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Archive for the ‘writing off debts’ tag

Creditor Not Listed But Knows about Your Case

April 8th, 2019 at 7:00 am

Usually if you don’t list a debt, it doesn’t get discharged.  An exception is if the creditor still learns about your case, on time. 

 

Last week’s blog post was about the importance of listing all debts in a bankruptcy case to write them off. Debts “neither listed nor scheduled” in the bankruptcy documents are not discharged (legally written off). Section 523(a)(3) of the Bankruptcy Code.

Special Scenarios

This rule raises a number of practical questions. Here are some common situations:

  1. You don’t list a debt but the creditor finds out about your bankruptcy some other way.
  2. Your debt has been sold or assigned to a collection agency without your knowledge
  3. You don’t have good records of your debts and you may not know some of their names and addresses.

Today we address the first of these.

Creditor Knows About Your Bankruptcy Case

If you don’t list a debt it’s still covered by your bankruptcy case if that creditor knows about the case. The Bankruptcy Code says a debt is not discharged “unless such creditor had notice or actual knowledge of the case.”  Section 523(a)(3)(A) and (B)

This doesn’t mean that you can avoid listing a creditor on your debt schedules because you know it will find out about your case some other way.

First, what if the creditor doesn’t actually find out or claims that it didn’t? You could end up owing the debt. It’s much safer to list the debt in your bankruptcy documents.

Second, you are required to list all your debts. Bankruptcy is not just about you and that one creditor.  If you want the benefits of bankruptcy you must play by the rules, which include listing all your debts.

If you have any reason for not wanting to list a debt, talk with your bankruptcy lawyer. There is usually a workable solution to your concerns.

Must Know about Your Case “In Time”

There’s an important condition to this “notice or actual knowledge” exception. Your creditor needs to learn about your case in time to participate in it.

So what’s the deadline for your creditor to learn about your case if you don’t list its debt?

There are 3 possible different deadlines for 3 different kinds of cases.

1. Proof of Claim Deadline

First, some bankruptcy cases give creditors the opportunity to file a “proof of claim.” That’s a document a creditor files at bankruptcy court documenting what it believes you owe. In Chapter 13 “adjustment of debts” cases creditors file proofs of claim to receive any money through your payment plan. In “straight bankruptcy” Chapter 7 “asset” cases creditors file proofs of claim to possibly share in the liquidation of any non-exempt (unprotected) assets. In these cases the bankruptcy court mails out a formal notice giving a strict deadline to file proofs of claim. 

In these cases your unlisted creditor must learn about your case in time to be able to file a proof of claim. Section 523(a)(3)(A).

2.  Creditor Objection Deadline

Second, sometimes a creditor has grounds to object to the discharge of its debt on the basis of your fraud or similar bad action in the incurring of the debt. This can happen in either a Chapter 7 or Chapter 13 case.  In all cases the bankruptcy court mails creditors a notice of the strict deadline to file an objection. 

In these cases your creditor must learn about your case in time to be able to file such an objection. Section 523(a)(3)(B).

3. Possibly No Deadline

Third, in other bankruptcy cases neither of the two situations above applies. In fact that covers most Chapter 7 cases. Most have no assets to distribute because everything the debtor owns is exempt, or protected. The case is a “no asset” case. With nothing to distribute, the court does not ask creditors to file proofs of claim. So there’s no deadline to do so. Also, most creditors have no grounds based on fraud or similar bad actions to object to the discharge of its debt. So any deadline to file such an objection doesn’t apply. So what’s the deadline for an unlisted creditor to learn about your case so that its debt is discharged?

In some parts of the country there is essentially no deadline in these kinds of cases. If you find out at any time about a debt you didn’t list in a “no asset” Chapter 7 case, you or your lawyer may be able to simply inform the creditor and the debt is covered in your case. The debt is then included in the discharge of debts that you received in your case. That may be true even if your case is already completed.

But because the statute does not directly address this situation, your local court may interpret it differently. You might still owe the debt because you didn’t give the creditor notice about your bankruptcy. Again, talk with your bankruptcy lawyer as soon as you learn about a debt that you forgot to include for advice about your specific options.

 

Debts You Don’t List in Your Bankruptcy Case

April 1st, 2019 at 7:00 am

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

 

Supposed to List All Creditors 

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

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

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

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

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

Unlisted Debts Not Written Off

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

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

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

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

If You Forgot a Debt

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

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

The Deadline(s) to Add a Debt

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

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

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

Other Scenarios

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

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

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

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

We’ll cover these other scenarios next week.

 

Writing Off Debts with Bankruptcy

February 11th, 2019 at 8:00 am

Bankruptcy is about writing off or “discharging” debts. The timing of discharge is quite different in Chapter 7 and 13; both are permanent.  


The main goal of most consumer bankruptcy cases is to get a fresh financial start through writing off debts.  In bankruptcy the legal term for write-off is “discharge.”

In virtually all successful Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” cases there will be a discharge of some or all of your debt.

In Chapter 7

People file Chapter 7 cases mostly to get a quick discharge of their debts. That is, the discharge of those debts that can be discharged, and that they want discharged.

Most debts qualify for discharge. We’ll dig into those that don’t next week.  In the meantime Section 523 of the U.S. Bankruptcy Code covers “Exceptions to discharge.”

You may not want to discharge certain select debts that are secured by something you want to keep. Possible examples are your vehicle loan and home mortgage. You may want to formally “reaffirm” such debts—agree to continue to be liable in return for keeping the collateral. See Section 524(c) of the Bankruptcy Code. You definitely want to discuss thoroughly whether you should reaffirm any of your debts with your bankruptcy lawyer.

The big benefit of Chapter 7 is speed. Most cases finish within 4 months of filing, and do so with a court order discharging your debts. Rarely, the debtor has to give up some asset(s) to get the discharge. Here is an official Chapter 7 Order of Discharge that would come at the end of the case.

In Chapter 13

The road to discharge is much longer under Chapter 13. Plus most, though not all, cases require paying something to your creditors before discharge.

Whether and how much you pay depends on a bunch of circumstances. Chapter 13 involves proposing and getting bankruptcy court approval of an official plan of payments. That plan usually gives you 3 to 5 years to do what you need to do. Often that includes paying special debts such as “secured” and “priority” ones that handles for you much better than under Chapter 7. The “general unsecured” debts usually only get paid any money that’s left over. (See our last blog post for descriptions of these 3 main categories of debt.)

Only after your successful completion of this payment plan do you get a discharge of all or most of your remaining debts. Here is an official Chapter 13 Order of Discharge that would come at the end of the case.

What Is the Exact Legal Effect of the Discharge of Debts?

If you look at either the Chapter 7 or Chapter 13 Order of Discharge linked to above you’ll notice in both the pertinent language is extremely short and sweet:

IT IS ORDERED: A discharge under [the pertinent section of the Bankruptcy Code] is granted to [the debtor].

The legal effect of this discharge is described in Section 524(a)(2) of the Bankruptcy Code as follows:

“A discharge… operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor…  .”

What does this mean? There’s a short Explanation of Bankruptcy Discharge in the two Orders of Discharge linked to above, with both containing the following language:

Creditors cannot collect discharged debts

This order means that no one may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.

The discharge court order is permanent, and the injunction that flows from it is permanent. Because of the penalties, most creditors are careful to comply. If you have any indication that any of your creditors is not complying, tell your bankruptcy lawyer.

 

Our next blog post will get into the special kinds of debts that may not get discharged.

Going to Trial on a Nondischargeability Dispute with a Creditor

March 24th, 2017 at 7:00 am

The trial, almost always in front of a bankruptcy judge and no jury, is the final determinator whether the challenged debt gets discharged. 


Today’s is the last of three blog posts on the procedure for litigating whether a debt gets discharged in bankruptcy.

Discharge Challenges Are Rare, Going to Trial is REALLY Rare

To determine whether or not a debt gets discharged in bankruptcy very rarely involves any litigation. The vast majority of debts are simply discharged. Those that are not are the exception. And most of those exceptional debts that bankruptcy does not discharge are either never discharged—such as child support—or are not discharged unless some rather clear conditions are met—such as with income taxes.

With the debts that are easily discharged, the creditors have no grounds to object and so they don’t. With debts that clearly cannot be discharged, there’s no point for debtors to complain and so they don’t.

There are only a few specific circumstances in which creditors have grounds for objecting to discharge. Mostly this is either when the debtor allegedly incurred the debt fraudulently, or caused “willful and malicious injury” to the creditor or its property. Since these circumstances do not apply to most debtors, creditors don’t usually object to a debt’s discharge.

When creditor’s DO object to discharge, the matter very seldom goes all the way to trial. That’s consistent with lawsuits in general—they seldom go to trial. Creditor objections to discharge are usually either:

  • dismissed (withdrawn or thrown out) because the creditor did not have valid grounds to object
  • settled with the debtor paying the full debt because the grounds for objection were solid
  • settled with the debtor paying only a portion of the debt because the grounds were weaker, but not weak enough to justify dismissing the objection

Why Creditor Objections to Discharge Seldom Get All the Way to Trial

The one-word answer is: money. Litigation is expensive.

Nondischargeability litigation is usually less expensive than most because the legal and factual issues are often narrower. For example, if you are accused of fraud by not including a significant debt in your written application for a loan, a key factual question may be whether the creditor reasonably relied on that inaccuracy when making the loan. That may simply turn on whether the lender pulled a credit report before making the loan, and whether that missing debt was disclosed on that credit report. If so, the debtor would have a strong argument that the creditor did not reasonably rely on the debtor’s incomplete loan application, which is a required element to show fraud.

But even if the issues are comparatively simple, litigation can still be an inefficient dispute-resolving mechanism. Going through “discovery” to get at all the pertinent facts can take a lot of time and effort. The truth of what happened can be slippery.

And of course lawyers are expensive. Unless the amount of debt is very large, the cost of litigating can approach or even exceed the amount in dispute. Spending so much  doesn’t make economic sense. So there is lots of practical pressure on both sides to settle a nondischargeability dispute quickly. And that almost always means doing so before it gets all the way to trial.

Settlement by Mediation or Arbitration

If the debtor and creditor can’t settle informally, most bankruptcy courts encourage “alternative dispute resolution” through mediation or arbitration.

Mediation involves a mutually respected mediator who can’t force settlement but can effectively encourage it. The mediator helps each side see the truth of their positions, often successfully inducing settlement.

Arbitration is a simplified trial-like procedure in which the arbitrator determines whether or not the debt is discharged. That determination may be binding or not. Either way, it can be a quicker way of getting to a determination or settlement.

Neither of these procedures is inexpensive, but usually cost much less than a full trial.

Going to Trial

A trial is the culmination of a lot of effort. The complaint has laid out the creditor’s step-by-step argument why the debt should not be discharged. The debtor has made clear which parts of that argument her or she disputes. Both parties have dug up the facts through the discovery process. Now it’s time bring it all together in front of the bankruptcy judge.

Trials in bankruptcy adversary proceedings are almost always in front of a judge instead of a jury. That streamlines the process considerably. Most consumer nondischargeability trials take only from a half day to one or two days. As we said above, the issues tend to be pretty sharply focused. So the evidence that each side presents can be presented relatively quickly.

The trial generally proceeds in the way you can imagine from everything you’ve heard about court trials. Each side usually makes an opening statement about what they intend to prove. Then each side presents witness testimony and documentary evidence to support its argument. There is opportunity to challenge the testimony and evidence presented by the other side. There are detailed rules about what evidence can be presented and how.

After all the evidence has been presented, and each side has had the opportunity to rebut the other’s evidence, each gives a closing statement. Then the judge, after weighing all the testimony and evidence, decides whether the debt at issue is discharged or not. He or she enters a judgment so stating.

 

Creditor’s Failure to File a Proof of Claim in Chapter 13

December 23rd, 2016 at 8:00 am

If a creditor doesn’t file a timely proof of claim on a debt in your Chapter 13 case, you pay nothing on that debt. 


Our last blog post was about Chapter 13 “adjustment of debts” cases in which you don’t pay anything on any of your “general unsecured” debts. In parts of the country where that’s allowed, those debts are fully and forever discharged after you pay nothing. That’s a pretty good debt “adjustment.”

But that can happen only in certain circumstances, with certain combinations of debts, assets, income and expenses. What’s much more common is a Chapter 13 case in which you would pay nothing only to certain creditors. That happens often because creditors regularly fail to file their proofs of claim on time with the bankruptcy court.

Sometimes that has little or no effect on how much you pay into your Chapter 13 plan before it’s completed. But sometimes it makes a huge difference. It could potentially save you lots of money, or even significantly shorten the time you’re in your payment plan.

Proofs of Claim in Chapter 13

Chapter 13 cases are usually 3- to 5-year payment plans. You would usually file one so that you could focus on paying certain special debts. Those special debts are either secured or “priority” debts. For example, you may want to catch up on arrearage on your home mortgage so that you could keep your home. Or you may need to pay income taxes that wouldn’t be discharged in a Chapter 7 case. The rest of your debts—“general unsecured” ones—usually just get whatever money you have left over the course of your Chapter 13 plan.

The Chapter 13 documents that your lawyer files at the bankruptcy court include a complete “schedule” of all your debts. The creditors on those debts all receive notice of your case. They are required to file a “proof of claim” stating how much you owe and the nature of the debt. A creditor that fails to file a timely proof of claim receives nothing through your Chapter 13 case. Then, unless the debt is of a kind that does not get discharged, it gets discharged when you successfully complete your case.

Focus on “General Unsecured” Debts

As mentioned above, you usually WANT to pay certain debts—such as a home mortgage arrearage and nondischargeable income taxes. So you want to be sure certain creditors DO file proofs of claim.

But usually you don’t care whether any particular “general unsecured” debt gets paid. In fact if it saves you money, you prefer that such creditors DON’T file a proof of claim. So the question is, what happens when a creditor with a “general unsecured” debt fails to file a timely proof of claim?

It depends on the terms of your Chapter 13 plan.

When It Doesn’t Make Any Monetary Difference

Many Chapter 13 plans have a designated amount that the debtor is paying towards the “general unsecured” debts. That amount is essentially what’s left over after the secured and priority debts are paid. Usually that’s less than the total amount of the “general unsecured” debts—often much less.

For example, if you have $50,000 in “general unsecured” debts you may have only $5,000 available to pay on those debts over the 3-to-5-year span of your plan. That’s a 10% payment plan. If one creditor with a $10,000 debt fails to file a proof of claim, it usually wouldn’t make a difference. You’d likely still need to pay $5,000 towards your “general unsecured” debts. But now that same amount would be distributed over the remaining $40,000 of debts. So you’re paying 12.5% of the remaining $40,000 in debts. Your same $5,000 is just spread out over fewer debts, with no monetary difference to  you.

When It Does Make a Monetary Difference

Although not terribly common, there are Chapter 13 plans requiring the debtor to pay the “general unsecured” debts in full. That’s a 100% plan. If one creditor fails to file a timely proof of claim, the amount the debtor must pay is reduced dollar-for-dollar. Not having to pay that debt can result in a lower monthly plan payment, a shorter plan, or both.

If the debt or debts without a filed proof of claim is/are large, this can significantly shorten your case.

A similar result can happen in a high percentage payout case, with a twist. Take the example of a debtor paying 90% of the “general unsecured” debts. If no proof of claim is filed on a significant debt, the money that had been earmarked for it would likely go to the other debts. But once all the “general unsecured” debts with proofs of claim are paid 100%, the debtor would not have to pay any more. That Chapter 13 case would be shortened accordingly.  

Every once in while a creditor or set of creditors fail to file proofs of claim so that little or no “general unsecured” debts are left. Conceivably that Chapter 13 case could be over in a matter of just a few months, instead of years.

Caution

Definitely talk with your own bankruptcy lawyer about this, because different Chapter 13 trustees and judges may have different practices and procedures. Chapter 13 trustees sometimes file proofs of claim on behalf of creditors to avoid a missed deadline. Or a bankruptcy judge may determine that a creditor did not get adequate notice of your bankruptcy case in order to be held to the proof of claim deadline.

Also, your lawyer can tell you the creditors’ deadline to file their proofs of claim. Then you can monitor the filed proofs of claim and their potential impact on your case.

 

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. 

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