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Creditor Collections NOT Stopped by a Bankruptcy Filing

You can’t count that filing a bankruptcy will instantaneously stop every act against you by every one of your creditors. Or can you?

Isn’t one of the most important benefits of filing bankruptcy the fact that it puts a screeching halt to all collection efforts of your creditors against you and your property? Yes, and in fact in many cases it does exactly that. This benefit of filing bankruptcy is called the “automatic stay,” because at the moment of the filing of your case a legal injunction automatically goes into effect “staying,” or stopping, most actions by creditors against you. But exactly because the automatic stay is something we count on so much, we better know its exceptions.

Today I’m just going to list some of the most important exceptions. Then in the next couple blogs I will explain in practical terms these and other important aspects of the automatic stay.

So creditors CAN do the following in spite of your bankruptcy filing:

1) A district attorney or other governmental authority can begin or continue a criminal case against you, such as an indictment, a criminal trial, or a sentencing hearing. This includes not just felonies and misdemeanors, but also lesser matters like traffic infractions that you might not think of as “criminal.”

2) Your ex-spouse, or about-to-be ex-spouse, or somebody on his or her behalf, can start or continue a variety of divorce and family court proceedings. These include legal procedures to establish paternity of a child, determine or change the amount of child or spousal support to be paid, settle child custody or visitation issues, address domestic violence disputes, and even dissolve the marriage. (Although a marriage dissolution usually cannot include a determination about how assets or debts would be divided between the spouses.)

3) Specifically about child or spousal support, the person owed ongoing support can continue collecting it. If there is back support owed, then in spite of a Chapter 7 filing, the person who is owed the support can in most cases start or continue collecting it. This includes not only collection through wage withholdings and garnishment of bank accounts, but also through seizure of a tax refund and suspension of a driver’s license, an occupational or professional license, or even a hunting or other recreational license. In contrast, a Chapter 13 filing can stop these aggressive methods of collecting back support.

4) Taxing authorities can start or finish a tax audit, can send you a notice that you owe taxes, can demand you to file your tax returns, can assess your taxes and demand you to pay them, and in some situations can even file tax liens against you and your property.

Notice that each of these exceptions involves a special kind of creditor. As I said, the automatic stay stops actions against you by most creditors. But if you are involved in a court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse, be especially aware of these exceptions.

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Another Five Ways to Save Your Home through Chapter 13

In my last blog I gave you the first five of ten big ways that Chapter 13 allows you to keep your home.  Here are the other five.

 

6. If you need to sell your home, Chapter 13 usually gives you much more time to do so than a Chapter 7 case. More time means more market exposure, which usually means selling at a better price. That’s especially true if you are otherwise forced to sell during a slower time of the year, or are trying to sell on a short sale (where the house is worth less than the debt against it). If you are behind on your mortgage payments and in danger of a foreclosure, a Chapter 7 case will usually only buy you an extra three months, and sometimes even less if the creditor is aggressive. Often the only way to stop the foreclosure is by paying the entire arrearage of payments, interest, late charges, foreclosure fees and attorney fees in a lump sum, often totaling tens of thousands of dollars. In contrast, in a Chapter 13 case you can usually maintain the status quo and stay in the house by resuming regular monthly mortgage payments and making meaningful progress towards paying the arrearage. If there is sufficient equity in the property, most or even all the arrearage can often be paid from the proceeds of the anticipated sale, reducing what needs to be paid monthly before then.

7. If you are behind on your child or spousal support obligations, Chapter 7 does nothing to stop collection efforts against you on those obligations, including against your home. Support obligations in most cases turn into liens against the real estate you own, including your home, often giving your ex-spouse the ability to force the sale of your home to pay the support arrearage. On the other hand, Chapter 13 does stop most collection efforts during your case as to any support arrearage which existed as of the time your bankruptcy is filed.  Your Plan must show how you are going to pay that arrearage before your case is completed, and you must stay current on those Plan obligations. But as long as you do, any support lien cannot be enforced against your home. At the end of your Chapter 13 case, you will have paid off the support arrearages, so the lien will be released, with no further risk to your home. (Important: Chapter 13 does NOT stop collection against any new support that you fail to pay after the filing date, so you must stay current on any such new obligations.)

8. In our last blog, I showed how Chapter 13 is usually the better option when dealing with an income tax lien against your home. There I used the situation in which the lien is on a tax debt that cannot be discharged—written off—in bankruptcy. But if the tax upon which the tax lien has been recorded can be discharged—because it is old enough and meets the other conditions for a dischargeable tax debt—dealing with the lien against your home in this situation is also better under Chapter 13. Depending on the amount of equity you have in your home and other possible factors, the IRS or other taxing authority may well not release the tax lien even after the underlying tax debt is discharged in a Chapter 7 case. In a Chapter 13 case, in contrast, there is an established mechanism for determining the value of that lien, and for paying it, so that at the completion of your case the tax debt is discharged and its lien is satisfied.

9. If you have fallen behind on property taxes, Chapter 13 is often the better way to deal with them. Usually, being current on property taxes is a condition of your mortgage, giving your mortgage lender an additional independent reason to foreclose if you are not. (This assumes you are not set up to pay the taxes through the “escrow” portion of your mortgage payment, but rather directly to the property tax authority.)  By showing in your Chapter 13 Plan how you are curing your property tax arrearage—even if it takes years to do so—your mortgage lender is no longer able to say you are in breach of your mortgage and justify foreclosing on that basis.

10. Saving the most obvious for last, people often file Chapter 13 to prevent a Chapter 7 trustee from taking assets that are worth more than the applicable exemptions. And that applies to your home as much as anything. If you have more equity in your home than the homestead exemption allows, you risk losing your home in a Chapter 7 case. That risk is aggravated these days because the highly irregular housing market makes property appraisals difficult to predict accurately. Chapter 7 trustees have a great deal of discretion, and predicting how aggressive yours will be is made even more difficult because in most places there is no way of knowing which trustee will be assigned to your case. In contrast, usually all Chapter 13s in a region are assigned to the single local “standing trustee.” So we are familiar with his or her inclinations. Even more important, Chapter 13 provides a much more predictable procedure for determining the value of a home, and a mechanism to protect the value of the home in excess of the homestead, if any.

In a nutshell, Chapter 13 provides quite a number of tools to help you keep your home. Simply said, it gives you more control over the situation. It is definitely not the automatic answer just because you have a home in distress, because Chapter 13 certainly has its limitations. But it is often a powerful option that you should discuss carefully with your attorney.  

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Ten Ways to Save Your Home through Chapter 13

In my experience the number one reason people choose to file Chapter 13 instead of Chapter 7 is to save their home. And it’s not just because it gives you a bigger hammer against your mortgage company. It gives you a hammer, but also a whole bunch of other tools. Some are more subtle but just as important in the right case. Each person’s situation probably doesn’t call for more than a few of those tools, but it’s great to have them all in the tool chest. So let’s look at the ten main ones, the first five in this blog and the other five in my next one.  


1.  The one tool most people know about is that in most circumstances you are given the length of your Chapter 13 Plan–as long as 5 years—to cure your mortgage arrears, the amount you are behind on your mortgages at the time your case is filed. Outside of Chapter 13, mortgage companies seldom let you have more than a few months to pay the arrears, an impossible task if you are not expecting to receive some windfall of money. During the entire repayment time that a Chapter 13 allows, you are protected from foreclosure and most other collection efforts, just so long as you play by the rules laid out in your Plan. If you do play by those rules, you will be completely current on your home when you finish your case.

 

2.  A benefit of Chapter 13 which has become tremendously helpful during these last few years of shrinking home values is the “stripping” of junior mortgages. If your home is worth no more than the amount of your first mortgage, then any second mortgage can be “stripped” of its lien against your home and treated in your Chapter 13 case like a “general unsecured creditor.” That means that the second mortgage balance is lumped in with the rest of those bottom-of-the-barrel creditors, and whatever portion of the balance is not paid during your case is written off at the end of it. This is not available in Chapter 7.

 

3. Both Chapter 7 and Chapter 13 prevent federal and other income tax liens from attaching to your home, but, assuming the lien would be on a tax that cannot be written off in bankruptcy, Chapter 7’s protection lasts only a few months. The tax lien can be imposed against your home just as soon as the Chapter 7 case is over, usually only about three months later. This gives the IRS or other taxing authority lots of additional leverage against you, requiring you to pay lots more interest and penalties, AND putting your house in jeopardy. In contrast, if you file a Chapter 13 case before a tax lien is recorded, there will never be a tax lien against your home. That’s because this tax will be paid off in your Chapter 13 case as a “priority creditor,” without any additional interest or penalties, with no tax enforcement—including a tax lien recording—permitted throughout the process.

 

4. Chapter 13 is also the better route if your home already has an unpaid income tax lien against it before you file bankruptcy. Again assuming that lien was imposed for a tax that cannot be written off in bankruptcy, Chapter 7 case neither provides you a way to pay this tax nor protects you from the full force of tax collection for any longer than a few short months. In contrast, Chapter 13 both provides you a mechanism to pay these inescapable debts on a reasonable timetable and protects you while you do so.

 

5. A key point of Chapter 13 is that it slashes your other debt obligations so that you can gain the needed monthly cash flow to better be able to afford your necessary home obligations. Amazingly, in many cases you can have more room in your budget to pay towards your home even than if you had filed a Chapter 7 case. That’s because if you owe certain kinds of debts that would not be written off in a Chapter 7 case—such as an ongoing vehicle loan, certain taxes, child or spousal support arrears, and most student loans—Chapter 13 could well allow you to pay less each month on those obligations, leaving more for the home.

 

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Qualifying for the Tremendous Tools of Chapter 13

You may want the fast fresh start of a Chapter 7 case, but sometimes your circumstances scream out for a Chapter 13 instead.  It’s true—for some people Chapter 13 provides tremendous tools not available under Chapter 7. Now all you have to do is qualify for it.

Qualifying for Chapter 13 is completely different than qualifying for Chapter 7. You 1) can’t have too much debt, and 2) must be “an individual with regular income.”

 

Too Much Debt

There is no limit how much debt you can have if you file a Chapter 7 case. But under Chapter 13 there IS a strict maximum debt amount. The idea is that Chapter 13 is a relatively straightforward and efficient procedure designed for relatively simple situations. If there’s a huge amount of debt, the theory is that you need a more complicated procedure, Chapter 11, which is arguably ten times more elaborate (and about that many times more expensive!).  

So Congress has come up, rather arbitrarily, with a strict debt maximum to qualify for Chapter 13. Actually, there are two separate maximums, one for unsecured debt and another for secured debt. You’re thrown out of Chapter 13 if you exceed either amount.

The current maximums are $1,081,400 for secured debt and $360,475 in unsecured debts. Those same numbers apply whether you are filing by yourself or with a spouse.

These amounts may sound like way beyond what most consumers would owe, and in fact they do not cause most people a problem. But these limits are problematic more than you might think. Consider if you owed a normal amount of debt and then were hit with a catastrophic medical emergency and/or very serious ongoing condition that quickly exhausted your medical insurance. A few hundred thousand dollars of medical debts can add up faster than you can believe.  

Other potentially troublesome situations, particularly for the unsecured debt limit, include if you’ve owned a business, or are involved in serious litigation. Or if you own real estate, especially more than just your primary residence, the secured debt limit can also be reached quickly, especially in certain part of the country.

 

“Individual with Regular Income”

First, corporations and partnerships can file Chapter 7s, but not 13s—you must be an “individual.”

Second, the Bankruptcy Code defines—not very helpfully, mind you—“individual with regular income” as someone “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”  That’s sounds like a circular definition—your income is regular enough to qualify to do a Chapter 13 case if your income is regular enough to do a Chapter 13 case!? Such an ambiguous definition gives bankruptcy judges a great deal of discretion about how they enforce this requirement. Some are pretty flexible, letting you at least try. Others look more closely at your recent income history and have to be pursuaded that your income is consistent enough to meet this hurdle. This is one of those areas where it pays to have a good attorney in your corner, one who has experience with your judge and the expertise to present your circumstances in the best light.

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Five Truths about Qualifying for Chapter 7 Bankruptcy

Not everyone who wants to file a Chapter 7 “straight bankruptcy” can do so. But most can. There is probably no topic that causes more confusion among people thinking about filing bankruptcy –do they qualify? Let me set the story straight.

1. Inaccurate publicity:  

People think it’s difficult to qualify for filing bankruptcy because of lingering public memory of a major amendment of the bankruptcy code six years ago.  This “reform” was intended to make filing bankruptcy, and especially Chapter 7, more difficult, and its proponents were happy to proclaim this intent. This has stayed in the public’s mind even though the law actually did not make it harder for most people to file whichever Chapter they wanted.

2. Confusion breeds fear:  

If you don’t think that it makes sense that a law which went into effect in the middle of the last decade continues to sow such misinformation, bear two things in mind. First, this set of amendments to the Bankruptcy Code was one of the most confusing, self-contradictory, and convoluted pieces of legislation ever to pass through Congress. (And that’s saying a lot!) Second, sorting out this sweeping set of statutory contradictions and ambiguities through the court system takes many years. Some of the important issues are just now making it to the U.S. Supreme Court. Others won’t be resolved for years. In an environment where the law is not reasonably clear, even common sense suggests “erring on the side of caution.” Add a dose of misinformation, and it’s easy to see why people assume the worst.

3. The new “Means Test” does not even apply to many bankruptcy filers:  

The “means test,” the main new hoop to jump through to qualify for Chapter 7, has complications, but a large percent of filers avoid it altogether. If your annualized income during the six full calendar months before filing the bankruptcy—counting income from virtually every source other than social security—is less than the published median family income in your state for your size of family, then you qualify for Chapter 7, without needing to apply the “means test.” A large percentage of people filing bankruptcy have relatively low income, at least for a time, and so they dodge the “means test.”

4. The “Means Test” is often easy:  

Even if your income IS higher than the applicable median, most of the time the expenses that you are allowed to subtract from your income enables you to pass the “means test” successfully. You end up showing you have no meaningful amount of “disposable income.”

5. Chapter 13 is often the preferred option anyway:  

The point of the “means test” is to require people who have enough “disposable income” to pay some (or, in rare cases, all) of their debts through a Chapter 13 case. In the relatively few times this happens, usually the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt. Plus, Chapter 13 provides advantages over Chapter 7 in many, many situations, so it may be the first choice anyway, regardless whether the person would pass or fail the “means test.”

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Chapter 7 vs. 13–the Easy Choice, and the Not So Easy

Picking the right Chapter to file can be simple, or it can be a very delicate, even difficult choice. And appearances can be deceiving. A situation that seems at first to call out for an obvious choice can turn out to have a twist or two that turns the case upside down.  

That twist can come in the form of an unexpected disadvantage in filing a bankruptcy under the intended Chapter, or instead an unexpected advantage in filing under the other Chapter.

Let me be clear. The majority of my clients walk into their initial consultation meeting with me with a strong idea whether they want to file a Chapter 7 or a 13.  After all, there is a wealth of information available—like this blog that you’re looking at now. So lots of my clients come in having read up on their alternatives. Whether their inclination to file one or the other Chapter comes from their head or from their gut, it’s often correct.

But often it is not correct.

That shouldn’t be a surprise. Although the main differences between Chapter 7 and Chapter 13 can be outlined in a few sentences, there are in fact dozens of more subtle but often crucial differences. Many of them do not matter in most situations, but sometimes one or two of those differences can be decisive in determining what is best in your case. If you did not know about them, you would file the wrong kind of case. And pay the consequences for many years.

So that this doesn’t just sound like just a bunch of hot air, let me show you through one example. Imagine that you have a home that you have been trying to hang onto for years, but by now have pretty much given up on doing so. You’ve fallen behind on both the first and the second mortgage. Besides, with the decline in housing values the last three years or so, the home is now not even worth the amount owed on the first mortgage. And say you owe $80,000 on the second mortgage, so the home is “under water” by that amount. You have no good reason to think that the market value will climb back up enough to give you equity in the home for many years.  Your family would sure like to keep living in their home, so the kids could stay in their schools and close to their friends, but it sure sounds like it makes no sense to keep trying to hang onto something worth $80,000 less than what you owe. Besides, you just can’t don’t have the money to pay both mortgages. So you figure it’s time to give up on the home, and just start fresh with a Chapter 7 “straight bankruptcy.”

But then you learn from your bankruptcy attorney that if your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. It becomes an unsecured debt which is lumped in with the rest of your unsecured debt (like credit cards, medical bills). In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you would be able to keep your home often by paying very little—and sometimes nothing—on that $80,000 balance. At the end of your case, whatever amount is left unpaid on that second mortgages will be “discharged”—legally written-off—so you own the home without that mortgage and having no debt (other than the balance on the first mortgage.  

This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. Having Saving your home by lowering your payments on it and bringing the debt against it much closer to its value may well swing your choice in the Chapter 13 direction.

This is just one illustration of countless ways that the option you initially think is the better one might not be. So keep an open mind about your options when you first consult with your attorney. Communicate your goals to him or her, and be clear about why you think one Chapter sounds better to you than the other. In the end, after laying out your story and hearing the attorney’s advice, it IS ultimately your choice. But do yourself a favor and be flexible, because you might get a better deal by the end of your meeting than you thought was possible at the beginning of it.

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The Chapter 13 Trustee — A Trustee of Many Hats

Your Chapter 13 trustee plays a huge role in the success or failure of your Chapter 13 case. Except he or she actually has at least a half-dozen different roles. Some of which are contradictory. Let me explain.

1) The trustee serves as the gatekeeper of your case, forcing us to play by the rules before allowing your Chapter 13 Plan to be approved by the bankruptcy judge.

2) As part of that role, the trustee’s job is to make you pay as much as possible to your creditors. Because each individual creditor often doesn’t have all that much to lose or gain compared to the cost of each of them hiring an attorney, the trustee is the creditors’ advocate in your case.

3) The trustee is your disbursal agent, taking in your money and paying it out exactly as your court-approved Plan specifies.

4) During the course of your case, the trustee is your Plan overseer, monitoring your Plan payments and your other obligations, and complaining to the court if you’re not in compliance.

5) The trustee is also your income monitor throughout the course of your case, mostly through annual tax returns that you must file on time and provide to his or her office, and sometimes through additional documentation. If your income rises significantly in a way not provided for in your Plan, the trustee can propose an “Amended Plan” to account for the increase.

6) Through all of this, believe it or not, the trustee is also legally required to be your helper through the Chapter 13 process. The Bankruptcy Code specifically says that the “trustee shall—advise, other than on legal matters, and assist the debtor under the plan.” Different trustees do this quite differently, taking on this helper role more or less seriously. At different points in your case, my staff and I may well suggest that you interact with the trustee’s office in certain specific ways. Always remember that they have a bunch of other roles besides helping you. But also note that on a personal level, the trustee genuinely wants you to have a successful Chapter 13 case, and can sometimes be a good resource to help get 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.”

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Who Is the Bankruptcy Trustee and How Can He or She Help or Hurt Me?

The three kinds of trustees in consumer bankruptcy have tremendous power over you. So it’s important to know what they do, and how to stay in their good graces. I’ll introduce them in this blog—the Chapter 7 trustee, the Chapter 13 trustee, and the United States Trustee. Then in the next three blogs I’ll tell you more about each of them.

1. Chapter 7 Trustee: Determines either that you have no “non-exempt” assets to collect or else pursues any such assets in order to liquidate them and pay the proceeds to your creditors. Reviews your documents and presides at your Meeting of Creditors for this purpose. Can conduct other investigation such as reviewing the public record. Can also pursue “fraudulent transfers” or “preferences”—money or assets either that you gave or sold to someone or that creditors got or took from you within a certain amount of time before the filing of your bankruptcy case.

2. 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.

3. 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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