For over a year, people throughout the United States have experienced multiple types of financial difficulties. Many families have had to deal with health issues related to COVID-19, resulting in large medical bills and affecting people’s ability to work and earn an income. Others have suffered job losses or decreases in work hours and income due to pandemic-related business closures. These financial problems have caused some families to be unable to cover their ongoing expenses, including mortgage payments. While many homeowners have been protected from foreclosure by a moratorium put in place by the federal government, this moratorium is coming to an end on July 31, 2021. However, federal agencies have implemented new rules and procedures that may help homeowners avoid the loss of their homes.

Lenders Required to Provide Borrowers With Options to Avoid Foreclosure

For mortgages that are backed by the federal government, including through agencies such as the Department of Housing and Urban Development (HUD), the Department of Agriculture (USDA), Fannie Mae, and Freddie Mac, the Consumer Financial Protection Bureau (CFPB) has implemented a new rule to provide homeowners with protections during foreclosure proceedings. Under this rule, most lenders will be unable to initiate foreclosure proceedings prior to December 31, 2021, and they must meet certain requirements before doing so.

Lenders must determine whether borrowers are eligible for affordable loss mitigation options that will allow them to continue living in their homes. Any homeowners who have not yet taken advantage of their ability to receive a forbearance on missed mortgage payments will be allowed to do so prior to September 30, 2021. Those who have already received a forbearance may be eligible to continue their forbearance based on hardships related to COVID-19. Homeowners who receive a forbearance may have missed payments added to the end of their loans, or they may be able to work with lenders to find ways to make up these payments.

There are many different types of debts that can cause difficulty for an individual or family. When money is owed to multiple creditors, a person may struggle to make ongoing payments while also managing their regular expenses. Tax debts can be especially difficult to deal with, since the IRS may take action in several ways to collect taxes that a person owes. The IRS may garnish their wages, seize funds in a bank account, intercept tax returns, or placing a tax lien on real estate or other property. In cases involving IRS tax levies, a debtor will want to understand whether filing for bankruptcy may allow them to discharge their tax debts.

When Can Tax Debts Be Discharged Through Bankruptcy?

As with other types of debts, the collection of tax debts can be stopped by filing for bankruptcy. The automatic stay that goes into effect following a bankruptcy filing will prevent the IRS from implementing tax levies. A debtor can then determine whether the tax debts they owe are eligible to be discharged.

Tax debts can only be discharged if a person has met certain requirements. Only state or federal income taxes can be discharged, so bankruptcy will not eliminate debts for payroll taxes, capital gains taxes, or other types of taxes. In addition, a taxpayer will need to show that:

Anyone who struggles with significant debts will want to understand the options that may allow them to reduce or eliminate what they owe. Chapter 7 bankruptcy is often the ideal option for those who do not own significant assets since it can be completed quickly and will allow a person’s unsecured debts (such as credit card balances) to be discharged. However, those who have secured debts (such as a mortgage or car loan) or who own significant assets may need to use Chapter 13 bankruptcy. In these cases, debtors may have options for reducing the debts they owe through methods known as “cramdowns” and “lien stripping.”

Addressing Secured and Unsecured Debts in a Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, a person’s unsecured debts will be consolidated into a repayment plan. The debtor will make payments on this plan over a period of three to five years, and once all payments in the plan have been made, the remaining unsecured debts included in the plan will be discharged. Typically, a person will need to make ongoing payments on secured debts along with the payments made during their Chapter 13 repayment plan. 

Chapter 13 bankruptcy usually will not be used to discharge secured debts since non-payment of these debts would result in the creditor repossessing the property used as collateral for these debts. However, a debtor may have options for reducing the amount of their secured debts.

Debt can be a difficult issue for anyone to deal with. Fortunately, bankruptcy can provide relief for those who find themselves unable to pay the debts they owe while also covering their ongoing expenses. In many cases, Chapter 7 bankruptcy is the preferable option, since it will allow most debts to be eliminated quickly and easily. This form of debt relief is referred to as a “liquidation bankruptcy” since the bankruptcy trustee may seize some of a debtor’s assets and sell them to pay off the debts owed to creditors. However, certain types of assets are exempt from liquidation. By understanding what exemptions apply to them, debtors can determine whether Chapter 7 bankruptcy is their best option or whether they should choose a Chapter 13 bankruptcy instead.

Bankruptcy Exemptions in Texas

Those who live in the state of Texas can take advantage of some of the most generous bankruptcy exemption laws in the United States, and if necessary, they can use the federal bankruptcy exemptions as an alternative. Homeowners can use the homestead exemption for the equity they own in their homes. In Texas, there are no limits on the amount of a homestead exemption that can be claimed, as long as the home is located on a property that falls within certain size limits. For urban homes located in a city or municipality, a lot can be no larger than 10 acres. For rural homes, a homestead may consist of up to 100 acres for a single person or 200 acres for a family. When filing for Chapter 7 bankruptcy, a homeowner may be able to avoid the foreclosure of their home if they make up any missed mortgage payments and will be able to continue making payments after completing the bankruptcy process. 

Texas’ exemption laws also cover the personal property owned by a debtor. A single person can exempt up to $50,000 of property, and a family can exempt up to $100,000. Personal property may include:

The recent CARES Act deadline for excluding pandemic relief payments from Chapter 13 “current monthly income” was extended to March 27, 2022. 

Way back in March 2020, the CARES Act made some helpful temporary changes to consumer bankruptcy law. (See our blog post in April 2020 about this.) Some of these changes would have expired, but in the meantime, Congress passed two other laws which extended the changes. These are still temporary, so it’s important to know the new deadlines. Last week we focused on one change dealing with Chapter 7’s means test. Today we focus on a similar change and new deadline about Chapter 13’s crucial “current monthly income” calculation. 

The Crucial Role of Your “Current Monthly Income” in Your Chapter 13 Payment Plan

The Chapter 13 “adjustment of debts” consumer bankruptcy option provides many advantages over Chapter 7 “straight bankruptcy” for many people. Chapter 13 tends to be better for those with tax and child/spousal support debts, vehicle and home mortgage loans, and more than usual or unusual assets. It involves paying into a monthly Chapter 13 plan for the benefit of your creditors. Usually, that plan allows you to prioritize paying your more important creditors over the rest of them.