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What Everyone Knows About Bankruptcy: Not

By Cathy Moran 3 Comments

torture device

Lots of people profess to know all about bankruptcy. Whether they have good information or not.

But other professionals should know better than to advise people about the workings of bankruptcy.

And if they don’t know better, they should be made to pay, in some exquisitely painful way, for the harm they inflict.

The rack seems good to me.

The accountant was wrong

The terrified client in my office was told by her accountant that if she filed Chapter 13 to save her home, the court would not allow her to buy prescription dog food for an ailing 16 year old pet!

Further, the accountant went on to declare that in Chapter 13, the debtor could pay only for housing, food and gas: nothing more. No maintenance for the house, no insurance, no clothes, no medical care.

Of course, the accountant was dead wrong. Articulate but wrong.

Means test and budgets in Chap.13

So I explained the operation of Chapter 13, how the means test works, and the balance between the debtor’s reasonable living expenses and the claims of creditors. And assured the client that she can provide for her treasured pet for the balance of its life.

Then I fumed.

I’m resigned in the age of the internet that new clients have encountered lots of bad information on the web. There is no competency examination before anyone with a browser and an internet connection can opine on any subject.

The most trusted advice on a criminal law site recently turned out to be from a 15 year old whose knowledge came from TV!

But the source of this utterly distorted information holds a professional license in another field; that license gave apparent authority to the tales of horror she told my client.

How was the client to know it was tripe, pure tripe?

It took me two hours to find and eradicate the externally caused fears in my client and the self-generated terrors she’d nurtured based on bad information.

Can I count on my readership to bail me out of jail if I find the accountant providing worthless and harmful bankruptcy advice?

More

How to interview a bankruptcy lawyer

Filed Under: Considering Bankruptcy, How bankruptcy works, True Stories

Bankruptcy Alternatives Cost More, Deliver Less

By Cathy Moran

bankruptcy alternatives
bankruptcy alternatives

Bankruptcy alternatives often suck.

The on-line story of one customer of a debt settlement company particularly sticks with me.

Using the “services” of this company, the poster now has six judgments of record and two garnishments in process. The debt settlement company, however, has its full fee.

One man I represented went to a debt management company before he found me.  The “plan” to get him out of debt was that he send the company 50% of his gross income (that’s before taxes and any other deductions) every month.

I have never seen a client who could keep body and soul together in the Bay Area on 50% of their gross income.

When his “plan” collapsed, he was meeting with a bankruptcy lawyer.  The debt management company was counting its fees.

Getting fat on fear

Such stories, and there are lots of them, are emblematic of the profit that debt settlement firms and credit management outfits make on the consumer’s fear of bankruptcy.

Most folks will do anything to avoid bankruptcy, either out of ignorance of how bankruptcy works or a values-driven preference for paying their debts.

Feed that fear and you profit.

Appeal to the inherent desire to do right by creditors, and you get your money before it’s obvious the debt is simply too large to pay off.

When is bankruptcy the best choice

Bankruptcy isn’t right or necessary for everyone, but it would improve the lives of a great many more working families than actually file.

My rules of thumb about when bankruptcy is best:

  • The older you are, the more likely you should file
  • The smaller your retirement savings, the more likely you should file
  • The larger your debts for recent taxes or family support, the more likely you should file
  • The greater your debts in general are to your income, the more likely you should file.

Do your get-out-of-debt homework

Everyone considering paying money to an organization promising to get them out of debt ought to see a bankruptcy lawyer before signing up with an alternative service.

A lawyer can tell you about  how bankruptcy would work for you and the risks in debt settlement.

myths about bankruptcy

Bankruptcy can often wipe out debt with no payment at all to  creditors and get you immediate relief without negative tax consequences.

People with high incomes or more assets than they can protect in Chapter 7 can reorganize their debt, frequently at a small fraction of the debt, through Chapter 13.

With a real understanding of  the alternatives to bankruptcy, there would be fewer of these sad stories.

More

When you want to pay your creditors in full

Why I love Chapter 13

Questions to ask a bankruptpy lawyer

Image courtesy of Flickr and Financial Match.

Filed Under: Featured, True Stories

California Homestead Exemption: The Truth Isn’t What You Think

By Cathy Moran

patchwork
patchwork

“They can’t take my house, whatever happens.  Right?”

The young man in my office “knew” how the California homestead works: he insisted that his home was exempt as a California homestead, even if he filed bankruptcy.

He “knew” that credit card debt was dischargeable.

And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.

Wrong.

In his mind, bits of legal truth got stitched together into a bankruptcy myth.  Let’s piece together the truth.

California homestead at work

True:  every California homeowner can claim a homestead in their principal residence.  CCP 704.720

UPDATE:California homestead increased

But:  the homestead is limited to a certain amount of value.  For the single guy sitting across my desk, that amount was $75,000.  Equity in his condo in excess of that isn’t protected by the homestead.

Worse, the homestead is only effective against certain kinds of creditors.  The tax liens that were of record for old tax years aren’t defeated by a state law homestead.   So the tax liens remain enforceable. *

Credit card debt is dischargeable

True:  unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.

But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards.  Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution. So, if there is non exempt value, dischargeable debts share in the pool of money.

Asset value matters in bankruptcy

True:  every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.

But:  the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes.  For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate.   Any unpaid balance is discharged.

Bankruptcy truths

So when the bits of the law my client got right are expanded and seen as a whole,  any bankruptcy discharge was unlikely to result in paying less to his creditors. His house represented far more value than the debts, dischargeable and non dischargeable, that he owed.

Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims.  In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.

True story of huge savings on credit card debt

The one critical bankruptcy advantage might be the power of the automatic stay:  if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.

* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted.  The stripped down lien would have to be paid in full through the plan.  The balance of the tax lien would be treated as an unsecured claim.

More

Bankruptcy myths abound

Everything you need to know about the California homestead exemption

Who gets paid first in bankruptcy

Filed Under: Strictly California, True Stories Tagged With: 2018

Which Bankruptcy Chapter Is Right For Me?

By Cathy Moran

choose bankruptcy chapter
choose bankruptcy chapter

Seven or Thirteen?

13 or 7?

When you have a choice, how do you decide which chapter of bankruptcy works best?

Usually, the choice is driven by the scope of the discharge and the kind of debts you have.

More kinds of  debts are dischargeable in Chapter 13 and the automatic stay protects you for the 60 month duration of the case.

So why did the client this week choose to walk out of Chapter 7 with fewer debts discharged than if he’d chosen 13?

It’s all about his  future.  And who will get to share in his growing earning capacity.

Chapter 7 over Chapter 13

On the surface, this client seemed a great candidate for Chapter 13, which is my favorite  bankruptcy chapter.

Some of his debts were only dischargeable in Chapter 13;  in Chapter 7, he’d emerge still owing some debts from a divorce.

So why choose the smaller discharge?

Because his earnings were likely to double or triple over the life of a Chapter 13 case.

If that happened, we anticipated that a Chapter 13 trustee would move to modify his payment plan to pay more to general unsecured creditors.

Credit card debt, which would get nothing in a Chapter 7, might well get a substantial repayment from his increased earnings.

He’d pay fewer dollars paying  the non dischargeable debt that survives a Chapter 7  directly than he would paying in a larger slice of his paycheck  to all of his creditors in a Chapter 13 plan.

Chapter 13 after confirmation

Judges approve Chapter 13 plans based on the situation when the bankruptcy case is filed.  The means test looks at recent income.  The liquidation test looks at non exempt assets at filing.

For this client, each of those numbers was modest and a repayment plan would be relatively cheap.

But Chapter 13 involves committing your future income to the supervision of the Chapter 13 trustee.

Now, that supervision is pretty minimal:  it usually means the trustee monitors your tax returns to see in your income has increased.

If there’s a significant increase, the trustee can file a motion with the court proposing increased monthly payments going forward.

The debtor gets to respond with updated expense schedules, and if the parties can’t reach a deal, a judge decides whether payments change.

In the Bay Area, this happens very infrequently.  I’ve seen it less than a half dozen times in 20+ years of doing lots of 13’s.

But it can happen, and for this client, it seemed quite likely that a new job in his usual profession would dramatically increase his income.

Chapter 7 looks at today

If Chapter 13 is a years long process, Chapter 7 is a single event.

The rights of the debtor and the creditors are determined by the situation on the day the case is filed.

If the means test says that Chapter 7 is an option, then the creditors get only what the debtor owns at the filing of the case.

And what the creditors share in is only what’s left after the debtor chooses his exempt property.  Most Chapter 7 cases make no distribution to creditors.

Future income belongs to the debtor.  The Chapter 7 trustee can’t come back a year later and ask for a slice of a larger paycheck.

So, much to my surprise, when we looked at this client’s current situation and his prospects, the more limited discharge was a better deal than Chapter 13.

He’ll get to enjoy a larger share of his future earnings and a fresh start.

More

Cheat sheet for passing the means test

Figuring what you pay in Chapter 13

How to make your divorce bankruptcy-proof

When your ex files bankruptcy

Dividing debts in divorce

Filed Under: Consumer Rights, True Stories Tagged With: 2016, choose chapter

Tax Liens Live On After Bankruptcy, Unless….

By Cathy Moran

Tax Problems

You mean the tax liens won’t  go away when I get a bankruptcy discharge?

The client was startled that the lien would live on beyond his bankruptcy.

So, if all my debt doesn’t go away, what do I get from the bankruptcy discharge?  he asked.

I thought the tax debt went away when I filed.

It’s your personal liability that is wiped out when you get a bankruptcy discharge.

Liens live on.

What’s personal liability for debt

In a nut shell, personal liability is the right of your creditor to use the powers of the law to reach your wages and your assets to satisfy a  debt.

When you get a bankruptcy discharge, that personal liability is erased.  The discharged creditors can’t reach assets that you acquire after the bankruptcy, nor the assets that you exempted in your bankruptcy case.

So, get a bankruptcy discharge that wipes out older taxes and the IRS can’t garnish your future wages or  levy your bank accounts.  Further, the existing tax lien won’t attach to assets you acquire in the future.

Tax liens  on current assets

But liens, which are rights that others have in your property, survive a Chapter 7  bankruptcy.  Your property doesn’t necessarily get a discharge when you do.

 Stripping tax liens in Chapter 13

By “property”, we mean personal property and real estate.  A properly perfected tax lien attaches to all your personal property and to real estate in the county where it’s recorded.

The critical question is:  what is that tax lien worth?  Does it really attach to anything of value?

Or is it just a big number hanging out there, unrelated to the value of what you own?

Tax liens after bankruptcy

In my client’s case, the tax obligation bordered on a million dollars, nine years later.  But the value of his assets was negligible.

So, the million dollar tax lien attached to an older car, a few dollars in the bank, and the shares of a business that would be worthless if he were to leave the business.

What does that tax lien really mean to his post bankruptcy life?  Not much.

The IRS does not want his old car or worthless stock.  It certainly doesn’t care about his household goods or dirty socks.  It would cost far more than these things are worth to conduct a tax sale.

He’s safe running the business and washing the socks, because the IRS won’t be there to take them.

Choices for dealing with tax liens post bankruptcy

What you do about the tax liens that live on after your bankruptcy depends on what they’ve attached to and what your financial life looks like, post bankruptcy.

The first thing to know is that tax liens, unlike diamonds, are not forever.  The lien expires when the statute of limitations under non bankruptcy law runs on the tax year that triggered the lien.

The general statute of limitations on federal taxes is 10 years from the date the tax was assessed.  Assessment usually occurs when you file the return and the return is processed by the IRS.

Thus, it’s the date the taxes were assessed, not the date the lien was recorded that is important.

Many people simply do nothing about tax liens that survive the bankruptcy.  They rely on the passage of time and the relative low worth of the liened assets to keep them out of the IRS crosshairs until the lien dies of old age.

If getting the tax lien off the public record, or off of a property that has some value that the tax lien reaches, you can approach the IRS with an offer to pay something for the release of the lien.

Typically, if you get a release of the lien, it will be up to you to record it in the public record.  The IRS will give you the document you need, but you have to actually record it.

So, while the tax lien may live on, it probably has little impact on your life after bankruptcy.

Or, you can file Chapter 13, where the liens are cut down to match the actual value to which they attach.  The secured portion gets paid over the life of the Chapter 13, and the lien is voided at the end of the plan.

Chapter 13 as a tax tool

Image: © freshidea – Fotolia.com

 

Filed Under: Featured, Life after bankruptcy, Taxes, True Stories

The Means Test: Badly Mangled

By Cathy Moran

411px-MSH80_st_helens_eruption_plume_07-22-80

Another purported financial professional has confidently and conclusively gotten the bankruptcy means test absolutely dead wrong.

And used that wrong conclusion to steer someone away from bankruptcy.

Mt. St. Helens has nothing on me in terms of venting.

How can financial professionals get this so wrong, more than a decade after the means test was enacted?

Mangling the law

It started off innocently enough when a reader asked financial columnist Jane McNamara on FoxBusiness about the impact of settling an old debt  versus filing bankruptcy.

She noted the possible tax consequences of a settlement and asked whether the money was really available to fund the settlement.

So far, so good.

But then she blew it, big time.

To qualify for a Chapter 7 filing in most cases your income must be lower than the median income for your state

Wrong, wrong, wrong.

An income over the median income for your state just means you have to complete the means test.  It’s largely another form requiring more figures about your income and your projected expenses.

The means test is another hoop to jump through.  It is not a barricade.

The vast majority of above median income debtors pass the means test and successfully file Chapter 7.

In my view, this misstatement is unforgivable.  If you hold yourself out to offer financial advice, you at least should have mastered the basics.

Then you wonder about the independence of the piece when you note a connection to creditcards.com. Who benefits if cardholders don’t file bankruptcy? Card issuers.

Bankruptcy means test in the real world

The man in my office recently made me worry about the means test.

Because passing the means test often relies on deducting certain living expenses from their income such as payments on back taxes and secured debts, this man appeared exposed.

His car was paid for, he had no dependents, he rented, paid his taxes, and had no toys bought on credit.  All of the usual deductions that get people with high incomes through the means test and into bankruptcy were missing.

But it didn’t matter.

Even with an annual income of $7000 above the median California income for a single person, he qualified for Chapter 7, just based on the standard expense allowances provided for in the means test.  In fact, he qualified with $650 a month cushion.

The means test wasn’t even close to knocking him out of bankruptcy.

He’s living proof that McNamara’s statement that you have to have a below median income to file bankruptcy is just plain wrong.

Just because someone wrote it

The internet is marvelous for making information easily available.  But just because it’s in print, it isn’t necessarily correct.

Unfortunately, lots of people will read the FoxBusiness article and conclude that they aren’t eligible for bankruptcy.

They’ll struggle on unnecessarily at financial and personal cost because some writer got it wrong, and they believed.

You can read more about how the means test in bankruptcy really works here:

  • How the means test works
  • Above median income families and the means test
  • Tale of terror caused by bad bankruptcy advice
  • 3 Steps to a Fresh Start

Image courtesy of Wikimedia and USGS

Filed Under: How bankruptcy works, True Stories

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

By Cathy Moran

chapter 13 rescue
chapter 13 rescue

Once again, Chapter 13 rescued a client.

He’ll get out of debt and pay off credit cards with no interest going forward.

So many people tell me they could pay off the credit card balance if it wasn’t for the high interest.

This client 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.

More

Why I love Chapter 13

Update on California homestead

Filed Under: Chapter 13, How bankruptcy works, True Stories Tagged With: 2016, homestead

Who Owns Your Business When You File Bankruptcy?

By Cathy Moran

business bankruptcy

business bankruptcy

The bankruptcy trustee’s question was straightforward (if inartful) yet the business owner nearly blew the answer.

The trustee asked:  are you the sole owner of your business?

When my client hesitated, she followed up:  are you a sole proprietor?

Focusing on the fact that he was the only person with an interest in the business, he said yes.

Wait a minute, was my response. That’s not so.

It took several minutes of sworn testimony at the first meeting of creditors to sort the matter out.

Who owns the corporate business

We were once again experiencing the phenomenon of the shape-shifting business owner.  The businessman had, in his mind, morphed into a sole proprietor rather than a stockholder.

The debtor was the sole owner of the corporation that owned and operated the failed business.

He was correct that no one else had an interest.  He skipped over the part that it was another legal entity, his corporation, that actually owned the assets and owed the debts of the business.

He owned the corporation that owned the business.

Why it matters

A sole proprietor owns a business as a personal asset.  In law, he owns the assets of the business and is liable for its debts.

A sole proprietorship has no legal existence separate from the owner.  The proprietorship may adopt a fictitious business name, but behind that dba is the individual who owns and operates the business.

So, if my client were a sole proprietor, the inventory of the business would have been an asset of the bankruptcy estate created when he filed bankruptcy.  The business bank accounts would fall to the control of the trustee.

When a corporation is created, it becomes a legal entity distinct from the individuals who own the shares in the corporation.  The corporation can have its own debts and its own funds that don’t belong directly to the shareholders.

That’s why business people incorporate:  to create a legal “person” that can take risks without exposing the shareholder’s other assets to that risk.

When my client filed his Chapter 7 case, his stock in the corporation was an asset of the bankruptcy estate, but not the business itself.  The business was owned and operated by the corporation.

Since the corporation had tons of debts, the stock that the bankruptcy trustee could administer had no net value.  That’s because, equity holders get money when a corporation liquidates only after creditors of the corporation have been paid off.

The takeaway

The first meeting of creditors in a bankruptcy case is the trustee’s opportunity to gather more information about what the debtor owns and owes.

Once you focus on what the trustee needs to get from the meeting, it’s easier to answer correctly and avoid the confusion that happened in my case.

When confusion ensues, it’s important to sort it out on the spot.

And that’s how I earned my keep in this case.

More

Rules for testifying at a bankruptcy hearing

How corporate officers can avoid personal liability

When a business needs to wind down

Filed Under: Consumer Rights, Small business, True Stories Tagged With: 2018

Getting Excused From Bankruptcy’s Means Test

By Cathy Moran

rp_800px-Chihuahua_portrait-300x225.jpgYou can get a pass on the means test without claiming your dog ate your homework. 

If your debt is not “primarily consumer debt”,  you don’t have to pass the means test to file bankruptcy.

So, you need to total up the consumer debt you have and compare it to the rest of your debts.

Don’t miss the fact that tort claims aren’t  “consumer debts” under the means test.

So if tort judgments or even unliquidated tort claims total more than your consumer debt, you don’t have to take the means test.

Check the box, and come on in and file the bankruptcy chapter of your choice.

Tort explained

Let’s start by defining a “tort”.  A tort is a civil wrong, other than a breach of contract, that causes injury or damage to another without excuse.

Automobile accidents make up the largest group of torts.  The law requires everyone to conduct themselves so that others are not hurt.  One who negligently fails to use appropriate care such that someone else is hurt has committed a tort.

Whereas people choose to enter into contracts, and the contract can specify the remedy if one breaches the contract, tort liability is imposed by law.

It is that imposition of liability that courts have looked to in finding that tort damages are not consumer debts for the purposes of bankruptcy law.

Means test controls access to bankruptcy

Virtually everyone who comes into my office has heard about, and obsesses over, the means test.

Often they assume that merely making more than the median income disqualifies them from bankruptcy relief.

Cheat sheet to pass the means test

I remind even bankruptcy lawyers that debt incurred for business or investment purposes and tax debt is not “consumer debt”.  If non-consumer debt predominates,  the means test does not apply.

Now, the logic of giving a pass in bankruptcy to those who don’t pay their taxes eludes me, but that’s Congress for you.

Not consumer debt

But there is a little discussed additional category of debt that is not debt “incurred for personal, family or household” purposes (§ 101(8)) :  tort claims.  The reported cases hold that these sorts of debts aren’t incurred in the manner of contract debts like credit cards and medical bills.

The client in my office had no contractual debt, other than a tiny student loan.  But the pending lawsuit accused him of harboring a dangerous dog.

Now mind you, the dog didn’t weigh 5 pounds and the wound it inflicted was objectively insignificant.  The suit, nonetheless, was expensive to defend, stressful, and could blight an otherwise sound financial life.

The bankruptcy case became just that much simpler  when I recognized that we could bypass the means test.

Tort claims aren’t consumer debts; since the dog bite claim dominated the client’s list of debts, it became irrelevant how much money the client made.

The best way to ace the means test is to avoid it altogether.

More

Even High Income Families Pass The Means Test

The Problem Even A Good Bankruptcy Lawyer Can’t Fix

Discharging Taxes In Bankruptcy

Image courtesy of Wikimedia Commons.

Filed Under: How bankruptcy works, True Stories

When Can I File Bankruptcy Again

By Cathy Moran

file bankruptcy again

calendarYou can file bankruptcy tomorrow, so long as you don’t currently have a bankruptcy case pending.

When you can get a discharge in that case is a different story.

The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case.

My friend Gene Melchionne wrote a marvelous piece about the timing of the bankruptcy discharge that conjures up the old high school cheer:  2, 4, 6, 8, who do we appreciate.

The waiting period between cases, if you want a discharge, can be 2 years, 4 years, 6 years or 8 years, depending on what kind of case you filed before and what kind of case you want to file now.

You count those years from the filing of the first case to the filing of the second case.

But, contrary to the usual thinking, the discharge isn’t everything.

Sounds like heresy from a bankruptcy lawyer, doesn’t it,  but let me tell you a couple of stories.

The no discharge Chapter 7

My client had a house with equity, a recent bankruptcy discharge, and a criminal conviction that had him heading to prison, soon.

He faced a future with no income and no way to pay the mortgage.  And at the point he didn’t live in the property, his right to claim a California homestead in the property was in doubt.

But the recent bankruptcy case meant he couldn’t get a discharge in a new Chapter 7 case; and prison wages were not going to support a Chapter 13.

But what we wanted was the automatic stay, the sale of the house, and the homestead paid to the client.

The balance of the equity was beyond saving, on these facts.  We were content to have the balance go to pay toward the restitution judgment.

So, we filed a Chapter 7.  The fact that my client wasn’t eligible for a discharge wasn’t important .  What we needed was a sale managed by the trustee while my client was behind bars and the homestead carved out and paid to the debtor.

No discharge Chapter 13

Much more common than prison-bound debtors are no-discharge Chapter 13 cases.  When they follow hard on a Chapter 7, we sometimes call them Chapter 20 cases:  7 + 13=20.

After BAPCPA’s changes to the bankruptcy code in 2005, the four year rule applies to getting a Chapter 13 discharge after a Chapter 7.  There must be four years between the filing of the 7 and the filing of the 13 in order to get a discharge of your debts in the Chapter 13.

But the discharge isn’t everything.

Pay debts that survived

Often what you need in a Chapter 20 is the automatic stay and time to pay debts that didn’t get discharged in the Chapter 7.  Those debts might be priority taxes, back family support, or even student loans.

It is the payment plan and the predictability that you need, not necessarily the discharge.

Catch up mortgage

Chapter 13 works to give you time and protection to bring a mortgage current.  Because the mortgage is a lien and wasn’t wiped out in the Chapter 7,  failure to get right with the lender will lead to foreclosure.

Liens that survive the discharge

File a Chapter 13, and you’ve got time to get current.

Strip off the worthless lien

While you can’t strip off liens in Chapter 7 unless they impair an exemption, in Chapter 13 you can void an utterly underwater mortgage AND  strip or bifurcate a tax lien.

Two recent 9th Circuit decisions make it clear that it is completion of the Chapter 13 plan, not the discharge, that entitles you to strip a lien, and that the balance on a lien that survived the Chapter 7 doesn’t count for the Chapter 13 debt limits.

When can you file

So, like lots of legal questions, it depends.  It depends on whether you can achieve your goal without getting a discharge.

More

When another bankruptcy case doesn’t protect you

Steps before you meet a bankruptcy lawyer

Why I love Chapter 13

Image courtesy of Flickr and Hichako.

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Filed Under: How bankruptcy works, True Stories

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About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

How Bankruptcy Works

What Everyone Knows About Bankruptcy: Not

Lots of people profess to know all about bankruptcy. Whether they have good information or not. But other professionals should know better than to advise people about the workings of bankruptcy. And if they don't know better, they should be made to pay, in some exquisitely painful way, for the harm they … Read more

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