it has under the loan.

This can cause problems because of the risk that sometime in the future you would not be able to make the loan payments. If so the lender would have the right to repossess the vehicle. And then the lender could come after you for the “deficiency balance”—the amount that you would usually continue to owe after the lender sells the repossessed vehicle and credits the proceeds to the balance. In most situations if you want to keep the vehicle you must sign on to a reaffirmation agreement. And so you are stuck with these risks.

With redemption you get out from the entire vehicle loan by paying the current fair market value of the vehicle in a lump sum, assuming that value is less than the balance on the loan. You get the money for this fair market value either through your own assets, by begging or borrowing it from friends or relatives, or by borrowing from commercial sources which do these kinds of special loans.

But often none of these ways of getting the money for the vehicle’s fair market value are feasible. You may simply not have any assets that you can turn into the required amount of cash, or the friends or relatives willing to give or lend you the money. And you may not qualify for a redemption loan.

So what do you do if you have a vehicle worth significantly less than you owe on it? What if you don’t want to reaffirm, risk losing it to repossession and then being sued for the deficiency balance? What if you can’t redeem because you can’t get the money to do so?

You may well be able to get a fresh start on this vehicle loan by filing a Chapter 13 “adjustment of debts” and doing a “cramdown” on that loan.

Cramdown Divides the Vehicle Loan into Secured and Unsecured Portions 

Under a Chapter 13 payment plan secured debts and unsecured debts are treated quite differently. In general, secured debts need to be paid in full if you want to keep the collateral (or at least paid current in the case of long term debt like a home mortgage). Unsecured debts in most cases only need to be paid if and to the extent that there is money left over during the 3 to 5 year term of the case after other more important debts are paid.

So a vehicle loan in which the vehicle is worth less than the balance is divided into two parts: the secured portion of the loan and the unsecured portion. The amount of the secured portion is determined by the value of the vehicle. The amount of the unsecured portion is the rest of the loan balance, the part that effectively has no collateral.

For example, if you still owe $16,500 on a 3-year old vehicle loan and the fair market value of your vehicle is $10,500, then the secured portion of that vehicle loan is $10,500 and the unsecured portion is $6,000.

Recalculation of Number of Payments, Interest Rate, and Amount of Payments

Cramdown allows the payment terms of the loan to be rewritten based on the secured portion of the debt only. Because that’s less than the full loan balance, the new monthly payments are usually less, sometimes hugely so.

In the above example, the new monthly payments are based not on the $16,500 full balance but rather on the $10,500 secured portion.

The number of monthly payments can often be stretched out, up to 60 months. How much this helps in reducing the monthly payment depends in part on how many months were left on the contract at the time of the bankruptcy filing—in other words how much more the payments can be stretched out.  

For example, if you’re 3 years into a 6-year vehicle loan when you file a Chaper13 case, you can usually stretch that remaining 3 years out over 5 years if you need to.

Of course more interest accrues if a debt takes longer to pay. But remember that the amount being paid—the secured amount—is less, which lessens the interest accrual. Plus, cramdown sometimes allows the interest rate to be lowered, especially if the contract interest rate is high. For example, depending on how your local bankruptcy judges are ruling on this issue, you may be able to reduce a 9% interest rate to about 5%.

The example we’ve been can illustrate the kind of reduction you can get in the monthly payments (although there may be need for some negotiation with the lender’s attorney to get at the final figures). The contract balance of $16,500 paid over the remaining 36 months of the 9% vehicle loan would require a monthly payment of about $525. But under Chapter 13 cramdown, paying the secured amount of $10,500 over the maximum 60 months of a payment plan at 5% would require a monthly payment of only about $198.

(Note that in this cramdown example the total interest paid over the term of payments is significantly less than under the contract—about $1,400 instead of about $2,400. This is true because of the lower principal amount being paid off combined with the lower interest rate, even though the monthly payments are much lower and are being stretched over a much longer period—60 months instead of 36.

The Unsecured Portion of the Vehicle Loan

That’s fine and well as to the savings on the secured portion of the loan but how about the remaining unsecured portion? In our example, what about the remaining $6,000?

This remaining unsecured portion is treated just like your other “general unsecured” debts. Some very special unsecured debts—such as recent income taxes and child support arrearage—called “priority” debts, have to be paid in full during the life of a Chapter 13 plan. But not “general unsecured” debts. In most cases these debts are paid only as much as there is money in your budget to pay them, if anything. In other words the percentage paid on the “general unsecured” debts is usually based on the amount you can afford to pay during the period of time you are in the Chapter 13 case AFTER paying the “priority” and secured debts. Although that percentage can conceivably be anywhere from 0% to 100%, it’s often on the lower end of that range.

Also note that usually you pay a certain total amount to your pool of “general unsecured” debts over the life of your Chapter 13 case. Therefore, adding the unsecured portion of your vehicle loan to that pool usually does NOT increase the amount you have to pay into your Chapter 13 plan. It rather just spreads that amount out among more “general unsecured” debts. Under these circumstances, for practical purposes the unsecured portion of your vehicle loan is not costing you anything.

Using our example with the $6,000 unsecured portion of the vehicle loan, assume that person had $25,000 of other “general unsecured” debts and that a total of $5,000 would be available to be paid his or her “general unsecured” debts over the entire life of the Chapter 13 case. Without the $6,000 unsecured portion of the vehicle loan, the other “general unsecured” debts would receive $5,000 out of the $25,000 owed, or about 20%. But adding in the $6,000 from the vehicle loan makes for a total of $31,000 in “general unsecured” debts. Now the same $5,000 distributed among the $31,000 would result in the “general unsecured” debts instead receiving about 16%, without it costing a penny more to the debtor. 

 

Bankruptcy Timing: Filing in 2016 to Write Off More Income Taxes with Chapter 13

January 4th, 2016 at 2:00 am

With Chapter 13 you may have to pay some part of the taxes that you could just discharge under Chapter 7, but it may be worth it.   

 

Last week just before New Year’s Day we showed how to discharge (legally write off) more of your tax debts (likely for the 2012 tax year) under a Chapter 7 “straight bankruptcy.” Today we show how that’s done under the Chapter 13 “adjustment of debts” form of consumer bankruptcy.

Dealing with Income Tax under Chapter 13

The most direct way bankruptcy deals with older income taxes is by quickly discharging them in a Chapter 7 case. As long as the tax meets the conditions for discharge, under Chapter 7 you would simply not legally owe the tax at all usually within about 4 months after filing the bankruptcy case.

But there are many circumstances in which a Chapter 13 case would be better for you than Chapter 7. Some of these circumstances involve income taxes and some so not.

You may owe some older income taxes which meet the conditions for discharge and some more recent income taxes that do not and so need to be paid. If the taxes that have to be paid are large, it’s often safer and/or saves you money by dealing with all of your taxes in a Chapter 13 case.

Or you may need a Chapter 13 case for reasons other than your income taxes, such as to save your home from foreclosure or to deal with a child support arrearage. Chapter 13 gives you extraordinary tools for dealing with these and a number of other special situations. It may be worth a potential disadvantage on the income tax side to have the advantage of those tools to meet your most important goal(s).

Dischargeable Taxes under Chapter 13

Be aware that the same rules apply to Chapter 13 that apply to Chapter 7 about which income taxes can be discharged. In most situations you can discharge older income taxes through Chapter 13 by meeting the following two conditions. The date of the bankruptcy filing must be both:

1) at least 3 years after the pertinent tax return was due (plus any time for extensions), and

2) at least 2 years after the tax return was actually submitted to the IRS or state tax agency. 

Some other possible conditions very seldom come into play—when there is tax litigation, offers in compromise, and other relatively rare procedural complications.

So most of the time if those two conditions are NOT met the tax must be paid in full, and Chapter 13 provides some very helpful advantages in doing so. But if those conditions ARE met, what happens to those taxes in Chapter 13?

What Happens to Dischargeable Taxes under Chapter 13

Simply put, income taxes that meet the conditions for discharge are lumped in with the rest of your “general unsecured” debts and paid whatever percentage those other debts are paid. Those taxes may be paid something or they may be paid nothing. Even if they are paid something, that may not increase what you have to pay during your Chapter 13 case. Let us explain what we mean.

0% Chapter 13 Plans

In many but not all parts of the country the bankruptcy court will approve a Chapter 13 payment plan in which all the money you pay goes to certain special creditors—those with debts secured by collateral and/or liens and those with “priority” debts that must be paid in full. That leaves nothing available during the length of the plan for the rest of the creditors—the “general unsecured” ones. Since income taxes that meet the conditions for discharge are in that “general unsecured” category, nothing is paid to them during the 3-to-5-year plan. If the case reaches a successful conclusion—mostly by all the plan payments being paid—then at that point all the dischargeable taxes are in fact discharged, without having being paid anything.

Chapter 13 Plans Which Aren’t Paid Any More in Spite of the Dischargeable Taxes

Even if when a Chapter 13 plan is designated to pay the “general unsecured” debts some percentage of what you owe, the fact that you have dischargeable income taxes often does not increase the money you would pay during the life of your plan. That’s because in many Chapter 13 cases you have only so much available to pay to all of your “general unsecured” debts. Adding your dischargeable income taxes to the “general unsecured” debts just reduces how much the rest of those debts are paid, without increasing the amount you pay.

An Example

Consider if you owe $30,000 in other “general unsecured” debts—credit cards and medical bills, for instance, and $10,000 in older income taxes that meet the conditions for discharge, a total of $40,000 in “general unsecured” debts. Assume that based on your income and expenses you have enough in your budget each month to pay into a Chapter 13 plan enough to catch up on a home mortgage, pay your vehicle loans, and pay off $15,000 in more recent “priority” income taxes that do not meet the “dischargeability” conditions and so must be paid in full. In addition, you have a little more “disposable income” adding up to a total of $5,000 over the entire course of the payment plan.

In this situation, the existence of the $10,000 in dischargeable income taxes would not affect the amount you’d have to pay into your Chapter 13 plan. Without these taxes, the available $5,000 would be distributed among the other $30,000 in “general unsecured” debts, thereby paying those about 17% of the amount owed ($5,000 divided by $30,000). When you add in the taxes, that same $5,000 would now be divided by $40,000, thereby paying about 12.5% of the amount owed. The amount paid to the “general unsecured” debts is not changed ($5,000); that money just gets distributed among more debts.

Either way, at the successful completion of the Chapter 13 the unpaid part of the “general unsecured” debts—including the $10,000 in taxes—would be discharged, forever written off.

Income Taxes Owed for 2012

This is all relevant to now particularly if you owe income taxes for the 2012 tax year. If so, you would meet the first of the above two conditions by waiting to file your Chapter 13 case until after April 15, 2016. That’s because at that point 3 years would have passed since that tax return was due.

This assumes you were not granted an extension to file that tax return. If an extension to file the return was granted to October 15, 2013, you’d have to wait to file the Chapter 13 case until after October 15, 2016 to meet this 3-year rule.

As to the second of the above two conditions, you’d meet it by waiting to file your Chapter 13 case until at least 2 years had passed since you submitted your 2012 tax return to the IRS/state. If you filed that return by the (non-extended) due date of April 15, 2013 then you would have already met this 2-year condition in April of last year. But you could have submitted the tax return a full year late—by April 15, 2014—and still meet this 2-year condition.

 

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