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When you file bankruptcy, you will likely only deal with one trustee. Who are the other two, and why do they matter?
The three trustees are: the Chapter 7 trustee, the Chapter 13 trustee, and the United States Trustee.
They’ll be introduced today in this blog, and discussed in more detail in upcoming ones.
The Chapter 7 Trustee:
His or her primary job is to determine whether everything you own is “exempt”—protected from the creditors, and if not, to collect the assets that are not exempt, sell, and distribute their proceeds to your creditor.
Does this by reviewing your documents and asking questions at your Meeting of Creditors. Has the right to investigate further, such as by reviewing the public record, questioning others, although seldom does so.
Can also pursue “fraudulent transfers” or “preferences”—money or assets you either gave or sold to someone, or that creditors took from you, but only within a certain amount of time before your bankruptcy case was filed.
The Chapter 13 Trustee:
His or her primary job is to determine if your proposed Chapter 13 Plan meets legal requirements, and if not can raises objections to the court, but also works with your attorney to adjust your Plan to satisfy any such objections.
The trustee or a member of his or her staff usually presides at your Meeting of Creditors. Your Plan payments are sent to the trustee, who disburses the money to your creditors according to the terms of your court-approved Plan.
The trustee and his or her staff cannot give you legal advice, and in some respects act on behalf of your creditors, but also have an obligation to help you complete your case successfully.
The U.S. Trustee:
You may well never hear about, and hopefully you will never hear from, this trustee. They are the administrators and enforcers of the bankruptcy system.
They are part of the U.S. Department of Justice, overseen by the U.S. Attorney General. The U.S. Trustee (“UST”) appoints and supervises the panel of Chapter 7 trustees and the “standing” Chapter 13 trustees.
The UST monitors the administration of bankruptcy cases, most closely with Chapter 11 business cases. In consumer cases they are most directly involved by raising objections to the eligibility of debtors to file Chapter 7 cases.
They can, in situations of very serious abuse of the bankruptcy laws, refer potential bankruptcy crimes to the U.S. Attorney for investigation and prosecution.
The next blogs will talk about how we work with these trustees to have a smooth bankruptcy case.
Chapter 13 can be a stronger and more flexible tool for dealing with priority debts than Chapter 7.
The last blog explained how sometimes Chapter 7 can be a good tool to pay or reduce your priority debts. Priority debts are ones specially designated in bankruptcy law to be treated better than you ordinary debts.
For consumers, the most common priority debts are back child/spousal support payments and taxes. But as the last blog showed, you need to have a relatively unusual “asset” Chapter 7 case, meaning that you need to have an asset or assets that is not protected—not exempt—that you would surrender to the trustee.
It helps if when that asset is sold by the trustee the sale proceeds would be enough to pay off your priority debts, after paying any costs of sale (such as a broker’s commission) and the trustee’s fee.
Chapter 13 is much more likely to apply to your circumstances if you owe a bunch of priority debts.
Here are some ways that it is better than Chapter 7, and better than trying to pay your priority taxes or back support without any bankruptcy.
1. Be protected from the priority creditors: Tax authorities and state support agencies have been provided by law with extraordinarily aggressive collection powers against you. These often include the ability to seize your assets; garnish your wages, bank accounts, and business receivables without additional court proceedings; suspend your driving and occupational/professional licenses, and even hunting and fishing licenses.
Some of these collection efforts can even continue when you file a Chapter 7 case, and all can continue as soon as your Chapter 7 is completed, giving you just a three month or so break. In contrast, Chapter 13 stops virtually all of these collection efforts, so long as you comply with the terms of your payment plan, as well as keep current going forward.
2. Stop further accumulating interest and penalties: Usually in a Chapter 13 case, the interest and penalties on priority debt stops being added, and then is discharged at your successful completion of your case. If you have large income tax debt, this can significantly reduce the amount you would pay.
3. Get a more sensible budget: Your monthly obligation under Chapter 13 tends to be based on more realistic expenses than what the IRS or your support enforcement agency will allow..
4. Allows you to favor the priority debt over other debt: Usually you are able to and indeed must pay your priority debt ahead of and often instead of your “general unsecured creditors.” So you are able to concentrate your financial efforts on paying off the debts that are usually in your self-interest to pay anyway.
You may or may not know that all of your debts are not all treated equally in bankruptcy.
Most debts can be “discharged” (legally written-off), but some can’t be, or only in certain situations. Some debts have no collateral—they are unsecured—while other debts are secured by collateral.
A secured debt can be treated differently depending on how much the collateral is worth compared to the amount of the debt it secures, and depending on whether you intend to surrender or retain the collateral.
A handy starting point in understanding debts in bankruptcy is to divide all debts into three categories: secured debts, unsecured debts, and “priority” debts. Today’s blog is on this last category.
Priority debts are a list of special debts which Congress has decided deserve special treatment, and in certain circumstances should get paid through your bankruptcy case ahead of other debts.
For consumers this priority list only comes into play with “asset” Chapter 7 cases and with Chapter 13 cases. This blog will cover the “asset” Chapter 7 cases; the next one will cover Chapter 13.
10 Different Priority Debts
There are 10 different priority debts. They are listed in the Bankruptcy Code in order of priority. So not only do priority debts usually get paid in a bankruptcy case before debts that are not priority debts, the priority debts themselves get paid in the order that they show up on the list.
Most of the 10 different kinds of priority debts are not applicable to a conventional consumer bankruptcy. But two of them are quite common: 1) child and spousal support arrearage, and 2) tax debts of various kinds. The support debt is listed as a higher priority than taxes, and indeed is the highest one on the entire list.
Most Chapter 7 cases are “no asset” ones—all your assets are protected from creditors through “exemptions,” so you keep everything you own and nothing goes to the Chapter 7 trustee to distribute to your creditors.
But in an “asset” Chapter 7 case you own something that is not covered by any exemption, so the trustee can take, sell, and distribute its proceeds to your creditors.
If you have a particular “non-exempt” asset, perhaps something that you do not mind surrendering to the trustee, and if you owe a priority debt, a Chapter 7 case can be way to turn these to your benefit.
Most priority debts are not dischargeable in a Chapter 7 case—such as support arrearage and most debts—so it’s beneficial to have the trustee use your unprotected asset as the means to paying off or paying down a support arrearage or tax.
Here’s an illustration. Assume you own a boat free and clear with a marketable value of $4,000 that you admit that you can’t afford to keep any longer, it is not exempt, and so you would surrender it to your Chapter 7 trustee.
You owe $1,000 in last year’s income taxes, plus $2,000 in back child support. Theoretically you could have sold the boat before filing bankruptcy and paid the taxes and support, but you may not have time if you were trying to stop a garnishment or some other creditor action.
In this case, the Chapter 7 trustee would sell the boat, pay herself a trustee fee (25% of the first $5000 collected, so $1,000 here), pay first the support obligation and then the tax debt. If the boat indeed sold for $4,000, you would finish your Chapter 7 case owing neither of those priority debts, and hopefully with all your other debts discharged.
You can see by this illustration that a carefully planned Chapter 7 can be a good tool in these kinds of situations.
One of the best sources of intelligent information on bankruptcy and related topics is a blog by a bunch of law professors called Credit Slips, “A Discussion on Credit, Finance and Bankruptcy.” (Well, OK, it can get a little heady, but they’re professors, after all.)
In a blog called “Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)” Prof. Robert Lawless, had this to say:
The long-term growth in U.S. consumer bankruptcies closely tracks the long-term growth in U.S. consumer debt. When the financial crisis hit, consumer credit dried up, and outstanding consumer debt experienced unprecedented declines.
There are fewer reasons to file bankruptcy today because there was less borrowing two to three years ago.
Consumer debt also has a profound but perhaps counter-intuitive short-term effect on consumer bankruptcy rates. In the short-run, a decline in consumer credit will lead to a bump in consumer bankruptcy filings.
As people run out of options–as they become less able to put this month’s grocery or utility bills on a credit card–bankruptcy becomes a more attractive option. People can and will continue to borrow to stave off the day of reckoning.
If a lender is willing to extend credit, further borrowing is a rational decision.
The take-away from this:
1) Most debt is incurred because credit is available. So, more bankruptcies happen when more credit is granted. (The exceptions are debts not based on credit, such as lawsuits for personal injuries or other disputes.)
2) People with debt problems try to avoid filing bankruptcy if possible, so when credit is available to them they will tend to use it instead of filing bankruptcy, or at least will put off filing bankruptcy until they run out of credit. This indicates that people still generally hate filing bankruptcy, avoiding it when they can, even if it often only kicks the can further down the road.
This may sound commonsensical, but shows that the answer to the question in the title is a bit more complicated than it might seem.
The answer is that historically credit availability to consumers has resulted in higher bankruptcy filings, but a short-term increase in credit availability will lower bankruptcy filings on an immediate basis.
Is rabid partisanship and campaign money dominating national politics today? It’s mild compared to the pistol duels and banking rivalries of our founding fathers.
The history of Chase Bank goes back to 1799 with the founding of its earliest predecessor, the Bank of Manhattan Company, by a U.S. Senator and future Vice-President. He established this bank to compete against the bank that had been founded by a political rival. And then killed him five years later in a pistol duel!
Yes, the founder of the predecessor to Chase Bank was Aaron Burr, who killed Alexander Hamilton in their infamous duel in 1804. At the time Burr was Vice-President under Thomas Jefferson, but was dropped from the ticket in that year’s election. Burr and Hamilton were fierce political rivals, but business rivals as well.
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Back in 1782 Alexander Hamilton had founded the first corporate bank, the Bank of New York. According to its current successor Bank of New York Mellon’s own history, Hamilton
personally wrote the company’s constitution and, during the early years, remained the individual most actively involved in the organization. Hamilton’s economic vision and firm grasp of financial principles served the company well. Hamilton went on to become the first U.S. Secretary of the Treasury and a member of George Washington’s first cabinet.
The Bank of New York was the only major commercial bank in the new country until, according to Chase Bank’s own history
Aaron Burr, a U.S. Senator and future vice president . . . founded The Bank of The Manhattan Co. [, which] had an unusual beginning. Burr led a group of New Yorkers, including Hamilton, in obtaining a state charter for a company to supply fresh water to the residents of Lower Manhattan. At Burr’s initiative, [and in opposition to Hamilton, who then withdrew from the deal], the charter included a provision allowing the company to employ its excess capital in any activity “not inconsistent with the Constitution and laws of the United States.” Burr then used that provision to start a bank.
And the reason for their duel? Hamilton allegedly made disparaging remarks about Burr that were published in a newspaper, and which had apparently come after many similar such statements over the course of many years. When Burr demanded that Hamilton deny or recant these statements Hamilton felt he could not do so without further harming his own reputation, which had been deeply damaged earlier because of a sex scandal!
In the early 1790s Hamilton had had an affair with a married woman, and paid the woman’s husband to be allowed to continue it. He subsequently admitted the affair in confidence to the future President, James Monroe, in the midst of a Congressional investigation against governmental corruption, in order to be exonerated of possible corruption charges. Monroe later passed this information, and evidence in the form of love letters between Hamilton and his lover, to Monroe’s close friend, Thomas Jefferson, a political adversary of Hamilton. Jefferson used the information to spread damaging rumors about him. In 1797, Hamilton’s incriminating love letters were published.
Then in 1804, as Burr was leaving the Vice-Presidency (because President Jefferson opposed him for a second term), he lost an election to be governor of New York State. He lost in part because of the political opposition of Hamilton, and a statement alleged to have been made by Hamilton that Burr was “a dangerous man, and one who ought not be trusted with the reins of government.” Burr demanded that Hamilton deny or recant that remark, and other similar statements allegedly made over the course of many years. Hamilton refused to do so because of his own very delicate reputation. So Burr challenged Hamilton to a duel, which Hamilton accepted. Hamilton’s shot missed; Burr’s did not, and Hamilton died from the wound the next day.
Burr was charged with murder in New York, and in New Jersey where the duel had taken place. He escaped to South Carolina, eventually came back to Washington, while avoiding New York and New Jersey, to finish his term as Vice-President. He was never prosecuted, but lived on for more than thirty years thereafter until reaching the advanced age (for that era) of 80.
And that’s how the original founder of Chase Bank murdered the original founder of the Bank of New York Mellon.
Myth #1: Bankruptcy can’t write off taxes.
Truth: Some taxes can’t be written off. But many others CAN be through either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” This depends on a number of rather complicated factors, including the following:
So any particular tax you may owe has to be analyzed carefully with your attorney. But don’t start with the assumption that your taxes can’t be written off, or dealt with in some other favorable way.
Myth #2: Business taxes particularly can’t be written off.
Truth: Income that you pay yourself from your business is generally treated as your personal income. And particularly if your business is a sole proprietorship or a partnership, then your share of the business’ income (after expenses) flow through to you as personal income.
If your business is a corporation, then your salary or any other form of income you receive from the business is generally treated as personal income. The income tax on these various sources of “business” income can be written off just like any personal income tax from a conventional employer, depending on the same factors listed above.
If any of your taxes can’t be discharged in either a Chapter 7 or 13 case, Chapter 13 would nevertheless give you 3-to-5 years to pay those taxes, while under the protection of the IRS (and any applicable state tax authorities). Also, usually all interest and penalties which would otherwise have accumulated during this time would be waived, as long as you finished the case successfully.
Furthermore you can often pay less–and maybe even nothing—to your other creditors, allowing instead for your money to go to pay off the taxes. So at the completion of your case you would owe nothing in either taxes or any other debts.
Myth #3: Bankruptcy particularly does not help with unpaid employee withholding taxes that as an employer you were supposed to turn over to the IRS or state.
Truth: Although bankruptcy never discharges this category of taxes, in a Chapter 13 case these withholding taxes are basically treated just like other taxes that can’t be discharged, as discussed immediately above.
So you would have years to pay off those withholding taxes, all while being protected from the tax authorities, and usually with the interest and penalties not accruing.
Finally, usually you’d be allowed to pay these taxes while paying less or nothing to many of your other creditors. These are huge advantages.
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