5 More Kinds of Chapter 13 Medicine for Saving Your Home

Chapter 13 is extraordinary in the number of distinct ways it can solve debt problems endangering your home. Here are five more ways beyond the five of the last blog.

6. Chapter 13 “super-discharge”: You can discharge (legally write off) some debts in a Chapter 13 case that you cannot in a Chapter 7 one. A couple of decades ago there were many more kinds of debts that could be discharged under Chapter 13, but Congress has whittled away at the list steadily. Now there are two left worth mentioning here. First, obligations arising out of divorce decrees dealing with the division of property and of debt (but NOT the part dealing with child/spousal support); and second, obligations involving “willful and malicious injury” to a person or property (but NOT related to driving while intoxicated). Both of these “super-discharged” types of debts are legally complicated, and definitely need to be addressed with the help of an experienced attorney. But in the right circumstances Chapter 13 can discharge one of your most serious debts, the same one that Chapter 7 would leave you owing.

7. Nondischargeable debts such as income taxes, back child/spousal support: Special debts which cannot be discharged in bankruptcy leave you at the mercy of those creditors just a few months after you file a Chapter 7 case. Those creditors—such as the IRS, and your ex-spouse and/or the state or local support enforcement authorities—often have the power to impose tax and support liens on your home, and potentially can even seize and sell your home to pay those liens. In contrast, a Chapter 13 protects you while you pay off those special debts in an organized plan, by preventing those liens from being placed on your home. By the time your Chapter 13 case is finished, those special debts are paid in full, never to threaten your home again.

8. “Statutory liens”: utility, ”mechanic’s”/”materialman’s,” and child support liens: If before filing bankruptcy you already have one of these involuntary liens imposed by law against your home, those liens would very likely survive a Chapter 7 bankruptcy. Because the “automatic stay” that prevents the enforcement of liens expires with the completion of a Chapter 7 case, these creditors would be able to threaten your home at that point. Instead, in a Chapter 13 the “automatic stay” continues throughout the three-to-five year case, again protecting your home while you satisfy the lien.

9. Judgment liens: Unlike the other nine items in this list, judgment liens can be avoided, or removed from your home’s title, in the same circumstances under Chapter 7 as in Chapter 13. A judgment lien can be removed if it “impairs” your homestead exemption, that is, if it encumbers the equity in your home that is protected by that exemption. The reason that I list it here is that this judgment lien avoidance can sometimes be put to extra good use in Chapter 13 when used in combination with one or more of these other 9, in a way which could not happen in Chapter 7. Let’s say for example that your home equity position would allow you to remove a judgment lien, but you are so far behind on your mortgage payments that you would lose your home to a foreclosure after finishing a Chapter 7 case. Your ability to remove that judgment lien from your home title would do you no good if you’re going to have your home foreclosed by your mortgage lender a few months later. It’s the Chapter 13’s ability to give you protected time to cure that mortgage arrears that gives practical value to your power to remove the judgment lien.

10. Preserve non-exempt equity: Home property values have declined so much in the last few years that most people thinking about bankruptcy do not have too much equity in their homes. That is, if there is any equity at all, it’s protected by the applicable homestead exemption, and therefore not at risk if you file a Chapter 7 case. But IF you DO have more value in your home than allowed under your homestead exemption, Chapter 13 can often protect it. You don’t run the risk of a Chapter 7 trustee seizing it to sell and pay the proceeds to your creditors. Instead, under Chapter 13 you can often either keep the home by paying those creditors gradually over the course of the up-to-5-year Chapter 13 case, or can sell the home yourself on your own schedule. Either way, Chapter 13 leaves you much more in control of the situation.

Each one of these ten Chapter 13 powers can solve a big problem so that you can keep your home. But they can have an especially dramatic impact when used in combination. In the next blog I’ll give some examples so that you see how these ten actually work, both separately and in combination.

 

I Just Got Sued by a Creditor . . . What Do I Do Now?

Getting a lawsuit filed against you by a creditor starts a very fast-ticking alarm clock. Don’t hit the snooze button on this one.

Here are the realities:

#1: Most conventional creditors don’t sue very quickly. So the fact you are being sued usually means you are in pretty serious financial trouble.

The vast, vast majority of debts that go into default don’t stay with the original creditors. They are assigned to collection agencies. Sometimes the creditor continues to own the rights to the debt, and the collection agencies just gets a percentage of what it collects. But much more often these days creditors sell all the rights to their non-performing debts to collection agencies, at a steep discount. The collection agency then pounds on you to pay the debt. It is often reluctant to sue you because doing so is relatively expensive, and requires putting out cash it may well never get back from you. Instead it will aggressively contact you and badger you into paying whatever it can get out of you for a period of time, and will then often turn around and sell the remaining debt to another collection agency, at an even steeper discount. Once a collector resorts to suing you, it’s admitting that getting money out of you by other means has not been working. That usually means that you truly can’t afford to pay the debt, and that it will only get money out of you if it is forcibly taken from you.

 

#2: Although you may feel powerless when you get served with a lawsuit, and are tempted to do nothing about it, that is almost never a good idea.

Collection agencies are not stupid. Your collector does not invest in the cost of a lawsuit unless it thinks it stands a good chance of getting a decent return on that investment—meaning your money in its pocket. A collection agency that makes too many wrong bets will soon be out of business. The ones that are in business know what they are doing. If you get sued, there’s a good chance the collector has its eyes on some specific target of yours that will get it paid—a paycheck to garnish, some real estate to put a lien on, or even a rich relative for you to beg from. The collector counts on your avoidance behavior so that it can get a judgment against you, and then to use the force of law to start grabbing your earnings and/or assets. Beat them at this game by finding out what they can and can’t do to you, and how you can protect yourself, preferably BEFORE they get their judgment,. Don’t let your creditors take advantage of you and your fear.  Most consumer or bankruptcy attorneys will give you a free consultation with honest advice about what’s best for you in your specific situation There’s no good reason not to find out your options and have a proactive game plan.

 

#3: Once you are served with a lawsuit, you have very little time to respond. If you don’t in time, you lose. The resulting default judgment is much more than simply an admission that you owe the debt.

Most collection lawsuits consist of a statement that you owe a debt, have not paid it according to its terms, and now owe the entire balance, plus ongoing interest, and the attorney fees and costs to bring the lawsuit. Most debtors’ reactions to this is, “yeah, I know I owe the money, so what’s the point of fighting it?” Here are some simple reasons you owe it to yourself to quickly see an attorney about the lawsuit, again preferably before the deadline expires and a judgment is entered against you.

a) You need to understand the consequences of the lawsuit, and your options for dealing with it. A lawsuit is a serious matter. You should not be flying blind about how it can affect you, and what you can do about it.

b) You may have defenses. Collection agencies routinely try to collect debts on which the statute of limitations has expired. They can sue the wrong person. It is worth having an attorney look over the paperwork for any such defenses.

c) You may have a counterclaim—an argument that the creditor did something wrong and owes you money for damages. These can be based on the creditor’s collection behavior, or the way the debt was entered into, and could result in a favorable settlement for you.

d) A lawsuit may include allegations beyond the usual ones about you owing the debt, which could restrict your options later. Once a judgment is entered, it is too late to deny the allegations upon which it is based.  The debt thus could become much more difficult to address in a future bankruptcy, for example.

e) Having an attorney review the lawsuit gives you the opportunity to think about it as part of your overall debt picture. Many consumers do not have an attorney who they can talk to on a regular basis. So problems accumulate and questions aren’t asked. That can lead to a tremendous amount of confusion and anxiety. Seeing an attorney about a pending lawsuit should lead to a discussion about how addressing it fits in with everything else going on in your financial life.  

Income Tax Refunds in a Chapter 13 Case

Chapter 13 gives you more flexibility about what you can do with your current income tax refund. But unlike Chapter 7 which doesn’t care about your future years’ refunds, Chapter 13 does.

As I said in my last blog, if you file a Chapter 7 bankruptcy after the beginning of the year, at a time when you’re still due a tax refund on the year that just passed, your trustee is going to be very interested in that refund. It’s your money that the government is simply holding for you until you claim it.  That’s true even if you haven’t yet filed your tax return, or don’t even know the amount of the refund. Whatever the amount, it’s still your money—you just haven’t yet claimed it or calculated the amount by filing the tax return. So unless that refund fits within an exemption, or is small enough to not be worth the trustee’s bother, the trustee is going to get that refund.

Chapter 13 comes with some good news and some bad news on tax refunds.

The good news comes from Chapter 13’s flexibility when it comes to assets that are not exempt. In a Chapter 7 case, non-exempt assets simply go to the trustee to be distributed to creditors according to a very rigid formula.  In Chapter 13, in contrast, you may be able to use that refund in two very beneficial ways.

First, you may be able to get permission to use the refund, or a part of it, for a necessary, one-time expense. A standard example is a critical vehicle repair, needed to be able to commute to work. The expense usually needs to be an extraordinary one, over and beyond what would be included in your standard monthly budget.

Second, to the extent that you are required to pay the refund over to the trustee, in a Chapter 13 case you usually have somewhat greater control over where that money will go. Your attorney might be able to explicitly earmark, through a specific provision in your Chapter 13 plan, where the trustee pay some or all of that refund. More likely, in certain cases, with careful wording of your plan, your attorney may be able to nudge that money in a particular direction that may be more favorable to you. For example, a vehicle that you need to keep could be paid off faster than otherwise, thus taking away from that creditor any grounds for objecting.    

Now the not-so-good news. One positive aspect of Chapter 7 is that it’s fixated on what assets you have a right to as of the moment your case is filed.  But Chapter 13 is by its very nature also interested in your future income during the three to five years that you are expecting to be in the case. And for most purposes future tax refunds are considered future income. So your Chapter 13 plan has to account for the tax refunds that you would be receiving during the years that you are in the case. In most cases that means that you must turn over your tax refunds to the trustee to be paid out according to the terms of your plan.

The truth is that this is not necessarily bad:

• If you usually get large tax refunds, your withholdings should likely be adjusted so that you can put that money to use during the year for your regular living expenses. This is especially helpful if your budget is tight. Doing so would reduce the size of the refunds going to the trustee, minimizing this problem.
• In some situations, a year or two into a case you may be able to get permission to use that year’s tax refund for a new special expense, such as ,again, for a new vehicle repair.
•  Even if the refunds do just go to the trustee during the course of your case, sometimes that extra money flowing into your Chapter 13 plan finishes your case faster, in other cases it may result in important creditors being paid more quickly, and finally sometimes the refunds may enable you to pay off the plan within the mandatory maximum deadline.