If you file bankruptcy, it’s okay to voluntarily repay any debt. But there can be unexpected consequences.


The Bankruptcy Code says “[n]othing…  prevents a debtor from voluntarily repaying any debt.” Section 524(f).

But that doesn’t mean that repaying a debt won’t have consequences, including sometimes some highly unexpected ones. So what are those consequences?

To start off let’s be clear that we’re NOT talking about a creditor which you want to pay because it has a right to repossess collateral that you want to keep. Nor is this about paying a debt because the law does not let you to discharge (write off) it. Those two categories of debts—secured debts and non-dischargeable ones—have their own sets of rules governing them. We’re talking here about voluntary repayment, paying a debt even though you’re not legally required to.

And let’s also make a big distinction about the timing of those voluntary payments. We’re NOT talking here about payments made to creditors BEFORE the filing of bankruptcy. That was covered in the last blog. Be sure to check that out because the consequences of paying certain creditors at certain times before bankruptcy can be very surprising and frustrating, seemly going against common sense.

Instead, today’s blog is about paying creditors AFTER filing your bankruptcy case. The straightforward rule here is that you can pay your special creditor after filing a “straight” Chapter 7 case, but can’t do so in a “payment plan’ Chapter 13 case. For that you must wait until the case is completed, which is usually three to five years after it starts. So, if you would absolutely want to start making payments to a special creditor—such as a relative who lent you money on a personal loan—right after filing your bankruptcy case, you would have to file a Chapter 7 case instead of a Chapter 13 one.

Why is there such a difference between Chapter 7 and 13 for this? Basically because Chapter 7 fixates for most purposes on your financial life as of the day your case is filed, while Chapter 13 cares about your financial life throughout the length of the payment plan. You can play favorites with one of your creditors right after your Chapter 7 is filed because doing so doesn’t affect your other creditors. In contrast, in a Chapter 13 case your payment plan is designed so that you are paying all you can afford in monthly payments to the trustee to distribute to the creditors in a legally appropriate fashion. Here the law does not allow you to favor one creditor over the other ones just because you have a special personal or moral reason to do so. You can only favor a creditor AFTER the case is completed, again usually three to five years after filing.

So what would the consequences be of paying your special creditor “on the side” during an ongoing Chapter 13 case? The simple answer is that it’s illegal so don’t do it. Beyond that it’s difficult to answer because it would depend on the circumstances of the case (such as how much you paid inappropriately) and would depend on the discretion of the Chapter 13 trustee and of the bankruptcy judge. You’d be risking having your entire Chapter 13 case be thrown out. You would be wasting a tremendous investment of time and money, risking years of your financial life. Clearly, things you want to avoid.

Instead, talk very candidly with your attorney about your special debt and why you are so committed to paying it. There are usually sensible ways for dealing with these kinds of situations once it’s all out on the table. Your attorney’s job is to present options to you for meeting your goals, including that of paying this special creditor. He or she will only be able to do that for you if you make clear that you want to pay off this creditor and explain why.

In bankruptcy it’s okay to FEEL differently towards some creditors than others. You can also sometimes ACT differently, but only if you very carefully follow the rules.


The last blog was about making a good decision about filing bankruptcy, one that sits well with you morally and serves your best interests legally. If you do decide to file bankruptcy, you usually also have the chance to decide how to deal with some of your creditors. Today’s blog is about creditors you would like to favor for some personal reason, usually because of a special relationship. Specifically, how you favor such creditors BEFORE your bankruptcy is filed is the subject of today’s blog.

The special creditors we’re talking about here are people you feel you must pay, whether out of family connection, loyalty to a friend, or any other personal reason. Your desire to pay this person can be an honorable moral obligation that just about trumps everything. For example, someone may have made a personal loan to you who now desperately needs you to pay it back.

The problem with favoring certain creditors is that doing so flies in the face of one of the basic principles of bankruptcy law—that creditors which are legally the same should be treated the same. Mostly that applies to how creditors are treated DURING the bankruptcy case itself. But in certain limited but crucial ways this principle spills over into the time BEFORE your case is filed. Payments you made to a creditor can be undone—the creditor can be forced to pay to the bankruptcy trustee whatever you paid to the creditor within a certain period of time before your bankruptcy filing.

The practical consequences of this can be devastating. You make a special effort to pay someone that you care about, likely when you don’t have much money, only to later risk having your bankruptcy trustee make that person pay that money “back,” not to you but rather to the trustee. Since this can happen long after you paid that creditor, the money you paid probably has long ago been spent, often leaving that creditor scrambling. Instead of you helping that person as you intended, he or she can get significantly inconvenienced and frustrated, or worse.  And after all that, you may feel obligated to pay that same amount of money a second time to that creditor if you still want to make him or her whole.

What’s the point of this seeming craziness? It goes back to that principle of treating creditors the same. For example, in the relatively rare Chapter 7 case in which you have assets at the time of filing that are not “exempt”—not protected—the trustee takes them, sells them, and distributes the proceeds to your creditors. If you pay a creditor not long before filing the bankruptcy case, the theory is that you “preferred” that creditor over others. The inappropriate payments are called “preference payments,” or simply “preferences.” The idea is that had you not made those payments, there would have been money to distribute to the creditors overall.

So what are the rules about this so that one can avoid them? If you’d like very effective sleep-inducing bedtime reading, here is Section 547 of the Bankruptcy Code explaining preferences. Nearly 1,400 words, in 57 subsections and sub-subsections!

But the good news is that the basic rule is both reasonably straightforward and often easy to work around if you understand it. So here it is.  A preference is a payment (usually money, but it can be any asset) made (voluntarily or involuntarily such as a garnishment) on a prior debt to a creditor (anybody to whom you legally owe money) during the period of 90 days before the filing of a bankruptcy.  That period of time stretches out to a full year before filing for payments made to “insiders”—basically relatives, friends, and business associates.

So how do you work around this? Well, if you know about the rule in advance, you avoid paying creditors you care about during those 90-day and 1-year periods before filing, whichever is applicable. And if you’ve already made those payments, you avoid the problem by waiting to file long enough to get past those time periods.

There are other aspects that make this easier than it might sound. Payments to most secured debts (on your home, vehicle) don’t count. The trustee can’t chase payments to a single creditor totaling less than $600 in the case of a consumer debtor or less than $5,000 for a business debtor.  And there are various other exceptions.

The bottom line is that overall it’s dangerous to pay creditors who you feel a special loyalty to before filing bankruptcy. The basic 90-day/1-year rule is rather simple, but it has lots of twists and turns so it’s safer to just avoid the issue whenever possible. Often it’s better to wait until after you file your bankruptcy case to pay these people. That’s the subject of the next blog.

Yes, you have a moral obligation to pay your debts. But do you have higher moral obligations to release yourself from those debts?

 

You could consider the choice whether or not to file bankruptcy to simply be a “business decision.” Merely a weighing of the costs and benefits of filing and not filing. This weighing would go beyond just the immediate dollars and cents by including intangible factors like the impact on your credit record. But still, in this approach your focus is on “the bottom line,” on what’s “in your best interest.”

That’s fine as far as it goes. After all, corporations of all sizes file “strategic bankruptcies” all the time. Their very smart and well-informed managers decide that bankruptcy is the best way to reduce debt and streamline their operations, so that the business can survive and hopefully thrive into the future.

And who doesn’t want to survive and thrive?

But you are more than a business. More than a corporation. For you, the human costs and benefits have to be added into the equation.  

And that’s where morality comes into the decision. We humans are moral creatures. That means that our important choices are often moral choices, between doing what’s right and doing what’s wrong. To strip this away from our decision about whether or not to file bankruptcy is to dehumanize us. If we don’t engage in the moral component of this choice, we are less likely to make a good decision. And we will likely feel unsettled afterwards regardless how we decide.

So what do you need to do to make a good moral decision?  

First, accept the choices that you made—good and bad, sensible and short-sighted, intentional and forced—and the circumstances that got you where you are now. Accept that you made a series of legal commitments to pay your debts, consider how much choice you had at the time about them, and in hindsight what you would have done differently, if anything. Why are you now not able to keep those commitments?

Second, consider both the moral costs and benefits of continuing to try to meet those financial commitments. The benefit would be keeping your promises to pay, which may be more or less strong of a commitment depending on the circumstances (for example, the carefully considered purchase of a home or vehicle versus incurring an emergency ambulance bill).  What would be the costs in terms of your physical and emotional health, your marriage and family relationships, and whatever other responsibilities you have to your community? You have moral obligations not just to your creditors, but also to yourself, to your spouse, to your kids, and to society in general. Do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs while doing so? And if you do not have a realistic chance, how do you weigh the benefit of putting up a good fight against the costs that come from just delaying the inevitable?

Third, recognize that you now have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments. To just accept the status quo without facing the situation honestly and bravely is making a decision by default, which is likely neither your morally best nor practically wisest move.

Fourth, get advice so that you know your legal options. You might not think you have a moral obligation to do this, but you cannot make morally good choices about how to deal with your legal commitments without knowing your legal alternatives about each of those commitments. You cannot know whether there are more morally acceptable ways to deal with your creditors—such as to file a Chapter 13 payment plan instead of a “straight” Chapter 7—if you don’t know your legal options. When you see the legal structure within which your choices have to be made, that often helps make the moral choices much clearer.

And fifth, look at each of your legal options, and weigh them in light of your different obligations—to each of your creditors, to yourself, your spouse, your family, and anyone else affected.  On one hand, this is an entirely personal decision. You need to look yourself in the mirror and be satisfied that you are doing the right thing. But as with any important decision, you can and most of the time should get help from the right people and resources. As appropriate, talk to your closest friend, your pastor, your accountant, write in your journal, or pray or meditate about it–do whatever you know helps you make a good decision. And although your bankruptcy attorney is primarily your legal advisor, and will respect that the final decisions are up to you, he or she has counseled countless people wrestling with these decisions and so will be able to help you with yours.

Henry David Thoreau said that the “price of anything is the amount of life you exchange for it.” What is “the amount of life” you are giving up until you decide that you’ve got to make a good decision and you go get the legal advice you need so that you can do so?

If you buying something on time and want to keep it, you often can do so for less money IF you bought it more than a year ago.

 

Background:

  • A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt. 
  • In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
  • If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
  • Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people. See my blogs of last week and earlier about some of these special rules.
  • But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.

Cramdown:

  • This tool applies only to Chapter 13—it can’t be done in Chapter 7.
  • If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt beyond the value of the collateral. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
  • In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 0%, then you would pay only the $600 secured portion, the remaining unsecured portion would get nothing and would be discharged (written off) at the end of your Chapter 13 case. Or if your unsecured creditors are receiving 50%, then you would pay $200 of that unsecured portion of $400, and the rest would be discharged at the end of your case. Note that you would still pay interest, but only on the secured portion instead of on the entire balance.  

THE cramdown rule with collateral other than your home or vehicle:

  • “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.

So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.

Bankruptcy saves your vehicle from immediate repossession. Whether you choose to file under Chapter 7 or 13 depends in part on how strong of a medicine you need for dealing with the back payments.

My last blog focused on ways in which Chapter 7 and Chapter 13 bankruptcy each make it possible for you to keep your vehicle by keeping your vehicle lender satisfied.  But to be very practical, today let’s hone in on one very common scenario: you’ve fallen behind on your vehicle loan, but need to keep that vehicle. What are your options?

Saved by the Automatic Stay

As you probably already feel in your gut, you’ve got to accept right away that you are in a very precarious situation. Vehicle loans are very dangerous because of how quickly the collateral—your car or truck—can be repossessed. With a mortgage foreclosure you usually have a number of major warnings, stretching over months, sometimes over a year or more. Instead, with just about all vehicle loans, you get no warning. Once you’re in default—missed a monthly payment or let your insurance lapse—your vehicle could get repossessed at any time. Realistically, most repossessions do not happen until you’re about 2 months late. But that depends on your payment history, the overall aggressiveness of the creditor, and, frankly, how the repo manager happens to be feeling that day. If you’re not current, you’re in danger.  

Once a repossession happens, that does not always mean that your vehicle is gone for good. But in many situations that IS the practical result. To get a vehicle back after a repo usually takes serious money. Money you don’t likely have hanging around if you’re behind on your car payments.

And once the repo happens, thing’s often just get worse—your vehicle is sold at an auction, and you often end up owing thousands of dollars for the “deficiency balance,” the difference between what the vehicle was auctioned off for and the amount you owed on the loan (plus repo and sale costs). Next thing you know, you’re being sued for those thousands of dollars.

All that is preventable, IF you file either a Chapter 7 or Chapter 13 bankruptcy BEFORE the repossession. The “automatic stay”— a legal injunction against repossession—goes into effect instantaneously upon the filing of bankruptcy. Even if the repo man is already looking for your vehicle to repo, once you file that gets you off his list. At least for the moment.

Dealing with Missed Payments under Chapter 7

As stated in the last blog, most vehicle lenders play a “take it or leave it” game if you file a Chapter 7 case. If you want to keep the vehicle, you must bring the loan current quickly—usually within about two months after filing.  Unless your lender is one of the relatively few  that are more flexible, you need to figure out if not paying your other creditors is going to free up enough cash to catch up on your missed payments within that short time. If not, the lender will have the right to repossess your vehicle if you are not current the minute the Chapter 7 case is completed, usually about 3 months after it is filed. In fact, you may have even less time if the lender asks the bankruptcy court for permission to repossess earlier.  

Dealing with Missed Payments under Chapter 13

You have much more flexibility about missed payments under Chapter 13. In fact, you do not need to catch up on them at all.

There are two scenarios, alluded to in the last blog.

If your vehicle is worth at least as much as your loan balance OR if you entered into your vehicle loan two and a half years or less before filing the case, than you will have to pay the entire loan off within the 3-to-5-year Chapter 13 plan period. Depending on the amount of the loan balance, that may or may not mean a reduction in monthly payments. Sometimes it could even mean an increase in payments.

If your vehicle is worth less than your loan balance AND you entered into your vehicle loan more than two and a half years before filing the case, then you can reduce the total amount to be paid down to the value of the vehicle. With this so-called “cramdown,” you still must pay that reduced amount within the life of the Chapter 13 plan. And you may need to pay a portion of the remaining balance, primarily based on whether you have extra money in your budget to do so. But the savings in terms of both the monthly payments and the total amount to be paid are often huge.

Conclusion

Bankruptcy stops your vehicle from being repossessed, and gives you options for dealing with previously missed payments. Chapter 7 may work if you can pay off the entire arrearage fast enough. Otherwise you may need the extra help Chapter 13 provides. Or you might want to file Chapter 13 to take advantage of the “cramdown” option if that applies to you, after also weighing all the other considerations between Chapter 7 and 13.  

Under Chapter 7, you can pay your vehicle loan mostly by getting rid of all or most of your other debts. Under Chapter 13, you can pay your vehicle loan ahead of most of your other creditors.


Bankruptcy law is all about balancing the rights of debtors and creditors. When you file bankruptcy you gain a lot of leverage against your creditors. But exactly how much leverage depends on the kind of debt and certain crucial details about it. With a vehicle loan, you get much less leverage than with some other types of debts because the lender has a right to its collateral–your car or truck. But if you want to keep your vehicle, you can often use the lender’s rights over your collateral to your advantage.

That’s because bankruptcy is also about sorting out the rights of the creditors among themselves. So if you WANT to keep your vehicle, you are able to favor that vehicle lender over most of your other creditors.

Let’s see how this works under Chapter 7 and then under Chapter 13.

Favoring your vehicle loan in a Chapter 7 “straight bankruptcy”

Between you and the vehicle lender, your leverage is that you have the right to simply surrender your vehicle to the creditor and pay nothing. The bankruptcy discharges (writes off) any remaining debt. Usually the lender does not get paid enough from selling the vehicle to cover the full balance on the debt—especially after accounting for the costs of repossession and resale.  Rarely the vehicle is worth more than the loan balance, such as towards the very end of a loan term, when the balance is low and the vehicle has retained some value. But, most of the time a vehicle depreciates faster than the balance goes down. So the lender usually loses money on a surrender.

This means that sometimes we can use the threat of surrender to improve the vehicle loan’s terms, maybe even reduce the balance to an amount closer to the current fair market value of the vehicle.

But unfortunately, most major vehicle lenders don’t see it that way. They made a decision at some point that they make more money by requiring all their Chapter 7 customers to pay the full balance on the vehicle loans, and then take losses on those who aren’t willing to do that and instead surrender their vehicles. Talk with your attorney about whether your creditor is one which will require you to stick to the contract terms, or instead one who might be more flexible.

As between your vehicle lender and your other creditors, in a Chapter 7 case you will likely be able to discharge the debts of most or even all those other creditors. The vehicle lender has leverage—its lienholder rights against the vehicle that you want to keep—greater than most of your other creditors. With the exception of other creditors which have other collateral you want to keep, and those relatively few creditors whose debts aren’t discharged in bankruptcy, during and after filing the Chapter 7 case you will be able to focus all of your financial energy on paying the vehicle loan.

Favoring your vehicle loan in a Chapter 13 “payment plan”

Between you and the vehicle lender, your leverage is both lesser and greater under Chapter 13 than under Chapter 7.

You have less leverage in threatening surrender if your Chapter 13 plan is paying anything to your unsecured creditors. That’s because the vehicle lender would recoup from you at least some of its losses upon surrender, instead of none.

And if your vehicle loan is two and a half years old or less, if you want to keep the vehicle you must pay the full balance of the loan, regardless of the value of the vehicle compared to the loan balance.  

But you have more leverage in two ways. With any vehicle loan, including those two and a half years old or less, you do not have to cure any arrearage, and can change the monthly payment, as long as the balance is paid in full by the end of the case.

And if the loan is more than two and a half years old, you can do a “cramdown”—reduce the amount you pay to the fair market value of the vehicle, plus whatever percentage you’re paying to the pool of unsecured debt, if any.

As between your vehicle lender and your other creditors, in a Chapter 13 case if you want to keep the vehicle and you follow the above rules, most of your other creditors generally can’t object to how much you’re paying for the vehicle instead of to them. Other creditors secured by other collateral have their own rights to their collateral, and whatever payments arise from that. And “priority” creditors are generally entitled to be paid in full. And there are other rules you must follow in Chapter 13. But unless the vehicle you want to keep is unreasonably expensive, or is an unnecessary extra vehicle, you will be allowed to make the required payments so that you can keep it.

 

In bankruptcy, are you allowed to favor: 1) creditors with collateral, so that you can keep the collateral; 2) creditors toward whom you have special loyalty; and 3) creditors who have extraordinary leverage against you?

When clients first talk with me about filing bankruptcy, they are often very concerned about what will happen to debts that they want to keep paying. In fact sometimes people believe that bankruptcy is not a serious option for them because they are afraid of what will happen with these debts that are so important to them. As their legal counselor, my job is to respect and understand these fears.  Then I can make recommendations about how to best deal with these debts.

These special debts fall into three categories.

1. Debts You Care About Because of Crucial Collateral

Before getting to the point of seriously considering bankruptcy, you may have been doing everything possible to keep current on your home or vehicle. You may have made the decision that holding on to your home for the sake of your family is your absolutely highest priority. Or you may feel the same way toward your vehicle, because you need to be able to get to work and/or to keep your family or personal life sane.

Chapter 7 and Chapter 13 both have ways that you can help keep your home and vehicles. Sometimes these involve not paying other creditors so that you can pay the mortgage or vehicle loan. In other situations you may be able to keep your home and vehicle while paying significantly less to do so. Overall, bankruptcy usually allows you to focus your limited financial resources on these kinds of debts if they are your highest priority.

2. Debts You Care About Because of Moral Obligation

Many of my clients feel different levels of loyalty to different creditors. Some even feel guilty about feeling that way. But it is perfectly human to feel differently about a personal loan owed to a family member than about a credit card balance owed to a national bank. Or how you feel towards a medical debt owed directly to your long-time family doctor compared to how you feel towards a debt that is now at a second or third collection agency and you don’t even know which medical provider they are collecting for. 

If you feel an absolute moral obligation to pay a debt regardless whether or not you file bankruptcy, there are safe ways to do so and very dangerous ones. I’ll tell you about this in an upcoming blog. In any event, be sure you tell your attorney about this because it can effect whether you file a Chapter 7 or a Chapter 13 case, and sometimes also the timing of your filing.

3. Debts You Care About Because of Extra Creditor Powers

Although one of the most basic principles of bankruptcy law is that your creditors must be treated equally, the more accurate version of that principle is that legally equal creditors must be treated equally. And because the law is filled with legal distinctions among creditors, some debts are more dangerous than others, both inside and outside of bankruptcy. You may well have heard about or directly experienced the extraordinary collection powers of the taxing authorities, support enforcement agencies, or student loan creditors, for example. You may also be aware that some debts cannot or might not be written off in bankruptcy. Understandably you’re concerned what will happen with these debts if a bankruptcy won’t help you with them.

The reality is that usually a bankruptcy will help you with even the most aggressive creditors, even those whose debts will not be discharged. Almost always there are sensible ways to deal with these special creditors. Sometimes it involves using the bankruptcy system’s own substantial powers to gain important advantages over these creditors. Sometimes it involves reasonable payment arrangements after completing a Chapter 7 case, when you have no other debts. Sometimes it involves directly favoring these creditors by paying them before or instead of other creditors in a Chapter 13 case, while under continuous protection from the bankruptcy court. Overall, usually bankruptcy provides you a manageable way to handle these legally favored creditors.

The next few blogs will give you specific information on how bankruptcy can help you keep valuable collateral, satisfy your moral obligations, and deal with your most aggressive creditors.

Three ways bankruptcy can help: 1) write off debts to focus on defense costs, 2) pay only the most important debts and expenses, and 3) reduce chance of related civil liability.

 

As discussed in the last blog, criminal fines, fees and restitution are almost never discharged in any kind of bankruptcy case. And yet if you’re facing a serious criminal charge, or have already been convicted, bankruptcy can still be hugely helpful.

If you’re charged with a crime, you need financial resources to pay for your legal defense. You need to be able to focus financially and emotionally on fighting the criminal charge. And then, if you do not win a complete acquittal, you have to figure out how you will pay whatever criminal fines, restitution, or other court and probation fees that the court orders as part of your criminal sentence. So you have to choose what your highest financial priorities are. Because of the grave potential consequences, that usually means paying for a defense attorney, and then paying whatever the criminal court requires of you.   Bankruptcy can help in this by re-prioritizing your debts and expenses, and protecting you from your creditors.

1. Bankruptcy can help by writing off all or most of your debts so that you can focus both your attention and your finances on the criminal charge(s) or their aftermath.

Right after you’ve been charged with a crime, unless you indigent and financially qualify for a public defender, your highest priority must be to pay for your criminal attorney and any related costs of your defense. That may mean selling assets, and/or surrendering collateral to creditors, like a vehicle with high monthly payments. And you may need to stop paying all your creditors.  Often the cleanest way to reduce your debt load is with a Chapter 7 bankruptcy. In the right circumstances it provides the financial relief you need.

After your criminal case is resolved, especially if you had to serve a jail sentence, you’ve probably had a gap in your income, or now have a job with lower income. You often have continuing financial obligations to the criminal justice system that you must absolutely pay because your release or probation is conditioned on you doing so. These can include restitution payments, probation/supervision fees, treatment costs, community service fees, and/or chemical and electronic monitoring charges. A bankruptcy can clean up your debts so you can pay these criminal fees and avoid re-incarceration. The last thing you need is some ancient creditor garnishing your wages or bank account so that you can’t meet your criminal obligations.

2. Bankruptcy can help you prioritize your debts and expenses so that you can keep paying the ones most important to the criminal conviction against you.

Sometimes the criminal court imposes other kinds of conditions on you which directly require you to keep current on certain of your debts or expenses, beyond the court and probation fees referred to above. Depending on the nature of your offense, you may be required to keep absolutely current on your child support payments, or file and pay income taxes on time, or always maintain vehicle insurance. A bankruptcy can make all the difference allowing you to fulfill such make-or-break commitments.

Also, your criminal sentence or terms of probation often require you to show up at certain scheduled events—to do your community service, attend probation meetings, or just maintain regular employment. All require reliable transportation. If you cannot make your vehicle payments or pay for vehicle insurance, or at least pay for public transportation, you will not be able to meet these conditions. A Chapter 7 or Chapter 13 bankruptcy may be the best way for you to be able to pay for these necessities.

3. Alleged criminal behavior often results in the threat of civil liability by the injured party. Filing bankruptcy might, under certain circumstances, dissuade that party from filing a lawsuit against you, or lead to a quicker settlement if a lawsuit has already been filed.

Bankruptcy law does make it difficult for you to discharge debts or claims that you may owe for personal injuries or financial damages resulting from certain kinds of allegedly criminal behavior. But, nevertheless, for the following practical reasons a bankruptcy may still help:

a. In a bankruptcy, you must present your financial circumstances in detail, in writing, under penalty of perjury. You are also questioned under oath about them, at least briefly, and potentially in depth. Although that may not sound like a lot of fun, taking the initiative to show that you have no assets may convince the other party—or may more importantly, his or her attorney—that pursuing you would not be financially worthwhile.

b. The other party has to jump through some relatively difficult hoops to establish that the debt or claim should survive beyond your bankruptcy case. Depending on the situation, this may dissuade him or her from spending lots of attorney fees on a difficult battle.  

c. With certain kinds of alleged damages, the other party has a very short amount of time to decide whether to pursue you or not. Some may simply miss the quick deadline. Or it may encourage a quicker settlement.

Whether a bankruptcy filing will give you an advantage along these lines is a very delicate tactical question that needs to be very carefully discussed with and analyzed by your attorney. But it is certainly worth considering.

The most practical questions you likely have if you are considering bankruptcy is what it will do to each of your debts. Will you still owe anything to anybody? What about debts you want to keep like a vehicle loan or mortgage? How to handle special debts like income taxes and child support?

To understand bankruptcy you need to understand debts. One of the most basic principles of bankruptcy is that it treats all creditors in the same legal category the same as all the other creditors in that category. So the first step in understanding debts is to understand the three main categories of debts. Not everybody has debts in each of these categories, but lots of people do. At the end of this blog, you should be able to at least start dividing your debts among these three categories. From there, bankruptcy and how it deals with each of your creditors will start making more sense.

The three categories are “general unsecured debt,” “secured debt,” and “priority debt.”

Secured Debts

All debts are either secured by collateral or not. Whether or not a debt is secured is often very straightforward, such as with a vehicle loan in which the vehicle’s title specifies your lender as the lienholder. That lien on the title, together with the documents you signed with that lender, gives that lender certain rights as to that collateral, such as the right to repossess it if you fail to make payments.

In the case of every secured debt, there is a legally prescribed way to attach the debt’s collateral to the debt. In the case of the vehicle loan, the lender and you have to jump through certain hoops for the lender to become a lienholder on the title. If those aren’t done right, the vehicle might not attach as collateral to your loan.

Debts can be fully secured or only partially secured. If you owe $10,000 on a vehicle worth only $8,000, the debt is only partially secured—secured as to $8,000, and unsecured as to the remaining $2,000 of the debt.

Debts can be voluntarily or involuntarily secured. Examples of the latter are judgment liens on your home, IRS income tax liens on all your personal property, and a mechanic’s or repairman’s lien on a vehicle that’s been repaired and the repair bill not paid.

General Unsecured Debts

All debts that are not legally secured by collateral are simply unsecured debt. And “general” unsecured debts are simply those which do not belong to any of the categories of “priority” debts (discussed below). So general unsecured debts are the default category—if a debt is not secured and not a priority debt, it’s a general unsecured one. They include every imaginable type of debt or claim. Common ones include most credit cards, essentially all medical bills, personal loans without any collateral, bounced checks, most payday loans (although those sometimes have collateral), unpaid rent and utilities, balances left over after a vehicle is repossessed, many personal loans, and uninsured or underinsured motor accident claims against you.

Sometimes debts which were previously secured can become general unsecured ones, and vice versa. An example of the first: once you’ve surrendered all the collateral—such as a vehicle on a vehicle loan—any remaining debt is general unsecured. And an example of the second: a general unsecured medical bill can become secured after a lawsuit is filed against you and a judgment entered, resulting in a judgment lien attached to your real estate.

Priority Debts

Just like it sounds, priority debts are special ones that the law has selected to be treated better than general unsecured debts. In fact, there are very specific levels of priority among all the priority debts.

It’s all about who gets paid first (which often means who gets paid at all). This comes up in two main ways.

First, most Chapter 7 cases don’t involve the trustee receiving any of your assets for distribution to your creditors. But in those cases where there are non-exempt assets, the priority creditors are paid in full before the general unsecured ones receive anything. And the higher priority creditors are paid in full before the lower priority ones.

Second, in a Chapter 13 case, your formal plan has to show that you will pay all priority debts before the completion of your case, and then you must in fact do so before you are allowed to finish it.

The most common priority debts for consumers or small business owners are the following, in order starting from the highest priority:

• child and spousal support—amounts owed as of the time of the filing of the bankruptcy case

• the administrative costs of the bankruptcy case—trustee fees and costs, and in some cases attorney fees

• wages and other forms of compensation owed to employees—maximum of $10,000 per employee, for work done in the final 180 days before the bankruptcy filing or close of business, whichever was first

• certain income taxes, and some other kinds of taxes—some are priority but others are general unsecured if they are old enough and meet some other conditions

In the next blog I’ll get more into how debts in each category are treated in Chapter 7 and Chapter 13.

 

One good reason that people filing Chapter 7 don’t lose any of their stuff to the bankruptcy trustee—if they did have something to lose, they  likely file a Chapter 13 instead. How does Chapter 13 protect what you’d otherwise lose in a Chapter 7 “straight bankruptcy”?

As I said at the beginning of my last blog, protecting assets that are collateral on a loan—like your home or vehicle—is a whole different discussion than protecting what you own free and clear. Chapter 13 happens to be a tremendously powerful tool for dealing with secured creditors—especially with homes and vehicles. But that’s for later. Today I’m talking about using Chapter 13 as a way to hang onto possessions which are worth too much or have too much equity so they exceed the allowed exemption, or simply don’t fit within any available exemption.

Right off the bat you should know that if you have possessions which are not exempt, you may have some choices besides Chapter 13. You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need.  There are also some asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures well beyond what I can cover today.

But depending on your overall situation, if you have an asset or assets which you really need (or simply want to keep), you can file a Chapter 13 and keep that asset by paying for the privilege of not surrendering it.  You do that by paying to your creditors as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee. But you have 3 to 5 years to do that, while you are under the protection of the bankruptcy court. Your Chapter 13 Plan is structured so that your obligation is spread out over this length of time, making it relatively easy and predictable to pay (in contrast to, for example, negotiating with a Chapter 7 trustee to pay to keep an asset).

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset. Often people with assets to protect have other reasons to be in a Chapter 13 case, and the asset protection feature is just one more benefit. And believe it or not, depending on the amounts and nature of your assets and debts, you may be able to hang onto your non-exempt assets in a Chapter 13 case without paying anything more to your creditors. This tends to be more likely if you owe taxes or back support payments. One of the biggest advantages of Chapter 13 is that it can play your financial problems—like having too much assets and owing back taxes—against each other. So that you get an immediate solution—assets protected right away and the IRS off your back–and a long-term solution, too—assets protected always and IRS either written off or paid for, until you’re done and are free and clear.