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5 More Kinds of Chapter 13 Medicine for Saving Your Home

Chapter 13 is extraordinary in the number of distinct ways it can solve debt problems endangering your home. Here are five more ways beyond the five of the last blog.


6. Chapter 13 “super-discharge”: You can discharge (legally write off) some debts in a Chapter 13 case that you cannot in a Chapter 7 one. A couple of decades ago there were many more kinds of debts that could be discharged under Chapter 13, but Congress has whittled away at the list steadily. Now there are two left worth mentioning here. First, obligations arising out of divorce decrees dealing with the division of property and of debt (but NOT the part dealing with child/spousal support); and second, obligations involving “willful and malicious injury” to a person or property (but NOT related to driving while intoxicated). Both of these “super-discharged” types of debts are legally complicated, and definitely need to be addressed with the help of an experienced attorney. But in the right circumstances Chapter 13 can discharge one of your most serious debts, the same one that Chapter 7 would leave you owing.

7. Nondischargeable debts such as income taxes, back child/spousal support: Special debts which cannot be discharged in bankruptcy leave you at the mercy of those creditors just a few months after you file a Chapter 7 case. Those creditors—such as the IRS, and your ex-spouse and/or the state or local support enforcement authorities—often have the power to impose tax and support liens on your home, and potentially can even seize and sell your home to pay those liens. In contrast, a Chapter 13 protects you while you pay off those special debts in an organized plan, by preventing those liens from being placed on your home. By the time your Chapter 13 case is finished, those special debts are paid in full, never to threaten your home again.

8. “Statutory liens”: utility, ”mechanic’s”/”materialman’s,” and child support liens: If before filing bankruptcy you already have one of these involuntary liens imposed by law against your home, those liens would very likely survive a Chapter 7 bankruptcy. Because the “automatic stay” that prevents the enforcement of liens expires with the completion of a Chapter 7 case, these creditors would be able to threaten your home at that point. Instead, in a Chapter 13 the “automatic stay” continues throughout the three-to-five year case, again protecting your home while you satisfy the lien.

9. Judgment liens: Unlike the other nine items in this list, judgment liens can be avoided, or removed from your home’s title, in the same circumstances under Chapter 7 as in Chapter 13. A judgment lien can be removed if it “impairs” your homestead exemption, that is, if it encumbers the equity in your home that is protected by that exemption. The reason that I list it here is that this judgment lien avoidance can sometimes be put to extra good use in Chapter 13 when used in combination with one or more of these other 9, in a way which could not happen in Chapter 7. Let’s say for example that your home equity position would allow you to remove a judgment lien, but you are so far behind on your mortgage payments that you would lose your home to a foreclosure after finishing a Chapter 7 case. Your ability to remove that judgment lien from your home title would do you no good if you’re going to have your home foreclosed by your mortgage lender a few months later. It’s the Chapter 13’s ability to give you protected time to cure that mortgage arrears that gives practical value to your power to remove the judgment lien.

10. Preserve non-exempt equity: Home property values have declined so much in the last few years that most people thinking about bankruptcy do not have too much equity in their homes. That is, if there is any equity at all, it’s protected by the applicable homestead exemption, and therefore not at risk if you file a Chapter 7 case. But IF you DO have more value in your home than allowed under your homestead exemption, Chapter 13 can often protect it. You don’t run the risk of a Chapter 7 trustee seizing it to sell and pay the proceeds to your creditors. Instead, under Chapter 13 you can often either keep the home by paying those creditors gradually over the course of the up-to-5-year Chapter 13 case, or can sell the home yourself on your own schedule. Either way, Chapter 13 leaves you much more in control of the situation.

Each one of these ten Chapter 13 powers can solve a big problem so that you can keep your home. But they can have an especially dramatic impact when used in combination. In the next blog I’ll give some examples so that you see how these ten actually work, both separately and in combination.

 

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Income Tax Refunds in a Chapter 13 Case

Chapter 13 gives you more flexibility about what you can do with your current income tax refund. But unlike Chapter 7 which doesn’t care about your future years’ refunds, Chapter 13 does.

As I said in my last blog, if you file a Chapter 7 bankruptcy after the beginning of the year, at a time when you’re still due a tax refund on the year that just passed, your trustee is going to be very interested in that refund. It’s your money that the government is simply holding for you until you claim it.  That’s true even if you haven’t yet filed your tax return, or don’t even know the amount of the refund. Whatever the amount, it’s still your money—you just haven’t yet claimed it or calculated the amount by filing the tax return. So unless that refund fits within an exemption, or is small enough to not be worth the trustee’s bother, the trustee is going to get that refund.

Chapter 13 comes with some good news and some bad news on tax refunds.

The good news comes from Chapter 13’s flexibility when it comes to assets that are not exempt. In a Chapter 7 case, non-exempt assets simply go to the trustee to be distributed to creditors according to a very rigid formula.  In Chapter 13, in contrast, you may be able to use that refund in two very beneficial ways.

First, you may be able to get permission to use the refund, or a part of it, for a necessary, one-time expense. A standard example is a critical vehicle repair, needed to be able to commute to work. The expense usually needs to be an extraordinary one, over and beyond what would be included in your standard monthly budget.

Second, to the extent that you are required to pay the refund over to the trustee, in a Chapter 13 case you usually have somewhat greater control over where that money will go. Your attorney might be able to explicitly earmark, through a specific provision in your Chapter 13 plan, where the trustee pay some or all of that refund. More likely, in certain cases, with careful wording of your plan, your attorney may be able to nudge that money in a particular direction that may be more favorable to you. For example, a vehicle that you need to keep could be paid off faster than otherwise, thus taking away from that creditor any grounds for objecting.    

Now the not-so-good news. One positive aspect of Chapter 7 is that it’s fixated on what assets you have a right to as of the moment your case is filed.  But Chapter 13 is by its very nature also interested in your future income during the three to five years that you are expecting to be in the case. And for most purposes future tax refunds are considered future income. So your Chapter 13 plan has to account for the tax refunds that you would be receiving during the years that you are in the case. In most cases that means that you must turn over your tax refunds to the trustee to be paid out according to the terms of your plan.

The truth is that this is not necessarily bad:

  • If you usually get large tax refunds, your withholdings should likely be adjusted so that you can put that money to use during the year for your regular living expenses. This is especially helpful if your budget is tight. Doing so would reduce the size of the refunds going to the trustee, minimizing this problem.
  • In some situations, a year or two into a case you may be able to get permission to use that year’s tax refund for a new special expense, such as ,again, for a new vehicle repair.
  •  Even if the refunds do just go to the trustee during the course of your case, sometimes that extra money flowing into your Chapter 13 plan finishes your case faster, in other cases it may result in important creditors being paid more quickly, and finally sometimes the refunds may enable you to pay off the plan within the mandatory maximum deadline.
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Why Chapter 13 is So Nifty

Chapter 7 is short and sweet and to the point. It often gets what you need—a discharge (a legal write-off) of all or almost all of your debts. But in SO many situations, Chapter 13 gives you so much more.

 In my last blog I showed a simple Chapter 13 case works. In my example, two debts that cannot be discharged in a Chapter 7 case—a recent IRS income tax debt and some back child support—were conveniently paid over time by the debtor through a Chapter 13 case, while that debtor was protected from those two particularly aggressive creditors. Chapter 13 buys time and protection that Chapter 7 simply isn’t designed to provide.

Here are just a few of the other extras that come with Chapter 13.

1. You can keep your possessions that are not “exempt,” instead of allowing a Chapter 7 trustee to take them from you. Retain much more control over the process compared to trying to negotiate payment terms with a Chapter 7 trustee. With Chapter 13 you have 3 to 5 years to pay for the right to keep any such possessions, instead of only the few months that the Chapter 7 trustees generally allow.

2. If you are behind on your first mortgage, you have 3 to 5 years to catch up on this arrearage, instead of the few months that a mortgage holder generally allows.

3. You can get a second or third mortgage off your home’s title, and avoid paying all or most of such mortgages, if the value of your home has slid to less than the amount of the first mortgage. You can’t do this in a Chapter 7 case.

4. If you bought and financed your vehicle more than two and a half years ago, then your vehicle payments, interest rate, and even the total amount to be paid on the loan can often be reduced through Chapter 13. This can enable you to keep a vehicle you could otherwise no longer afford. In Chapter 7 by contrast, you are usually stuck with the contractual payment terms.

5. In the same situation—a 2 and a half-year or older vehicle loan—if you are behind on the vehicle loan payments, in a Chapter 13 you don’t have to catch up those back payments. But in a Chapter 7 you almost always must do so.

6. If you owe an ex-spouse non-support obligations, you can discharge those in a Chapter 13 but not in a Chapter 7. These usually include obligations in a divorce decree to pay off a joint marital debt or to pay the ex-spouse for property-equalizing debt.

7. If you have student loans, with Chapter 13 you may be able to delay paying them for three years or more, which can be especially valuable if you have some other debts that are critically important to pay (such as back child/spousal support or taxes). And if you have a worsening medical condition, this delay may buy time until you qualify for a “hardship discharge” of your student loans.

Straight Chapter 7 bankruptcy if often exactly what you need to get a fresh financial start. But one reason you need to talk with an experienced bankruptcy attorney is that sometimes Chapter 13 can give you a huge unexpected advantage, or a series of lesser ones, which can swing your decision in that direction. (There are others beyond the main one listed here.) My job is to give you honest, unbiased, and understandable advice about these two options—or any other applicable ones—so that you can make the very best choice. Give me a call.

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Keeping Everything You Own Through Chapter 13 Bankruptcy

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.

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