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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. 

 

Can I Sell Stuff Before I File Bankruptcy

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insect-in-amberThinking about filing bankruptcy?  Need cash?

Folk wisdom supplies many “rules” about the period leading up to actually filing bankruptcy:

  • Don’t sell anything
  • Don’t pay anyone
  • Don’t make any money

This kind of thinking will have you frozen in time and space like this insect in amber.

Only, this folk “wisdom” is all wrong.

Here’s how to sell assets before filing and without messing up your right to a bankruptcy discharge.

Sell stuff for what it’s worth

Bankruptcy law objects if you dispose of assets for less than they are worth.  It’s not the sale that might be objectionable, it’s the price.

When you transfer an asset for less than its real value, there is less for your creditors.  And  Anglo Saxon law since the Statute of Elizabeth in 1571 has prohibited gifts, bargain sales, or sham transfers that have the effect of reducing your assets.

Transfers where you dispose of an asset for less than its fair market value are called fraudulent transfers.

The transfer can be actually fraudulent, where you intended to hide an asset from creditors.  Or, constructively fraudulent.  Those transfers  can be innocent or even benevolent, as when you make a donation to charity.

But, if you got less in return than you gave up, it may be a fraud on creditors.

Fraudulent transfers in bankruptcy

Bankruptcy law frowns on fraudulent transfers.

The bankruptcy trustee is empowered to recover the assets or money transferred within 2 years of the filing from the recipient  if the transfer was fraudulent.

That strips the benefit of the transfer from the transferee.

In many cases, even when a transfer is fraudulent, it isn’t worth the expense to the bankruptcy trustee to recover it.  The benefit to creditors as a group is just too small or too tenuous to make it worthwhile.

But for the debtor in bankruptcy, significant transfers of assets with intent to hinder, delay or defraud creditors constitute a ground to deny an individual a discharge in bankruptcy. 11 USC 7272(2).

Sell for today’s value

You are absolutely free to dispose of assets before your bankruptcy is filed if you get “reasonably equivalent value” in return.  That’s legalese for getting what it’s worth.

Remember, it’s only worth what a buyer will give you for this particular asset, on this day, in this market.

The stuff may be worth far less now than it was when you bought it.  It may be that the market is glutted or the thing is obsolete, worn, or out of fashion.

If you get about what the market says it’s worth, you’re OK.

If you are selling on the eve of bankruptcy, just make sure that you expose the asset to the market.  That may be Craig’s List;  e Bay; Auto Trader or like marketplaces.  Even a garage sale will do.

Keep a record of the steps you took in your sales campaign.

Disclose the transfer in the bankruptcy schedules and the Statement of Financial Affairs.

And if it genuinely doesn’t have any market value, you’re free to donate it or junk it.

More

What not to do before bankruptcy

Image licensed by Anders L. Damgaard  under Creative Commons license 3.0.

Your Bankruptcy Discharge Doesn’t End Your Case

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bankruptcy trustee

Isn’t my case over?

I got my discharge.  Why’s the bankruptcy trustee still  hounding me?, my client asks.

People who’ve filed bankruptcy are focused on the discharge as their goal.

With their discharge in hand, they think it’s all over.

They lose sight of the fact that the administration of a bankruptcy estate by the trustee runs on a parallel track to the one that leads the debtor to a discharge.

Different tracks.  Different timelines.

Trustee’s job

The Chapter 7 trustee’s job doesn’t necessarily end at the 341 meeting where the debtor appears and answers questions.

Most Chapter 7 cases end for the trustee with the first meeting of creditors.  There are no assets for the trustee to administer and no unanswered questions.

But the trustee may have responsibilities that remain after the meeting.

The trustee is charged with investigating the debtor’s right to a discharge and with turning any nonexempt assets of the debtor  into cash for benefit of creditors.

How exemptions work

The trustee may need to know about bank balances on the date of filing or transfers that he may be able to recover.

If he has assets to distribute, he needs to review the claims filed by creditors.  If the bankruptcy estate has income, he may need to file a tax return.

There can be lots of work for the trustee in an asset bankruptcy case.

Road to discharge

For the debtor, the track is usually far shorter.

The Bankruptcy Code was structured to let the debtor know very quickly after the filing of the case whether he will get a discharge.

Or rather, it’s set up to let the debtor know whether there’s a dispute about getting a bankruptcy discharge or about the dischargeability of a particular debt.

The notice that goes out to creditors right after a bankruptcy case is filed sets out the deadline for creditors to challenge the discharge or the dischargeability of a particular debt.  That date is usually 60 days after the date of the first meeting of creditors.

Anyone challenging the discharge must file an adversary proceeding with the bankruptcy court in that time.

Absent the filing of an adversary, the court issues the discharge.  The debtor heaves a sigh of relief and thinks it’s all over.

Trustee work continues

The trustee’s work is not ended just because the debtor got a discharge.

If there are assets, he’s still got work to do.  He may need information or other forms of cooperation from the debtor to do his job as trustee.

The debtor’s failure to provide that cooperation can lead to an action to revoke the discharge.  So the debtor still has some skin in that game.

The administration of some bankruptcy estates goes on for years.  It all depends on the nature of the assets the trustee is administering.

No asset cases

The vast majority of bankruptcy cases are no-asset cases.

That’s a shorthand way to say that there are no assets for the trustee to administer and there will be no distribution to creditors.  Even though  Chapter 7 is termed a liquidation proceeding, there may be nothing of value worth liquidating.

In those cases, the trustee may file his no-asset report and close his file long before the debtor gets the discharge.

So the trustee and the debtor proceed down the tracks of a bankruptcy case, in parallel, but not intersecting.

More

The stuff you keep:  exemptions

Choosing between the bankruptcy chapters

Making the most of your bankruptcy discharge

Image courtesy of Flickr and Anna L. Martin.

 

 

 

 

 

 

 

 

 

 

 

 

What’s Included In Bankruptcy?

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included in bankruptcy

 

Bankruptcy is a snapshot of your situation on the day the bankruptcy case is filed.

Think of your bankruptcy like the Clampett’s Buick,  arriving in Beverly Hills, crating all their stuff.

For bankruptcy purposes, your case includes your financial “stuff”,  debts and  assets.

  • The debts that are included in the case are those existing on the day you file.
  • The assets that are included are the things you owned when you filed bankruptcy.

The bankruptcy filing draws a line between your pre bankrutpcy life and your life after bankruptcy.

With a couple of exceptions, whatever you earn after the date you file bankruptcy is not included in your bankruptcy.

Likewise, if you cause an accident or incur a debt after your case is begun, those debts will not be discharged in your bankruptcy case.  They weren’t in the snapshot of your situation when you filed your case.

The exceptions

The Bankruptcy Code has three exceptions to the rule that the bankruptcy estate is made up of what you owned when you filed.

They are

  • Assets acquired by inheritance, bequest or devise
  • Life insurance proceeds by reason of someone’s death
  • Assets acquired by a marital property settlement or judgment

If you acquire the right to any of these kinds of assets within 6 months of the commencement of the case, they are treated as if you had them when your case began.  The debtor has an obligation to report such acquisitions to the trustee.

Creditors not debt balances

Bankruptcy acts on the debtor/creditor relationship.  That’s why listing all those who have claims against you is so important in getting your bankruptcy schedules right.

It isn’t generally important to list exactly what you owe a creditor in your schedules.  The bankruptcy discharge will wipe out whatever it is you owe on a dischargeable debt.

Remember, you can list and discharge debts where you dispute your liability, so long as you give the creditor notice of your case.

Chapter  13

If your bankruptcy case is a Chapter 13, the rules are a lot less clear.

One part of the law says the rights of creditors to repayment are determined by the property you have at filing; another part of the bankruptcy code says that your earning during the case are property of the estate.

While lawyers can spend lots of time parsing the law, for the debtor in 13, the rule that is clear is that dramatic changes in your income may trigger a change to your plan payments.

Elusive assets

The biggest trouble debtors have in listing their assets in the bankruptcy schedules involves intangible assets, like the right to sue for an accident that has already happened, or a claim in a class action.

Tragic consequences of filing bankruptcy without listing her mother’s house

Even though it’s not known at filing whether you will win such a claim, and if you win, how much you will get, the claim is still an asset you own.  It has to be listed or you may lose it because you didn’t disclose it.

New day

So your fresh start really begins on the day you file your bankruptcy, not when you get the discharge.  Every dollar you now earn is yours.

Image courtesy of prewarbuick.com.

 

Debts To The Government: Can They Be Wiped Out

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Uncle Sam public domainIt’s easy to assume that debts owed to the federal government can’t be discharged in bankruptcy.

Easy, but wrong.

Just because the creditor is Uncle Sam doesn’t mean the debt can’t be wiped out in bankruptcy.

In fact, debts to the government range from freely dischargeable to not-in-this-lifetime nondischargeable.

Honesty required for discharge

All of the discussion that follows assumes that your debt to the government is honestly incurred, and is unsecured.

Secured debts, those for which there is a lien, generally survive a bankruptcy discharge.

So tax liens and SBA liens live beyond a Chapter 7 discharge.  More on limits on tax liens after bankruptcy.

Debts dischargeable in bankruptcy

Income taxes for years more than three years before the bankruptcy filing are dischargeable.  You count the three years from the due date of the return.  If there is a tax lien, the lien survives on existing assets, but doesn’t attach to new property.  More on taxes in bankruptcy

Social Security overpayments  can be wiped out in bankruptcy.  After a bankruptcy filing, your current benefits are not subject to reduction on account of a prior overpayment.  More from SSA.

SBA loans are just loans, subject to discharge in bankruptcy.  The complication with SBA loans is that they are often secured.  It’s important to determine what assets, if any, are pledged to support the loan.  A bankruptcy discharge will prevent the SBA from suing you to collect its loan from your wages, savings or other assets;  the collateral you gave the lender when the loan was negotiated survives.

Student loans may be dischargeable

Government guaranteed student loans occupy the middle ground in our range of possibilities.  A student loan guaranteed by a governmental entity can be discharged if the borrower can show a bankruptcy judge that repayment would create an “undue hardship” on the debtor or the debtor’s dependents.  The standard is pretty tough.

Some bankruptcy courts will discharge part of a student loan.  Those courts find that repayment in full is a hardship, but partial repayment is possible without undue hardship.  The 9th circuit which includes California, is one of those circuits allowing partial discharge of student loans.

Government debts that survive bankruptcy

Fines and penalties owed to a government that are imposed to punish, rather than compensate, can’t be discharged in Chapter 7.  There is an exception for tax penalties:  if the tax is dischargeable or the event that triggered the penalty occurred more than three years ago, the penalty can be wiped out.  11 USC 523(a)(7).  In Chapter 13, fines and penalties are dischargeable.

Trust fund payroll taxes are never dischargeable in bankruptcy.  The trust fund portion of payroll taxes is the taxes withheld from the employee’s paycheck for payment to the government.  Officers of corporations who short the government for trust fund taxes can be personally liable for shortfall.

Military scholarships and incentive pay remain collectible despite bankruptcy.  Most of these exceptions make the debt non dischargeable for a period of years, shorter than the usual statute of limitations.  Here’s a more extensive list of governmental exceptions to bankruptcy discharge.

Non dischargeable debts in bankruptcy

Even if a debt is non dischargeable at the end of a bankruptcy case, some of the bankruptcy rules still apply.

Collection of non dischargeable debts is still stayed by the automatic stay.  The stay remains in place til the debtor is otherwise discharged, or until a bankruptcy judge lifts the stay as to that debt.

The statute of limitations still  controls how long a debt is legally enforceable.  The running of time on statute of limitation is suspended while the stay is in place, and sometimes for a specified additional period.  But just because a debt is not dischargeable in bankruptcy, applicable law may still allow it to die of old age.

Bankruptcy Alphabet: B Is For Business

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B

Business is my bankruptcy “B’ word. Business debt of the individual filing bankruptcy is dischargeable just as other personal debt.

In Silicon Valley, the very innovation and risk taking that makes the Valley vibrant brings with it the risks of not making it in the marketplace.

Bankruptcy can be the “do over” vehicle, freeing manpower and resources to move on with life. People here inevitably move on to try again, which is what makes this place exciting.

At the conclusion of his book The Lexus and the Olive Tree, Thomas Friedman, writer for the New York Times, (@NYTimesFriedman) imagined the characteristics a society needed to thrive in the global economy. 

Generous bankruptcy laws, he proposed, were essential for that society to prosper.

 a country with a system of bankruptcy laws and courts that actually encourages people who fail in a business venture so declare bankruptcy and then try again, perhaps fail again, declare bankruptcy again, and then try again, before succeeding and starting the next Amazon.com without having to carry the stigma of their initial bankruptcies for the rest of their lives.

In Silicon Valley, says renowned venture capitalist John Doerr, it is O.K. to fail and in fact it might even be important that you failed before on someone else’s money: In Silicon Valley, bankruptcy is viewed as a necessary and inevitable cost of innovation, and this attitude encourages people to take chances. If you can’t fail, you won’t start. Harry Saal, who founded one of the most successful software diagnostic systems in Silicon Valley, after being involved in several start-up ventures that went belly-up, once told me over coffee in Palo Alto: The view here is that you are always better and wiser for having failed. Which is why when people here fail after having tried something, they often have an easier time raising money the next time around. People say, Oh, he went bankrupt on that first venture. I bet he learned something from that, so I’ll bankroll him again.

In Europe, bankruptcy carries a lifelong stigma. Whatever you do, do not declare bankruptcy in Germany: you, your children and your children’s children will all carry a lasting mark of Cain in the eyes of German society. If you must declare bankruptcy in Germany, you are better off leaving the country. (And you’ll be welcomed with open arms in Palo Alto.)

Some struggle with the concept that when the business is a sole proprietorship, rather than a corporation or an LLC, there is no dividing line between business debts and personal debts. When a person files bankruptcy, all of their debts of whatever origin, must be listed. One cannot just “file bankruptcy on the business debts.”

While our bankruptcy laws became less generous with the changes of 2005 for those with largely personal, consumer debt, bankruptcy remains open and forgiving for those with business debts.

This post was brought to you, as they say on Sesame Street, by the letter “B”.

More

Is it safe for your corporation to file bankruptcy?

Bet-the-company lawsuit and Chapter 13

Extract yourself from payroll tax troubles

Image courtesy of TooFarNorth.

Can A Trust Protect You In Bankruptcy?

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protect assets

Can a trust protect your assets from loss?

According to the lawyer advertising and the self-help books, everyone needs a revocable trust.

The asset protection industry loves irrevocable trusts to get assets out of your name so your creditors can’t reach your wealth.

So, do trusts work in bankruptcy to change the rights of debtors and their creditors?

Not so much.

What’s a revocable trust

A revocable trust is also called a living trust.  It’s created during the lifetime of the person putting their assets in trust.

The settlor, the person creating the trust, can unwind the trust altogether.  Or, the settlor can extract one or more assets from the trust.  It’s revocable.

The appeal of a revocable trust is that assets owned by a trust don’t need to be probated at the settlor’s death.  The terms of the trust determine who gets the trust assets.

I find revocable trusts useful to manage assets of the aging or the incapacitated.

Title to trust assets in a revocable reads:  George Smith, Trustee.  The asset appears to no longer be George’s asset, personally, but the asset of his trust.

Many people would like to think that George’s creditors can’t reach the asset if George doesn’t pay his debts.  Is it so?

Revocable trust and creditors

The very quality that makes a revocable trust appealing, that it can be revoked in whole or in part, is what defeats it as an asset protection tool.

The law says, if the settlor, the person who settles assets on the trustee, can revoke the trust, the settlor is treated as the absolute owner of the assets.

The trust changes nothing as far as the settlor’s exposure to his creditors.

California law puts it this way:

If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor.  Ca. Prob. Code § 18200

So when bankruptcy schedules ask for a list of your assets, the property in your revocable trust must be listed.

If the trust is irrevocable

An irrevocable trust is one where the trust can’t be revoked.  Assets that flow into the trust can’t be extracted by the settlor.

With an irrevocable trust, you’ve traded flexibility as to your assets for protection.

So, some see the irrevocable trust as the answer to creditor problems:  put the money in trust, let the trustee pay it out to you, and thumb your nose at creditors.

But there’s this pesky idea called the law against fraudulent transfers.

In this case, the law protects creditors who have a claim at the time the trust is funded.  The theory of law is that you can’t defeat the claims of your creditors by giving your property to a trust without getting back reasonably equivalent value.

If you got nothing for giving away your assets to the trust, it’s a fraudulent transfer.

State law, and bankruptcy law, have rules about how long a fraudulent transfer can be challenged by creditors.

Further, state law and the terms of the trust itself will determine the rights of creditors to monies paid out from an irrevocable trust.

Make sure your expectations about trusts, creditors, and bankruptcy are grounded in law.

More

Asset protection for cheapskates

The dangers of giving

Before you clean your financial house

What you keep through bankruptcy

 

 

 

Inclusion in Bankruptcy Doesn’t Equal “Discharged”

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include debts

Convincing clients that they need to include all of their debts in bankruptcy is one of the hardest parts of being a bankruptcy lawyer.

The struggle often seems Herculean.

Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”.

Sometimes I find the student loan payment in the budget but not on the list of creditors.

Or there’s a creditor they don’t want to know about the bankruptcy.

Listed not the same as discharged

Part of the issue is confusion between scheduling a debt and discharging the debt.

When you file bankruptcy, you are required to list all debts and or risk denial of discharge if you don’t.

After all, you sign the schedules under penalty of perjury.  One of the standard questions the trustee asks at the first meeting of creditors is “did you list all of your debts”.

Rules for testifying when you go to bankruptcy court


You need to be able to say, honestly, “yes”.

However, debts are not necessarily discharged just because they are listed.

The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy. Those debts still must be listed.

Debts secured by your assets must be listed, even though the lien on the asset will survive the bankruptcy.

The bankruptcy bargain involves making full disclosure of your financial situation in exchange for the discharge.

Debts after bankruptcy

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case.

A reaffirmation agreement essentially waives the discharge as to that particular debt.  A reaffirmation agreement puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Reaffirm the car loan and you are protected against repossession as long as you make the payments as you did before bankruptcy.

More on keeping your car through bankruptcy

You can keep paying

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish.

“Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. “

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic.

I have to tell them the sad news that the love is one sided.  The issuer has other ways to find out about the bankruptcy case and may cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.

More

Who you need to pay after bankruptcy

If you left a creditor out of your bankruptcy papers

Image credit:  Monidas de Mon and Flickr

Get A Bankruptcy Discharge Even Without Making All Your Payments

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You can get a Chapter 13 discharge even  without making all the plan payments you promised.

There are hoops to jump through and facts to marshal to get that discharge, but it’s possible.

The Bankruptcy Code provides for a hardship discharge in Chapter 13 to those whose failure to complete their plan is due to circumstances for which they should not be held accountable.

Those circumstances, in my practice, have included illness, job loss, advancing age, and even tax debt arising after the case was filed from the sale of property.

Requirements for hardship discharge

Three conditions have to be met to get a discharge without paying as promised.

  1. Unsecured creditors must have received at least as much as they would have if the case had been a Chapter 7.
  2. Modification of the plan isn’t possible.
  3. The inability to make payments is traceable to events out of the debtor’s control.

The debtor must file a motion for a hardship discharge and provide evidence that shows each of those factors are present in the case.

The motion can be brought anytime after confirmation.

Hardship discharge has limits

Certain debts that would be dischargeable in a fully completed Chapter 13 are not wiped out by the hardship discharge, including priority taxes or debts incurred by fraud, dishonest behavior, or intentional acts.  The complete list is found in §523.

Importantly for lots of debtors is that liens determined to be worthless at the beginning of the case still get stripped.

How lien stripping works

You’ve got to jump through the paper hoops to get the lien voided, but you are entitled to have it wiped out even with a hardship discharge.

Why not just convert?

Converting a Chapter 13 case to Chapter 7 is another alternative when you can’t complete the Chapter 13 plan or modify the plan to one you can complete.  The case remains the same case (no new filing fee, though you need to pay a few bucks to the clerk on conversion).

Three reasons stick out for getting the Chapter 13 discharge rather than converting.

  1.   A discharge in the Chapter 7 won’t happen for months;  there’s another first meeting of creditors, and a requirement to amend schedules to bring them up to date.
  2.   If you wanted to stay in control of assets or keep a Chapter 7 trustee from messing around in your finances when you first filed, those reasons probably continue.
  3.    A Chapter 13 discharge makes you eligible for bankruptcy relief in the future in the shortest time possible.

All good reasons to get a Chapter 13 discharge if you can.

More

The range of options when 13 flounders

Why I love Chapter 13

Keys to Chapter 13 success

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Phone: (650) 694-4700

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