Protecting Your Co-Signer in a Chapter 7 Bankruptcy

Chapter 7 bankruptcy helps you protect your co-signer, mostly by discharging your other debts so that you can pay the co-signed one.

 

Last week we wrote about protecting yourself from both your co-signer and from the creditor owed the co-signed debt. 

If you decide to file bankruptcy you want to discharge (legally write off) all the debts that you can.  Then you can—if you want and are able to—pay any obligation you feel morally compelled to. Especially if you’re no longer friendly with your co-signer you want to end any legal liability you may have to him or her. And you want to end the legal liability you have to the creditor itself. So you legally discharge those two obligations to protect yourself.

But now let’s focus on protecting the co-signer. Let’s assume that you feel very strongly about doing all you realistically can do for that person. You want to do what you can to prevent the creditor from coming after him or her. Or if your co-signer has already paid part or all of the debt, you’d like to make your co-signer whole. How could bankruptcy help in this?

Chapter 7 and Chapter 13 each have advantages and disadvantages in protecting your co-signer. We start today with Chapter 7.

How Chapter 7 Helps

Chapter 7 “straight bankruptcy” helps mostly indirectly. Filing this type of bankruptcy would discharge all or most of your other debts. That should make it at least somewhat easier to pay the co-signed debt if you wanted to.

Be sure to list both your original creditor and its co-signer on your bankruptcy schedules. Do so both because you are required by law to list all creditors and it’s prudent to cover those distinct obligations. You owe the creditor based on your debt agreement. You likely owe your co-signer based on whatever agreement you have with him or her, oral or otherwise. Both obligations would very likely be discharged in your Chapter 7 case. (This assumes that there is no fraud-based objection by either). So you would very likely have no legal obligation to pay either of them.

Protecting Your Co-Signer through Chapter 7

The discharge in Chapter 7 happens quite quickly—usually within about four months from filing. So then IF and WHEN you wanted to, you could start making the monthly payments to the co-signed creditor. If your co-signer had started making these payments, you could informally consent to start making them again.

Your legal obligation to pay this would by this time have been discharged in bankruptcy. You certainly don’t want to create a new legal commitment. So you should make clear that you are paying strictly voluntarily.

If your co-signer has already paid the entire debt you could similarly consent to reimburse him or her.

The same applies if the co-signer has paid part of the debt. You could arrange to make the remaining payments directly to the creditor, and then work on reimbursing the co-signer through payments afterwards—or whenever you wanted.

Again, in all situations make clear that whatever you choose to pay is strictly voluntary.

No Legal Constraint on Paying This Debt

One advantage to Chapter 7 regarding a co-signed debt is the flexibility it gives you to pay the debt. As Section 524(f) of the U.S. Bankruptcy Code makes clear, nothing “prevents a debtor from voluntarily repaying any debt.”

Because Chapter 7 is such a short procedure there is nothing preventing you from paying a discharged debt. In contrast, a Chapter 13 case usually last 3 to 5 years, during which time you are in a formal payment plan. During that period of time you can’t favor any creditors except as the law specifically allows you to do.

Nevertheless, Chapter 13 does give you other advantages with co-signed debts, which we’ll get into next week.

 

Crucial Facts about Co-Signed Debts in Bankruptcy

Bankruptcy protects you from your co-signed creditor and also from your co-signer. Be sure to cover any legal obligation to your co-signer. 

Protecting Only Yourself

Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.

Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the other signer.

Your Obligation to the Creditor

The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or sometimes on other exceptions. But those objections or exceptions don’t apply to most debts.

Your Probable Obligation to Your Co-Signor

Usually you have a distinct legal obligation to the other person legally liable on the debt. What exactly that obligation is depends on the circumstances.

Assume the other person co-signed to enable you to get credit. Then there could be a stated understanding that, if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. You may have effectively promised to pay back the co-signer if necessary. That obligation to repay may not be stated but just presumed by both people.

Or it’s possible that the stated or presumed understanding was that you wouldn’t have to re-pay your co-signer. The co-signer could have said “I’ll co-sign and if you can’t pay the debt I’ll take care of it without you having to pay me back.” Maybe not likely but it’s possible.

But now assume instead you co-signed to help the other person, and you got no benefit from the credit acquired. Then you may have no legal obligation to the other person.

So again you may or may not have a legal obligation to the co-signer.

Being Practical

There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the other signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished.

Can Your Co-Signer Object?

Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.

Although relatively rare, these objections tend to be raised out of anger by people with personal connections to you. Former friends, ex-spouses, ex-business partners may react out of spite and anger because they have a personal axe to grind. Plus they may have compromising information (or think they do) providing grounds for objection more than conventional creditors would.

If you suspect that a co-signer may react this way, explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and take any appropriate action to minimize your risks. 

 

Crucial Facts about Child and Spousal Support in Bankruptcy

Filing bankruptcy mostly does not affect the collection of child or spousal support against you—except it can help in one very important way.  


Support Obligations Mostly NOT Affected by Bankruptcy

1. No discharge (“write-off”) of child and spousal support obligations

Your support obligation was determined by state law and a divorce court’s order. Bankruptcy law does not attempt to disturb that obligation. Support is excluded from bankruptcy’s legal write-off of most debts.

2. Collection of ongoing monthly support obligations not stopped

Your bankruptcy filing has no effect on your ongoing support amount(s). Again, that amount was determined by a divorce judge and can only be changed by such a judge. The monthly collection of that court-ordered amount can continue regardless of your bankruptcy filing. This is true whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.”

3. Collection past-due support obligations also not stopped under Chapter 7

Any and all of the following can continue after you file a Chapter 7 case:

  • the voluntary withholding of support from your paycheck or account
  • the garnishment of your paycheck and/or bank account
  • the interception of your income tax refund
  • the reporting to a credit reporting agency that you’re late on support payments
  • potentially the suspension of your driver’s license and even occupational licenses

This is in contrast to how past-due support obligations are affected under Chapter 13—see below.

4. Various divorce/family court proceeding are not stopped by bankruptcy

Your bankruptcy filing stops most lawsuits and other court proceedings against you. But it does not stop divorce/family court proceedings to:

  • establish a support obligation
  • increase or decrease the support amount
  • address child custody or visitation issues
  • deal with domestic violence
  • establish the paternity of a child
  • dissolve a marriage, other than as it pertains to the division of property

Chapter 13 CAN Stop Collection of Past-Due Support

The most important way that bankruptcy can help is only available under Chapter 13. This help is for any support payments that you had not made on time and continue to owe.

Filing a Chapter 13 case stops all the potentially very aggressive ways that your ex-spouse and/or the support enforcement agency can collect any such past-due support. They have to accept catch-up payments determined by your actual ability to pay.

You have to pay the entire past-due amount by the time you finish your 3-to-5-year Chapter 13 case. And you must immediately start or continue to make any ongoing support payments strictly on time. Then when you successfully complete your Chapter 13 case you will be completely current on the support.

Bankruptcy Can Also Help Less Directly.

Both Chapter 7 and 13 can help by simply getting rid of or significantly lower your other debt obligations. Then usually you’ll be able to more reasonably pay your child and/or spousal support and avoid falling behind.

Consider Trying to Lower Your Ongoing Support Amount

As you file bankruptcy seriously consider going back to the divorce court to change the monthly support amount. If you’re filing bankruptcy now that may be a good indication that your finances have deteriorated since the domestic relations court determined the amount. Compare your income and expenses now to what they were when the support amount was determined. You may be able to lower your support obligation to a more reasonable amount.

 

5 More Crucial Facts about Income Taxes in Bankruptcy

Here are 5 more facts to help clear up the many misconceptions about how bankruptcy affects income tax debts. 


In our last blog post we’ll give you our first 5 crucial facts about income taxes in bankruptcy. Here are the rest of them.

6. A Chapter 7 “straight bankruptcy” case can often really help with income taxes.

If you owe older income taxes, Chapter 7 case may be able to completely discharge those. And if you owe newer taxes, discharging your other debts lets you focus on paying those tax afterwards. You may well be able to enter into a reasonable monthly payment plan with the IRS and/or state to pay off any taxes you still owe. With such a payment plan:

  • interest and penalties continue to accrue
  • you must comply with the taxing agency ‘s often rigid rules for determining the monthly payment amount
  • you are at the agency’s mercy if you can’t pay as agreed

Or instead you may be able to negotiate a settlement with them for less than the balance. (This is called an Offer in Compromise with the IRS).

7. A Chapter 13 “adjustment of debts” case buys you much more time and protection.

With Chapter 13 you have up to 5 years to pay the more recent tax debts that you cannot discharge. Throughout this time you and your assets are under continuous protection from collection. This protection usually lasts as long as your case is open. Before its completion you would have paid off all those taxes, so you’re effectively protected from all tax collection. This is very unlike Chapter 7 in which that protection expires just 3 or 4 months after you file your case.

8. A Chapter 13 case usually stops additional interest and penalties from accruing.

In a Chapter 7 case interest and penalties continue to accrue on any taxes that are not discharged in bankruptcy. But in most Chapter 13 cases interest and penalties stop accruing on those taxes. Avoiding additional interest and penalties saves you a lot of money over a 3-to-5-year plan. That gets you out of tax debt faster. Also, you usually do not have to pay the prior-accrued tax penalties in full, and sometimes not at all. That also reduces the amount you need to pay to get out of tax debt.

9. Flexibility is the most important benefit of Chapter 13.

Paying income taxes that you can’t discharge is very flexible under Chapter 13 in two main ways:

1. How much you pay per month to all your creditors is based on your budget. This includes the portion paid towards your nondischargeable income taxes. The amount you pay is not based on the IRS’ or state’s own rules but rather on a sensible budget with reasonable amounts for your living expenses.

2. There is a lot of flexibility about paying other urgent creditors ahead of the taxes. This is particularly important if you have to catch up on your mortgage, vehicle, or support obligations. It also helps a great deal if you owe to both the IRS and your state tax agency.

10. Some taxes that are related to income taxes cannot be discharged.

There are taxes that the taxpayer collects from someone else and then must pay to a tax agency. The common example is withholding taxes: an employer withholds taxes from an employee’s paychecks on behalf of the tax authority. That employer would be liable for any withheld money that was not turned over as required. Beyond the employer being liable, any person who was responsible to pay those taxes could be held liable. With the IRS that could include the employer’s managers and sometimes even high-level staff (the never-dischargeable “trust fund recovery penalty”). 

 

5 Crucial Facts about Income Taxes in Bankruptcy

There are many misconceptions about how bankruptcy affects income tax debts. These facts will help make sense of this confusing arena. 

 

1. Filing your bankruptcy case immediately stops virtually all tax collection actions against you.

The IRS, your state taxing agency, and all other tax entities have to obey the “automatic stay” just like any other creditor. This law requires them to stop all collection actions immediately upon your filing.  This means no more paycheck garnishing and no recording of tax liens on your home, vehicles, or other possessions. And no collection threats and phone calls from them. 

2. There are some very limited, sensible contacts that ARE still allowed.

The IRS and state tax agencies can still, after you file your bankruptcy case:

  • start or continue an audit to determine your tax liability,
  • send you a notice that you owe taxes (but it can’t try to collect on that tax),
  • make a demand for a tax return, and
  • make an assessment of a tax.  

Essentially, the tax authorities can still take action to determine the amount of a tax. But they can’t act to collect on any taxes.

3. Certain income taxes can be completely written off (“discharged”) in bankruptcy.

The law does get complicated. But most of the time discharging an income tax debt requires just meeting two conditions:

  • the pertinent tax return was due more than 3 years before the bankruptcy case was filed (plus any tax return filing extension), and
  • that tax return was actually submitted more than 2 years before your bankruptcy case is filed.

There are other conditions but they involve circumstances that don’t often apply to most people. The main point is that most income taxes can be discharged by filing the tax return and waiting long enough.  

4. Some income taxes can never be discharged.

There is one circumstance that doesn’t apply to most people but is worth emphasizing. If a taxpayer filed “a fraudulent return or willfully attempted in any manner to evade or defeat” a tax, that tax can never be discharged. What this covers and does not cover is open to some interpretation. For example, would not filing a tax return for years be considered “tax evasion” for this purpose? Discuss any situation like this with your lawyer to find out whether it may cause you a problem.

5. A bankruptcy case cannot discharge any taxes that become due after the case is filed.

A bankruptcy filing can only cover and affect those debts that you legally owe as of the date of that filing. That applies to income taxes as well. So, especially under Chapter 13 consider delaying filing until the current year’s tax is due. Then you can include that tax in the payment plan and be protected from its collection.

In our next blog post we’ll give you 5 other crucial facts about income taxes in bankruptcy.

 

12 Questions while Dealing with Collateral Other Than Your Home or Vehicle

Do you owe a debt that you think is secured by things like your furniture, appliances, electronics? How does bankruptcy deals with these?  

 

1. Is it really secured?

The first thing is to make sure that the debt you think is secured by collateral really is. Does the creditor really have a legal right to repossess the personal property that you think is the collateral? The laws about this vary depending on the type of collateral and from state to state. Tell your bankruptcy lawyer about any possible secured debts, and bring any paperwork you might have about them.

2. Is something unexpectedly the collateral on a debt?

A creditor might have a legal interest in some of your personal property that you are not aware of.  Did you finance the purchase of something and unknowingly give the creditor a “security interest” in what you bought? This may apply to store credit cards, “90-day-same-as-cash” purchases, and “rent-to-own” purchases disguised as leases. Or did you borrow money and somehow give the creditor a right to something you already own as collateral? Small loan companies and payday lenders are among the creditors who do this.

3. What’s the effect if a debt is NOT secured?

If the creditor does not have a legally valid right to the intended collateral, the debt is an unsecured debt. The personal property is free and clear and the creditor has no right to take it from you. You’d likely be able to “discharge”—write off the debt in bankruptcy—without paying anything. It’s not unusual for a creditor to fail to take the right steps to legally attach the collateral to the debt. Check with your lawyer about whether this may have happened to any of your seemingly secured debts.

4. What’s the effect if a debt IS secured?

If the creditor does have a legally enforceable security interest, then the discharge you receive near the end of either a Chapter 7 or Chapter 13 case would still likely legally write off the debt. But the security interest—the creditor right to the collateral—would survive. The creditor would have a right to repossess the collateral after the bankruptcy was finished. The creditor might even get permission from the bankruptcy court to repossess during your case. The rest of these questions go through your options for dealing with secured debts through bankruptcy.

5. What if a secured debt is not treated as secured?

Sometimes, when the collateral is not worth much, the creditor may not want the collateral back even if you pay nothing. The creditor decides that its costs in repossessing the collateral would be more than what the collateral would generate. Your lawyer will have a feel for which debts this would likely apply to.

6. Can you ever change a secured debt into an unsecured one?

Under certain circumstances bankruptcy allows you to “avoid” a lien or a security interest. This undoes an otherwise valid right of a creditor on certain specific kinds of collateral. Check with your lawyer for details. When applicable, you can keep the collateral without paying anything for it.

7. What if I’m willing to surrender the collateral to the creditor?

If a creditor does have a right to repossess, you can always just surrender the collateral to the creditor. Then under Chapter 7 you discharge the remaining debt. Or under Chapter 13 you discharge the portion you’re not paying.

8. What’s redemption of collateral?

If you want to keep the collateral under Chapter 7 you can redeem it. This requires paying its fair market value in a lump sum. After paying the redemption amount you would owe nothing more, with any remaining amount discharged. If you don’t have any way to gather the money needed to redeem, you may be able to borrow it in a redemption loan. This may make sense because you’d be replacing a larger debt with a smaller one, and keeping the collateral.

9. What’s reaffirmation of a secured debt?

A more common option is to reaffirm the debt under Chapter 7. You enter into a new agreement to remain liable on the debt and pay it off over time. You exclude it from the discharge of your other debts. In return you can keep the collateral. This also gives you a running start on re-establishing your credit. You often have to reaffirm the whole debt, but not always. Especially if the collateral is worth much less than the debt, it makes sense for the creditor get paid a part of its debt, more than if it repossessed the collateral.

10. What are the risks in reaffirmation?

You need to be cautious about reaffirming a debt. If you reaffirm a debt you would remain liable even if you couldn’t make the payments later or changed your mind about keeping the collateral. So sometimes it’s better to just make payments on the debt as long as you want to, without reaffirming. The creditor may not have a contractual right to repossess as long as you stay current. And then when you pay off the debt, the collateral is yours free and clear. If you ever stop paying, the creditor can then repossess if it bothers to at that point. But the creditor can’t pursue you for any of the remaining debt since it would have been discharged.

11. How do you keep collateral in a Chapter 13 “adjustment of debts” case?

You could pay the debt in full under Chapter 13, in monthly payments through your court-approved plan. This may make sense if the value of the collateral is more than the amount of its debt. If the collateral is something that you reasonably need, you could pay the debt in full before your unsecured creditors would receive anything.  But if the collateral is not something you genuinely need, the trustee or a creditor could object. You might have to surrender the collateral so that the money instead goes to other debts.

12. Can you “cram down” a debt secured by something you own other than a vehicle?

You may be able to keep the collateral without paying all of its debt through a Chapter 13 “cramdown.” The debt usually needs to be more than a year old (less than with a vehicle), with the collateral worth less than what you owe. Cramdown allows you to favorably re-write the loan. You can reduce the secured portion of the debt to the collateral’s fair market value, usually reduce the interest rate, sometimes stretch out the payments over a longer term, and often significantly reduce the monthly payments. You end up owning the collateral free and clear, often for lots less than otherwise.

 

13 Ways Bankruptcy Helps You with Your Vehicle

Bankruptcy protects your vehicle and helps you deal with your vehicle’s debt in many ways. Here are 13 of them.

 

1. Is your vehicle free and clear of any debt? That means it could be exposed to seizure by creditors for payment of their debts. Protect your free and clear vehicle(s) by filing bankruptcy and applying the applicable state or federal vehicle exemption.

2. What if your vehicle is worth more or has more equity than the exemption provides? You can likely protect that extra value or equity by paying off that extra amount in monthly payments to your Chapter 7 trustee. In the right situations that money would just go to another one of your important debts. That debt is likely one you would have to pay anyway, such as recent income taxes or child/spousal support arrearage.

3. You can also protect such extra value or equity through a Chapter 13 case. Similarly, the money you pay to protect the vehicle may go to debts that you must pay anyway. Or you may be required to pay the money because of other requirements (because of your budget, for example). As a result you may succeed in protect your vehicle without really paying substantially more to do so.

4. What if you do owe a vehicle and can’t afford your vehicle loan payments? Eliminate all or most of your other debts through bankruptcy so you can afford those payments. 

5. And what if you are behind on your vehicle loan payments? You can immediately stop your vehicle from being repossessed by filing either a Chapter 7 or Chapter 13 case.

6. What if you’re not far behind on your loan? If you could catch up within a month or two after eliminating all or most of your other debts, file a Chapter 7 case.

7. Do you need more time? Get as much as 5 years to catch up by filing an “adjustment of debts” Chapter 13 case. Your vehicle would be protected from repossession as long as you follow a payment plan. That’s a court-approved plan that you and your bankruptcy lawyer propose based on how much you can afford.

8. Do you owe more on your vehicle than it’s worth? Under Chapter 7 pay your vehicle lender the fair market value of the vehicle to “redeem” it at that price. If you can find the money to do this you’d then own your vehicle free and clear.

9. What if you cannot come up with the lump sum needed to “redeem”? You may qualify for a redemption loan. That’s a loan from a new lender in the amount of the value of the vehicle. That allows you to “redeem” when can’t get the money elsewhere. The interest rate on a redemption loan is likely high but potentially still very worthwhile if your vehicle is worth much less than the amount you owe on it.

10. Is your vehicle loan is more than 910 day old (about 2 and half years). Do you owe more on your vehicle than it’s worth? Do a “cramdown” on that loan. That effectively re-writes the loan under very favorable terms. You reduce the secured debt to the vehicle’s fair market value. Usually you can also reduce the interest rate, and stretch the payments out over a longer period. All these almost always result in a significantly reduced monthly payment. In many cases you pay little or nothing on the unsecured portion of the loan. That’s the dollar amount beyond the vehicle’s value. The end result is a savings of many thousands of dollars on your vehicle loan.

11. Do you have unpaid income taxes? Protect your vehicle from seizure by the IRS or state tax agency for those taxes. Protect them from tax liens. Discharge (legally write off) the taxes with a Chapter 7 case. Or if your taxes don’t qualify for discharge, pay them through a Chapter 13 case while your vehicle is protected.

12. Are you behind in child or spousal support payments? Chapter 13 gives you extraordinary powers. Prevent your state or local child/spousal support enforcement agency from seizing your vehicle and/or suspending your personal or commercial driver’s license.

13. What if you decide to surrender the vehicle to your lender? Avoid owing a deficiency balance. That’s the often surprisingly large amount still owed after the lender sells your repossessed vehicle. Often repo’d vehicles are sold for much less than you’d think at an auto auction. Then a bunch of extra fees are added to your account. As a result of all this, the “deficiency balance” is often an unexpectedly high amount. Your lender often doesn’t waste time suing you for it. Either a Chapter 7 or 13 case would almost always discharge this deficiency balance.

 

20 Ways Bankruptcy Helps You Keep Your Home

If you are at risk of losing your home, bankruptcy can help you keep it through a wide variety of ways. Many of these likely apply to you. 

 

Here are 20 ways that filing bankruptcy can make it possible for you keep your home:

1. If you have equity in your home you can protect that equity through the homestead exemption. If you don’t currently have any equity in your home the homestead exemption can protect future equity.

2. If you have more equity than the homestead exemption protects, filing Chapter 13 can protect that extra equity. See Section 1325(a)(4) of the U.S. Bankruptcy Code.

3. Discharge—legally write off—all or most of your other debts so you can reasonably afford your monthly mortgage payments. See Sections 727 and 1328 of the Bankruptcy Code.

4. If you are only a little behind on your mortgage, discharge your other debts through Chapter 7 “straight bankruptcy. That could enable you to catch up on your missed mortgage payments through a forbearance agreement with your lender. That gives you a certain number of months to catch up through agreed monthly catch-up payments.  

5. Get up to 5 years to catch up on your back mortgage payments though a Chapter 13 “adjustment of debts.” Throughout that time you’re protected from foreclosure as long as you follow some sensible rules.

6. Discharge or reduce other debts to possibly qualify for a mortgage modification.

7. Stop a property tax foreclosure by paying the unpaid property taxes through a Chapter 13 plan. This also prevents your mortgage lender from using your nonpayment of the property tax as a basis for its own foreclosure.

8. Significantly reduce how much you owe on your home by “stripping” off the second or third mortgage from your title. If you qualify, you can immediately stop paying that second or third mortgage payment. You can often pay only pennies on the dollar of that mortgage debt. By stripping off that junior mortgage debt from your “underwater” home, you bring the amount of your home debt closer to the value of your home. As a result you create future equity in your home much sooner as the home’s value increases.  

9. Remove a current judgment lien encumbering your home’s title by “avoiding” that lien under either Chapter 7 or 13.  Section 522(f)(A).

10. Prevent future judgment liens against your home. Stop pending lawsuits by creditors through the “automatic stay,” imposed on creditors the moment you file bankruptcy. Section 362(a)(1). Discharge credit card, medical, and other debts through bankruptcy before those creditors sue you. That stops them from ever getting a judgment and recording a judgment lien on your home.

11. Prevent the recording of an income tax lien on the title of your home. Section 362(a)(4 and 5).If you owe an older and otherwise qualifying tax debt, discharge that tax debt. Do this before the IRS or state taxing agency records a tax lien. Then it will never be able to do so.

12. Possibly persuade the IRS/state to release a prior recorded tax lien on your home arising out of a dischargeable tax. After the tax debt is discharged, if there’s no equity available now or in the reasonable future, the IRS/state may voluntarily consent to release the lien.

13. Deal favorably with an income tax lien on your home, even if the underlying tax is too new to discharge. Pay that “priority” debt under very favorable terms in a Chapter 13 plan. Section 1322(a)(2). Do so while being protected from all collection efforts against you on that tax. Then at the end of the case the IRS/state releases that tax lien on your home.

14. Prevent a child or spousal support lien from attaching to your home. Do so by discharging your other debts so that you can afford to keep current on your support obligations.

15. Prevent an existing support lien against your home from being foreclosed. Catch up on your support obligations through a Chapter 13 payment plan. This gives you as much as 5 years to do so, all the while being protected from that foreclosure.

16. Stop your homeowners’ association from foreclosing on your home for unpaid association dues and/or assessments. Again, you have as much as 5 years to pay those off through a Chapter 13 plan. And in the meantime the HOA can’t foreclose or take other collection action.

17.  Get more time to sell your home. Get either a few more weeks or months through Chapter 7. Possibly get much more time, maybe even up to 5 years, through Chapter 13.

18. In a dispute with a home repair or remodeling contractor, if he or she attaches a construction lien to your home, stop the lien’s foreclosure. Gain leverage and buy time in fighting the dispute by filing a Chapter 13 case.

19. Resolve utility liens and local governmental liens on your home. Either dispute them or pay them through a Chapter 13 case.

20. Resolve accounting disputes with your mortgage lender by objecting to its proof of claim filed at the bankruptcy court. This court is a relatively favorable and efficient forum for cleaning up these frustrating disputes.

 

More Powers of a Simple Chapter 13 Case

The unique powers of even a simple Chapter 13 case are impressive. They allow you to reach goals that a “straight bankruptcy” simply can’t. 


Some of the Simple Benefits of Chapter 13

Even in with a simple Chapter 13 case you can:

1) catch up on your unpaid mortgage payments, have up to 5 years to do so, while continuously being protected from foreclosure;

2) possibly “strip” off a second or third mortgage from your home’s title;

3) likely do a “cramdown” on your vehicle loan, reducing your monthly payments AND the total paid for your vehicle;

4) pay those income tax debts that can’t be discharged, without more interest and penalties, while being protected from tax collection;

5) catch up on child and/or spousal support while being protected from the extreme collection powers of support enforcement agencies; and

6) keep assets that a Chapter 7 trustee would take from you.

We covered the first two of these in our blog two weeks ago, and give you the rest of them today.

“Cramdown” on Your Vehicle Loan

You can do a “cramdown” under Chapter 13 if:

  • your vehicle loan is more than 910 days old (about 2 and a half years), and
  • you owe more on it than your vehicle is worth

“Cramdown”:

  • reduces the secured debt part of the debt to the amount to the vehicle’s value
  • often lowers the interest rate
  • stretches out the payments
  • often significantly reduces the monthly payment
  • the remaining unsecured portion of the debt is treated like your other “general unsecured” debts, which you pay only to the extent that you have any money to pay them, if at all

“Cramdown” often enables you to pay off your vehicle loan for thousands of dollars less.

Pay Income Tax While Being Protected           

You can discharge—legally write off—some income taxes under Chapter 7 if they meet certain timing and other conditions. But otherwise—usually if they’re not old enough—you can’t discharge them. At that point you might be able to enter into an installment agreement with the IRS or the state to pay those remaining taxes. Or you could try to settle them through an IRS Offer in Compromise or similar procedure with the state.

But Chapter 13 provides what is often a much better alternative for dealing with these tax debts. It can handle all of your tax debts in one package, along with all your other debts. You make affordable payments on those taxes that are not being discharged. They’re affordable because the amount you pay is based on your budget instead of on what the taxing authorities demand.

This often means that even more urgent obligations can be paid ahead of the taxes. So you can usually cure the arrearage on a mortgage or vehicle loan before the taxes. Also, usually prior penalties do not have to be paid in full, and often are paid nothing or very little. Interest and penalties usually stop accruing once you file the Chapter 13 case. That alone can save you lots of money, enabling you to pay off your taxes faster. And very important, during your Chapter 13 case the IRS/state can’t continue taking any collection efforts against you, such as recording tax liens or levying on your wages or accounts. Then at the end of your successful Chapter 13 case you would be tax-free and debt-free.

Pay Unpaid Child/Spousal Support While Being Protected

Support collection methods can be extremely aggressive. Your ex-spouse and the support enforcement agencies can use tremendous powers against you if you fall behind. They have the usual capacity to garnish your wages and levy on your bank and credit union accounts. But they can usually to do so without needing to sue you because of the prior divorce judgment. It creates continuing authority to garnish and levy against you. They can also suspend your driver’s license. Most potentially devastating, after going through appropriate procedures they can also suspend any state-issues occupational or professional license, effectively shutting down your ability to work.

Chapter 13 can’t change your monthly child or spousal support obligation amount. Only your state domestic relations court which originally ordered the support can do that. Neither can Chapter 13 discharge (write off) any support debt or stop collection efforts on the REGULAR monthly support.

But what Chapter 13 CAN do which Chapter 7 can’t is to stop collection efforts for UNPAID support. It can force your ex-spouse/support enforcement agency to accept catch-up payments based on your actual ability to pay. Most importantly, filing Chapter 13 can stop all their super-aggressive collection procedures. You just need to make your regular support payments going forward, show how you’ll bring the support arrearage current in your court-approved plan, and then comply with what you’ve proposed.

Keep All Your Assets Even Those Not “Exempt”

Chapter 13 provides a great mechanism for keeping and protecting assets that you’d lose in a Chapter 7 case. These are assets which are not “exempt” and so you’d have to give them to the bankruptcy trustee. Your Chapter 13 plan just needs to have you pay enough extra to cover however much a Chapter 7 trustee hypothetically would have received from the sale of your non-exempt assets. You get to keep those otherwise unprotected assets by paying to do so. But you do this on terms based on your budget and ability to pay.

 

What Makes a Simple Chapter 13 Case

 Even a simple Chapter 13 case has many powers unavailable under Chapter 7. So the extra time Chapter 13 takes can be highly worthwhile. 

 

Chapter 13

Consumers file a Chapter 13 case mostly because of significant advantages that it gives them over Chapter 7. Also, sometimes people file under Chapter 13 because they don’t qualify under Chapter 7. 

In 2016, out of about 771,000 consumer bankruptcies, almost 294,000 were Chapter 13 cases. Administrative Office of the United States Courts. That’s about 38%, a significant part of all consumer cases.

Why are all these people choosing a procedure that usually takes three to five years to finish, instead of the three or four months to do a simple Chapter 7 “straight bankruptcy” case?

Your Powers under Chapter 13

People file under Chapter 13 because it enables them to do what Chapter 7 does not. In a simple Chapter 13 case, in the right circumstances you could:

1) catch up on your mortgage arrearage over as long as 5 years, while continuously being protected from foreclosure;

2) “strip” off a second or third mortgage from your home’s title;

3) do a “cramdown” on your vehicle loan, reducing your monthly payments AND the total amount paid for your vehicle;

4) pay off unpaid income taxes that can’t be discharged, in a flexible way based on your budget, while being protected from tax collection;

5) catch up on child and/or spousal support arrearages, while protected from aggressive collection tools of ex-spouses and support enforcement agencies; and

6) keep for yourself assets that you would lose under Chapter 7.

We cover the first two of these in today’s blog post, and the rest of them in the next one.

Catching up on a Mortgage

One of the biggest reason people file Chapter 13 is to save their home. And the most direct way it does this is to give them up to five years to catch up on mortgage payments.

Under Chapter 7 your mortgage lender could start or re-start a foreclosure right after your Chapter 7 case is over. That’s only about 3 months later. And if the lender wants to be pushy it can likely get permission to do this even sooner.  If you want to keep the home you likely have to catch up very quickly. You’re completely at the mercy of your lender about the timetable for doing so. 1 year is often the maximum amount of time they give. If you have fallen behind by, say, $10,000, coming up with an extra $800 or $1,000 per month beyond your regular monthly mortgage payment is beyond most people’s ability.

In a Chapter 13 case, your catch-up payments are much lower because you have so much longer to catch up. Plus your lender can’t foreclose as long as you maintain the payments approved in your payment plan.

 “Stripping” a Second/Third Mortgage

 If your first mortgage balance is less than your home’s value, Chapter 13 gives you the power to “strip” your second mortgage off the title. That means that the second mortgage is treated as an unsecured debt. It’s not secured by your home since there is no equity backing it. And that means that you would no longer need to make the monthly payments. So this debt would only be paid to the extent, if any, that you would have extra money during your Chapter 13 case to pay it. Instead of having to pay it in full, with tons of interest, you’d often pay only pennies on the dollar.

This applies to third mortgages as well. The combination of the first and second mortgage balances just needs to exceed the value of your home.

When calculating in the future interest payments that you would no longer have to pay, this could save you tens of thousands of dollars. If your stripped mortgage is large, it could potentially save you a few hundred thousand dollars. In addition this mortgage stripping can bring a home that is hopelessly “under water” and bring its debt closer to its value. This makes the effort of holding onto the home much more economically sensible.

Conclusion

Neither of these first two Chapter 13 powers is available under Chapter 7. Clearly, either of these alone would make Chapter 13 worthwhile. If you need and qualify for both a Chapter 13 case could be incredibly beneficial.