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Are Creditors Going to Challenge the Discharge of Debts in My Bankruptcy Case?

Every creditor has the right to challenge your ability to write off your debts in bankruptcy. But none of them likely will. Why not?

 

For most people filing bankruptcy, every debt they intend to discharge (write off) will in fact be discharged.

There are two categories of debts that are not discharged in bankruptcy. The first category includes those special ones that Congress has decided for policy reasons simply should not be subject to a bankruptcy discharge. Among the most common ones are spousal and child support, most student loans, and many tax obligations. Assuming you are represented by a competent bankruptcy attorney, you will know before your case is filed if any of your debts fall into this category.

The second category of debts includes those that are discharged UNLESS the creditor files a formal objection to the discharge. Any creditor can raise an objection. But creditors very seldom do, for these reasons:

1. Although any creditor can challenge your discharge of its debt, it can only win such a challenge if it can prove that you acted inappropriately in certain very specific ways.  In essence, the creditor has to show that you cheated it in how you incurred the debt. I won’t go into the details here of exactly what kind of dishonest behavior qualifies, but just be aware it simply does not apply to most people and their debts.  So a creditor would just be wasting its time to raise a challenge when it had no legal grounds for doing so.

2. It would not just be wasting its time, but also a fair amount of money. The creditor’s objection has to be in the form of a lawsuit filed in bankruptcy court, which means paying a filing fee and at least hundreds of dollars for its attorney fees. Most creditors are sensible enough to not throw the proverbial good money after bad chasing a hopeless cause.

3. On top of that, bankruptcy law discourages creditors from raising challenges in two ways:

a. Debts are presumed to be dischargeable—at least if they do not fit any of the special nondischargeable debts in the first category referred to above. So the creditor has the burden of proving that the debt is not dischargeable, and the debt is discharged if it fails to provide the necessary evidence to meet that burden.

b. The creditor risks being ordered to pay YOUR costs and attorney fees for defending a challenge if you defeat the challenge. This is an added disincentive for a creditor to push a challenge when it has weak facts against you.

So no matter what a bill collector told you to try to get you not to file bankruptcy, creditors will usually not raise challenges because they usually don’t have legal grounds to do so. And even when a creditor believes it has some facts in its favor, the creditor takes significant financial risks in pushing the challenge.

However, creditors sometimes DO genuinely think your behavior in incurring the debt gives them grounds for filing a challenge to the discharge of its debt. Also the law can favor them when it comes to certain actions by you such as incurring credit card debt or cash advances in the months before filing bankruptcy, writing bad checks even inadvertently, and similar actions which might not seem very egregious.

Also, you may have a creditor who is motivated less by economic good sense than by a desire to cause you trouble, say an ex-spouse or former business partner.

The best way to deal with these situations is, first, to be completely honest with your attorney in answering every question he or she asks you, whether during a meeting or when providing information in writing. Be thorough in your responses. And second, if you have ANY concerns along these lines, make a point of voicing your concerns, and do so early in the process. Never hide the ball from your attorney. Particularly, if you wonder whether you’ve acted inappropriately with any of your creditors, or if you have any personal creditors who are carrying a grudge, discuss it with your attorney. Not only will you be much better protected from rude surprises. Often you’ll feel the relief of learning that you have much less to worry about than you had feared.

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Is Discharging a Student Loan Possible in Bankruptcy?

What does it take to write-off a student loan in bankruptcy? An “undue hardship.” And that is a very tough standard to meet.

 

Student loan debts have hit the national consciousness like a ton of bricks. More like the weight of $1 trillion dollars ($1,000,000,000,000.00), the total amount of student loan debt as of a few weeks ago

The part of the Bankruptcy Code which says whether or not student loans can be discharged is a prime example of statutory ambiguity. All the pertinent law says is that a student loan is not discharged unless it “would impose an undue hardship on the debtor and the debtor’s dependents.” See Section 523(a)(8).

“Undue Hardship”

What does that mean-“undue hardship”? Congress did not define “hardship,” nor did it say what more it would take to turn a mere “hardship” into a qualifying “undue” hardship.

What a curious choice of words. “Undue” means “excessive, going beyond the limits of what is normal.” So Congress seems to be saying that you cannot discharge a student loan even if it is causing you a hardship, it has to be causing you a more than normal, excessive hardship.

But how does such a vague standard get applied in the real world of student loan borrowers in bankruptcy and unable to make their student loan payments?

Three-Part Test

In the last few decades as bankruptcy courts all over the country have struggled to figure out when an “undue hardship” exists or does not. There are some differences among regions of the country. But there is a general consensus that to meet this “undue hardship” hurdle, you have to show that you meet three conditions:

1. Under your current income and expenses, if you were required to repay the student loan, you would be unable to maintain even a minimal standard of living.

2. This inability to maintain a minimal standard of living while repaying the student loan would likely stretch out over all or most of the loan repayment period.

3. You had made a meaningful effort at repaying the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.

Some Important Practicalities

Unlike some debts in which the burden is on the creditor to challenge the discharge of the debt, with a student loan the burden is on the borrower to establish “undue hardship” during the bankruptcy case. Otherwise the debt survives your bankruptcy case.

In some situations, if you qualify later for an “undue hardship” after your bankruptcy case is completed, because of a subsequent disability, for example, you may be able to reopen your bankruptcy case for the court to make that determination.

Or if you are working now but have progressively worsening medical condition, so that you don’t qualify for an “undue hardship” now but expect to in the future, filing a Chapter 13 case may be the best choice. It may allow you to avoid making any ongoing student loan payments for the next few years while you focus on other more pressing obligations. And then you would have the opportunity to attempt to qualify for “undue hardship” just before the Chapter 13 case is completed 3 to 5 years later.

Conclusion

Although bankruptcy law does not provide a very easy way to deal with most student loans, more and more people in financial distress have these loans as part of their problem. Because student loans are challenging to deal with, that is all the more reason to get good legal advice about your whole situation to determine your best way forward.

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Debts for Recent “Luxury Goods or Services” and Cash Advances

What is the “presumption” that certain recent credit card purchases and cash advances will not be discharged in bankruptcy?

 

In the last couple of blogs I have written about the types of debts that get written-off (“discharged”) and those that don’t. Included on my earlier list of those that might NOT be discharged are those “incurred through fraud or misrepresentation, including recent cash advances and ‘luxury’ purchases.” Today’s blog focuses on this one type of debts.

In fact, this blog just looks at one particular subcategory of these debts—those that the Bankruptcy Code says “are presumed to be nondischargeable.” What is this “presumption,” how does it work, and what should you do about it?

The Fraud/Misrepresentation Exception to Discharge

First of all, the idea behind this exception to discharge is that debtor who cheats the creditor to borrow the money or get the credit should not be able to discharge that debt in bankruptcy. That follows one of the most basic principles of bankruptcy, that you have to be honest to get the benefits of bankruptcy. As the U.S. Supreme Court said 78 years ago, the purpose of bankruptcy is “that it gives to the honest but unfortunate debtor… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 US 234, 244 (1934).

So this exception to discharge says that a creditor can challenge your ability to write off a particular debt “to the extent obtained by… “false pretenses, false representation, or actual fraud… .” Section 523(a)(2) of the Bankruptcy Code. In other words, if you got the loan or credit through fraud or misrepresentation, the creditor could make that argument in order to exclude that debt from the discharge of your debts.

The Point of a “Presumption”

Debts which potentially belong to this fraud/misrepresentation category of debts ARE discharged UNLESS the creditor formally objects to the discharge of the debt within a rather quick deadline, usually 60 days after your meeting with the bankruptcy trustee. That objection would be in the form of a lawsuit the creditor files at the bankruptcy court. In that lawsuit the creditor lays out the facts of fraud or misrepresentation that would justify the debt not being discharged.  The creditor would then need to prove those facts with evidence. The debt is still discharged unless the creditor present evidence that leads the bankruptcy judge to decide that the debt was in fact obtained by the debtor’s fraud or misrepresentation.

A presumption in the bankruptcy law that a debt is not dischargeable simply makes it much easier for the creditor to prove that point, in those specific circumstances where the presumption applies. The creditor simply needs to establish that those circumstances apply to the challenged debt. Then that debt is “presumed” not to be discharged. And it will not be discharged unless the debtor can bring contrary evidence showing the lack of fraud or misrepresentation by him or her. In terms that may be familiar, a presumption “shifts the burden of proof” from the creditor to the debtor.

Why is this important? Litigation is expensive. Most cases are settled before going to trial because the amounts at issue are not worth the costs of battling it out in court. Congress has decided in two sets of  circumstances to tip the advantage in favor of the creditors, by giving them the presumption of no discharge.

The “Luxury Goods or Services” Presumption

The first of these circumstances arises if a consumer incurs a debt of more than $500 in “luxury goods or services” in the 90 days before filing the bankruptcy. That debt is presumed not to be dischargeable, meaning that the creditor doesn’t need to bring evidence establishing that the debtor intended to cheat the creditor by not paying the debt. The thought behind this is that either the person making the purchase knew he or she was going to file bankruptcy and was not going to pay the debt, or else at least was quite reckless to be using creditor that close to filing bankruptcy.

So what are “luxury goods or services”? Broader than it sounds. They include anything except those “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” The court decides what fits that definition. It’s up to the debtor to persuade the court that the goods and/or services totaling more than $500 were “reasonably necessary,” or that the debt was incurred with the honest intention, at that time, of paying it.

The Cash Advances Presumption

The second of these circumstances arises if a consumer incurs a debt of more than $750 through a cash advance or advances made in the 70 days before filing the bankruptcy. In the same way as with the “luxury goods” presumption, the creditor does not need to bring evidence establishing that the debtor did not intend to pay the debt. And in the same way, the debtor can try to persuade the court that the cash advance was incurred with the intention of paying it.

A Creditor Does Not Need a Presumption

Just because a “luxury good” was purchased more than 90 days before your bankruptcy case is filed or a cash advance was made more than 70 days before then, these do not necessarily mean that the creditor will not challenge your ability to discharge that debt. In these situations the presumption would not apply. So the creditor would have to show the court convincing evidence that you did not intend to pay the debt. Since that is often not easy to show, creditors are not as likely to challenge purchases and cash advances that were made before the presumption period.

Avoiding These Presumptions

Avoid these presumptions by not using any credit and making cash advances in the few months before filing bankruptcy. But if you did avoid these, can you just wait to file until enough time has passed to get beyond these 70 and 90-day periods? Yes, that is a way to get past the presumption periods, as long as you do not have an urgent need to file your case. But although that may make it less likely that a creditor will raise a challenge, this does not necessarily mean it won’t happen.  If a creditor thinks it has evidence that you incurred a debt that you did not intend to pay, or that you incurred in other circumstances involving fraud or misrepresentation, the creditor may still decide to raise the issue without the benefit of a presumption.

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How Come My Attorney Cannot Always Tell me Which of My Debts Will be Discharged under Chapter 7?

Most of the time your attorney will know which debts will be legally written off in your bankruptcy. But not always, for two reasons.

 

A couple of blogs ago I made the point that the discharge order entered on your behalf by the bankruptcy judge will write off all of your debts, EXCEPT for those types of debts which are on a list in Section 523 of the Bankruptcy Code. The most common ones on the list include:

a. most but not all taxes

b. debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases

c. debts which were not listed on the bankruptcy schedules on time

d. money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship

e. child and spousal support

f. claims against you for intentional injury to another person or property

g. most but not all student loans

h. claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)

These different types of debts each deserve a closer look, which I will do in upcoming blogs. But let’s go back to the question in today’s title. Most of the time your attorney can reliably tell you whether a particular debt will be discharged in your bankruptcy case. But sometimes he or she will not know because:

1. With some types of debts—the ones described in items b, d, and f of the list above—the debt is discharged unless that creditor raises an objection by a specific deadline (which is usually 60 days after your meeting with the trustee). If you are candid with your attorney about the facts at the beginning of your case, he or she can tell you if there is a risk that a particular creditor will object to the discharge of its debt. Your attorney may even be able to tell you roughly how much of a risk you have, depending on the facts, and sometimes on the reputation of that creditor to object under similar facts. But whether the risk is high or low, with these types of debts neither your attorney nor you will know for sure whether that debt will be discharged until either the creditor objects or the deadline for objection passes without objection.

2. With the other types of debts—the ones described in items a, c, e, g, and h of the list above—at the beginning of the case sometimes either the facts are not sufficiently clear or how the law should be applied to the facts is not clear, or both. You might think that the attorney should get all the necessary facts before filing the case. But sometimes the facts are simply not available, the additional work to get them is not worth the cost, or there is no time to do so because of the need to file the case quickly. Add in the consideration that the bankruptcy statutes often use broad language that can be and is in fact interpreted differently by different judges. As a result, in these situations there is simply no absolute way to know at the start of the case whether a particular debt will be discharged.

Take as an example one of the types of debt listed—a claim against you for causing personal injury to someone by driving while intoxicated. You might think that sounds relatively clear. But not necessarily. What if the accident occurred in a rural area so that the police did not arrive on the scene until well after accident, making unclear whether you were “intoxicated”? What if there wasn’t enough evidence for a criminal conviction but possibly enough for a civil verdict against you? What if the injured driver was also arguably intoxicated? Under these kinds of circumstances, the pertinent facts may not be known until a possible future trial. And even if the facts were clear, the law may not be settled about how to apply those facts to come to a decision. So you can see that in these “gray areas” your attorney may well not be able to tell you in advance whether that particular debt will be discharged.

I need to finish by emphasizing again that most situations are not gray but are black and white, or at least close to it. So usually your attorney CAN tell you with a high degree of confidence whether any particular debts will or will not be discharged. Indeed, in a large percentage of Chapter 7 cases all debts that you want will be discharged. And if you have debts that won’t be discharged—such as support obligations or recent income taxes—that will be quite clear. The point of this blog has been to explain why there are some situations when it is not so clear, when your attorney must make a judgment call based on the likelihood of an objection by a creditor, or based on imprecise facts and/or law.

 

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What’s Different about the Discharge of Your Debts under Chapter 13?

Here’s the good news/bad news about the discharge of debts in a Chapter 13 payment plan compared to the discharge you get in a straight Chapter 7 case.


Sometimes choosing between Chapter 7 and 13 is easy, but other times it means carefully weighing lots of considerations. Whether the choice is easy or hard, one of those considerations is how these two options compare in their discharge (legal write-off) of your debts.

The good news in favor of Chapter 13 is that it discharges a couple more types of debts than Chapter 7 does. So in the right case this “super discharge” could be reason enough to choose Chapter 13.

The bad news is about timing—the discharge is not effective until the very end of a Chapter 13 case—usually 3 to 5 years after it is filed. That means you have to successfully complete the case to get a discharge of your debts. The fact is that a significant percentage of Chapter 13 cases are not successfully completed, leaving the debts still owed. That’s a risk that needs to be seriously considered before filing a Chapter 13 case.

The Mini “Super Discharge”

In the past, one way that Congress encouraged debtors to file Chapter 13s is by allowing various kinds of debts to be discharged under Chapter 13 that could not be discharged under Chapter 7. Chapter 13 was said to provide a “super discharge.” But over the last quarter-century or so, Congress has whittled away at the list of debts treated more favorably under Chapter 13 until now only two noteworthy ones remain:

1. You can discharge non-support obligations owed to an ex-spouse in a Chapter 13 case (and not in a Chapter 7 one). These obligations usually include those in a divorce decree requiring you to pay off a joint marital debt or to pay the ex-spouse to compensate for you receiving more than your share of the marital property. They are often called the “property settlement” part of your divorce.

2. An obligation arising from a “willful and malicious” injury that you are accused of causing to a person or to property can be discharged in Chapter 13. This refers to allegations that you hurt somebody or their property not merely through your negligence—which would be discharged in Chapter 7—but instead either intentionally or recklessly—the discharge of which could be challenged in a Chapter 7 case.

These are both very delicate areas. What’s a “property settlement” type of divorce obligation instead of a support obligation, and what’s a “willful and malicious” injury instead just of a negligent one—these are often not straightforward distinctions. The decision to use Chapter 13 to undo part of a divorce decree or to escape accusations of “willful and malicious” injury can have a variety of legal, human, and tactical considerations. Weigh these carefully with an experienced bankruptcy attorney before relying on the Chapter 13 super discharge.

No Discharge until the End of the Case

Not getting a discharge until the end of a Chapter 13 case is theoretically no different than under Chapter 7. In Chapter 7 as well you must satisfy a number of conditions before you can successfully complete the case and receive a discharge. But, if you are being guided through the process by an experienced bankruptcy attorney, the Chapter 7 conditions are usually met relatively easily. As a result most of the time within about three months you receive the court order discharging your debts.

In contrast, completing a Chapter 13 case requires you to meet many more conditions, and to do so consistently over the course of years. This includes making monthly “plan payments” to your Chapter 13 trustee for distribution to your creditors, and sometimes also sending payments directly to some creditors (usually vehicle and mortgage lenders). But you also must stay current on spousal and child support obligations, file income tax returns on time, and often meet other special requirements laid out in your plan. Your Chapter 13 case will be designed so that you should be able to meet all the conditions, but sometime circumstances change so that you can’t.

If your circumstances do change, you may well still be able to get a discharge of your debts. Your attorney may be able to adjust your budget and amend your plan to deal with the changes, allowing you to complete the Chapter 13 case and discharge the debts. You may qualify for a “hardship discharge.” Or it may be best to “convert” your Chapter 13 case into a Chapter 7 one, and receive a Chapter 7 discharge.

At the beginning of your Chapter 13 case discuss with your attorney possible future changes in your circumstances, and what options you would have if these happened. And then if any significant changes do happen, inform your attorney right away so that you can get advice about your options. In most cases you can get a discharge of your debts even when your circumstances change if you deal with the situation proactively.

 

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Here’s What You Need to Know about the Discharge of Your Debts under Chapter 7

The point of filing bankruptcy is to get relief from your debts. So, when and how DO those debts get “discharged”—legally written off—in a regular Chapter 7 bankruptcy?

 

Here’s what you need to know:

1.      You WILL receive a discharge of your debts, as long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” except in relatively unusual circumstances:

  • If you’re not an individual!  Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
  • If you’ve received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
    • you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
    • you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
  • If you hide or destroy assets, conceal or destroy records about your financial condition.
  • If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.

2.      ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:

  • most but not all taxes
  • debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
  • debts which were not listed on the bankruptcy schedules on time
  • money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
  • child and spousal support
  • claims against you for intentional injury to another person or property
  • most but not all student loans
  • claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)                                                                                                                   

3.      A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction against the creditor from taking any action—through a court procedure or on its own–to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.

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A Combination of Chapter 13 Tools for Saving Your Home, Illustrated

It’s often the combination of tools that come with Chapter 13 that allows you to keep your home. Because Chapter 7 has only some of these tools, sometimes it can’t do nearly as much for your home as Chapter 13 can.

 

Please read my last blog. There I laid out an example to illustrate how much a Chapter 13 case can do—on multiple fronts—to enable you to keep your home. That example also shows why sometimes Chapter 7 is not effective for that purpose. Today I explain how Chapter 13 can pull it off.

To summarize, here is a list of this hypothetical person’s debts:

  • first mortgage arrears: $5,000
  • first mortgage balance: $230,000
  • second mortgage arrears: $3,000
  • second mortgage balance: $50,000
  • past-due real estate taxes: $2,000
  • judgment lien from unpaid medical debt: $8,000
  • 2009 income tax with tax lien recorded against the home: $3,000
  • 2010 and 2011 income tax: $5,000 (no tax lien, yet)
  • credit cards: $18,000

A Chapter 7 “straight bankruptcy” would discharge (write-off) all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away the threat to your home from the judgment lien.

But that still leaves both mortgage arrears, the past due real estate taxes, and many thousands of dollars of income tax debts, one holding a tax lien on the home. This debtor can afford to pay a total of $1,500 per month to all creditors, but with a $1,000 first mortgage and $300 second mortgage regular payment, that leaves only a measly $200 per month for the mortgage arrearages and all the taxes. Looks quite hopeless.

And yet, here is how Chapter 13 could be the solution:

1. Stripping second mortgage: In this example the home is now worth $225,000, less than the $230,000 balance on the first mortgage. So there is no equity in the home securing that second mortgage. Under these conditions, Chapter 13 can legally turn that second mortgage balance into an unsecured debt. (This cannot be done under Chapter 7). As a result, the debtor no longer pays the $300 monthly mortgage payment, freeing up that amount to pay other more important creditors. So instead of $200, there’s now $500 per month available to pay the remaining creditors.

2. Plan payment of $500 per month: Paying this $500 per month into a 36-month Chapter 13 payment plan results in a total of $18,000 paid ($500 X 36 = $18,000), or a total of $30,000 in a 60-month plan ($500 X 60 = $30,000). The length of a plan depends on a number of factors. But in this case let’s assume that the plan will run only as long as it takes to pay all secured and priority creditors—here, the first mortgage arrears and all the property and income taxes. That’s $5,000 of arrears, $2,000 of property tax, $8,000 for all the income taxes, or a total of $15,000. Interest needs to be paid on the property tax and on the portion of the income taxes with the tax lien, but Chapter 13 often allows those debts to be paid faster to lessen the amount of interest. The plan payments also need to pay the Chapter 13 trustee– usually a percentage of the amount flowing through the plan–plus whatever portion of the debtor’s own attorney’s fees not paid before the filing of the case. To simplify the calculations, let’s estimate that the total amount that the debtor would need to pay into the plan would be $20,000. At $500 per month, that would amount to 40 months of payments. (In some situations, the unsecured creditors would also need to be paid a certain amount of money or a certain percentage of their debt. In that situation, the $500 payments would need to be paid into the plan that much longer.)

3. Continuous protection from the creditors by the “automatic stay’: During the entire length of the Chapter 13 case—this estimated 40 months–the “automatic stay” would be in effect, preventing any of the creditors—the mortgage lenders, the property tax creditor, or the IRS—from taking any action against the debtor or the debtor’s home. So the first mortgage lender would not be able to start or continue a foreclosure because the monthly payments or the property taxes weren’t current. The property tax creditor itself could not conduct a tax foreclosure. And the IRS could not enforce its tax lien nor could it record a new one for the more recent tax debts.

4. Debt-free: At the end of the 40 months or so, the first mortgage and property taxes would be paid current, all of the income taxes would be paid in full, the tax lien would be released, and all the (remaining) unsecured debts would be discharged, leaving the debtor debt-free.  

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The Power of Chapter 13 to Save Your Home, Brought to Life

A mere list of the many ways that Chapter 13 can help save a home can start sounding dry. So here’s a powerful example that shows off some of its extraordinary advantages.

 

Let’s start by setting the scene. Say you lost your job in early 2010 and, except for temporary, part-time work, you did not find new full-time employment until 3 months ago. It pays less than your old job.

  • While you weren’t working full-time, you used up your savings and then borrowed on your credit cards to try to pay the house payments. That seemed to make sense at the time because you kept getting promising job leads, none of which panned out until you finally got hired for your present job. So you owe $18,000 on the credit cards, with minimum payments totaling $550 per month.
  • After your savings and available credit ran out, you still fell $5,000 behind on your first mortgage and $3,000 behind on your second. They are both starting to send papers sounding like they are going to start foreclosing.
  • Because there wasn’t enough money in your property tax escrow account with your first mortgage lender to pay the recently due annual $2,000 property tax bill, the lender is demanding that you pay that right away. It is threatening to foreclose for this separate reason if you don’t.
  • You had some medical problems soon after losing your earlier job, while you had no medical insurance, resulting in a $7,500 medical bill. That went to a collection agency, turned into a lawsuit, and then recently into an $8,000 judgment lien against your home.
  • Money had been tight even back before you’d lost your job because of cutbacks in hours, so you cut your tax withholding way back, so that you owed $2,000 to the IRS for 2009 income taxes. You couldn’t make the agreed monthly installment payments, and have just found out that that a tax lien has been recorded against your home in the amount of $3,000, after adding in all the accrued penalties and interest.
  • While you were working temporary jobs during 2010 and 2011, you were desperate for every dollar you could bring home, and so didn’t have any taxes withheld. As a result you owe the IRS another $2,500 for each year, or a total of another $5,000 that you have not even filed tax returns for yet.  You’re afraid to because you have no money to pay it and are afraid of more tax liens against your home.
  • Your home was worth $300,000 in 2008, but has lost about 25% of its value by now, so is worth $225,000. You owe $230,000 on the first mortgage, with monthly payments of $1,000, and owe $50,000 on the second mortgage, with monthly payments of $300.
  • With your current reliable income, after paying modest but reasonable living expenses, you have $1,500 available monthly for all creditors, including the two mortgages. That’s only $200 per month beyond the two mortgage payments, a drop in the bucket considering this mountain of debt:
    • credit cards: $18,000
    • first mortgage arrears: $5,000
    • second mortgage arrears: $3,000
    • property tax arrears: $2,000
    • judgment lien: $8,000
    • 2009 income tax with tax lien: $3,000
    • 2010 and 2011 income tax: $5,000

That’s a total debt of $44,000, besides the $230,000 first mortgage and $50,000 second mortgage.

  • Last fact: your two school-age kids live with you, they’ve lived in this home their whole lives, and have gone to the good local public schools for years, with their friends who live in the neighborhood. So more than anything you want to maintain this home and the stability it brings to their lives (and yours!). But it sure seems hopeless.

A Chapter 7 “straight bankruptcy” would help by discharging (writing off) tens of thousands of dollars, but NOT likely help nearly enough for you to be able to keep the home. A Chapter 7 case would likely discharge all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away one threat to your home. But with only $200 to spare after paying the current first and second mortgage payments, that $200 is just way too small to even begin to satisfy the mortgage lenders or the IRS, much less both.

So after your Chapter 7 case would be completed, the IRS would attempt to collect the 2009 debt through garnishments of your bank account or wages, and sooner or later you’d have to deal with the 2010 and 2011 taxes, possibly resulting in them at some point turning into tax liens. And sooner or later your home would be foreclosed because you would have no way to catch up on the mortgage arrears.

However, if INSTEAD you filed a Chapter 13 case, under these circumstances you very likely you WOULD be able to keep your home, cure the mortgage arrears, and pay off all the taxes. And all this would happen while you and your home was protected from collection efforts by any of your creditors. How could that possibly be? I’ll show you in my very next blog. Sorry to keep you hanging, but today’s blog is way too long already.

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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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Stronger Medicine for Vehicle Loan through Chapter 13

If you are behind on your car or truck loan and a Chapter 7 case will not help you enough, file a Chapter 13 case instead so that you can keep that vehicle.


I laid out your options with vehicle loans under Chapter 7 in my last blog:

1. Surrender the vehicle and discharge (write off) any “deficiency balance”–the often large amount that outside of bankruptcy you would still owe after the creditor sells off your vehicle for less than the loan balance. The vehicle’s gone but so is all your debt.

2. Keep the vehicle and maintain the regular payments if you’re current. Or if you are behind, pay the full amount of back payments so that you are current within a month or two of filing the bankruptcy case. In both of these situations, you will almost certainly be required to sign a “reaffirmation agreement” renewing your full liability on the vehicle loan.

But what if you absolutely must keep your vehicle, and simply won’t be able to scrape up the money to catch up within a month or two after filing?  Some creditors may be somewhat more flexible—giving more time or even putting missed payments “at the end of the loan.” But these situations are relatively rare, and may not help you enough. Then it’s time to consider the Chapter 13 option with your attorney.

Keep the Vehicle through a Cram-Down

If you meet one straightforward condition, Chapter 13 gives you some tough medicine indeed, way beyond just buying you more time to pay the missed payments. Through the so-called cram-down, you get to re-write the loan—disregarding any missed payments. The balance on the loan is reduced to—crammed down to–the fair market value of the vehicle (assuming that’s less than the loan balance). Sometimes the interest rate can be reduced and often the loan term can be extended. The combined effect of all this is usually to reduce the monthly payment amount, often significantly. The amount of total savings depends on the details of your case, but most of the time you get the vehicle free and clear at the end of the Chapter 13 case after paying significantly less than you would have otherwise.

So what’s the condition you have to meet to be able to do this cram-down?  The vehicle loan must have been entered into more than 910 days (about two and a half years) before filing your Chapter 13 case. If your vehicle loan is not at least that old, no cram down.

Keep the Vehicle without a Cram-Down

You may not qualify for a cram-down because your loan is not old enough, or a cram-down could simply not do any good because your vehicle is worth more than the loan balance. But Chapter 13 can still be helpful, by not being obligated to catch up quickly on the back payments. And in the right circumstances, your monthly vehicle loan payments can be reduced, giving you more money for living expenses or to pay other important creditors.

Surrender the Vehicle

To be clear, although Chapter 13 gives you some big advantages if you are keeping your vehicle, if you don’t need that vehicle you can surrender it just as you can in a Chapter 7 case.

The difference is that instead of the “deficiency balance” being discharged without the creditor receiving anything as in the vast majority of Chapter 7 cases, under Chapter 13 that “deficiency balance” is added to the rest of the pool of general unsecured creditors.

What’s the effect of that? In most cases it doesn’t cost you anything, nothing more than what you would have paid to complete your Chapter 13 case without that “deficiency balance” included. Why? Because in most Chapter 13 plans, you are required to pay a certain amount based on your budget, or a certain minimum amount to the unsecured creditors based on assets you are protecting. So in those cases having an extra chunk of unsecured debt merely shifts how the creditors divide up among themselves the same amount of your money.

But there are some uncommon situations in which adding that “deficiency balance” to your unsecured debts would increase the amount you would have to pay into your Chapter 13 plan. Discuss whether any of those apply to you before deciding whether surrendering your vehicle in a Chapter 13 is in your best interest.

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