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Priority Debts in a Chapter 13 Case

December 9th, 2019 at 8:00 am

Chapter 13 gives you some huge advantages over Chapter 7 for paying your priority debts. You’re protected while you pay what you can afford.


Priority Debts under No-Asset and Asset Chapter 7

Our last two blog posts described how Chapter 7 can sometimes be a sensible way of dealing with priority debts. (Those are ones you can’t “discharge”—legally write off, the most common being recent income taxes and child/spousal support.) Our blog post two weeks ago: a no-asset Chapter 7 case discharges all or most of your other debts. So then afterwards you can better afford to pay your priority ones. Last week: in an asset Chapter 7 case your bankruptcy trustee collects your unprotected asset(s). He or she then pays part or all of your priority debt out of the proceeds from selling those asset(s).

But Chapter 7 is not well-designed to deal with priority debts in many situations. Here are the main problems:

  • You get only brief protection, or none at all, from your priority creditor(s). With income taxes, the IRS/state can resume collections when your Chapter 7 case is over. That’s only 3-4 months after you and your bankruptcy lawyer file the case. With child/spousal support, there is no protection at all: collection continues even during your Chapter 7 case.
  • Because of this lack of legal protection, you have little or no leverage about the dollar amount of payments you pay on your priority debts. You are largely at the mercy of the IRS/state or the support enforcement agencies.
  • In an asset Chapter 7 case, you have no control over the trustee’s sale of your asset(s). Plus you have to pay a significant amount for the trustee’s costs and fee. That reduces what goes to your priority debt(s).

The Benefits of Chapter 13

In contrast, Chapter 13 is well-designed for you to deal favorably with your priority debts. Here are its main benefits and advantages.

1. Ongoing Protection, for Years

The protection from creditors called the automatic stay lasts not 3-4 months but rather 3-to-5 years in Chapter 13. You can lose this protection under Chapter 13, if you don’t follow the requirements. But usually this sustained protection is a very powerful tool. It gives you tremendous peace of mind. It forces otherwise very aggressive creditors like the IRS/state and support enforcement to cooperate. It gives you an incredible and practical second chance to do what you need to do. Instead of these tough creditors having the law and the leverage on their side, Chapter 13 puts you much more in charge.

2. Pay Monthly What You Can Afford to Pay

The practical leverage Chapter 13 gives you helps where it counts. It enables you to pay your priority debts under sensible and manageable payment terms. Priority debts are ones you have to pay regardless of bankruptcy. You mostly just wish that there was a way to do so that was doable. Chapter 13 fulfills that wish.

Here’s how it works You and your bankruptcy lawyer propose, and the bankruptcy judge approves a payment plan. (This approval comes after possible input from the Chapter 13 trustee and your creditors.) This payment plan is mostly based on how much you can actually afford to pay the pool of your creditors. You have to pay all your priority debts in full, but you have 3 to 5 years to do so.

You generally pay nothing on your other unsecured debts until you pay your priority debts in full. Sometimes you don’t pay anything on those “general unsecured” debts. At the end of your case whatever you haven’t paid is forever discharged. At that point you will have paid off your priority debts in full, and usually owe nothing to anybody.

3. Avoid Interest and Penalties

You can often avoid paying any interest or penalties on your priority debt(s) under Chapter 13.

For example, with recent income taxes, interest and penalties continue to accrue after you file your case.  But as long as there no prior-recorded tax lien, and you successfully finish your case, you don’t pay these additional interest and penalties. You only pay the initial priority tax debt.

Furthermore, in most situations the penalties that accrued before your Chapter 13 filing are not a priority debt. This portion of your tax due at the time of filing is treated as “general unsecured.” This means it’s treated just like your unsecured credit cards or medical bills. You only pay it to the extent you have money available after paying the priority debts, if at all.

This combination—no accruing interest and penalties, and no penalties treated as priority—can significantly reduce how much you must pay. The less you have to pay as priority means the less you pay in your Chapter 13 payment plan. The less you have to pay usually means you finish your plan quicker. It’s more likely to last closer to 3 years rather than 5 years. And if you have to pay less there’d be less pressure to pay more per month to get it done on time.

4. Pay Priority (and Secured) Debts Ahead of (and Instead of) Other Debts

If you have secured debts you have to pay—a vehicle loan or home mortgage arrearage, for example—you often can pay these ahead of the priority debts. Your priority debts generally just have to wait, as long as you are appropriately following the payment plan.

This flexibility, and being able to essentially force priority creditors to be this flexible, can be extremely beneficial to you. You not only get to pay your important priority debts ahead of your other unsecured debts. You often get to favor debts that are very important to you—for example, to save your home and/or vehicle—ahead of the priority debts. You do have to pay the priority debts in fully before you can finish your Chapter 13 case. But often you are allowed to fit those payments in only after paying your crucial secured debts.

 

Priority Debts in an Asset Chapter 7 Case

December 2nd, 2019 at 8:00 am

Your Chapter 7 trustee may pay your priority debts—in full or in part—through the proceeds of the sale of your unprotected, not exempt assets.  


Our last blog post was about what happens to priority debts in a no-asset Chapter 7 case. Most consumer “straight bankruptcy” Chapter 7 cases are no-asset ones. This means that the bankruptcy trustee does not take anything from the debtor because everything is protected, “exempt.” The trustee does not take and liquidate any assets, and has nothing—no assets—to distribute to the debtor’s creditors. That’s a no-asset Chapter 7 case.

No-Asset Case Even If Some Assets May Not Be Exempt

To understand how this actually works, sometimes a Chapter 7 case is a no-asset one even when not all assets are exempt. That’s because the bankruptcy trustee has some discretion about whether to collect and liquidate an otherwise unprotected asset. Here are three reasons why he or she may not pursue an asset:

  • The value of the asset, or the amount beyond the exemption, is too small to justify the trustee’s collection efforts. Example: A vehicle worth only a couple hundred dollars more than the vehicle exemption.
  • Finding and/or selling the asset may be too expensive compared to its anticipated value. Example: A debt owed to the debtor by somebody who can’t be located and likely has no reliable income.
  • The asset could be more of a detriment than a benefit to the trustee. Example: real estate with hazardous waste contamination.

Usually your bankruptcy lawyer will be able to reliably predict whether your Chapter 7 case will be an asset or no-asset case. But not always. The trustees have wide discretion about this. Plus before filing your lawyer doesn’t know which trustee will be assigned to your case. So you can’t always know whether a trustee will pursue an asset or not.

Paying Priority Debt through a Chapter 7 Asset Case

If you know that you will have an asset case, you can pay a priory debt through your case.

In our last blog post our main point was that in a no-asset Chapter 7 case you have to pay any priority debts yourself directly to your creditors after completing the case. But in an asset case, the trustee would pay any of your priority debts before any other debts. The trustee collects and liquidates your assets (any not protected by exemptions). From the proceeds he or she then pays your debts, only to the extent there’s money available.

So in the right case you can pay all or part of your priority debt(s) in this way. Often, there only enough money to pay towards the priority debt(s), along with the trustee’s fee. If so, then there’s no money to pay anything to your other, general unsecured debts. This way, the trustee would pay those (priority) debts that you’d have to pay anyway, and nothing to those (general unsecured debts) that bankruptcy would discharge and you’d not have to pay.

For Example

Assume you owe $4,000 to the IRS for last year’s income tax. You also owe $75,000 in medical bills and unsecured credit cards. If you filed a Chapter 7 case in which everything you owned was protected, that would be a no-asset case. The IRS debt is a priority debt that you can’t discharge (legally write off). So you would have to make arrangements to pay it after your Chapter 7 case was over. Most likely the case would discharge the $75,000 in other debts.

But now assume that you have a boat that you no longer want because it costs too much to maintain.  There’s usually no exemption for a boat. So the Chapter 7 trustee takes and sells your boat. Let’s say the boat sells for $5,000. The proceeds of that sale would go to pay your tax debt before your other creditors would receive anything.

Usually a Chapter 7 trustee receives a fee of 25% on the first $5,000 of assets liquidated and distributed. U.S. Bankruptcy Code Section 326(a). That’s $1,250 on the $5,000 boat sale proceeds, leaving $3,750 left over. All of that would go towards the $4,000 IRS debt, leaving a $250 balance owed. The trustee would have no money left over to pay towards your $75,000 in other debts. You would not have to pay any of that yourself because your Chapter 7 case would very likely discharge it. You would only have to pay the not-discharged remaining balance of $250 on the tax debt.

Conclusion

In some circumstances paying a priority debt in a Chapter 7 case is not a bad deal. This is especially true if you have an asset not protected by an exemption that you don’t mind surrendering. Usually you would be personally on the hook to pay a priority debt after your Chapter 7 is finished. So if you surrender a non-exempt asset to the trustee and most of its proceeds go to pay towards your priority debt, that’s a good result.

These situations don’t necessarily fall together as neatly as in the above example. But this option is worth looking at with your bankruptcy lawyer whenever you have a the combination of a non-exempt asset and priority debt(s).

 

Priority Debts in a No-Asset Chapter 7 Case

November 25th, 2019 at 8:00 am

Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.

 

Most Chapter 7 Cases Are No-Asset Cases

Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge any remaining debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.

A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. The trustee just verifies that you have no unprotected assets. He or she does this mostly by reviewing your bankruptcy documents and asking you some simple questions at your hearing. A large majority of Chapter 7 cases are no-asset ones. Your bankruptcy lawyer will tell you if yours is expected to be.

Although Chapter 7 is theoretically a liquidation form of bankruptcy, in a no-asset case there is nothing to liquidate. You lose no assets, and you lose all or most of your debts.

What Happens to Your Special, Priority Debts in a No-Asset Chapter 7 Case?

Yes, what about debts that do not qualify for discharge? There are various types of such debts, although most cases have either only one or two not-discharged debts, or none at all.

Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes. See the U.S. Bankruptcy Code subsections 507(a)(1) and (8). (Not to go into the rules here, but many older income taxes are not a priority debt and can be discharged.)

Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets.  In fact the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!

But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.

Dealing with Priority Debts During and After a Chapter 7 Case

However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).

The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support. (Note that Chapter 13 “adjustment of debts” can stop the collection of unpaid prior support under most circumstances.)

So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer make arrangements to begin paying the debt. With ones that the automatic stay does not apply to, you need to be prepared to deal with immediately.

If neither of these make sense in your situation, consider filing a Chapter 13 case instead. Talk with your bankruptcy lawyer about the advantages and disadvantages of each option. Chapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt (or secured or any other nondischarged debts), it can really help.

 

Priority Debts

November 18th, 2019 at 8:00 am

One of the most important aspects of bankruptcy is that all debts are not equal.  “Priority” debts are treated special in a number of ways.

Debts Are Different So the Law Recognizes Some Differences

The law does not treat all debts the same. That’s because you have different kinds of creditors that you owe for very different reasons. The law tries to be practical and so to some extent it respects these differences.

Your debts all fall into three categories:

  • Secured
  • General unsecured
  • Priority

Today we start a series of blog posts covering priority debts.

Priority Debts

Priority debts are specific categories of debts that the law has decided should be treated as more important. Bankruptcy gives them higher priority, especially over “general unsecured” debts. Priority debts have power over you and over other debts in various ways.

Secured debts that are debts with liens on something you own.  Secured debts are special in that the creditor usually has a stronger position because of its lien. The lien gives the creditor power over you if you want to keep whatever secures the debt.  

Most priority debts are unsecured, but some may have a lien and so are secured. Secured priority debts have that much more power over you and over other creditors.  

Reasons for Priority

Each of the priority debt categories have their own different reason to be treated as special.

For example, the two most common categories of priority debts in consumer bankruptcy cases are:

  • Child and spousal support—the support you would owe when filing your bankruptcy case. See Section 507(a)(1) of the U.S. Bankruptcy Code.
  • Income taxes—certain income taxes that meet certain conditions. See Section 507(a)(8).

Support payments are special essentially because society very strongly believes that children and ex-spouses should receive the financial support ordered by divorce courts. Federal bankruptcy law incorporates this social attitude. So support debt has the highest priority in the list of priority debts.

Income tax debts are special because taxes are a debt to the public at large. It’s not a debt to a private person or business. In effect it’s a debt to us all. So it deserves a higher priority than regular private debt. However, unlike support debt which is always a priority debt, an income tax is a priority debt only if it meets certain conditions. Those conditions mostly relate to how old the taxes are. The newer the tax is the more likely it is to be priority. Income taxes that do not meet the required legal conditions are mere general unsecured debts.

Priority Debts in Bankruptcy

In most bankruptcy cases there isn’t enough money to pay all debts. So the laws that determine the order that creditors get paid often determine which debts receive full or partial payment and which receive nothing. Priority debts often receive full payment while general unsecured debts receive less or, often, nothing.

This works very differently under Chapter 7 “straight bankruptcy” vs. Chapter 13 “adjustment of debts.” Our next blog posts will show how.

 

The Surprising Benefits: Chapter 13 Stops the Recording of an Income Tax Lien

July 30th, 2018 at 7:00 am

Chapter 7 and 13 can both prevent the recording of a tax lien. But if the tax qualifies for discharge Chapter 7 is quicker and less risky. 

 

Last week we showed how detrimental the recording of an income tax lien can be for you. It can turn a tax that you could fully discharge (legally write off in bankruptcy) into one you’d have to fully pay. We showed how Chapter 7 “straight bankruptcy” could prevent recording of the tax lien and could discharge the tax.

How about a Chapter 13 “adjustment of debts” case? Would filing one also stop an income tax lien recording?  If so, what would happen to that tax debt?

Chapter 13’s Automatic Stay

The filing of a Chapter 13 case stops the recording of a tax lien by the IRS or state just like a Chapter 7 would. Any voluntarily filed bankruptcy case by a person entitled to file that case imposes the “automatic stay” against almost all creditor collection activities against that person and his or her property. (See Sections 301 and 362(a)  of the U.S. Bankruptcy Code.) Those “stayed” or stopped activities specifically include “any act to create, perfect, or enforce” a lien. (See Section 362(a)(4) and (5).)

So filing under Chapter 13 stops a tax lien recording just as fast and just as well a Chapter 7 would.

But Would Chapter 13 Be Better than Chapter 7?

That depends. It depends at the outset on whether the tax is one that qualifies for discharge. If it does qualify (mostly by being old enough) then a Chapter 7 is actually often better.

Under Chapter 7 the automatic stay protection lasts only the 3-4 months that the case is active.  But that’s long enough since the discharge of the tax debt would happen just before the case was closed. Once the tax debt is discharged the IRS/state could no longer do anything to collect that tax. It would certainly have no further ability to record a tax lien on that tax.

What would happen in this situation under Chapter 13, with a tax debt that qualifies for discharge? It would get discharged like under Chapter 7, but with two big differences.

First, the discharge would happened not 3-4 months after case filing but usually 3 to 5 years later.  The automatic stay protection usually lasts throughout that time, preventing tax collection, including the recording of a tax lien. But that long period of time under Chapter 13 does create more opportunities for things to go wrong. That’s all the more true because throughout that time you have various obligations, such as to make monthly Chapter 13 plan payments. If for any reason you don’t successfully complete your Chapter 13 case, the otherwise dischargeable tax debt still won’t get discharged.

Second, under Chapter 13 you may have to pay part of the tax debt before it is discharged. This is in contrast to usually paying nothing on it under Chapter 7. (This assumes that you’d have a “no-asset” Chapter 7 case—in which all of your assets would be “exempt”, protected.) Whether  you’d pay anything on a dischargeable tax debt in a Chapter 13 case, and if so how much, depends on many factors, mostly the nature and amount of your other debts and your income and expenses. But why risk paying something on a tax debt under Chapter 13 if you wouldn’t have to pay anything under Chapter 7?

So Chapter 7 Is Usually Better at Dealing with a Dischargeable Tax Debt?

The answer is likely “yes” if you focus only on this one part of your financial life.

But you may have other reasons to file a Chapter 13 case. For example, you may owe a more recent income tax debt that does not qualify for discharge, in addition to the one that does qualify. Chapter 13 provides a number of significant advantages in dealing with the nondischargeable tax. These could make Chapter 13 much better for you overall.

Or you may have considerations nothing to do with taxes, such as being behind on a home mortgage, a vehicle loan, or child support. Chapter 13 gives you huge advantages with each of these kinds of debts. Your bankruptcy lawyer and you will sort out all the advantages and disadvantages of each legal option to choose the best one.

 

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.

 

Timing: Writing Off Income Taxes

September 22nd, 2017 at 7:00 am

Usually you can discharge—write off—an income tax debt by just waiting long enough. Here’s how to discharge a tax debt under Chapter 7.  

 

Timing is Just About Everything

If you owe an income tax debt and file a Chapter 7 “straight bankruptcy” case, one of two things will happen to that debt:

  1. It will be discharged—permanently written off—just like any medical bill or other ordinary debt, or else
  2. Nothing will happen to that tax debt; you’ll continue to owe it as if you hadn’t filed bankruptcy.

The difference, most of the time, is timing—when you file your Chapter 7 case.

The Timing Rules

In most situations a Chapter 7 case will discharge an income tax debt if you meet two timing conditions. The date you and your bankruptcy lawyer file that case must be both:

  1. at least 3 years after the tax return for that tax was due, and
  2. at least 2 years after that tax return was actually submitted to the IRS or state tax authority.  

See Sections 507(a)(8)(A)(i) and 523(a)(1)(B) of the U.S. Bankruptcy Code.

One important twist: IF you got an extension to file the applicable tax return, then the above 3-year waiting period doesn’t begin until the end of the extension. Section 507(a)(8)(A)(i). For example, let’s say you got a 6-month extension from April 15 to October 15 of the pertinent year. So then the 3-year period starts on that October 15 instead of on the usual April 15 return filing due date.

These Rules Applied

Assume you owe $7,500 in income taxes for the 2013 tax year. You’d asked for a 6-month extension to October 15, 2014. But then you didn’t actually submit the tax return until December 31, 2014.  

If you’d file a Chapter 7 case at any point before October 15, 2017, you’d continue owing the $7,500 tax. If you’d file on or after October 15 you would likely not owe a dime.

That’s because on October 15, 2017:

  1. At least 3 years would have passed since the extended due date of October 15, 2014, and ALSO
  2. At least 2 years would have passed since actually submitting the tax return on December 31, 2014.

Or, take with same $7,500 tax debt for the 2013 tax year with similar facts but a couple differences. You didn’t ask for an extension, but also didn’t submit the tax return until December 31, 2015.

Under these facts you’d have to wait until after December 31, 2017 to file the Chapter 7 case.

That’s because:

  1. 3 years since the tax return was due—on April 15, 2014—would have passed on April  15, 2017, but
  2. 2 years from the day the return was actually submitted would not pass until December 31, 2017.

Other Conditions

Earlier we said that “in most situations” Chapter 7 discharges income taxes debt when you meet the two timing conditions. So what are the other situations when taxes would not be discharged, even after meeting the 2-year and 3-year conditions?

There are two sets of them.

The first set comes into play if you made an “offer in compromise” to the IRS or state to settle the debt, or if you had filed a prior bankruptcy case involving this same tax debt. Since these are unusual situations, and the rules are detailed, talk with your bankruptcy lawyer if they apply to you.

The second set applies in situations in which the taxpayer “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” Section 523(a)(1)(C).  Different bankruptcy judges interpret this language differently. For example, is it a willful attempt to evade a tax to merely not submit its tax return when due, even if you submitted it voluntarily a year later? How about if you didn’t submit the tax return until the IRS personally contacted you to do so? Again, talk with your bankruptcy lawyer about how this part of the Bankruptcy Code is interpreted by your court. 

 

Chapter 13 Buys Time

July 21st, 2017 at 7:00 am

Chapter 13 is very different from Chapter 7 “straight bankruptcy.” It buys you time to deal effectively with your special debts. 


The Main Overall Benefit of Chapter 13

The main benefit of Chapter 7 “straight bankruptcy” is the discharge—legal write off—of your debts.

You also get a discharge in Chapter 13 “adjustment of debts.” But a more immediate and often more important benefit is that you’re protected from collection action by creditors while you pay all or a portion of certain special debts. Those special debts are usually ones that Chapter 7 does not discharge, or does not help in a meaningful way.

Buying Time

Here are some examples of the kinds of debts that buying time under Chapter 13 helps you with.

  • Home Mortgage: If you’re behind on your first mortgage Chapter 13, can give you as much as 5 years to catch up. An ongoing foreclosure is stopped. Future ones can be prevented. This buying of time gives you a much more practical way to save your home. And a much more peaceful one.
  • Recent Income Tax Debts: Taxes that don’t qualify for discharge (usually because they are too recent) are subject to immediate collection as soon as a Chapter 7 is completed. Interest and penalties continue to accrue. In contrast, under Chapter 13 the tax creditors must stop collections throughout the 3 to 5-year payment plan. And generally interest and penalties both stop accruing.
  • Child or Spousal Support: Chapter 7 does not buy you ANY time if you’re behind on support. Chapter 13 stops collection on the arrearage (although ongoing monthly support can continue being collected). You then have time to catch on the support over time, based on what you can afford.
  • Vehicle Loans: If you’re behind on your car or truck, in Chapter 7 you have to catch up in a matter of weeks. Chapter 13 gives you years. And if the debt is more than the value of the vehicle, through “cramdown” you would probably not need to catch up at all. Plus the monthly payment can often be reduced. The term of payments may be stretch out over a longer period of time. These all buy you time. The end result is that you can keep the vehicle less expensively and with less worry.
  • Unpaid Property Taxes: If you’ve fallen behind, just like a mortgage you get years to catch up. And you don’t have to worry about a property tax foreclosure in the meantime. Also, your mortgage lender can’t use your being behind on property taxes as a reason to foreclose on the mortgage.
  • Student Loans: Generally you can stop paying on your student loan during your Chapter 13 case. This is especially beneficial if you do not currently qualify for an “undue hardship” discharge but expect to more likely do so later in your case. Ask your bankruptcy lawyer about how the law is enforced because it varies by region.

 

Priority Creditor Proofs of Claim in Chapter 13

November 21st, 2016 at 8:00 am

Priority proofs of claim need to be carefully monitored in a Chapter 13 case. Make sure one’s filed so it gets paid, and at the right amount.

 

Priority Debts and Chapter 13

One major reason you’d file a Chapter 13 “adjustment of debts” case is if you have “priority” debts. These are special debts that generally can’t be discharged—legally written off—under Chapter 7 “straight bankruptcy.” So they must be paid.

The main priority debts consumers tend to owe are:

Chapter 13 is often better than Chapter 7 for dealing with substantial priority debts because it can shield you much better from those debts, as you pay them on your own terms. A Chapter 7 cases usually last about four months, shielding you from priority debts only during that short time.  In fact Chapter 7 does not protect you at all from collection of current or back child and spousal support.

In contrast, a Chapter 13 case lasts three to five years. You have that much more time to pay the priority debts, and usually the creditors can’t collect throughout that time.

Proofs of Claim of Priority Debts

Your creditors file “proofs of claim” in your bankruptcy case to assert how much you owe them. A creditor doesn’t get paid under your court-approved payment plan if it doesn’t file one. But if it doesn’t and you want it paid, you or the Chapter 13 trustee can file one for them. Section 501(c).

You generally want priority debts to be paid. Assuming so, your Chapter 13 payment plan would earmark funds to pay them. So you or your bankruptcy lawyer needs to monitor whether the creditors do file proofs of claim, and file one on behalf of any that neglect to do so.

Unexpectedly Large or Small Proofs of Claim

The priority creditors’ proofs of claim also need to be monitored to see if the amount of debt is accurate. The amounts need to match or be quite close to the amounts used in calculating your Chapter 13 plan.

If a priority proof of claim is significantly larger than expected, your case may take longer to finish than planned. But there’s a limit: a Chapter 13 case is generally not allowed to take longer than 5 years. So you may have to increase your monthly plan payments to complete it on time. Or your lawyer may be able to “modify” (amend) your plan to reduce what you are paying to other creditors to make up for the increase in a priority proof of claim.

Similarly, if a priority proof of claim is lower than expected your case may be done faster. But usually you must pay all of your disposable income into the plan for a certain period of time. That’s usually either three or five years, depending on your income at filing. If that’s true in your case, money that had been earmarked for that priority debt would usually just go to other creditors.

 

“Priority” Debts in Chapter 7 Bankruptcy

September 7th, 2016 at 7:00 am

Here’s what happens to “priority” debts in an “asset case.

 

Our last blog post introduced “priority” debts. They are debts that are favored in bankruptcy because Congress has decided they are of a type that should be favored. Today we focus on how they’re favored in Chapter 7 “straight bankruptcy.”

Chapter 7 Trustee Usually Doesn’t Pay Any Debts, Including Priority Ones

Last time we said:

In most Chapter 7 cases the bankruptcy trustee does not take possession of any of your assets to distribute to your creditors. Because there are no funds for the trustee to pay any debts, priority debts do not come into play. But there are (relatively few) cases where there are unprotected assets for the trustee to liquidate. In those cases the trustee must pay the priority debts in full before paying the general unsecured ones anything.

So, in most Chapter 7 cases you get to keep everything you own; the bankruptcy trustee gets nothing. Those are called “no asset cases”—the trustee has no assets to collect and distribute among your creditors. And because the trustee is paying none of your debts out of your unprotected assets, the order in which the trustee would pay the debts makes no practical difference. It doesn’t matter whether you owe any priority debts because the trustee is paying nothing to anybody.

So let’s look at the more unusual situations where you owing priority debts would make a difference. These are “asset” cases, in which the bankruptcy trustee does pay some of your debts, likely your priority ones.

Consumer Priority Debts

Let’s first remember that there are only two types of priority debts in most consumer bankruptcy cases: 1) all child and spousal support owed at the time of the bankruptcy filing; and 2) income taxes that meet certain conditions.

Of these two, support debts have a higher priority. That is, the Chapter 7 trustee pays a support debt in full before paying anything on a priority income tax debt. And the trustee would pay both priority taxes in full before paying any other debts.

In an “Asset Case” the Priority Debts Are Paid in Full Ahead of Other Debts

So let’s now show how this works in an example of an “asset case.”

Imagine that you owe $4,000 in back child support and $5,000 in income taxes for last year. These are both priority debts. The support is because that’s always a priority debt. The income tax is a priority debt because it’s new enough to meet the conditions making it a priority debt.

You also owe $90,000 in other debts—credit card balances, medical bills, personal loans. None of these are priority debts.

Also imagine that you own a $10,000 boat free and clear. It is not protected from a bankruptcy trustee; it’s not “exempt.” You can no longer afford to insure, maintain, and operate the boat, so you don’t mind giving it up. You file a Chapter 7 case knowing that the bankruptcy trustee will get the boat from you, sell it, and pay the proceeds to your creditors.

You especially don’t mind this when you learn two things. First, you learn that the support and income tax debts are priority debts, to be paid ahead of your other debts. Second, you learn that those two debts would not be discharged in your Chapter 7 case. That is, you’d continue to owe them after your Chapter 7 case would be completed. You’re happy to hear that debts that you’d still have to pay would instead likely be paid in part or in full out of the boat’s sale proceeds.

So What Happens? 

The Chaper 7 trustee sells your boat for $10,000. The bankruptcy court gives permission to pay him or her $2,500 in compensation for services. (See Section 326(a) of the U.S. Bankruptcy Code.) That leaves $7,500. Out of that the trustee pays the $4,000 child support debt in full. He or she then pays the $3,500 that’s left towards the $5,000 income tax debt. That leaves $1,500 of the tax debt not paid. The trustee does not pay anything on the $90,000 in other debts because there’s no money left to do so.

The end result is that $7,500 of debts that you would have had to pay after bankruptcy are instead paid by the trustee through the boat sale proceeds. Yes, the $2,500 the trustee received is arguably wasted to you. And yes, you’d still need to pay off the remaining $1,500 in taxes (likely through a reasonable monthly payment plan).

But in the right circumstances it’s quite a good deal. If you didn’t owe any support or taxes the trustee would distribute the $7,500 among your $90,000 in general debts. Those are debts that most likely would have simply been discharged in the Chapter 7 case. You would owe nothing on them regardless what the trustee paid or didn’t pay. The boat proceeds would have done you no personal good.

In our scenario, in contrast, the majority of the boat proceeds ARE doing you personal good. Those sale proceeds are going to eliminate or reduce debts that otherwise you would have had to pay in full out of your own pocket after the bankruptcy case was over.  

 

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