Keep Your Vehicle with More Time to Catch Up and a Lower Monthly Payment

What can you do if you MUST keep your car or truck, but can’t afford the monthly payments?

Or if you fell behind and just can’t catch up?

Chapter 7

A regular bankruptcy”—Chapter 7—won’t usually help in these situations.

It would only help if writing off your other debts results in you able to do ALL of the following:

1) catch up on any missed payments within a month or two of filing the bankruptcy,

2) start making the regular monthly payment on time by the next due date, AND

3) consistently pay on time all the rest of the monthly payments on the contract.

Most vehicle loan lenders—especially the major national ones—are just not flexible about any of this. If you do not have the means to catch up on any missed payments fast enough, you will generally not be allowed to keep the vehicle. If during the Chapter 7 case itself you don’t make the regular monthly payments on time, the lender may well ask the bankruptcy court for permission to repossess your vehicle even before the case is completed. And even if you get past all that, some of these lenders are quicker to repossess if you are late with payments any time down the line.

As far as lowering the payments or changing any of the other terms of the contract, very few vehicle lenders will even consider doing that.

Chapter 13

So, if you can’t meet these payment hurdles, but you have no choice but to hang on to your vehicle to commute to your job or to meet other family responsibilities, the other kind of consumer bankruptcy, Chapter 13, is worth seriously considering.

It can help two ways:

1) almost always it can give you more time to catch up if you’re behind; and

2) under certain conditions a Chapter 13 case can also—through a “cram down”—reduce your monthly vehicle payments, likely lower your interest rate, and shrink the total amount you need to pay on the loan.

Lots More Time to “Cure the Arrearage”

Instead of being stuck with catching up on any missed payments in a matter of weeks (as under Chapter 7), Chapter 13 often gives you many months or even a few years to bring your account current. A portion of your plan payments would go towards your arrearage. Generally, as long as you consistently make your plan payments and your regular monthly vehicle payments (usually also included in the plan payment) on time, and keep up on your insurance, your lender has to allow you to do this. 

 “Cram Down”

Under some conditions, you will be able to keep your vehicle without needing to make up any missed payments. Through a “cram down,” the amount you must pay for your vehicle is reduced to the value of the vehicle. The interest rate is often reduced, the length of the loan is often extended, all of which usually result in a reduced monthly payment, often significantly so.

“Cram down” only makes sense when—as is very often but not always the case—your vehicle is worth less than what you owe on it.

Bankruptcy law only allows a “cram down” if you got your vehicle loan at least two and a half years before filing your Chapter 13 case—910 days, to be precise.

Conclusion

Chapter 13 provides some extremely valuable tools enabling you to keep your vehicle. This may or may not justify filing under Chapter 13 instead of Chapter 7, but it sure means that it’s an option worth exploring with your attorney.

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I Know What My Bankruptcy Trustee Does, But How about the U. S. Trustee?

If you are about to file a Chapter 7 or Chapter 13 case, you’ve heard who your trustee is what he or she does.

In a Chapter 7 case, your bankruptcy trustee looks over your paperwork and talks with you for a few minutes at the “meeting of creditors,” primarily to determine if you own anything that is not “exempt” so that you have to surrender it to your creditors.

In a Chapter 13 case, your trustee verifies that the Plan we file meets legal requirements and tells the court if it appears not to. After that this trustee gets your monthly Plan payments and distributes them to your creditors.

The “Office of the United States Trustee” is something altogether different. It mostly works in the background, but in a rare case it can cause you problems. So it’s worth knowing what it does.

The U. S. Trustee (UST) is part of the U.S. Department of Justice, and has two primary tasks including:

1) helps the Bankruptcy Court administer bankruptcy cases, and

2) enforces bankruptcy law.

In its administrative role, the UST appoints and supervises the Chapter 7 and Chapter 13 trustees.

It oversees bankruptcy cases for administrative efficiency, and reviews and can object to fees charged by attorneys and other professionals.

In its enforcement role, the UST can get involved in two primary ways:

1) in a Chapter 7 case, object to you being in Chapter 7 and so try to “convert” your case into a Chapter 13 one; and

2) accuse you of giving inaccurate information on your bankruptcy documents or while under oath during your hearing with the trustee.

As nasty as these sound, most of the time staying clear of the UST’s enforcement arm is not that hard. Just do the following:

First, as for avoiding your Chapter 7 cases being challenged as not belonging under Chapter 7, this is mostly a matter of meeting the “means test,” a potentially complex set of income and expense disclosures.

Avoid this kind of challenge by the U. S. Trustee by working closely with your attorney before your case is filed to make sure the means test disclosures are presented accurately and that you clearly meet this test.

And second, as far as avoiding allegations of accuracy, again it’s a matter of appropriate preparation. Diligently provide your attorney with the paperwork and information needed so that all of the documents are accurate and complete.

If after all this you and your attorney still hear from the UST, most of the time the concern can be resolved favorably.

What’s crucial is to address and respond quickly to any contact from the UST, because it is dealing with some immediate legal deadlines and so will be compelled to get aggressive fast if doesn’t get fast cooperation.

You and your attorney share the goal of having your bankruptcy case go as smoothly as possible. So treat issues involving the UST carefully before filing bankruptcy, and respond right away if they do contact you during your case.

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I Know What My Bankruptcy Trustee Does, But How about the U. S. Trustee?

If you are about to file a Chapter 7 or Chapter 13 case, you’ve heard who your trustee is what he or she does.

In a Chapter 7 case, your bankruptcy trustee looks over your paperwork and talks with you for a few minutes at the “meeting of creditors,” primarily to determine if you own anything that is not “exempt” so that you have to surrender it to your creditors.

In a Chapter 13 case, your trustee verifies that the Plan we file meets legal requirements and tells the court if it appears not to. After that this trustee gets your monthly Plan payments and distributes them to your creditors.

The “Office of the United States Trustee” is something altogether different. It mostly works in the background, but in a rare case it can cause you problems. So it’s worth knowing what it does.

The U. S. Trustee (UST) is part of the U.S. Department of Justice, and has two primary tasks including:

1) helps the Bankruptcy Court administer bankruptcy cases, and

2) enforces bankruptcy law.

In its administrative role, the UST appoints and supervises the Chapter 7 and Chapter 13 trustees.

It oversees bankruptcy cases for administrative efficiency, and reviews and can object to fees charged by attorneys and other professionals.

In its enforcement role, the UST can get involved in two primary ways:

1) in a Chapter 7 case, object to you being in Chapter 7 and so try to “convert” your case into a Chapter 13 one; and

2) accuse you of giving inaccurate information on your bankruptcy documents or while under oath during your hearing with the trustee.

As nasty as these sound, most of the time staying clear of the UST’s enforcement arm is not that hard. Just do the following:

First, as for avoiding your Chapter 7 cases being challenged as not belonging under Chapter 7, this is mostly a matter of meeting the “means test,” a potentially complex set of income and expense disclosures.

Avoid this kind of challenge by the U. S. Trustee by working closely with your attorney before your case is filed to make sure the means test disclosures are presented accurately and that you clearly meet this test.

And second, as far as avoiding allegations of accuracy, again it’s a matter of appropriate preparation. Diligently provide your attorney with the paperwork and information needed so that all of the documents are accurate and complete.

If after all this you and your attorney still hear from the UST, most of the time the concern can be resolved favorably.

What’s crucial is to address and respond quickly to any contact from the UST, because it is dealing with some immediate legal deadlines and so will be compelled to get aggressive fast if doesn’t get fast cooperation.

You and your attorney share the goal of having your bankruptcy case go as smoothly as possible. So treat issues involving the UST carefully before filing bankruptcy, and respond right away if they do contact you during your case.

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The Multiple Roles of Your Chapter 13 Trustee

You’re going to spend 3 to 5 years dealing with your trustee. To have that happen as smoothly as possible, it helps to understand his or her roles.

Your Chapter 13 trustee can help you have a successful Chapter 13 case. Maybe more importantly, having a good relationship with your trustee and his or her staff increases your odds of success.

The trustee has a number of different roles, some of them somewhat contradictory.

The gatekeeper of your case: Requires you and your attorney to play by the rules—as she or he interprets them—before allowing court-approval of your Chapter 13 Plan.

Payment maximizer to your creditors: Make you pay as much as the law requires to your creditors. In this respect the trustee is the creditors’ advocate in your case.

Creditors’ disbursal agent: Receives your money and pays it out exactly as your Plan specifies.

Plan overseer: Throughout your case, monitors your Plan payments and other obligations, and raising issues with the bankruptcy court if you’re not complying.

Income monitor: During your case, verifies that you are paying all you can afford, mostly by reviewing your annual tax returns that you must provide. If your income rises significantly in a way not anticipated in your Plan, the trustee can require you to amend your Plan accounting for the increase.

Your helper: In the midst of all this, the trustee is also supposedly required to help you through the Chapter 13 case. The Bankruptcy Code specifically says that the “trustee shall—advise, other than on legal matters, and assist the debtor under the plan.”

Each trustee takes this more or less seriously. So follow your attorney’s lead on how your particular trustee can help. Most trustees do genuinely want you to have a successful Chapter 13 case, and can sometimes be a resource for getting you there.

Here’s a good final word on this, from the website of one of the Chapter 13 trustees:

“The role of the chapter 13 trustee is unique. The trustee does not take into his or her possession or control property of the estate. The trustee does not operate the debtor’s business. Rather, the trustee receives payments from the debtor, and disburses those payments to the debtor’s creditors pursuant to the debtor’s plan. The chapter 13 trustee does, however, counsel with and advise the chapter 13 debtor on all matters relating to the plan other than legal matters. In short, the chapter 13 trustee is an amalgam of social worker and disbursing agent.”

Each trustee balances these roles somewhat differently. But this gives you an idea of the balancing that they must do as they serve you and all their other constituencies.

And frankly, different trustees balance these sometimes contradictory roles differently

Chapter 13 Trustee: Determines if your proposed Chapter 13 Plan meets legal requirements, raises objections, and works with your attorney to adjust your Plan to satisfy any such objections. The trustee or a staff attorney usually presides at your Meeting of Creditors.

You send your Plan payments to the trustee (or a designated collection office), who disburses these funds to your creditors according to the terms of your Plan. The trustee and his or her staff cannot give you legal advice, but will provide you some help in completing your case successfully.

U.S. Trustee: Is part of the U.S. Department of Justice, overseen by the U.S. Attorney General. The U.S. Trustee (“UST”) appoints and supervises the group (“panel”) of Chapter 7 trustees and the “standing” Chapter 13 trustees.

Each regional UST, through a staff usually including an attorney and/or accountants, monitors the administration of bankruptcy cases, most closely with Chapter 11 business cases.

They are most often involved in consumer cases in raising objections to the eligibility of debtors to file Chapter 7 cases. In rare cases, they can refer potential bankruptcy crimes to the U.S. Attorney for investigation and prosecution.

Again, in my next blogs I’ll tell you more about each one of these trustees, especially how to avoid worrying about them by taking the right steps in your bankruptcy case.

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The Easiest Way to a Smooth Chapter 7 Case Is Cooperating with Your Trustee

The way to keep the Chapter 7 trustee happy is by making it easy for him or her to do his or her job.

The trustee has a great deal of power over your Chapter 7 case. He or she is like the traffic light governing progress in your case.

Imagine two intersections with traffic lights—the first about your assets, the second about your discharge (write-off) of debts. Most of the time, you will get through both intersections.

The trustee will want none of your assets for distribution to your creditors because they will be exempt and legally beyond the reach of the trustee.

And the trustee will raise no objections to your discharge. But you want to make sure you to get through those intersections, without any worry or delay. So our goal is two quick green lights to a successful case.

If you do not deal responsibly with your case—by communicating clearly and thoroughly with your attorney, and answering the trustee’s questions truthfully, he or she can slow you down with a yellow light or stop you with a red one.

You could lose assets that you did not expect to or, in extreme situations, lose your right to a discharge of your debts altogether.

Instead, keep the trustee happy, and turning on those green lights by:

Be Honest

Being honest and thorough with your attorney. When in doubt, raise it. If you’re concerned about something, tell your attorney. He or she is on your side, and can’t protect you when blindsided by facts you didn’t disclose.

Understand What You’re Signing

Reviewing the bankruptcy documents carefully before signing them. You are signing most of those documents under penalty of perjury. The trustee expects them to be accurate, and incomplete or inaccurate documents can cause very serious problems. If in doubt about anything on the documents, be sure to ask your attorney or his or her staff.

Provide Information Quickly

Providing whatever information or documents your attorney requests from you as quickly as possible. Some of those go directly to the trustee, Simply getting the paperwork to him or her on time avoids unnecessarily irritating the trustee.

Be Prepared For Your Meeting Of Creditors

Being completely honest with the trustee at the “meeting of creditors” (usually a short hearing with just the trustee and other folks waiting for their turn). If in doubt, ask your attorney who will be there with you.

Be Responsive To Your Attorney

Finally, doing whatever follow-up the trustee or your attorney asks of you, doing so by the deadline given.

Doing these will greatly increase your odds of getting green lights and quickly getting through your Chapter 7 case!

 

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Who Are the Three Different Bankruptcy Trustees?

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.

 

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Priority Debts in Chapter 13 Bankruptcy

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.

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What Are Priority Debts and Why Are They Important?

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.

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Do Bankruptcy Filing Go Up or Down As Credit Becomes More Available?

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.


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Business Tax Debts-the Myths and the Truth

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Bankruptcy can often help you deal effectively with business taxes. Here are three myths, and the truth exploding them.



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:



  • whether you filed a tax return for the tax year at issue
  • if so, when that tax return was filed
  • how long it’s been since that tax was first due
  • whether and when you asked to get a compromise of that tax
  • whether you tried to evade that tax in any way



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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