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Unpaid Child and Spousal Support in Chapter 7

January 6th, 2020 at 8:00 am

Chapter 7 does not stop the collection of child or spousal support, nor provide any procedure to pay the support. It may still help enough.  


If you are behind on child or spousal support payments Chapter 7 may or may not be a good solution.

Chapter 7 “straight bankruptcy” is the most common type of consumer bankruptcy case.  It is more likely to be a sensible solution if 1) the support isn’t being collected aggressively and 2) you don’t owe terribly much. Why? Because:

1) Filing Chapter 7 does not stop collection of unpaid child or spousal support. Chapter 13 can.

2) Chapter 7 does not give you a procedure for catching up on the support. Chapter 13 “adjustment of debts” does so.

So why would you file a Chapter 7 bankruptcy if you were behind on support?

Filing Chapter 7 When Owing Support

Chapter 7 is usually the most straightforward type of bankruptcy. A case lasts only about 4 months from when your bankruptcy lawyer files it to when it’s completed. A Chapter 13 case involves a formal payment plan that almost always takes 3 to 5 years to finish.

As mentioned above Chapter 13 can stop the immediate collection of unpaid support, and give you time to catch up.

The much quicker Chapter 7 makes sense if you don’t need these kinds of help.

If you stopped paying the debts that Chapter 7 would discharge, could you quickly catch up on support? Would your ex-spouse be willing to accept monthly catch-up payments at an amount you could afford? Or if the debt is being collected by a support enforcement agency, would it accept such voluntary payments? Could you reliably make such payments, while presumably keeping current on the ongoing monthly support?

If you have a feasible way along these lines to catch up on your support obligation during and after your Chapter 7 case, then it may well be your best option.

Other Advantages and Disadvantages of Chapter 13

But you and your bankruptcy lawyer will discuss two other considerations revolving around your other debts.  Chapter 7 and Chapter 13 deal with debts quite differently.

The first consideration is about debts secured by your assets or other ones that you must pay. Secured debts include home mortgages, vehicle loans, and any others with a lien on anything you own. Debts you must pay—besides support—include recent income tax debts. Chapter 13 often handles these kinds of debts much better than Chapter 7. Without getting into the details here, Chapter 13 protects you while you pay such special debts as your budget allows. If you have such debts, how Chapter 13 helps with those may be reason enough to choose that option. Or this, along with the benefits it gives you with unpaid support, may swing you in that direction.

The second consideration is about the rest of your debts—those that are neither secured nor ones you must pay.  These are your “general unsecured” debts. Usually you can discharge (legally write off) all or most of such debts in either Chapter 7 or 13. In most Chapter 7 cases you pay nothing on your general unsecured debts. However, In a Chapter 13 case you often pay a portion of these debts. Whether and how much you pay on your general unsecured debts depend on lots of factors. The biggest factors are your income and expenses and the amount of your special debts (secured and otherwise) that you are paying in full. So you need to weigh the benefits of Chapter 13 regarding your unpaid support and other special debts against the likelihood that you would be paying something instead of nothing on your general unsecured debts.

What Happens to Your Unpaid Child/Spousal Support Debts in a No-Asset Chapter 7 Case?

A “no-asset” Chapter 7 case is one in which everything you own is covered by property exemptions. Exemptions usually allow you to keep certain dollar values of assets in various categories. Most Chapter 7 cases are “no assets” ones. If yours is, you’re able to keep everything (with the exception of collateral you decide to surrender).

In a no-asset Chapter 7 case your bankruptcy trustee does not get any of your assets to liquidate and pay to any of your creditors. (That’s why it’s called “no asset.”) Your bankruptcy lawyer will tell you if yours is expected to be.

Since the trustee doesn’t collect any money to pay your creditors anything, your support debts also receive nothing. So, a support debt gets no money directly from a no-asset Chapter 7 case. You have to deal with the support debt yourself (perhaps with the help of your lawyer), and be prepared to do so right away.

 

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.

 

Resolve Mortgage Accounting Disagreements

October 21st, 2019 at 7:00 am

Chapter 13 gives you valuable power to force your mortgage lender to be up front about how much you owe, and to efficiently dispute the amount. 

 

Catching Up on Your Mortgage over Time

A Chapter 13 case gives you the power to catch up on your home mortgage(s) over an extended period.  This “adjustment of debts” type of bankruptcy can give you up to 5 years to catch up.

This power is found in the U.S. Bankruptcy Code language allowing you to cure “any default within a reasonable time.” Section 1322(b)(5). That amount of time is interpreted to mean, in most circumstances, the length of your Chapter 13 payment plan. Most payment plans are between 3 and 5 years long. If you need more than 3 years, usually you can extend your plan longer, up to 5 years.

The Mortgage Accounting Challenge

If you fall behind on your mortgage it can be ridiculously difficult to get accurate information from your lender about the amount you owe. If you don’t have accurate information, you can’t fulfill your desire and responsibility to cure the arrearage.

This problem is aggravated over the course of the case when the mortgage payment amount changes over time. This could be from normal changes in the interest rate, property tax and insurance, or the addition of fees.

You can’t cure the arrearage or maintain monthly payments if you aren’t timely told the amounts you owe. You can’t efficiently dispute the stated amounts if the lender does not respond in good faith.

This accounting confusion had been a serious problem for millions of homeowners trying to save their homes. In 2011 a new procedure was created within Chapter 13 to efficiently resolve mortgage accounting disputes. It’s contained in Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It gives you the power to force your lender to work with you to determine how much you owe.

How the Procedure Works

The procedure focuses on changes to the ongoing mortgage payment amount.  You can’t catch up on the arrearage if that arrearage increases because you’re not paying the right monthly payment. 

Your lender “shall file and serve on” you, your bankruptcy lawyer, and your Chapter 13 trustee “any change in the payment amount.” This includes “any change that results from an interest rate or escrow account adjustment.” This notice must be given “no later than 21 days before a payment in the new amount is due.” Rule 3002.1(b) of the Federal Rules of Bankruptcy Procedure.

You or your lawyer can object to the change in the lender’s notice. You must do so before that new payment is due. If you don’t object on time, the lender’s payment change goes into effect.

If you do object, the bankruptcy judge determines whether the lender’s proposed new amount is appropriate or not.

This procedure forces the lender to be up front about changes in how much you owe. It allows you to dispute those changes, and to get a quick court determination about who is right.

 

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