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More income taxes and credit card debts can be discharged (written off) by tactically delaying bankruptcy. See an attorney to do this right.
Last week we introduced the idea that many of the laws about bankruptcy are time-sensitive. When your case is filed can have significant consequences. Last week we focused on the how timing can affect whether you can file a Chapter 7 case or are forced to do a Chapter 13 one. Today we address how timing of a bankruptcy filing can effect what debts can be discharged.
1. Most Income Taxes Can Be Discharged, with the Right Timing
Federal and state income taxes are forever discharged if you meet a number of conditions. Two of the most important of these conditions are met by just waiting long enough before filing your bankruptcy case:
For example, assume a taxpayer owes $10,000 to the IRS for the 2009 tax year. She had asked for an extension to file that year to October 15, 2010, but then did not actually file that tax return until October 31, 2011. The above 3-year condition is met after October 15, 2013, because that is three years after the tax return was due. But the 2-year condition has to be met as well, which would not occur until after October 31, 2013, two years after the actual tax return filing date. So filing a bankruptcy case on or before October 31, 2013 would leave that $10,000 tax debt still owing; filing on November 1, 2013 or after would result in it being discharged forever. Simply waiting this one day makes a difference of $10,000.
2. Recent Credit Card Purchases and Cash Advances More Easily Challenged
If a person incurs a debt without intending to repay it, that creditor can challenge the person’s ability to discharge that debt. It’s considered fraudulent—incurred with the intent to cheat the creditor.
Along the same lines, a debt that was entered into a very short time before the person files bankruptcy understandably leads the creditor to wonder if the person already intended to file bankruptcy at the time of that debt. The law takes this situation and creates a “presumption”: under very specific facts, recent credit card purchases and cash advances are “presumed” to be fraudulent. This presumption does not necessarily mean that that particular portion of the debt is not discharged, but that the creditor has a much easier time making that happen.
Here are the specific facts creating the presumptions. The law says that purchases on a single credit card totaling more than $650 made within 90 days before filing bankruptcy are “presumed” not to be dischargeable. Same thing with cash advances on a single account totaling more than $925 made within 70 days before filing bankruptcy.
As shown in our discussion about income taxes above, a delay in filing the bankruptcy case can also work to your advantage with these presumptions. We can avoid giving a creditor the benefit of these presumptions two ways. First, if possible do not use any credit or make any cash advances in the few months before filing bankruptcy—or certainly no more than the stated threshold dollar amounts on any single credit card. Or second, if you’ve already made such purchases and/or cash advances, we could simply hold off filing bankruptcy until the indicated 70-day and 90-day presumption periods have passed.
Be aware that while doing these would solve the presumption problem, a creditor could still challenge the debt’s discharge. But it needs to have evidence that you incurred a debt which you did not intend to pay, or that there was some other kind of fraud or misrepresentation. But because proving such bad intentions is difficult, such challenges without the benefit of a presumption are relatively rare.
So as long as you avoid filing bankruptcy within the 70/90 day presumption periods, you will significantly reduce the chance that the creditor will challenge the discharge of its debt.
Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.
Timing Does Not Always Matter Much, But It CAN Be Huge
Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.
It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.
Today’s blog post covers the first one of those potential timing advantages.
Being Able to Choose between Chapter 7 and Chapter 13
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.
To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.
The “Means Test” Income Calculation
What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.
So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.
Conclusion
Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.
The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided.
Not responding to a lawsuit by a creditor can harm you in more ways than you think.
Three Different Sets of Reasons
Judgments can harm you in three distinct ways:
1) Give the creditor powerful collection tools against you to collect the debt.
2) Force you into filing bankruptcy when it’s not to your best advantage.
3) Makes it harder sometimes to discharge (write off) the debt later in bankruptcy.
Today’s blog addresses the first one of these. The other two will be covered in my next blogs.
The Temptation to Let a Lawsuit Turn into a Default Judgment
Most lawsuits filed by creditors and collection agencies to collect debts result in judgments against the people being sued. That’s because the main allegations in most of these lawsuits simple argue that the debt at issue is legally owed. And that’s usually not in dispute. So the people being sued understandably figure that there’s no point in responding to allegations that appear to be true.
Practically speaking, most of the time the people being sued are at the end of their financial rope. So they believe that they can’t afford to hire an attorney to find out what their options are, or the consequences of doing nothing.
What ARE the Consequences of Doing Nothing?
You may know that a judgment gives a creditor the right to garnish your wages and bank accounts. You may believe that you can prevent such garnishments from happening to you by keeping your money out of bank accounts and by being paid other than a regular wage or salary (although even those are not practical options for most people). Perhaps, but the “judgment creditor” usually has other rights against you once it gets that judgment.
The laws differ state by state, but generally a judgment becomes a lien against any real estate you own, or will own in the future. Depending on the facts and applicable law, the creditor may then be able to foreclose on that real estate to get its debt paid. Think about not only property under only your own name, but also your rights to property held jointly with a spouse, parent, or through a trust or estate.
An aggressive creditor usually has other tools available. In most states it can get a judge to order you to go to court to answer questions under oath about what you own so that the creditor can find out what it can take from you. The creditor may be able to get a court order sending a sheriff’s deputy to your home or business to seize some of your possessions for payment of the debt. If someone owes you any money (or anything else), that person can be ordered to pay that debt to the creditor instead of to you.
Similarly, if you own a business, the creditor can force your customers to pay it instead of you. This can be devastating both to your cash flow and to your business reputation. Your business could even be subjected to a “till tap”: a sheriff’s deputy arriving at your place of business to take money directly out of the cash register to pay towards the judgment debt.
Will These Happen to You?
We don’t want to give the impression that these kinds of aggressive collection procedures are used in most cases, or will necessarily be used in yours. Some of these are unusual, taking a fair amount of extra work and fees for the creditor or its attorney, and so likely won’t happen in most simple collection cases. The point is that once creditors have a judgment against you, they have many powerful options against you. We meet all the time with distressed new clients who have been shocked at how creditors with judgments against them have been able to financially hurt them.
Why See an Attorney If You Have No Defense to the Debt?
Flying blind is scary and dangerous. Getting sued and not knowing the potential consequences of just letting the creditor win is like flying blind. Besides potentially finding out about possible defenses to the lawsuit, consulting an attorney gives you the opportunity to consider your broader financial situation, and your options for addressing it. A lawsuit by a creditor is usually a symptom of a broader problem. By consulting with a knowledgeable attorney, you may learn about potential solutions to both the lawsuit AND the rest of your financial problems.
Please visit our website again for the next two blogs about the other very important reasons why you should not allow a creditor to take a default judgment against you.
If you’re under financial pressure to sell your home, first get legal advice about your options. Because you need it. And it’s free.
When it comes to selling your home, it is only sensible to know all your available options before you act. That’s especially true if you’d rather not sell the home, but are doing so because you believe you have no choice.
This is the last in a series of blogs about why you should get advice from a bankruptcy attorney before rushing to sell your home. Review the last several blogs to see how the bankruptcy laws can save you tremendous amounts of money and give you tools to do what would otherwise be impossible, with you house and otherwise.
So maybe there ARE some better options. You may be able to keep your home, or to sell it when it’s better for you and your family to do so.
Not Being Able to Afford an Attorney
If you are under serious pressure from creditors, you would be quite sensible to assume that you could not afford to pay for an attorney to get legal advice about your options. But that is not true, because, as you may have seen in this website and others, many attorneys provide a free consultation meeting just for that purpose.
But Isn’t There a Catch?
You may also sensibly figure that you don’t get something for nothing. So you think there’s got to be a catch. You may wonder if you’ll be forced to hire the attorney you meet with, and to do what he or she tells you to do, such as to file bankruptcy.
But the truth is that all licensed attorneys are ethically and legally bound to provide accurate legal advice to their clients. What is often misunderstood is that this is true regardless whether or not you are paying the attorney for that advice. For an attorney to advise you to take some action—such as to file a certain type of bankruptcy—if that is not in your own best interest could both jeopardize that attorney’s license to practice law and expose him to a malpractice lawsuit.
Similarly, the decision whether or not you should file bankruptcy, or pursue any other legal option, is one that an attorney cannot legally or ethically make for you. He or she can make recommendations, and show the benefits and detriments of certain options, but in the end it’s your decision. If you ever feel pushed against your will into any decision by any attorney, stop working with him or her.
Still, How Can Attorneys Not Charge for the Consultation Meeting?
The reason that attorneys find it worthwhile to provide free initial consultations is that, because of the population of people who see bankruptcy attorneys, and the benefits provided by bankruptcy law, a certain percentage of these consultations WILL result in the client deciding to hire them, soon or later, for filing bankruptcy or some other purpose. For the attorneys it’s a combination of sensible marketing and public service.
The Good Result for You
The bottom line for you is that this gives you the opportunity to get valuable legal advice for free.
You DO need to be a careful consumer, as with any important purchase decision. Use the initial meeting to gauge whether the attorney appears knowledgeable, trustworthy, and approachable. Does the attorney take the time to understand your situation, and are your questions answered clearly? Is the attorney respectful of you? Do you feel comfortable with the attorney and others in his or her office?
If you are very comfortable with the first attorney you meet with, fine, but otherwise be prepared to take the time to meet with one or even two others. Your time is valuable, but this effort is worthwhile considering what is at stake. Besides likely being your biggest asset, your home also your biggest debt. Instead of making decisions about it in the dark, you deserve to have the best possible game plan for it.
Falling behind on property taxes is serious, but not necessarily reason to rush off and sell your home.
This continues a series of blogs about why you should get advice from a bankruptcy attorney before selling your home while under financial pressure, this one particularly on getting behind on property taxes.
Property Tax—the Superior Lien
Your local property tax agency is generally the first lienholder on your home. It comes ahead of your mortgage, and anything else like judgment and income tax liens. The property tax agency has a right to foreclose on your property, and because of its superior position on the title can foreclose out even your mortgage lender. As a result, if you fall behind on property taxes, at some point the mortgage lender will usually pay the property tax to avoid losing its lien on your property.
Most mortgage documents specifically give the mortgage lender the right to pay the property tax, to add that amount to what you must pay the mortgage lender, and to start its own foreclosure against you for not paying the property taxes. That’s true even if you are current on the mortgage payments themselves, although most people have by that time also fallen behind on their mortgage. (If you are paying your property taxes in the “escrow” portion of your monthly mortgage payment, then of course you are simultaneously falling behind both on your mortgage and property taxes.)
The Temptation to Sell
So by the time you miss a payment in property taxes you are likely in serious financial trouble, and understandably may decide that you should sell your home quickly to get any of your equity out of it. And regardless whether you have any equity, you may figure you should sell, on a short sale if necessary, to prevent the home from getting foreclosed, by either the property tax agency or your lender.
Maybe that is your only choice. But maybe not.
Bankruptcy As Medicine for a Property Tax Debt
Bankruptcy can give you some powerful medicine to deal with property taxes. A Chapter 13 “adjustment of debts” in particular can give up to five years to catch up on your property taxes, while freezing both your lender’s and property tax agency’s foreclosures throughout that time. Through your Chapter 13 plan, you could earmark payments to flow relatively quickly towards catching up on your property taxes, and to your mortgage—even ahead of any back income taxes and virtually all your other creditors. Your budget would include money to pay the ongoing property taxes (and mortgage), ahead of most or all your prior creditors. So at the end of your Chapter 13 case you would be current on your property taxes and your mortgage, and otherwise debt-free.
If instead of keeping your home you do need to sell it, Chapter 13 can enable you to do so later instead of immediately. You can get more market exposure, have time to make needed repairs, or begin your sale during a better time of year. Or you may even be able to delay selling for several years until you get to a better time to do so for your family’s needs, or perhaps until the property’s value has increased.
Sell Only If, and When, It’s Right to Do So
There’s no question that falling behind in property taxes is not good, and may well be a sign that you cannot keep the property long term. But that depends on all your circumstances. Given the power of bankruptcy—both to buy time before selling and maybe to save you from needing to sell at all—it only makes sense to find out what bankruptcy may be able to do for you.
If under financial pressure to sell your home, bankruptcy law can surprise you with ways to keep your home or sell it on your own schedule.
When it comes to selling your home, it is only sensible to know all your available options before you act.
This is the third in a series of four blogs about why you should get advice from a bankruptcy attorney before rushing to sell your home. It is so easy to make false assumptions about your options, and feel like you have to act in a certain way because of those assumptions. This often happens when you are under financial pressure, you think you need to act quickly, and the last thing on your mind is to question your assumptions. Well, maybe there ARE some better options. Consider the following two situations:
1. If You Need to Sell to Avoid a Foreclosure:
You likely know that filing a bankruptcy case stops a foreclosure. But that’s just the beginning. Bankruptcy law provides a wealth of tools for helping you keep your home, or to buy extra months or even years before needing to sell. If you have a second mortgage, you may be able to avoid paying most of it, potentially saving you tens or even hundreds of thousands of dollars. If you have a judgment lien, or tax or support lien, if you are behind on property taxes, or many months behind on your mortgage payment, in all these situations bankruptcy may be able to help in ways better than you thought possible. You may even be able to take advantage of property values that are finally climbing in most markets, by staying in your home permanently or long enough for it to regain some of its value.
The reality is that every homeowner who is facing a foreclosure has a unique set of circumstances. You need and deserve an individual analysis. Bankruptcy can often give you many different combinations for solving your personal home challenges, so you need to find out what will best fit your own goals.
2. If You Need to Pay off Your Ex-Spouse:
Divorce is so often so traumatic. Even in relatively non-antagonistic ones, emotions can cloud your judgment and memory. Your legal obligations about your property and your debts can get fuzzy.
So you may understand that your divorce decree says you are required to sell the marital home to pay off your ex-spouse. But that obligation might be changed through bankruptcy law. Most obligations that you owe arising from a divorce are not written off by a bankruptcy. But some are. And even those that are not written off, bankruptcy can affect the timing of payment or favor you in other ways.
Practically speaking, even if during your divorce you got some advice about how a possible future bankruptcy filing would affect the terms of your divorce, you may not remember that advice, or not remember it accurately. You had other things crowding your mind. You may not have even gotten correct advice, or complete advice, about all your options. Many—maybe even most—divorce attorneys do not know bankruptcy law well enough to give you the complete picture. Plus circumstances could have changed in the meantime. So now, before you sell your home to pay off your ex-spouse, get current and thorough advice about your options from a competent bankruptcy attorney.
Please come back next week for the final blog in this series. Thank you for visiting.
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