Tag Archives: Chapter 13

Are you eligible for Ch. 7 or Ch. 13 bankruptcy?

Leave a reply

Eligibility for Ch. 7 or Ch. 13 bankruptcy can turn on who is filing the bankruptcy, the type and amount of debt, the amount of income, and the amount of expenses.

Who is filing the bankruptcy:

Only a human being (or a human being and his or her spouse) can file a Chapter 13 case. Neither a partnership nor a corporation can file a Chapter 13 case, but it can file a Chapter 7, whether or not the business owner also files one individually.

The type and amount of debt:

If your debt is primarily consumer debt (a dollar amount of more than 50%), then you have to pass the means test to qualify for a Chapter 7. Under Chapter 7, there is no restriction on the amount of debt you can have in order to qualify. But, Chapter 13 is restricted to cases where the person filing has a maximum of $383,175 in total unsecured debt and $1,149,525 in total secured debt.

Amount of income:

If your income is no more than the median income for your family size and state, then you can easily pass the means test to qualify for a Ch. 7. Chapter 13 requires regular income, which the Bankruptcy Code defines as income that is “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” This makes sense because you will be making regular monthly payments for the duration of your Ch. 13 case. A Ch. 13 case will last three years if the income is less than the median income applicable to your family size and state; if the income is at the applicable median income amount or more, the Ch. 13 case will last five years.

The amount of expenses:

In Ch. 7, if your income is not below the median for your state, then you must complete a highly technical test involving some, but not necessarily all, of your expenses to see whether you pass the means test and thus whether you are eligible for a Ch. 7. In Ch. 13, a similar, but often more complicated, calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Ch. 13.

Choosing between Ch. 7 and 13 can be simple. But there are at least a dozen major differences among them, differences of which you may not be aware. So when you come in to see me or another attorney, be clear about your goals but also be open-minded about how to reach them. You may well have tools available that you didn’t know about.

For bankruptcy in Northern New Jersey, call: (201) 676-0722 or schedule a consultation at my Setmore page.

Debts in bankruptcy and how they’re treated

Leave a reply

Debt-is-Slavery-How-the-Things-You-Own-End-Up-Owning-You-v.2
One of the most practical questions you’re likely to have if you’re considering bankruptcy is what will happen to certain  debts:  Will you still owe money to certain creditors? What if you want to keep debts, like a vehicle loan or a mortgage? How are  special debts, such as income taxes and child support, handled?

One of the most basic principles of bankruptcy is that it treats all creditors in each legal category the same as all the other creditors in that category. There are three main categories of debts. Not everyone has debts in each of the three categories, but many people do. You should be able to start dividing your debts among the three categories. Then bankruptcy and how it deals with each of your creditors will begin to make more sense.

The three categories of debts are: Secured debt; general unsecured debt; and priority debt.

Secured debt

All debts are either secured by collateral or not. Whether a debt is secured is often straightforward, such as with a vehicle loan in which the vehicle’s title specifies your lender as the lienholder. The lien on that title, together with the documents you signed with the lender, gives that lender certain rights as to that collateral, such as the right to repossess it if you fail to make payments as agreed.

In the case of every secured debt, there is a legally prescribed way to attach the debt’s collateral to the debt. In the case of the vehicle loan, the lender and you have to jump through certain hoops for the lender to become a lienholder on the title. If those aren’t done right, the vehicle might not attach as collateral to your loan.

Debts can be fully secured or only partially secured. If you owe $10,000 on a vehicle worth only $8,000, the debt is only partially secured—secured as to $8,000, and unsecured as to the remaining $2,000.

Debts can be voluntarily or involuntarily secured. Examples of the latter are judgment liens on your home, IRS income tax liens on all your personal property, and a mechanic’s or repairman’s lien on a vehicle that’s been repaired and the repair bill not paid.

General unsecured debts

All debts that are not legally secured by collateral are unsecured. And “general” unsecured debts are those that don’t belong to any of the categories of “priority” debts, discussed below. General unsecured debt is a default category—it applies if a debt is unsecured and non-priority. This includes every imaginable type of debt or claim. Common ones include most credit cards, medical bills, personal loans with no collateral, bounced checks, most payday loans (although those sometimes have collateral), unpaid back rent and utilities, balances left over after a vehicle is repossessed, many personal loans, and uninsured or underinsured motor accident claims against you.

Sometimes debts that used to be secured can become unsecured, and vice versa. An example of the first: once you’ve surrendered all the collateral—such as a car on a car loan—any leftover debt is unsecured. And an example of the second: an unsecured medical bill can become secured after a lawsuit is filed against you and a judgment is entered that results in a judgment lien attached to your real estate.

Priority debts

Priority debts are special because the law treats them as better than general unsecured debts. There are specific levels of priority among all the priority debts.

It’s all about who gets paid first (which often means who gets paid at all), which comes up in two main ways:

First, most Chapter 7 cases don’t involve the trustee receiving any of your assets for distribution to your creditors (known as “no-asset cases”). But in those cases where there are non-exempt assets (known as “asset cases”), the priority creditors are paid in full before the general unsecured ones receive anything. And the higher priority creditors are paid in full before the lower priority ones.

Second, in a Chapter 13 case, your plan must show that you will pay all priority debts before the completion of your case and then you must actually do so before you are allowed to complete the plan.

The most common priority debts for consumers or small business owners are the following, in order starting from the highest priority:

• Child and spousal support—amounts owed as of the time of the filing of the bankruptcy case;

• The administrative costs of the bankruptcy case—trustee fees and costs, and in some cases attorney fees;

• Wages and other forms of compensation owed to employees—maximum of $10,000 per employee, for work done in the final 180 days before the bankruptcy filing or close of business, whichever was first; and

• Certain income taxes, and some other kinds of taxes—some are priority but others are general unsecured if they are old enough and meet some other conditions.

Reading over and thinking about these categories of debts can give you a good sense of where your debts fall in the grand scheme of things if you were to file for bankruptcy.

 

Pre-Bankruptcy Tax Strategies

Leave a reply

taxes-646511_1280Get the maximum benefit from your bankruptcy against your taxes by following these sophisticated strategies.

Pre-bankruptcy planning to position a debtor in the best way for discharging or for otherwise favorably dealing with tax debts is one of the more complicated tasks handled by a bankruptcy attorney. Do NOT attempt these strategies, including the five mentioned here, without an attorney, indeed frankly without an attorney who focuses his or her law practice on bankruptcy. Elsewhere in this website I make clear that you cannot take anything in this website, including what I write in these blogs, as legal advice. That’s especially true in this very sophisticated area. Also, I could write a chapter in a book on each of these five strategies, so all I’m doing here is introducing you to them, to begin the discussion when you come in to see me.

1st:  Wait out the appropriate legal periods before the filing of your bankruptcy case.

As you may know from elsewhere in these blogs, most (but not all) forms of income tax become dischargeable after the passing of specific periods of time. Much of pre-bankruptcy tax strategy turns on figuring out precisely when each of your tax liabilities will become dischargeable, and then either waiting to file bankruptcy until all those liabilities are dischargeable, or, when under serious time pressure to file, at least when the maximum amount will be discharged as is possible under the circumstances.

2nd:  File past-due returns to start the clock running on those as soon as possible.

If you know you owe taxes for prior years and don’t have the money to pay them, your gut feeling may well be to avoid filing those tax returns in an attempt to “fly under the radar” as long as you can. But irrespective of any other rules, you cannot discharge a tax debt until two years after the pertinent tax return has been filed. Get good advice about how to deal with the IRS or other taxing authority during those two years so that you take appropriate steps to protect yourself and your assets. You deserve a rational basis for getting beyond your understandable fears about this.

3rd:  Try to stay in compliance with the new tax year(s) while you wait to file your bankruptcy case, by designating tax payments to the more recent tax years instead of older ones.

Because recent tax year tax liabilities cannot be discharged in a Chapter 7 case and must be paid in full as a priority debt in a Chapter 13 case, you want to try to stay current on your most recent tax debts. It’s also usually a necessary step in keeping the IRS and its ilk from taking aggressive action against you, thus allowing you to wait longer and discharge more taxes. With the IRS in particular you can and should explicitly designate which tax account any particular tax payments are to be applied to achieve this purpose.

4th:  Avoid tax fraud and evasion, and whenever possible, withholding taxes.

Simply put, you can’t ever discharge any taxes related to fraud, fraudulent tax returns, or tax evasion, so avoid these kinds of illegal behavior. If you have any doubt, talk to a knowledgeable tax accountant or attorney. Unpaid tax withholdings also cannot be discharged, so either try to avoid them from accruing, focus your resources on paying them off, or just recognize that they will either have to be paid after your Chapter 7 case or as a priority debt during your Chapter 13 case.

5th:  Be aware of tax liens.

Tax lien claims have to be paid in full in Chapter 13, with interest, and can survive a Chapter 7 discharge. So try to avoid having the taxing authority record a tax lien against you—admittedly sometimes easier said than done. Or if that is not possible, at least refrain from building up equity in possessions or real estate. That equity, although often exempt from the clutches of the bankruptcy trustee and most creditors, is still subject to a tax lien. So any built up equity just increases what you will have to pay to the taxing authority on debt you might otherwise been able to discharge completely.

Can a Chapter 7 save your business?

Leave a reply

Chapter 13 can help keep certain small businesses afloat, but what about Chapter 7?  Can it be used to save a small business?

Generally, Chapter 7 is seldom a good option if you own a business that you want to keep operating.  This is because Chapter 7 is a liquidation in which the bankruptcy trustee could make you give up any valuable parts of your business.

Once a Chapter 7 bankruptcy is filed, all of the debtor’s assets are automatically transferred to a new legal entity called the “bankruptcy estate”.  A trustee is assigned to oversee this estate, which usually means that the trustee is looking for assets in the estate that are worth taking and giving to creditors.  The debtor can protect, or “exempt,” certain assets, which remain the debtor’s and cannot be taken by the trustee.  The reasoning behind exemptions is that bankruptcy filers should be allowed to keep a minimum amount assets to live on while obtaining a fresh start. In most consumer Chapter 7 cases, the debtor can exempt all their assets, leaving nothing for the trustee to take.  This type of bankruptcy is called a “no-asset” case.

Can you file a Chapter 7 and continue to operate a business?  The answer requires responses to two other questions:

First, can you exempt the entire value of the business from the bankruptcy estate?

Many small businesses are would not exist but for the services of one or two owners.  In that case, they could not be sold as a going concern separate from their owners.  When faced with this type of case, a Chapter 7 trustee must decide whether he or she can sell any of the various assets that make up the business, or whether the debtor can exempt all of its assets.

The assets of a small business can include tools and equipment, receivables (money owed by customers for goods or services already provided), supplies, inventory, and cash.  There may also be value in a brand name, a below-market lease, or some other unusual asset.

If all of a business’ assets can be exempted in bankruptcy, it is possible for the owner/debtor to have a no-asset Chapter 7 case.

The second question is whether the trustee is willing to allow the business to operate in spite of its potential liability risks for the estate?

Recall that everything you own immediately becomes part of the bankruptcy estate once your case is filed.  One result of this is that your business becomes the trustee’s to operate.  Thus, the estate is potentially liable for damages caused by the business.  The trustee may also be liable for such damages.  That is why many Chapter 7 trustees’ want to shut down ongoing businesses where the owner is in an active bankruptcy.  The exceptions to this depend on the trustee, the nature of the business, and whether it has sufficient liability insurance.

Photo by Peter Blanchard.

How bankruptcy can help save your small business

Leave a reply

Bankruptcy isn’t just for winding up after the end of a business.  It can help keep your business around for longer.

Bankruptcy saves a lot of companies.  Companies can get out of a lot of debt, restructure their operations, and save a lot of jobs.  If you own and run a small business, bankruptcy may be able to save your job, too.

Let’s assume you have a small, simple business.  One so simple that you did not form a corporation or any other kind of legal entity when you set it up.  And let’s assume that you don’t have any partners – that is, you have a sole proprietorship.

In a sole proprietorship, you and your small business are treated as a single unit—unlike a corporation, which is legally separate from you and which owns its own assets and has its own debts.  In the right circumstances, a sole proprietorship can be easier to handle in a bankruptcy.

A Chapter 7 liquidation is seldom a good option if you own a business that you want to keep operating during and after the bankruptcy.  You can discharge your debts in return for liquidation—the surrender of your assets to the trustee to sell and distribute to your creditors. Except that in most Chapter 7 cases everything you own is protected–“exempt”—so that you lose nothing or very little. But if you own an ongoing business, you are likely to have some non-exempt assets.  So the Chapter 7 trustee could take some important parts of your business to sell off or otherwise shut down.

Instead, a Chapter 13 case— sometimes called a “wage-earner plan”—is much better designed to enable you keep your personal and business assets.  You get immediate relief from your creditors under the automatic stay, and for a much longer period of time, usually with a significant reduction in the amount of debt to be repaid.  So Chapter 13 can help both your immediate cash flow and your long-term prospects.  It is also a good way to address tax debt, which is often an issue for struggling businesses.  Overall, it can be a relatively inexpensive tool that combines the discipline of a court-approved payment plan with the flexibility of continuing the operation of your business.

Please understand that when you own ANY kind of business, solving your financial problems will be more complicated.  This is because you are  not dealing merely with the size and timing of a paycheck, but instead with all the financial and practical aspects of running a business.  In addition,  timing issues are often more important in business bankruptcy cases and they require more pre-bankruptcy planning to plot out the best path for you.  So, no matter how small your business, be sure to get thorough legal advice as soon as possible.

Photo by Ruben Schade.

Be sure you file bankruptcy at the right time

Leave a reply

Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge. The two examples in this post should convince you that you do not want to be rushed to file because a creditor got a judgment against you is now garnishing your wages. Since the timing of your bankruptcy filing can be a strategic decision, you should preserve the ability to file bankruptcy at a time that’s best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the means test. This test largely turns on a very special definition of “income.” For many people, means test income can change every month. So you may not qualify to file a Chapter 7 one month but maybe you can the next month. Being able to delay filing means being able to file when you are likelier to pass the means test and not be forced into a Chapter 13. Chapter 7 cases are usually shorter and normally cost less than Chapter 13 cases.

2. Discharging debts:  Getting certain debts discharged can be more difficult if you incurred them within a certain amount of time before your bankruptcy case was filed. Delaying the filing of your case makes it less likely that the dischargeability of one of these debts would be successfully challenged. If a creditor is successful in challenging the dischargeability of a debt, you would still owe the debt, possibly along with the creditor’s costs and attorney fees and your attorney’s fees.

If you get sued, what do you do to avoid getting a judgment against you, so that you’re not rushed into filing bankruptcy at a bad time? See a bankruptcy attorney as soon as possible. The earlier you get advice, the more options you will have.

Photo by: mao_lini.

Stopping the foreclosure of your home through bankruptcy

Leave a reply

Both Chapter 7 and Chapter 13 can help you save your home. But how does a bankruptcy stop foreclosure?

You have undoubtedly heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This post tells you more about how bankruptcy stops a foreclosure.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway?

As long as your bankruptcy is filed at the court BEFORE the foreclosure sale, then that sale is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the court” is usually actually done electronically from my office, with a date and time-stamped record proving when the court filing took place.)

IF a sale happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure sale and its documentation. If your lender would fail to undo such a sale after becoming aware of your bankruptcy filing, it would be in ongoing violation of the automatic stay, exposing itself to significant financial penalties. That would be rare.

Does it matter whether your case is a Chapter 7 or Chapter 13 one for purposes of the automatic stay?

No, the automatic stay is the same under both chapters, and would have the same immediate effect.

On the other hand, how long the protection of the automatic stay lasts can depend on which chapter you file. That’s because even though you get the same automatic stay, the other tools each chapter provides for protecting your home are very different. So your mortgage lender or servicer may very well react quite differently depending on the chapter you file, as well as on what you propose to do about your home and your mortgage within that chapter.