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How One Family Settled Huge Debt For Pennies

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debt settlement
When he started the Chapter 13 trek, he owed $370,000 in personal loans and credit cards.

As he completes his plan, he will have settled that debt for three cents on the dollar.

No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.

And that’s why I love Chapter 13 bankruptcy.

Chapter 13 in the real world

I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay.  It’s sometimes dry and dense, but you see how it works.

But here’s how it worked for one real family now completing their plan.

They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.

They got five years to pay that 3%, interest free.

The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.

They were protected from the taxing authorities while they cured delinquent property taxes.

And in our insane real estate market in the Bay Area, their home appreciated about 50%.  Appreciation that is theirs, rather than their creditors’.

Plan payment driven by asset value

Not all unsecured creditors are as lucky as the creditors in this case, who got something on their claims, even if it was only three cents.

Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.

Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.

So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.

But seen from the top of this mountain, Chapter 13 is powerful.  And the view of life after bankruptcy is stunning.

More

Life after bankruptcy

How Chapter 13 plan payments are calculated

Little known alternative to bankruptcy

 

Debt Limits Increase For Chapter 13 Bankruptcy

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bankruptcy debt limitsNew debt limits for Chapter 13 become effective on April Fool’s Day, 2019.

The new numbers are effective for cases filed April 1, 2019 and will control for the next 3 years.

And those limits are:

Unsecured debt = $ 419,175

Secured debt = $$1,257,850

The current limits effective through March 31, 2019 are

 unsecured debt = $394,725

 secured debt = $1,184,200

In the Bay Area, that will mean more families will be eligible to file Chapter 13.

Why Chapter 13 rocks

Chapter 13 bankruptcy allows individuals to strip off worthless liens, cure home loan defaults, and pay recent taxes over time, without interest.

In Chapter 13, the person filing keeps ownership and control of their assets.  They create a plan to repay creditors, in whole, or more usually, in part from future income.

Why 13 is best

While in 13, they are protected by the automatic stay from collection actions. They have access to the bankruptcy court to enforce that protection.  The bankruptcy judge is also available to resolve disputes about the allowance of claims or mortgage accounting.

Is debt secured or unsecured

The debt limits apply to debts that are liquidated and not contingent.

Secured debts are those for which the creditor has collateral.  The most common secured debts are mortgages, home equity lines of credit, and car loans.

Tax liens and judgment liens also fall into the secured debt pile, but only to the extent that the lien attaches to value in your possessions.

More about secured debts in bankruptcy .

Unsecured debts are those where there is no collateral or where the lien is greater than the available collateral.

In my Bankruptcy Alphabet, U is for Unsecured.

A great recent decision by the 9th Circuit determined that you don’t have to count liens that have passed through a previous bankruptcy as unsecured.

There are no debt limits in Chapter 7 or Chapter 11.

Exemptions expand

The value of items protected by exemptions under the bankruptcy code also increases April 1.

This means little to Californians since the federal bankruptcy exemptions aren’t available in California.

Instead, we have the Code of Civil Procedure 703.140 series of exemptions which mimic the federal exemptions.  The dollar amounts of the §703 exemptions are found here.

The Federal Register published the Bankruptcy Code changes of other dollar amounts found in the Code, such as the cap on priority employee wage claims, preference safe harbors, and luxury goods purchases.

Enjoy the increases. They are with us for another three years.

 Image courtesy of geehall2.

How Chapter 13 Cuts Car Loan Down To Size

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car in bankruptcy

Car lenders who make new car loans with an underwater trade-in will face the music in Chapter 13.

The Supreme Court declined to review a 9th Circuit decision that stripped car loans of their protected specially protected status in bankruptcy; as a result, Californians will continue to benefit from the debtor-friendly decision in Penrod, rising out of a San Francisco bankruptcy case.

The question in Penrod

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value. That left-over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle.

And BAPCPA, the bankruptcy “reform” act of 2005 prohibited reducing a secured claim on a vehicle purchased within 910 days of the bankruptcy.  But did it similarly protect that part of the loan that wasn’t really related to the cost of the vehicle purchased?

Penrod facts

In Penrod, the Redwood City resident had traded in a car worth $6,000 on which she owed $13,000.  The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan.

The 9th Circuit held the negative equity was not purchase money as to the current car.  The appeals court remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

More

How Chapter 13 thwarts repossession

Keeping your car after Chapter 7

10 ways bankruptcy makes you better off

Image  Snackariah under a Creative Commons license

How 13 Works To Save Your House From Foreclosure

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save house

Saving a house from foreclosure is the single reason most people file bankruptcy.

Bankruptcy stops foreclosure- that’s a given.

But then what?

How can bankruptcy save the house,  rather than just putting off the inevitable loss?

The mortgage lender has a lien on the house, and liens aren’t discharged in bankruptcy.

So, how does bankruptcy help?  Meet Chapter 13 of the Bankruptcy Code.

Chapter 13 bankruptcy is the chapter of choice if your goal is to keep living in the house, as opposed to selling it to realize equity or to avoid the credit hit of a foreclosure.

Chapter 13 imposes a payment plan on lender

Baked in to Chapter 13 is the power to cure defaults on long term debts like mortgages.

Gone is the ability of the lender to refuse to take catch-up payments or to insist on cure in a single payment.

This is federal law, and the homeowner is at the helm of this ship. [Read more…]

Behind On Your Car Payment? How To Keep The Car & Pay Less

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car repossessionIf you are one of the  7 million Americans living in fear that your car will be repossessed, consider how Chapter 13 bankruptcy can save your wheels.

Losing your car can accelerate a torrent of nasty financial consequences.

No car, no way to work.

No work, no income.

So, what can a Chapter 13 bankruptcy do to put you back on the road?

Stop repossession

All chapters of bankruptcy impose an injunction on creditor efforts to collect debts, or enforce liens, automatically when you file.   That automatic stay applies whether or not the creditor knows about it.

So, file bankruptcy and any collection actions taken without court permission are void and legally ineffective.  If they pick up your car after you’ve filed, you can compel its return.

The only exception to the stay applying automatically is if you’ve had two bankruptcy cases dismissed in the past 12 months.  More on multiple dismissals.

Spread out car payments

Chapter 13 allows you to put forward a plan to restructure your car loan.  The remaining payoff balance on your car loan can be spread over 60 months.

Unless your car loan is very new, or the original term very long, that probably lowers what you pay each month through the plan.

Reduce interest rate

You can adjust the interest rate on a car loan paid through the plan to the current day, market rate.  As I write, that interest rate in California is between 4 and 5%.

This power to lower the interest rate is central to a successful readjustment of a high interest car loan.  It’s of little help if your loan is less that today’s market rate.

But Chapter 13 in the states of the 9th Circuit has another trick up its sleeve.

Strip out loan add ons

Part of a Chapter 13 plan can be cutting the car loan down to the portion of the loan that financed the car itself;  you can knock out any part of the loan that paid off an underwater trade-in, or a service contract, or gap insurance.

The 9th Circuit said in Penrod that these additions to the amount financed were not protected by the 2005 bankruptcy amendments that gave special consideration to car lenders.

So, you can pare down the car loan that has to be repaid to just the amount of the loan balance used to buy the car itself, and not all the extras.

Deal with other debts

You don’t just file bankruptcy on one debt; bankruptcy includes all your debts.

Some may be absolutely dischargeable, perhaps without paying anything on them.

Some liens can be wiped out.  Back payments on home loans can be caught up in Chapter 13.

Chances are that there’s more going on in your financial life than just the trouble with  your car loan.

An experienced bankruptcy lawyer can help you look at the big picture and propose a solution to keep you trucking.

More

Your car in Chapter 7 bankruptcy

Is bankruptcy the right choice for you

Interviewing a bankruptcy lawyer

 

 

 

Why What You Think About Chapter 13 Is Dead Wrong

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bankruptcy misunderstanding

The difference between bankruptcy’s Chapter 7 and Chapter 13 is often expressed this way:   

Liquidation: the process of turning assets into cash

Chapter 7 is a liquidation proceeding

Chapter 13 is a repayment plan

 

And therein lies the biggest misconception about Chapter 13: 

13 does not repay everything you owe.

It’s a repayment plan alright, but not necessarily a 100% repayment .

You may not pay much at all, to any creditor.  It depends.

How much you repay

The amount you repay to creditors through your plan is determined by comparing

Rough and dirty, you calculate the number for each of these factors, and your plan must pay the largest of the three tests.  That payment is spread over 3 to 5 years.

Which creditor gets 100%

Bankruptcy law gives special standing for repayment to two common kinds of creditors.

  • Family support (alimony, child support, or other Domestic Support Obligations)
  • Recent income taxes or payroll taxes

These creditors have a priority for payment,  ahead of all other unsecured creditors.  They get paid in full.  The interest that accrues on family support obligations even survives the Chapter 13 discharge.

Therefore, to get court approval of a plan, the plan payments must be sufficient to make these payments, along with any fees of the Chapter 13 trustee and any of your attorneys fees to be paid through the plan.

Unsecured creditors out of luck

The brutal truth is that general unsecured creditors holding medical bills, personal loans, judgments for money, and credit card debt may get nothing in Chapter 13.

That’s because the available money is paid first to priority claims and the costs of administration of the case.  So a debtor with little disposable income may propose a plan that pays only the costs of the plan and the priority creditors.

Chapter 13 makes creditors face reality

The strength of Chapter 13 is that it often forces unsecured creditors to accept that there simply isn’t enough money to pay their claim.

The bankruptcy schedules show it, and the bankruptcy judge enforces it.

It is that coercive effect that makes Chapter 13 so much more effective than debt settlement:  if the numbers support it, the plan can pay them little or nothing.

So, don’t be put off by the phrase “repayment plan”.

Chapter 13 pays creditors only what you can afford, over a limited period of time, in the order of the importance of the debt.

That’s why I love Chapter 13.

More

Debt settlement is a dud

How secured debt can scuttle a Chapter 13

What bankruptcy should cost

 

 

 

 

 

 

 

Bankruptcy Without A Discharge: Why Chapter 20 Works

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13 without discharge

What does a Chapter 13 bankruptcy get you if it doesn’t get you a discharge?

Lots, actually.

It’s complicated.  Powerful, but complicated.

Let’s see how all the parts interact when your Chapter 13 is filed before you’re eligible for a discharge.

Law limits discharge

The bankruptcy code doesn’t limit when you can file bankruptcy;  it limits when you can get a discharge in bankruptcy.  It imposes various interval between discharges in bankruptcy, depending on what kind of a case you filed first.

The nifty, marvelous, no discharge Chapter 7

The discharge is the court order at the end of the case that wipes out debts as a personal liability.  Bankruptcy “reform” in 2005 lengthened the intervals between discharges.

But nothing keeps you from filing a bankruptcy case, even when a prior discharge prevents a discharge in the new case.

More on Chapter 20.

And because not every debt nor every lien is wiped out in Chapter 7, there is often a need for a follow-on Chapter 13 to deal with the debts not discharged.

Automatic stay to the rescue

The debtor’s right to a stay of collection action exists, regardless of whether there will be a discharge at the end of the case.

So even a creditor who holds a debt not discharged in a previous Chapter 7 must cease collection when a new bankruptcy case is filed.

Different rules on automatic stay if the previous case was dismissed short of discharge

Important creditors paid first

Chapter 13 imposes a payment plan on creditors, willing or not.  The plan and the underlying law dictate which creditors get paid first through the plan.

The debts most likely to survive a Chapter 7 are recent taxes, family support and home loan delinquencies.

Bankruptcy law dictates the order in which creditors are paid by the Chapter 13 trustee.  Generally, secured creditors like mortgage lenders and taxing authorities with surviving liens are paid first by the Chapter 13 trustee.

That benefits the debtor who is often trying to hang on to a house or other assets that a secured creditor could otherwise foreclose or auction off.  It keeps the creditor with a non dischargeable debt that is low on the priority list, like a student loan or a restitution order, from garnishing wages or levying bank accounts.

Liens cut down to size

Liens of all kinds are unaffected by the discharge in Chapter 7, with a limited exception.  Avoiding judgment liens.

Chapter 13 lets you eliminate tax liens and judgment liens on any of your assets included in the bankruptcy without depending on your eligibility for a discharge.

Mortgage liens on your home get special protection under bankruptcy law; but a mortgage lien behind a senior lien that exceeds the value of the house can be stripped in 13 and nowhere else in the law.

Judges available for nasty fights

Bankruptcy judges stand by to consider and resolve disputes between creditors and the debtor.  In my world, that’s most often a fight between a mortgage servicer and the homeowner over what’s really owed on a home loan.

Resolution of that dispute doesn’t require a discharge, since the claim is likely secured by collateral.  The issues is how much is owed and can the servicer prove it.

That’s what judges are for.

And at the end of a 13 that cures mortgage default, the homeowner gets a determination about the true state of the debt via Rule 3002.1.

Value beyond discharge

There’s more to Chapter 13 than the discharge and it’s available without reference to prior bankruptcies.

 

 

 

4 Keys To Chapter 13 Success

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successful Chapter 13

How do I make a Chapter 13 plan that succeeds?

That’s important because a successful Chapter 13 lets you

keep your assets,

keep control of your income, and

discharge more debts than any other form of bankruptcy.

Yet a distressing number of Chapter 13’s fail before they reach the finish line.

Debtor writes the plan

One powerful characteristic of Chapter 13 is that the debtor writes the payment plan.

How Chapter 13 works

Not the judge, not the trustee, not some anonymous “they”.  You.

The court must confirm it, but creditors don’t have to like it or support it for it to become the order of the court.

The plan sets out how much money you will pay in every month, and tells the trustee whom to pay with that money.

So,  how do you craft a plan that you can follow and will get you to your goals?  What plan elements increase the odds of success?

1.  Don’t overreach

Biting off too much to chew (or really, to pay) dooms more Chapter 13 plans than anything else in the debtor’s control.

And that usually comes down to trying to save a house with a loan badly in arrears. Or, keeping a vehicle with a huge unpaid balance.

Bankruptcy allows you to choose whether to continue paying on debts secured by things you own.  Chapter 13 differs from Chapter 7 in that it provides you protection from creditors and a space to catch up on secured debts that are delinquent.

But some other debts must, by law, be paid in Chapter 13.  Child support and recent taxes are the two most frequent examples.  Those debts have a  priority under the law, and must be paid in full through the plan.

Since secured debts are usually paid first by the Chapter 13 trustee, the first dollars into your plan pay for those secured debts you choose to pay.

If  later you are unable to fund the plan, you can find yourself tossed out of bankruptcy, still behind on house and car, AND owing the feds and your ex.

Sometimes, the most valuable thing a bankruptcy provides is a chance to walk away from deals you can’t afford any longer.

2.  Be real about the cost of living

Bankruptcy is unlike many kinds  of legal representation where you can hand the problem to a lawyer and go on about your life.

Not in Chapter 13.

Chapter 13 requires that you help your lawyer present a budget for the life of your plan that is realistic.  Nothing good comes of estimating that you can feed a family of four on $200/month, or that you can operate an older car for just the price of gas.

Make unrealistic assumptions about ongoing living expenses, so that the plan appears to work, just pushes the next crisis a bit down the road.

Think about the real cost of running your house and nurturing your family.  Make provisions in the projected budget for those expenses that come around but not on a monthly schedule.

3.  Opt for automatic payments

Have your Chapter 13 payment automatically deducted from your paycheck, or your bank account, and you stand a far better chance of completing your plan.

It’s simply easier to look at what’s in the account and spend what’s available than it is to spend such that enough is left to make the Chapter 13 payment.

‘Nuff said.

4.  Cling to a capable lawyer

Your bankruptcy lawyer is yours for the duration of the plan.  Stay in touch.

Before there’s a crisis, or even a change that cramps your ability to make plan payments, pick up the phone.  Tell your lawyer what you’re facing.

Be proactive in solving problems before those problems prompt the Chapter 13 trustee to dismiss your case.

You may be eligible to reduce your payments, to surrender the collateral for some debt, or to suspend payments for a while.

If not, your choices may include converting to Chapter 7,  asking for a hardship discharge, or simply voluntarily dismissing your case.

Your lawyer can help you figure out which of the options works best for you.

Most problems in Chapter 13 are solved more effectively and more cheaply when you are proactive in facing those problems early.

Don’t be a stranger to your lawyer.

More

How to interview a bankruptcy lawyer

Why I love Chapter 13

If your Chapter 13 is in trouble

 

 

 

 

Who Gets A Slice Of The Bankruptcy Pie?

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pie-chart-pixabay_opt

“That woman filed a claim in our bankruptcy case, and we don’t owe her any money!”

The next line, or paragraph really, of my client’s email asked what was I, her bankruptcy lawyer, going to do about it.

The short answer was nothing.

Nada.

Not a thing.

I didn’t plan to do anything.

Because when you have a pot plan in Chapter 13, it doesn’t matter who files a claim or for how much.

You pay the same.

Pot or Percentage

When you choose Chapter 13, you get to set the terms of the plan.  The plan  tells creditors and the Chapter 13 how much money you’ll pay the trustee each month and how that money gets distributed.

The claims of creditors are categorized:  secured, priority, co signed, and general unsecured.

You can treat claims of the run-of-the-mill unsecured creditor in two different ways.  You can promise each unsecured creditor a certain percentage of their allowed claim:

Creditors holding unsecured claims shall receive 20% of their claim.

Or, you can propose a “pot” plan.  You fund a pot of a specified number of dollars, to be shared among unsecured creditors according to the percentage of the total claims represented by that creditor’s claim.

When filed claims differ

The difference between the two ways of stating your payment plan comes out when claims are actually filed.  (No creditor gets paid in Chapter 13 without filing a claim.) [Read more…]

Tax Deductions Hidden In Chapter 13

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taxesDon’t miss the tax deductions hiding in your Chapter 13 plan payments.

The same, very important debts that your Chapter 13 plan pays are often tax deductible.

And you are still the person who’s paying, even if the trustee writes the check.

Deductions in bankruptcy

Let’s look at some common deductions lurking in the Chapter 13 disbursements.

Mortgage interest  If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.

Taxes  Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

 Business expenses  If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Get the info you need

In my experience, you have to dig out the information on deductible payments;  I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.

Step by step to claiming the mortgage interest deduction

But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.

Pull up the report of last year’s disbursements and flag the payments that are deductible.

Save the printout of the trustee’s report in case of question  by the taxing authority.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

How to treat 1099’s on foreclosures and short sales

Go back to prior tax years

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.

Tax returns are generally amendable for three years.

Check it out

Take this post with a grain of salt, or rather, take it to a tax professional.

I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job.  But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.

What your tax professional should know about tax and bankruptcy

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