A Simple Chapter 13 Case

If you have debts that can’t be written off (“discharged”) in a Chapter 7 “straight bankruptcy,” such as back child support or recent income taxes, Chapter 13 can be a much better alternative.

 In my last blog I wrote about the discharge of debts under Chapter 7. I ended by saying that if you have debts that can’t be discharged in Chapter 7, “Chapter 13 is often a decent way to keep those under control.” Here’s how.

The best way to show this is with an example. So let’s say you owe $6,000 in IRS debt for 2009 and 2010, $4,000 in back child support, $15,000 in credit cards, and $3,000 in medical bills. You had lost your job in 2009, tried to run a business during 2009 and 2010 that made a little money but not enough to pay its taxes and to make all your support payments. Then you got a new job a few months ago that pays less than the one you’d lost in 2009, but at least you now make enough to pay your ongoing taxes and support, and your living expenses. However, you’re left with only about $400 left over to pay ALL of your debts. That would not be enough to pay the minimums on just the credit cards, much less anything on the rest of the debts.

A Chapter 7 case would discharge the $12,000 in credit cards and the $3,000 in medical bills, but would leave you with $6,000 owed to the IRS and $4,000 in back support—so you’d still be $10,000 in debt. Although the IRS would likely be willing to accept payments of $400 per month, the problem is that the state support enforcement agency is about to garnish your wages for the back support, trashing any possible arrangement with the IRS. Also, you’re still in the probationary period at your new job and the last thing you want is for the payroll office to get a garnishment order for back child support. Filing Chapter 7 would not stop that kind of garnishment.

But Chapter 13 would. So you file a Chapter 13 case, keep up your ongoing regular child support payments, and put together a plan to pay to the Chapter 13 trustee $400 per month for 36 months. During that period of time neither the IRS, nor the support agency, nor your ex-spouse—nor any of your other creditors—would be able to take any action against you or any of your assets. That is they couldn’t as long as you consistently made your $400 payments, and kept current on your ongoing tax and support obligations. Over those three years you’d pay to the trustee $14,400 ($400 X 36 months), which would pay all the $4,000 of back support and the $6,000 in taxes—usually without any additional interest or penalties from the date of the filing of your Chapter 13 case. The Chapter 13 trustee would also get paid, usually about 5-to-10% of what you’re paying into the plan, as would any attorney fees you did not pay to your attorney at the beginning of your case.  If there is still any money left over (not likely very much in this example), that gets divided pro rata among the credit card and medical debts. After the 36 months of payments, any remaining balances on those debts are discharged, leaving you owing nothing to any of your creditors, and current on your taxes and support payments.

So that’s how a simple Chapter 13 case works.

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THE Goal of Bankruptcy: Discharge of Your Debts

Most—but not all—debts are written off, or “discharged,” in a bankruptcy case. Is there a simple way to know what will and what will not be discharged?


As part of getting a fresh start for the new year, I’m covering the most basic concepts about bankruptcy in the first few blogs of the year. And there is nothing more basic than bankruptcy’s main purpose, getting a fresh financial start through the legal discharge of your debts.

Both kinds of consumer bankruptcy can discharge debts. But most Chapter 13s tend to have other purposes as well, and the discharge usually occurs only 3 to 5 years after the case is filed. In contrast, most Chapter 7 “straight bankruptcy” cases are filed for the sole purpose of discharging debts. And in most Chapter 7 cases, all debts that the debtors want to discharge are discharged, and it happens within just three months or so after your case is filed. So I’m focusing in this blog on Chapter 7 discharge of debts.

So is there a simple way of knowing what debts will and will not be discharged in a Chapter 7 case?

Sorry. Not really.

I can give you a list of the categories of debts that can’t, or might not, be discharged (and will give you that list in a couple paragraphs), but some of those categories don’t have clear boundaries, and some depend on whether a creditor is going to challenge the discharge and how a judge might rule.

But why can’t it be simple? Because in the political tug of war between creditors and debtors over the last few centuries, there have been lots of compromises, leaving us today with a bunch of hair-splitting rules about what debts can and can’t be discharged.  Believe it or not, the original bankruptcy laws in England did not even include ANY discharge of debt, since bankruptcy was originally designed as a procedure to help creditors collect from debtors.

But I’m making it sound a lot worse than it is in practice. Here’s what you need to know:

#1:  All debts are discharged, EXCEPT for those that fit within an exception.

#2:  There ARE a lot of exceptions, BUT if you are thorough and candid with your attorney you will almost always know whether you have any debts that may not be discharged. Surprises are rare.

#3:  Some debts are never discharged, NO MATTER WHAT: for example, child or spousal support, criminal fines and fees, and withholding taxes.

#4:  Some debts are never discharged, but THAT’S ONLY IF the particular debt fits certain conditions: for example, income taxes, depending on conditions like how long ago the taxes were due and the tax return was filed; and student loans, as long as conditions of “undue hardship” are not met.

#5:  Some debts are discharged, UNLESS timely challenged by the creditor and resulting in a ruling by the judge that the debt meets certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.

#6:  A few debts (used to be many more) can’t be discharged in Chapter 7, BUT can be in Chapter 13: for example, divorce debts other than support.

The bad news: as simple as I would like to make it, determining what debts aren’t dischargeable is simply not simple. But there’s more good news than bad. First, for many people all the debts they want to discharge WILL be discharged. Second, an experienced bankruptcy attorney will be able to predict quite reliably whether all of your debts will be discharged. And third, if you have troublesome nondischargeable debts, Chapter 13 is often a decent way to keep those under control. More about that in my next blog about simple Chapter 13.

 

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“Automatic” Protection from Your Creditors

Many bankruptcy attorney ads say: “Stop garnishments.” “Stop foreclosures.” “Stop repossessions.” So bankruptcy stops all those bad things. But is it as good as it sounds? How does it really work?

 

In my last blog I said that in keeping with getting a fresh start for the new year, I’d get down to basics.  There’s nothing more basic than getting immediate protection for you, your paycheck, your home, and your possessions. You get this protection the minute a bankruptcy is filed for you, either a “straight” Chapter 7 case or an “adjustment of debts” Chapter 13 one. Other than some very rare exceptions, all efforts by creditors against you or your property must come to an immediate stop. You’ll hear this referred to as the “automatic stay.”

“Stay” is just a legal word for “stop” or “freeze.” “Automatic” means that this “stay” goes into effect simultaneously with the filing of your bankruptcy petition. That filing itself, by virtue of the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or grab collateral. It doesn’t take a judge signing an order or even any further action by you or your attorney to impose the stay.

But although the automatic stay is instantaneous, practically speaking the creditors need to know about the filing of your case so that they can abide by the stay. Assuming your creditors are all listed in your schedules of creditors, they should all get informed by the bankruptcy court within about a week or so after your case is filed, without any additional action by either you or your attorney. If you are not anticipating any action against you by any of your creditors sooner than that, usually letting them all be informed by the court is appropriate. But if do expect some quick creditor action, be sure to talk with your attorney about it so you’re both on the same page about informing that creditor.

But what if a creditor unexpectedly takes some action in the days after your bankruptcy is filed but before it finds out about it? The automatic stay is so powerful that if this does happen, the creditor must undo whatever action it took against you, even if it did not know about your bankruptcy filing. So if after your bankruptcy is filed, a creditor, for example, files a lawsuit against you or turns its earlier lawsuit into a judgment, that lawsuit must be dismissed or the judgment must be set aside.

In my next blog I’ll tell you about how long this automatic stay protection lasts. If you can’t wait until that blog, give me a call or set up an appointment to see me. I’ll tell you all about it personally.

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Getting a Fresh Start for the New Year

You’ve fallen behind with your creditors or are just about to. You’re anxious, trying to avoid thinking about it, angry that life is so tough, trying to build up the courage to face up to the realities. You wonder whether you really have any decent options, how to figure out the best one and make it happen.

 In these blogs I get into all kinds of twists and turns about how bankruptcy works. That’s because life comes with complications, and the law has evolved to address them. But now at the start of the new year, let’s get down to basics.

You’re financially in over your head. You don’t know what to do, or where to get help. To get started, you need 1) some general information and then 2) some personal advice.

1) General Information:

Different people get information differently about something important like what do about their finances. Some are more comfortable scouring through the internet. There is a wealth of information here, at all levels of sophistication. Some prefer to go to the library, or get a how-to manual or book through a bookstore or sources like Amazon.com. Some like to talk things over with trusted friends or relatives. Common sense says you have to be very cautious about all sources of information, always considering the reliability and accuracy of the source. And always remember that general rules, even if they are true, can have exceptions or may not apply to your situation for some reason. At this point you are just trying to get broadly informed about your options, and their possible advantages and disadvantages. You’re holding back on making any final judgments about which option is best because you know that the information you’re gathering is incomplete and may or may not match your own unique situation.

People are different about how much information they want to pull together before starting to act on it. Some like to do a bunch of research before going to see an attorney, others are more comfortable skipping that and just going straight to the attorney. As you can guess, I meet with people from one extreme to the other, and everything in between. So just do what feels right to you, because I can accommodate you.

2) Personal Advice:

People considering bankruptcy can be reluctant to talk with an attorney for lots of reasons. Based on my extensive experience, here are some that don’t hold water.

  • “If I see an attorney, he or she will make me file a bankruptcy”:  An attorney is legally and ethically obligated to represent YOU, and to lay out your options honestly, in an understandable way so that YOU can make an informed choice. It’s not my job to make you do anything, certainly not to file bankruptcy. Certainly I’ll tell you if you do not qualify for any particular option. And I’ll advise you why I think certain options look more advantageous than others, and may well make a strong recommendation towards a certain option. But the choice is yours.
  •  “I’m not really ready to see an attorney yet”:  There is virtually no downside to getting advice early in the process and there are many ways to hurt yourself by getting it late.  It is extremely common for people to come in to see me after they have already acted (or failed to act) in ways that were against their best interest. If on the other hand they see me earlier than necessary, they still get good advice on what they should do in the meantime and they start a relationship with me in case they want to or need to work with me later.
  • “I don’t think I can afford an attorney, and I don’t even know if I need one”:  You may be able to file a bankruptcy by yourself, or take some other appropriate action, but wouldn’t it be good to find out whether in your situation you can or should do so? My job is to give you unbiased, straight talk about your options, including what you can do on your own, how much my services would cost if you decide to hire me, and how that could be paid. There may be ways that you can afford my fees that you did not expect. We won’t know until we explore your options.
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