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Recent Blog Posts
Unpaid Child and Spousal Support in Chapter 7
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.
A Chapter 13 Plan to Pay Income Tax
Here’s an example of a Chapter 13 payment plan to pay income tax, showing how you pay what you can afford and avoid some interest, penalties.
Today we put the facts of last week’s blog post into a Chapter 13 plan, showing how it actually works. You’ll see how Chapter 13 saves you money and avoids stress as you pay off your priority income taxes.
The Example: The Tax, Interest, and Penalties
Assume you owe $10,000 to the IRS for income taxes from the 2016 tax year. That’s for the tax alone without the penalties and interest. Plus you owe interest of $1,200 (currently 5% annually), $2,000 for a failure-to-file penalty (which the IRS assesses at 5% per month of being late), and $1,650 for a failure-to-pay penalty (calculated at 0.5% per month). So including the current interest of $1,200 and a total of $3,650 in penalties this $10,000 tax has turned into a total debt to the IRS of $14,850. And the interest and failure-to-pay penalty just keep on accruing.
Can You Incur More Debt During a Chapter 13 Repayment Plan?
If you have gotten a bankruptcy, the one thing you do not want to do is to incur more debt; being unable to pay your debt is the reason you filed for bankruptcy, right? Chapter 13 bankruptcy repayment plans usually last anywhere from three to five years, meaning you must be financially responsible during that time period or you could risk having your case dismissed and being responsible for repaying your debts in full. While it is a good rule of thumb to avoid taking on any further debts during a Chapter 13 bankruptcy, sometimes taking on more debt is unavoidable and is a necessity. Incurring new debt during your Chapter 13 repayment period is possible, but there is a certain way you must go about it.
Reasons for Incurring New Debt
Sometimes, life can be unpredictable. Even though you were probably not planning on taking on any new debts during your Chapter 13 repayment period, things can happen and can put you in a situation where there is no other option. Generally, incurring new debt during a Chapter 13 repayment period is frowned upon and is only permitted when the debt is for something that is considered a necessity. Common reasons for incurring debt during a repayment plan include:
Paying Income Taxes through Chapter 13
Chapter 13’s advantages in paying off your priority income taxes become clearer when you see what you don’t have to pay.
Last week we got into the advantages of paying priority income taxes through a Chapter 13 “adjustment of debts” case. Those are the usually-recent income taxes which cannot be written off (“discharged”) in bankruptcy. Today we show more clearly how Chapter 13 can be tremendously helpful with income taxes.
The Example: The Tax Breakdown
This example expands on one we introduced last week. Assume that you owe $10,000 to the IRS for income taxes from the 2016 tax year.
In addition there’s a failure-to-file penalty of $2,000 for filing 4 months late without getting an extension. The IRS assesses that penalty at 5% per month of being late. So here, 4 months at $500 per month = $2,000.
Priority Income Tax Debts under Chapter 13
Chapter 13 gives you huge advantages for paying off your priority income tax debts. You’re protected while you pay what you can afford.
Last week we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.
Recent Income Taxes Can’t Be Discharged
The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.
There are two conditions determining whether a tax debt can be discharged. (There are a few other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:
What Debts Are Not Dischargeable in a Texas Bankruptcy?
Filing for bankruptcy is often the last resort for many people. If you successfully file for bankruptcy and your debts are discharged, it can affect your current and future finances for years, which is why people do not typically get a bankruptcy unless they absolutely have to. For most forms of bankruptcy, receiving a discharge of your debts is typically the end goal. Most debts can be discharged or forgiven in a bankruptcy, but there are certain types of debts that either cannot be discharged or will not be discharged based on certain circumstances.
Student Loans
When it comes to student loan debt, it is almost never automatically discharged in a bankruptcy. If you are looking to have your student loans forgiven, you must prove to the court that making your student loan payments would cause you undue hardship. To do this, you have to prove that making your student loan payments would not allow you to maintain a minimal standard of living, you will likely be in a tight financial situation for the remainder of your student loan repayment period and you have made a decent number of payments in good faith on your loans.
Priority Debts in a Chapter 13 Case
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:
Priority Debts in an Asset Chapter 7 Case
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:
FAQs About Chapter 7 and Chapter 13 Bankruptcy
There is a multitude of reasons why a person can find themselves in debt. Credit card debt, student loan debt, mortgages and even medical debt are all common reasons why Americans owe money to lenders. In many cases, the amount of debt owed is proportional to a person’s income and they can make their monthly payments. In other cases, a person has so much debt that they are either constantly paying their bills late, not paying them in full or cannot pay their bills at all. In cases such as these, it is a good idea to look into the idea of bankruptcy. Though most people know what the basic idea is behind bankruptcy, many people still have questions about how it works, the process you go through and how it can help their situation. Here are some of the most commonly asked questions about bankruptcy.
What Is the Difference Between Chapter 7 and a Chapter 13 Bankruptcy?
Priority Debts
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.
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