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Chapter 13: Know Who Gets Paid First Under Your Plan

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The financial road isn't always smooth

Reality exists outside of television shows.

And when real-world reality hits some debtors, it’s a trainwreck.

It comes up for me when Chapter 13 clients and I sit down to write the plan for the case.

The plan will set out which classes of creditors get paid over the five year life of the plan.

Too often, my ever-optimistic client wants to keep all of his assets with secured debts AND pay off the must-pay back support or non dishchargeable taxes.

The Problem

Secured debts are things like car loans, home mortgages , and property taxes.

If you don’t pay a secured debt, the creditor has the right to take the asset that is the collateral.

More on secured debts in bankruptcy

In Chapter 13, you get a choice on secured debts:  you can cure any back payments through the Chapter 13 plan or you can surrender the asset.

If you surrender the collateral, you owe neither the back payments nor the payments that come due after you file bankruptcy.

Priority claims in a Chapter 13 must be paid in full over the life of the plan to get the discharge.

The debtor gets no choice.  Priority claims are usually income taxes and family support.

The zinger is that the Chapter 13 trustee generally pays the secured claims first.

Over optimism

So here’s the dilemma.  It’s hard to decide to give up houses and cars.  You’ve usually got some part of yourself invested in the choice.

Even if the car is a gas guzzler or the house burdened with a bad loan or too little value, it’s tempting to assume you can gut it out. Make up the back payments over five years and have something at the end.

When the collateral is a toy, a boat or bike, or a rental home, you spin yourself messages of entitlement or future appreciation.

You commit in your plan to pay both the secured claims and the priority claims within the five year limit of a chapter 13 plan.

You look at your budget and it works, barely.  You can project enough money to do it all within five years.

Hit a bump

But then, mid plan, life intervenes.  Your work hours are reduced.  The car breaks down.  A family member gets sick.

And all of a sudden, there isn’t enough money to make the plan payments that get you everything.

Worse, what you’ve paid into the plan has gone for things you didn’t have to pay for:  the Harley, the underwater rental, the house that’s too expensive.  The trustee’s order of distribution puts the debts that won’t go away behind the options you chose.

Depending on how significant the loss of income or increased expenses, you may be able to recover.

But maybe not.

Plan for the unexpected

When making choices at the beginning of a Chapter 13, don’t assume that everything in your financial life going forward will be uniformly stable or improving.

Where you will be if there is a major negative event in your life?  Have you taken care of the most important debts first?

Or does the overly optimistic plan you propose have you continuing to live on the financial edge?

Image courtesy of Flickr and  bwats2.

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.

Cut Tax Penalties In Bankruptcy

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redwood-pixabay_opt

Get in tax trouble and the penalties often grow huge.

What starts as a manageable problem can soon tower over you.

Breathe deep;  there is a solution.

Chapter 13 bankruptcy can cut tax penalties down to size.

All tax penalties discharged in 13

Old or new, large or small, Chapter 13 discharges all unsecured tax penalties.

In contrast, Chapter 7 discharges some tax penalties.

 Discharged are penalties for taxes that are themselves dischargeable.

Also dischargeable in Chapter 7 are penalties where the transaction or event that triggered the tax occurred more than three years before filing, whether or not the tax itself is dischargeable.  523(a)(7)(B).

That’s good, but if you are eligible, Chapter 13 is better.  All penalties are discharged.

Who can file Chapter 13

Chapter 13 is available to individuals (no corporations or LLC’s), with regular income, whose debts total less than the caps for secured and unsecured claims.

You know if you are a real person and whether you have regular income, so the thing that needs analysis is the allocation of your debts between those that are unsecured (the creditor has no lien on your assets) versus the debts for which there is a lien.

To be a secured claim in bankruptcy, that lien has to attach to an asset that has market value greater than any liens senior to it.

Tax liens don’t go to the head of the line just because they are debts owed to the government.  They fall in line behind any other lien holder who perfected their lien before.

Recent taxes must be paid

Chapter 13 plans are written by the person who has filed the bankruptcy case.  The Bankruptcy Code requires, however, that recent income taxes be paid in full through the plan.

Note that it is the TAX and the INTEREST on that tax that have to be paid during the life of the Chapter 13.

Penalties get treated just like personal loans, medical bills, and credit card debt:  what that class of creditors gets in the Chapter 13 is driven by the means test and the best interests of creditors test.   In most Chapter 13 plans, that’s little, or nothing.

Chapter 13 cuts those penalties down to size.

Tax liens whittled down

toothpicks-pixabay_optThe discussion above deals with unsecured taxes and tax penalties.  The rules change when a tax lien is filed.

At its simplest, a Chapter 7 discharge eliminates the IRS’s ability to levy your bank account or garnish your wages for taxes that have been discharged.

However, the Chapter 7 discharge doesn’t alter any tax lien recorded before the bankruptcy, even if the taxes themselves are discharged.

If the tax liability is discharged, any lien in place will not attach to assets you acquire after your bankruptcy is filed.

More about tax liens after bankruptcy

Chapter 13 does alter tax liens.  (See why I’m a fan of 13?)

Chapter 13 treats as a secured claim only that part of a lien that attaches to real value in the taxpayer’s assets.

Put bluntly, if you don’t have any assets, then the lien is worthless and will be voided at the conclusion of your Chapter 13 plan.

Oh, technically,  the tax lien may attach to your household goods, all right.  But those things have very little market value.

Pay the resale value of your pots and pans through the Chapter 13 plan, and the lien is deemed satisfied.

If you can’t cut a deal with the IRS that eliminates the tax penalties as part of an offer in compromise or payment plan, you have bankruptcy options for tax penalties.

More about Chapter 13

Get rid of credit card balances without paying interest

Why Chapter 13 Plans Fail

How Chapter 13 Works

Images courtesy of Pixabay. 

 

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

 

 

 

 

3 Real Reasons Chapter 13 Plans Fail

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chapter 13 success

Two out of three confirmed Chapter 13 cases fail.  Those are cases that met all the tests and got the judge’s OK.

And still they crater.

That’s a heap of people, deeply in debt, who don’t make it out of debt by using Chapter 13.

Arizona bankruptcy lawyer John Skiba has a theory about those failures:

  • Life
  • Lack of a lawyer
  • Luck of the trustee draw

I wouldn’t argue against any of John’s culprits:  none of the things he lists help a Chapter 13 debtor.

But I have an alternate set of reasons that those trying to reorganize their debt through Chapter 13 don’t make it to the end. [Read more…]

Sloppy Mortgage Servicers Prey On Borrowers

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banks behaving badly

 

Given the way they behave, you’d think mortgage servicers actually flew a pirate flag over their operations.

They cash your check for the mortgage payment, then who knows what they do with it and what they credit it to.

Outside of bankruptcy, screw ups in handling your payments are a breach of the contract between you and the lender.  The servicer is the agent for the lender.

Good luck in getting the real story about what’s going on, and call up a miracle to get it fixed.

But, if you’ve been through Chapter 13, you’ve got a teammate in the fight to get proper credit for your payments:  the bankruptcy judge.

Because in, or after, a Chapter 13, getting the loan accounting wrong violates federal bankruptcy law. [Read more…]

Discharged Debts Don’t Bar Chapter 20 Lien Strip

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Underwater liens that linger after an earlier bankruptcy don’t count in Chapter 13.

At least, they don’t count against the unsecured debt limit that restricts entry into Chapter 13, says the 9th Circuit Bankruptcy Appellate Panel in Free.

Great news for homeowners for whom Chapter 13 was not initially available because they exceeded the debt limits.

Free settles the question of whether the lien that passed through a prior bankruptcy case is a “debt” counted for eligibility purposes in a subsequent Chapter 13 if there is no collateral value to secure it.  The answer is no.

Neither the Code nor case law compels inclusion of the discharged in personam liability in such calculation.

What survives a bankruptcy discharge

Without getting so technical that only a lawyer would care, the problem when a Chapter 13 case is filed after a Chapter 7 is characterizing what’s left of the liens in effect when the 7 was filed.

The Chapter 7 discharge eliminated any personal liability of the debtor for the debt that was secured by a lien, but left the lien as a valid charge on any collateral to which it had attached. [Read more…]

Social Security Safe In Bankruptcy

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Social Security in bankruptcyThe Chapter 13 trustee objected to the debtors’ repayment plan because they did not plan to devote their Social Security income to repaying creditors.  

And, he complained, they proposed to keep and pay for vehicles that are luxury items.

The plan is not proposed in good faith, he claimed, as required by the Bankruptcy Code.

The trustee fought for inclusion of the debtors’ Social Security payments through three different courtrooms.  The  9th Circuit Court of Appeals decided in the debtors’ favor.

The good faith test for confirmation is not a back door around the statutory calculation of disposable income to be paid to creditors nor does it entitle courts to second guess which pre bankruptcy secured creditors the debtor pays through his plan.

Chapter 13 plans that meet the statutory tests for confirmation cannot be rejected under the catch all provision that they lack “good faith”.  Drummond v. Welsh.

Good faith doesn’t require Social Security 

The trustee in Welsh argued that the debtors’ plan was not confirmable because it excluded Mr. Welsh’s Social Security benefits from the plan.  The plan was not  proposed in good faith, the trustee claimed.

Not so, said the 9th Circuit.

With the  1984 amendments to the Bankruptcy Code, Congress created the best efforts test for confirmation of a plan.

With the formulation of that test, the amount of the payment to unsecured creditors was no longer a basis to challenge the debtor’s good faith.

The 9th Circuit held that BAPCPA and the means test introduced in those 2005 amendments refined the best efforts test.  The law did not permit opposition to a plan that argued for larger payments than the Form b-22 calculations, at least where those larger payments would have to be funded by Social Security.

Good faith could not be stretched to gather into the Chapter 13 plan the debtors’ Social Security. [Read more…]

Not Too Late To Strip Mortgage Lien

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Strip mortgage liens

It’s never too late to value a lien and avoid it in bankruptcy.

Even after the Chapter 13 case is done and closed.

So says the 9th Circuit Bankruptcy Appellate Panel in Chagolla, decided February 9, 2016.

In the absence of prejudicial delay, we find that a motion to value and avoid the lien of a junior lienholder may be brought after discharge if the confirmed plan called for its avoidance and treated it as unsecured and if no prejudice to the  junior lienholder will occur

And it’s a welcome decision in Northern California, where a number of courts have held that failure to value a lien in advance of confirmation of a Chapter 13 prevents subsequent avoidance of the lien.

Lien slips through cracks

Here’s what happened to Lucio and Maria when they filed Chapter 13 in 2008. [Read more…]

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