Chapter 13 Archives - Page 3 of 4 - Northern California Bankruptcy Lawyer

The Zero Interest Get-Out-Of-Debt Tool: Bankruptcy For The Solvent

Once again, Chapter 13 rescued a client.

He’ll get out of debt and pay (effectively) no interest going forward on his credit cards.

He owned a home, had a job, and was solvent on paper, but he couldn’t sleep for worry about his debts.

Despite having lots of equity in a house, there wasn’t not enough income to retire the debt when the mortgage resets in the spring.

Chapter 7 would get rid of the debt, but cost him his house.

Thank goodness for Chapter 13, where you

keep your assets,
propose a plan, and
get a discharge.

Chapter 13 gets my client out from under credit cards with ruinous interest rates, reduces the interest rate on his high interest car loan, and lets him sleep at night knowing he won’t lose his house to unsecured creditors.

A pretty good deal for a $310 filing fee.

Interest free debt repayment

The good news is that the equity in his house requires that his Chapter 13 plan pay his debts in full. But, “in full” does not mean “with the usual credit card interest”.

Pay off the cards in full in Chapter 13 and you pay only the federal judgment rate. Currently , that’s little more than one half of one percent, instead of 18-34% due under the credit card agreements.

To pay off the cards according to their terms outside of bankruptcy, most of each payment for a long while goes to interest. That’s why credit card issuers are content to have you carry a balance.

For this client, we figure that a 100% repayment plan for the cards and the tax debt will require a payment about 1/3 of what he currently pays each month on the cards.

No need to be broke to file bankruptcy

This client looks good on paper. He’s solvent due to lots of equity in his house. He’s current on his bills.

He just sees the freight train coming down the tracks when he reaches the end of the interest-only feature on his home equity loan.

You don’t have to be upside down, financially, to file bankruptcy. You only need to be willing to play by the rules of the Bankruptcy Code for dealing with your creditors.

The applicable rule for this client says: if you keep your house with that much equity, you must pay the creditors in full.

Bankruptcy won’t change the terms of his home loan, it will just spread out and pay off the other debts that have a claim on his monthly income.

And, he can stop underwithholding on his taxes. He had increased his exemptions to get more cash monthly, leaving him owing taxes at the end of the year.

Part of our plan is making the withholding match the taxes owed, so we don’t have a recurring tax problem.

13 was my client’s lucky number.

Social Security Safe In Bankruptcy

By Cathy Moran

The 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

By Cathy Moran

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…]

Who Gets To Choose Your Bankruptcy Chapter?

By Cathy Moran

Does someone other than the debtor get to choose which chapter a bankruptcy case is filed under?

Some seem to think so.

There’s an ongoing tug of war in the courts between the bankruptcy establishment on one side and debtors and their lawyers on the other about whether a Chapter 13 that pays only the attorneys fees necessary for the bankruptcy is allowed.

Some courts mutter that such a plan is a “disguised Chapter 7” as though Chapter 7 was the default choice and the choice of Chapter 13 needs to be justified. Those courts propose to dismiss or convert cases that in the court’s view would be appropriate Chapter 7 cases.

That view is wrong, for many reasons which I’ll get to in a minute.

But the most compelling reason to choose Chapter 13 is baked into the Bankruptcy Code after Congress “reformed” it in 2005:

Choose Chapter 13 and, if your finances go to hell after you file your case, you can file another, full strength Chapter 13 to deal with new troubles.

File Chapter 7, and you are locked out of a subsequent bankruptcy discharge for four years.

How can anyone other than the debtor make that choice about future risks? Where do judges get a crystal ball that sees into the debtor’s future? [Read more…]

Tugging On Superman’s Cape

By Cathy Moran

When a Chapter 13 trustee complains that the means test is not easy to administer when only one spouse files, should I be sympathetic?

After all, Chapter 13 confirmation is often a negotiation on disputed issues between the trustee and debtor’s counsel.

Here’s what I said recently at ConsiderChapter13.org on that issue.

Come on, Madame Trustee, get over it. What is there about BAPCPA that leads you to expect that it or its misbegotten spawn of a means test treats debtors fairly or equally?

And where does the Chapter 13 trustee have a mandate to challenge the filing of a case by a debtor whose spouse will not or cannot join in the filing?

The Bankruptcy Code clearly permits a married person to file without their spouse. I see no basis to deny relief to one spouse or to hedge that relief because their spouse does not file.

The single spouse filing has become more attractive for debtor’s counsel in a world of longer periods between bankruptcy filings and Chapter 13 debt limits that disqualify homeowners in sections of the country that once had a hot real estate market.

I will join in the chorus of boos about how the means test is obscure. In so many ways, it simply does not fit neatly with a myriad of real world configurations.

How does it apply to the recently married, the recently widowed, the family whose composition will change when the expected baby is born? What’s the logic of including family support received in Chapter 7 but backing it out in Chapter 13?

Face it, this is simply an instance of drafter’s malpractice. The formerly explicit power of judges to determine whether expenses were reasonable or the plan non-abusive has been superseded by a judicial warrant to interpret an opaque and ill-conceived statute.

I sympathize with your difficulty in determining how to assess the appropriate elements of the marital deduction. We don’t get much help in the statute.

Some expenses seem obviously deductible: support arising from a previous marriage and debts incurred pre-marriage come to mind. It’s harder to find an analytic line for debts incurred during marriage in the non-filer’s name only. Is the deciding factor who is liable or the purpose of the expenditure?

But looking at the issue of fairness from another perspective, why should a creditor who has no claim against the non-filing spouse get the benefit of all of the non-filing spouse’s income? If the creditor expected recourse against the spouse, they should have bargained for it at the inception of the debtor/creditor relationship. Is the creditor any worse off than they would have been had the marriage failed before the bankruptcy case was filed?

Join debtors’ counsel in trying to make sense out of nonsense.

Image courtesy of aka kath

Why I Love Chapter 13

By Cathy Moran

How do I love thee, Chapter 13?

Let me count the ways.

Hang on, because it’s a long list. Thirteen reasons Chapter 13 rocks.

I love Chapter 13 because:

1. Debtors keep control of their assets. They run their businesses. There is no trustee tasked to sell assets.

2. Repayment to creditors can be little or even nothing. It depends on the debtor’s income and the value of their assets.

3. Chapter 13 plans can be changed during the case. If income falls or is temporarily interrupted, the plan can be changed to accommodate the change.

4. The case can be freely dismissed. You can get out of bankruptcy if you want, unlike Chapter 7 .

5. The automatic stay protects the debtor for the 3 -5 years of the plan. No foreclosures, no repossessions, no levies.

6. Mortgage defaults can be cured over as long as five years.

7. The interest rate on car loans can be reduced to today’s market rate.

8. Mortgage liens that are totally underwater can be eliminated forever in 13.

9. The IRS has to go along with the repayment terms in your plan, without interest.

10. Tax penalties are dischargeable, even when the tax is recent.

11. Debts to former spouses, other than support, can be discharged.

12. Tax liens greater than the value of the debtor’s assets at filing are eliminated.

13. Attorneys fees for the case can be paid after filing.

More advantages to Chapter 13

When you file Chapter 13, you are eligible to file another Chapter 13 case, if you need to, far more quickly than if you had filed a Chapter 7.

In fact, you are eligible to file a second Chapter 13 after two years from the filing of your first case. (But you can’t have two cases active at once.)

Your Chapter 13 filing generally drops off your credit report three years earlier than if you had filed a Chapter 7 bankruptcy. It’s gone two years after the Chapter 13 discharge in a five year plan.

Unlike debt settlement arrangements, your repayment plan is enforced by a federal judge. All creditors are required to go along. No creditor can elect not to be involved and opt out of the plan. Whether a creditor files a claim or not, the creditor’s claim is likely toast at the end of the case.

Chapter 13 can be a powerful and affordable tool for getting back on your financial feet.

Chapter 13 To The Rescue In Ruinous Business Lawsuit

By Cathy Moran

Twice in the last six months, Chapter 13 bankruptcy has saved clients facing catastrophic lawsuits arising out of business.

And because the targets of these lawsuits filed bankruptcy before they’d spent a fortune on lawyers and before the court had a chance to award huge damages, they fit beneath the Chapter 13 debt limits.

We think of Chapter 13 as a consumer tool. It’s designed for those with a regular income. It’s sometimes called a wage earner plan. The amount of debt involved has to be below certain limits.

So, Chapter 13’s application to business litigation isn’t obvious.

But it works like a charm.

Here’s how Chapter 13 rescued one client sued about a business dispute.

Chapter 13 filed before judgment

[Read more…]

Claim Tax Deductions Lurking In Your Chapter 13

By Cathy Moran

Tax deductions may be hiding in your Chapter 13.

Did you file for an extension of time to file your income tax return?

Well, time to get the return done is running out: returns are due October 15th.

If you are in a Chapter 13 bankruptcy case, you may have deductions you haven’t considered found in the payments the Chapter 13 trustee has made in your case.

If your plan provides for

curing mortgage arrears,
paying taxes,
spousal support or
business expenses,

consider claiming amounts paid to those creditors through your plan as deductions.

The Chapter 13 trustee is paying those claims with your money. I see no reason that the trustee’s expenditures aren’t deductible to you.

Check with your tax professional.

And if you are several years into a Chapter 13, consider whether you can amend prior years to claim the trustee’s distributions for earlier years.

More on tax issues when you’ve filed bankruptcy: the 1099.

Lurking kitty courtesy of Aftab Uzzaman and Flickr under Creative Commons license.

Why Creditors Should Get Less in Chapter 13

By Cathy Moran

Spending every dollar they make, and then some, is often how our Chapter 13 clients got into financial trouble.

Yet Chapter 13, as practiced, validates the practice of continuing to spend 100% of each month’s income during the life of the plan. In doing so, we squander the chance to use Chapter 13 to teach new budgeting habits.

Shame on us.

It was more obvious before BAPCPA: we calculated the debtor’s projected income and living expenses, and all of what was on the bottom line was paid into the plan.

Now, we use Congress’ objective measure of what it should cost to live, and pay 100% of the arbitrary formula into the plan. There is no provision in the Chapter 13 means test for savings other than long term retirement savings required by an employer.

I’m not knocking saving for retirement. In fact, as debtor’s counsel, my most oft-repeated reason for clients reluctant to take the plunge and file bankruptcy is to provide for retirement.

American Express does not have to retire, and you do. What have you saved for that day?

But every household needs some savings for today, for tomorrow, and next month.

The Supreme Court’s Ransom decision reinforces the sense that saving is not a financial virtue.

A debtor with a paid for car is not reminded that the old car will need to be replaced, and saving toward that inevitability is a good thing. Rather, the car is paid for and we’ll indulge in the idea that the car will last another 5 years and devote that cash flow to unsecured creditors.

We have effectively mandated that, instead of putting a serious down payment on the next car, our client will again finance the next purchase at whatever interest rate is available to the newly discharged. The cycle of borrowing is perpetuated.

Debtors are required to take a class in personal financial management to get their discharge. Those classes surely do not promote consuming 100% of one’s income. Short term saving is needed to provide for the unexpected and the infrequent. Otherwise, you continue to live on the financial brink.

It is ironic, but true, that a Chapter 7 debtor can begin reforming the way she handles money almost immediately after filing bankruptcy. A Chapter 13 debtor lives for 3 to 5 years with a budget that makes no provision for an emergency fund.

I would like to think that Chapter 13 is rehabilitative, that it uses the duration of the plan to build new and better habits of money management. That isn’t what’s happening. As it is, the system’s distaste for savings while debts are unpaid perpetuates budgeting to spend every single dollar the debtor handles.

The language of our confirmation order provides that the debtor’s post petition income is submitted to the supervision and control of the Chapter 13 trustee. What kind of financial professional is the Chapter 13 trustee if that supervision and control doesn’t encourage some level of savings?

Or is the required financial management class just window dressing whose lessons don’t really apply until the creditors have gotten their pound of flesh?

This article was originally written for the Variety of Views feature at ConsiderChapter 13.org.

Image courtesy of kenteegardin

Lien Stripping Works Without A Bankruptcy Discharge

By Cathy Moran

The waiting and uncertainty is over. The judges have decided.

Chapter 13 debtors can void underwater junior liens even if they aren’t eligible for a bankruptcy discharge in the Chapter 13 case.

So says the 9th Circuit Court of Appeals in a case called Blendheim, decided October 1.

And so, a myriad of Chapter 20 debtors and title insurers round the circuit heave a sigh of relief.

“Chapter 20” is legal slang for a Chapter 13 case that follows a Chapter 7 case so closely that the debtors don’t get a discharge in the new case.

Bankruptcy courts in many districts have been voiding worthless liens in cases where the homeowner isn’t eligible for a discharge generally since the Great Recession began.

Yet some judges and some scholars questioned whether the law allowed elimination of a lien at the end of a Chapter 13 when the cases concludes without a discharge.

I have tried to imagine the chaos that would be created if the appeals court had ruled that all these lien strips in Chapter 20 cases were themselves void. [Read more…]

Interest free debt repayment

No need to be broke to file bankruptcy

Good faith doesn’t require Social Security

Lien slips through cracks

I love Chapter 13 because:

More advantages to Chapter 13

Chapter 13 filed before judgment

More on tax issues when you’ve filed bankruptcy: the 1099.

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