Chance M. Mc Ghee | San Antonio Bankruptcy Attorney
Filing for bankruptcy is a major life decision that requires the assistance of an experienced and knowledgeable attorney. At the Law Offices of Chance M. McGhee, that is exactly what you will get. Attorney Chance McGhee has over 18 years of experience helping people from all backgrounds get the fresh financial start they need through bankruptcy.
Bankruptcy can go beyond giving you immediate and long-term relief from your debts. It comes with many other surprising benefits.
The next 12 blog posts will be about some of the most powerful and surprising benefits of bankruptcy.
You’re likely considering bankruptcy because you’re financially overwhelmed and need relief. You need immediate relief from debt collection pressures. You need long-term relief from having to pay debts you can’t handle. Bankruptcy provides that immediate and long-term relief.
But bankruptcy can often also give you some other rather amazing benefits, beyond the basic relief you expect. The next dozen weekly blog posts will give you details about the following benefits:
1. Get Back Money Recently Paid to a Creditor
Through “preference” law you could get back money you’ve recently paid to a creditor—paid either voluntarily or not.
2. Undo Judgment Liens on Your Home
Through judgment lien “avoidance” you can often permanently remove a judgment lien, a tremendous practical benefit.
3. Get Back Your Driver’s License after an Unpaid Judgment
Reinstate your license if you lost it by not paying a debt from an uninsured or underinsured motor vehicle accident.
4. Reinstate Your Driver’s License from Failing to Pay Tickets
Reinstate your license if it had been suspended for unpaid traffic infractions.
5. Get Back Your Just-Repossessed Vehicle
Filing bankruptcy not only prevents vehicle repossession; it may be able to get your vehicle back to you after it’s already been repossessed.
6. Get Out of an Unaffordable Payment Plan with the IRS/State
Bankruptcy comes with a surprising array of tools to use against your tax debts, allowing you to prevent or get you out of an onerous monthly payment plan.
7. Prevent Debt Collections from Re-Starting after Being “Stayed”
Bankruptcy doesn’t stop or only temporarily stops certain select debts from being collected—such as child/spousal support arrearage, recent income taxes, student loans, and debts incurred through fraud. But there are tools bankruptcy provides for resolving special debts like these permanently.
8. Prevent an Income Tax Lien Recording and Its Potentially Huge Damage
An income tax lien can turn a debt that could be discharged—permanently written off—into a debt that you must pay in full. A timely bankruptcy filing can prevent this financial hit.
9. Bankruptcy Can Often Reduce Some or All of a Tax Lien’s Financial Impact
In some situations a tax lien can be made either wholly or partially ineffective. Besides saving you lots of money you get the peace of mind that your home is not at risk.
10. Avoid Paying Your Ex-Spouse Most of Your Property Settlement Debts
Chapter 13 allows you to discharge—write-off—some or all non-support obligations of your divorce.
11. “Cram down” and Change the Payment Terms of Your Vehicle Loan
If your vehicle loan is more than two and a half years old, you can usually reduce your monthly payments and the total amount you pay on the loan.
12. Get Out of Your Vehicle Lease through Bankruptcy
Leasing is often the cheapest way to have a vehicle short term, but is actually usually the most expensive long-term. Bankruptcy can be the best way to get out of this expensive obligation.
Besides fulfilling the terms of your Chapter 13 payment plan, you may need to make other payments and meet other requirements.
The bankruptcy court’s approval of your payment plan (at the Confirmation Hearing) happens about 2-to-4 months after filing your case. At that point your Chapter 13 case is fully on its way. You likely have about 3 to 5 years altogether to finish the case. Having gotten to this crucial point, there are a few other crucial steps you need to fulfill to successfully finish your case.
Last time we got into three of these:
Do your “debtor education”
Avoid or defeat “nondischargeability complaints”
Pay your Chapter 13 plan payments
Today we lay out two other crucial steps.
Pay Any Obligations NOT Within Your Plan Payment
In many Chapter 13 cases you pay nothing to your creditors except the single plan payment each month. The trustee divides that payment among your creditors as laid out in your court-approved plan. You pay nothing else to any creditor.
But in other cases, you pay one or more creditors directly. This may be referred to paying “outside the plan.”
To be clear, you are not paying these secretly. Your plan clearly refers to these debts and their payments. So the bankruptcy court approves these payments. They’re just not included within the single monthly plan payment, for various possible reasons. (See the explanation in paragraph 3.1 of the official Chapter 13 Plan form.)
Often these are ongoing payments on secured debts such as home mortgages or vehicle loans. Direct payments are more likely used when you’re current and are simply continuing to make the regular payments. In some jurisdictions it’s considered easier for everybody that you continue to pay such straightforward payments directly to the creditor. Paying them through the trustee is seen as causing too much delay and accounting confusion.
Naturally it’s essential that you know whether all of your creditors are being taken care of through the single plan payment, or whether there’s a creditor or two you need to pay directly. Your income and expense schedules should make that clear, as well as the plan itself. But if you have any doubt, be sure to ask your bankruptcy lawyer.
Do Anything Else Required
Two documents combined—your plan and the Order Confirming Plan signed by the judge—are the law of your case. These documents contain requirements beyond making payments. They include some standard ones that apply to just about all consumer debtors. There may also be some special requirements for you.
avoid using credit without prior Chapter 13 trustee or bankruptcy court permission
Special requirements can include:
a specified deadline to sell an asset
permission for you to use an income tax refund for a specific expense, such as a vehicle repair
a requirement to report when an unemployed spouse gets employed
Notice that these special requirements often relate to anticipated changes to your income, expenses, or assets. These changes can directly affect your future obligations under your Chapter 13 case. They may well require you to adjust the payment terms of your plan in the future.
It does take consistent effort to complete a Chapter 13 case successfully. But that effort is worthwhile because it gains you tremendous benefits. Chapter 13 provides many tools that Chapter 7 cannot. Through those tools you can likely meet some otherwise impossible goals. Once you’ve decided that these goals are worthwhile, usually the effort will be worthwhile as well.
The automatic stay immediately stops most collection actions when you file bankruptcy. But it doesn’t stop a “criminal action or proceeding.”
The Automatic Stay
This protection against debt collection is crucial because it gives you a necessary financial break. It’s effective because it is so fast and broad in its coverage.
It’s fast because the protection goes into effect simply by your act of filing bankruptcy. It becomes binding on your creditors without any further action by the bankruptcy court.
It’s broad because almost all debts are covered. They’re generally covered even if the debt can’t be discharged—written off—in bankruptcy. For example, if you owe a very recent income tax debt, it can’t be discharged. And yet the automatic stay immediately stops the IRS and state tax collector just like any other creditors.
But while the automatic stay is broad there are some specific kinds of debts it does not protect you from. And because the automatic stay is such a crucial benefit to a person filing bankruptcy, it’s very important to know these exceptions. You need to know which debts a creditor CAN continue to collect in spite of your bankruptcy filing.
The Debts NOT Protected by the Automatic Stay
Bankruptcy’s automatic stay does not protect you from:
1) criminal debts and proceedings
2) certain family court proceedings
3) child and spousal support obligations
4) certain income and business tax collection procedures.
We’ve covered all of these exceptions last month, except for the first one. We cover this today.
“Criminal Action or Proceeding against the Debtor”
The U.S. Bankruptcy Code says that your bankruptcy filing “does not operate as a[n automatic] stay–… of the commencement or continuation of a criminal action or proceeding against the debtor.” Section 362(b)(1) of the Bankruptcy Code. This means that you have no bankruptcy automatic stay protection from criminal matters of any sort.
So, bankruptcy does not prevent a district attorney or other governmental authority from starting or continuing a criminal case against you. That includes any step of a criminal case: arrest, indictment, plea bargaining, trial, sentencing, appeal, incarceration, probation, and parole. The automatic stay simply does not apply to criminal matters.
This also includes any efforts by the authorities to collect any criminal debts. These include fines, restitutions, and any of the many possible criminal fees and charges that a criminal court may impose upon you.
Careful: “Criminal” Is Broader than You Think
This exception for criminal debts doesn’t apply only to felonies and misdemeanors. It may apply to much more commonplace matters that you might not consider “criminal.” For example, included may be certain traffic infractions and their related court proceedings and fines.
This can get genuinely confusing because the line between criminal and civil proceedings can get blurry. Again in the traffic court arena, what may be considered a criminal fine vs. a civil violation can vary from state to state. Plus there are situations that can involve both civil and criminal sides. The civil side would be stopped (at least temporarily) by a bankruptcy filing; the criminal side would not.
The Bottom Line
Tell your bankruptcy lawyer about any potential criminal proceedings and/or debts during your first meeting. You’ll learn quickly whether you’re dealing with criminal vs. civil debts and/or proceedings. Then even if they’re criminal in nature, bankruptcy may still be able to help a lot.
To be able to keep your property that’s collateral or security on a secured debt, you must give that secured creditor “adequate protection.”
In the bankruptcy system, debtors and creditors each get certain protections.
“Automatic Stay” Protection for You
A major protection that you as a debtor filing bankruptcy get is the “automatic stay.” That’s the part of bankruptcy law which stops creditors’ collection actions against you. That includes stopping a secured creditor from repossessing or foreclosing its collateral or its security. (See Section 362(a) of the U.S. Bankruptcy Code.)
The automatic stay protection goes into effect immediately upon your filing of bankruptcy. But it doesn’t necessarily keep the collateral protected for the long term. The creditor can challenge that protection.
“Adequate Protection” Protection for Secured Creditors
“Adequate protection” refers to what you must provide to your creditor to be able to keep your collateral long-term. The term refers to conditions you must meet to keep the automatic stay in effect. (See Section 361 of the U.S. Bankruptcy Code.)
Why the Creditor Gets “Adequate Protection”
Bankruptcy law tries to respect and balance debtors’ and creditors’ property rights.
With secured debts, your original contract gave you a right to keep the collateral, but only while meeting certain conditions. You could keep possession as long as you made payments when due, maintained insurance, and maybe met some other conditions.
That contract also gave your creditor the right to take away the collateral if you didn’t satisfy the conditions. So you’d lose the collateral if you didn’t make payments on time or keep insurance in effect.
Your bankruptcy filing stops your creditor from taking the collateral, but then you still have to satisfy the creditor’s property rights. You do that by providing the creditor “adequate protection.”
What is “Adequate Protection”?
The Bankruptcy Code says that “adequate protection” is
provided by… mak[ing]… periodic cash payments to [the creditor] to the extent that the [automatic] stay… results in a decrease in the value of such [creditor’s] interest in such property.”
In practical terms this means is that to maintain the automatic stay and keep collateral you need to:
pay the creditor periodic (usually monthly) payments
in an amount large enough to at least offset any reduction of the creditor’s interest in the property while you keep the property
Payments to Offset the Decrease in the Value of Creditor’s Interest in the Property
This essentially means that you need to pay enough each month to make up for depreciation and any other loss in value of the collateral while you continue in possession of it.
Take an example of a vehicle loan. The vehicle loses value simply by the passing of time and from your use of the vehicle. Assume that over the course of one year your $15,000 used vehicle would depreciate by $2,400—to being worth $12,600. That’s $200 of reduction in value each month. To provide adequate protection you would have to pay the creditor at least $200 towards the loan each month.
Beyond depreciation, there’s a risk that your vehicle could be damaged or destroyed in an accident. It could also be stolen. The creditor is also entitled to protection from these possible big decreases in the value of its collateral. So besides the $200 per month, adequate protection requires you to maintain insurance on the vehicle.
Again, if you provide adequate protection in these ways, you can protect the collateral securing your secured debts in the long run.
A creditor might file a motion to avoid violating the stay, or to get permission to take some action other than collect a debt.
In the last three blog posts we’ve covered five reasons why creditors ask for “relief from the automatic stay.” The first one is by far is the most common. Creditors ask for “relief from stay” to take back collateral, or to establish payment and other terms that you must meet to avoid losing the collateral.
The other four reasons were to get permission to finish a lawsuit or other proceeding to determine:
whether you owe any debt to the creditor
the amount of that debt, assuming you owe something
whether you owe a debt which can be paid by insurance (instead of you personally)
whether the debt you owe can be discharged (written off) in bankruptcy
Today we cover two more reasons that a creditor may ask the bankruptcy court for “relief from stay.” These tend to be precautionary—arguably the creditor or other party could act without bankruptcy court permission. But because of the risks of potentially violating the automatic stay the party first asks for permission.
So, a party could file a motion for relief from stay
to get a court determination whether the creditor’s intended actions would violate the automatic stay
to get permission to take some other action against you not involving collecting a monetary obligation
Penalties for Violation of the Automatic Stay
When a creditor or other party learns that you’ve filed a bankruptcy case, it knows that it can no longer take collection action against you to collect any debt. If it does take such action it would likely be in violation of federal law and may have to pay damages.
an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
In other words there can be significant financial penalties for taking action against you in violation of the automatic stay.
1. Avoiding Violation of the Automatic Stay
The problem is that sometimes it’s not crystal clear whether a certain action by a creditor would violate the automatic stay or not. Bankruptcy Code Section 362 about the automatic stay has 8 subsections about the kinds of actions that bankruptcy stays (stops). It has 28 exceptions about the kinds of creditor actions that the automatic stay does not stop. The entire code section contains about 6,500 words—lots of potential for confusion.
So how does a creditor or other adversary of yours avoid the potentially serious penalties for violating the stay? It can file a precautionary motion for relief from stay to put the issue before the bankruptcy court. The creditor/adversary doesn’t act against you until after getting the court’s determination that it is acting legally.
For example, assume that you file a bankruptcy case while you are in the midst of a divorce. Your ex-spouse wants to finish the divorce proceeding regardless of your bankruptcy filing. The Bankruptcy Code says it’s not a violation of the automatic stay to finish a divorce proceeding. However it IS a violation to the extent that “such proceeding seeks to determine the division of property that is property of the estate.” (Section 362(b)(2)(A)(iv).)
So your ex-spouse may file a precautionary motion to find out if the property to be divided is included in “property of the [bankruptcy] estate.” He or she wants to know how to go forward with the divorce without violating the automatic stay.
Note that you can simply not respond to such a motion if you’re fine with the action your adversary proposes. Then the bankruptcy judge will likely give the adversary the clarification it needed. If you don’t object your adversary will more likely get what it is requesting.
But if you do want to object, you respond through your bankruptcy lawyer to the creditor’s motion. The judge then decides whether the creditor’s proposed action would be a violation of the automatic stay. And if it would be a violation, the court usually also decides whether the adversary is still entitled to relief from stay to proceed with his or her action.
2. Permission to Take Action Other Than to Collect a Debt
Similarly, a creditor may ask for relief from stay to take some action separate from collecting its debt. It is essentially asking to take some action other than debt collection, and wants to be sure it can.
When you enter a contract with a creditor, you often have contractual obligations beyond just paying the debt. For example, if you’re behind on rent payments on an apartment when you file bankruptcy, you owe a debt. The landlord cannot pursue you on that debt because of your bankruptcy filing. But it may want to evict you so that it can rent it to another tenant. So the landlord could file a motion for relief from stay to get permission to evict you. That motion would make clear that the landlord is NOT asking for or getting permission to collect the back rent. It’s just asking for permission to proceed with an eviction-only lawsuit. If the landlord succeeded in that motion, the court’s order granting the permission would also be limited to the eviction proceeding, and would not allow collection of the back rent.
(There are special rules about the automatic stay involving residential rentals. So be sure to discuss this with your bankruptcy lawyer if it pertains to you. Also, see Section 362(b)(22 and 23) of the Bankruptcy Code and our recent blog posts about this.)
A creditor might want to pay a claim through your insurance, or finish a lawsuit to establish that you got the debt through fraud.
“Relief from the Automatic Stay”
Our last blog post got into some reasons that creditors ask for “relief from stay” other than to repossess collateral.
The “automatic stay” is one of the biggest benefits you get for filing bankruptcy. It “stays”—legally stops—virtually all creditor collection actions right away when you file a bankruptcy case. The automatic stay protects you, your assets, and your income from creditors. It does so permanently in many circumstances.
But there are exceptions, when creditors can ask for permission to pursue a debt, and may get that permission. So it’s important to know the circumstances in which a creditor would be able to get “relief from stay.”
Last time we explained two of those circumstances, allowing a creditor to finish a legal proceeding against you to determine whether you are liable on a debt, and if so how much you owe. Now here are two other circumstances where creditors may get “relief from stay.”
1. Getting Paid Insurance Proceeds
When you file bankruptcy you get protection from creditors to which you are personally liable on a debt. But what if your liability is completely covered by insurance, such as with a vehicle accident? Or what if insurance would at least partially cover the amount of your liability?
The money to pay the claim is not coming from your pocket but that of your insurance company. Should your bankruptcy filing affect your insurance company’s obligation to pay your liability up to the coverage limits? Arguably not. An injured person may understandably believe your insurance company should pay your liability regardless of your bankruptcy filing.
But the person allegedly damaged by you can’t pursue you, your assets, or your income because of the automatic stay. However, he or she could file a motion asking the bankruptcy court for permission to pursue ONLY the insurance proceeds. The motion would make clear that the debt would be pursued only against your insurance coverage. Assuming that the court would agree, it would sign an order granting “relief from stay” for the person to go after your insurance proceeds, but not against you in any other way.
Note that your insurance company likely has a “duty to defend” you in such a situation. So the insurance company and the allegedly damaged person, or their respective lawyers, would likely negotiate the matter. Most likely there would be no lawsuit. Or, if there would be one it would get settled and not go to trial. In the unlikely event that it would go to trial, your insurance company would pay to defend the lawsuit, and would pay out any damages up to the coverage limit. Any damages beyond coverage limits would very likely be written off—discharged in bankruptcy.
2. Determining Dischargeability of the Debt
Most types of debts can be discharged in bankruptcy. But there are quite a few exceptions. Some examples of exceptions are criminal debts, unpaid spousal and child support, recent income taxes, and many student loans. See Subsections 523(a)(1),(5),(8), (13), and (15) of the U.S. Bankruptcy Code.
But more conventional debts may also not get discharged based on how you incurred them. A debt incurred through fraud or misrepresentation usually can’t be discharged. See Subsections 523(a)(2) and (4) of the Bankruptcy Code. However, unlike the above exceptions of criminal and support debt, fraud-based debt IS discharged unless the creditor proves the fraud. Then if the creditor would allege fraud, you’d have the opportunity to dispute it.
The bankruptcy court usually decides such fraud-related disputes. But what if at the time of your bankruptcy filing there’s already a state court lawsuit addressing that question?
Just as with the insurance-based circumstance above, your bankruptcy filing would stop that lawsuit from proceeding. But then the creditor could ask for relief from stay to allow the lawsuit to go ahead.
The bankruptcy court might allow the state court to finish deciding whether the debt was incurred through fraud. Or the bankruptcy court might want to decide that issue itself. Likely it would focus is which court would be more efficient than deciding this issue. And that would likely turn mostly on whether the state court was actually deciding the fraud issue (and not just whether you were merely liable in the debt) and on how close the state court was to a resolution.
A creditor may ask the bankruptcy court to let another court finish a lawsuit about liability and/or the amount of damages.
“Relief from the Automatic Stay”
Our last blog post was about the possibility of a creditor asking for “relief from the automatic stay.” The automatic stay refers to the immediate protection you receive from debt collection as soon as you file bankruptcy. (See Section 362 of the U.S. Bankruptcy Code about the “Automatic stay.”)
So, a creditor’s motion for “relief” from that protection refers to a creditor’s request to the bankruptcy court for permission to pursue a debt in spite of your bankruptcy filing. In certain circumstances a creditor may have legal grounds to ask for an exception to the automatic stay protection. (See Section 362(d) of the Bankruptcy Code about “relief from the stay.”)
Last time we focused on the most common situations in which creditors ask for “relief from the automatic stay.” That’s when a creditor wants to pursue the collateral securing the debt. For example, it wants to repossess your vehicle or foreclose on your home because you aren’t current on monthly payments. Once you file bankruptcy creditors can’t take such actions until asking for and getting “relief from stay” from bankruptcy court.
Relief for Creditor for Reasons Other than Pursuing Collateral
However, there are other reasons for creditors to ask for relief from stay. The automatic stay covers more than the protection of collateral from your creditors. It also stops most lawsuits against you to collect a debt. In most cases your bankruptcy filing will permanently stop that lawsuit. But sometimes, under limited circumstances, a creditor which has sued you may ask for bankruptcy court permission to finish that lawsuit.
We cover two of these limited circumstances today (and the rest in our next blog post).
Reasons to Ask for Relief from Stay to Finish a Lawsuit
A creditor might ask to finish a lawsuit in order to determine:
whether you are at all liable on a debt—liability
if you are liable on a debt, the amount you owe—the damages
1. Determining Liability Outside of Bankruptcy Court
Someone or some business may think you owe something to it, but you dispute that you do. You don’t think you owe anything. You think you have no liability at all.
If this dispute about liability is already being addressed in a lawsuit when you file your bankruptcy case, sometimes it makes sense to finish determining liability in that lawsuit. Your bankruptcy filing would almost always stop that lawsuit. The creditor would have to get the bankruptcy court’s permission to continue the lawsuit to determine whether you were liable.
For example, you may dispute any liability on a large credit card debt run up by your ex-spouse without your knowledge. If the cred card company sues you to collect the debt, you may be able to establish in that lawsuit that you owe nothing on that debt. The creditor may believe that you are liable and wants to determine that through the lawsuit. It may file a motion for relief from stay to do so in spite of your bankruptcy filing. (It would more likely do so if it could get money out of your bankruptcy case. That could happen in an asset Chapter 7 case or in a Chapter 13 case paying unsecured debts.)
2. Determining the Amount of a Claim
You may instead be in a lawsuit in which you admit that you owe something but dispute the amount owed. The creditor may ask for relief from stay to finish the lawsuit in order to determine the amount you owe.
For example, you were in an accident in which you admit some liability but dispute the amount of damages. You admit that you were at least partially at fault but dispute the damages you caused and their dollar amounts. In this situation the creditor may ask the bankruptcy court for relief from stay to finish the pending lawsuit to determine the amount of damages for which you are liable.
As in the situation above, the creditor would not bother asking for relief from stay if the debt is simply going to get discharged (written off) with nothing paid to it no matter how large the debt. It’s only worth pursuing the matter if the creditor can anticipate getting paid something. Again, this would be much more likely in an asset Chapter 7 case or a Chapter 13 case paying general unsecured debts.
Will the Creditor Get Relief from the Stay?
In both of these situations, the bankruptcy court may or may not grant relief from stay to finish the lawsuit. It mostly depends on which court could more efficiently finish resolving the dispute—the original court or the bankruptcy court. If the liability or damages dispute has come close to being litigated in the original court, the bankruptcy court may just let the first court finish the lawsuit. That’s also more likely if that court has more experience dealing with those kinds of cases than a bankruptcy court. That’s often the situation. But it a lawsuit has just started, and the dispute is one that the bankruptcy court is experienced in handling, it may not give relief to the creditor but instead resolve the liability or damages dispute itself.
Filing bankruptcy stops creditors’ collections against you immediately. But sometimes a creditor tries to get permission to collect anyway.
In our last 10 blog posts we’ve been talking about the “automatic stay.” It is one of the most important and immediate benefits of bankruptcy. The automatic stay stops most kinds of creditor attempts to collect their debts against you, your income, and your assets.
We’ve been looking at the relatively few special situations where the automatic stay protection does not apply. (Examples have included certain family court debts and proceedings, and some tax procedures.)
Today we focus in on how creditors can react to bankruptcy’s automatic stay. Creditors can sometimes challenge whether the automatic stay remains in effect or not, or whether conditions apply to its protection.
Creditor Challenges to the Automatic Stay
When you think of “relief” in bankruptcy what comes to mind is relief from your creditors. At the heart of the bankruptcy petition are the words, “I request relief.” (See page 6 just above the signature line of Official Form 101.)
But the meaning of “relief” when used in this phrase, “relief from the automatic stay,” the meaning is very different. This phrase refers a creditor’s “relief” from the protection that the automatic stay gives you. A creditor challenges your right to that protection by asking the bankruptcy court for “relief from the automatic stay” (or simply “relief from stay”).
This might also be referred to as a creditor’s motion to lift the automatic stay injunction.
Most Creditors Don’t Ask for Relief from Stay
Creditors get relief from stay only if they qualify under certain circumstances laid out in the law. (See Section 362(d) of the U.S. Bankruptcy Code about creditor requests for “relief from the stay.”)
So don’t be concerned that all or many of your creditors will try to take this protection away from you.
Most Chapter 7 “straight bankruptcy” cases are completed without ANY creditor trying to do so. They do happen but often don’t change the outcome.
These challenges are more common in a Chapter 13 “adjustment of debts.” That’s because these kinds of case last much longer, and often involve changes to the payment terms of secured debts, resulting in more opportunities for negotiations and legal wrangling. Still this usually only involves one or two creditors. And even in Chapter 13 there are many cases with no such challenges.
Secured Creditors Requesting Relief from Stay
Most creditors which ask for relief from stay do so to get permission to take back collateral. Or often their goal is to put conditions on the automatic stay to encourage you to keep making payments on the collateral-secured debt. Here’s an example.
You file a Chapter 7 case when you are 2 payments behind on a vehicle loan. You want to keep this vehicle and have said so in your bankruptcy paperwork. Because of your payment history the lender files a motion for relief from the automatic stay. It wants to push you to catch up on those late payments quickly. It also wants court permission to repossess the vehicle if you don’t make those payments or fall behind later. The lender and you and your bankruptcy lawyer enter into negotiations. If necessary the issue goes to the bankruptcy judge for a decision. Usually the result is a negotiated agreement on the terms for catching up and keeping current on the payments. If you don’t comply you would likely quickly lose the automatic stay protection and lose your vehicle. If you comply you keep your vehicle.
Other Creditors Requesting Relief from Stay
Much less common, but sometimes a creditor without a secured debt has reason to ask for relief from stay. Here’s an example.
You file a Chapter 13 case right after being served with an eviction lawsuit by your residential landlord. The automatic stay stops the eviction. Your Chapter 13 payment plan shows how you will catch up on the unpaid rent payments and keep current thereafter. The landlord wants to proceed with the eviction. Most likely the automatic stay will continue in effect and stop the eviction as long as your payment plan does show how you’ll comply with the rental agreement, and then you in fact do what your plan says you will.
Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.
The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections. We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.
Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.
Tax Determination is Allowed, Tax Collection is Not
Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.
The IRS/State CAN’T…
The automatic stay immediately stops virtually all debt collection activity against you when you file bankruptcy. This protects you, your income, and your assets. Everything is put on hold so that the bankruptcy laws can be applied to your entire financial situation.
Debts that the law discharges—legally writes off—disappear. Other possible debts that the law does not discharge you continue to owe. With income taxes, if they’re old enough and meet other conditions, they’re discharged. Otherwise you’ll either owe them after completing the Chapter 7 case or you’ll pay them through the Chapter 13 case. But in the meantime the IRS and state are forbidden from collecting the debt. They are also forbidden to take any action directly related to collection, like recording a tax lien against your home or vehicle.
So to be clear, the automatic stay exceptions we’re discussing here do NOT allow the tax authorities to take any action to get your money or assets. The IRS and state tax authority can’t start or continue garnishing your paychecks or bank accounts. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax, and can’t send you tax bills.
The IRS/State CAN…
As we said above, the taxing authorities can take certain specific steps to determine how much tax you owe. Some of these steps you wouldn’t expect your bankruptcy filing to affect—they’re probably not surprising. You filing bankruptcy does not prevent the IRS/state from doing the following:
Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.) But there can be no attempt to collect whatever that tax liability ends up being.
Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).) That notice is NOT a demand to pay the tax.
Demand that you file your tax returns. (Section 362(b)(9)(C).) In fact this step is often essential for the processing of your bankruptcy case.
Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).) “Assessment” is a formal determination of the tax amount. The “demand” here is a term of art meaning that you are put on notice that you are obligated to pay the debt. But whether and when you really owe it usually depends on bankruptcy law.
The interplay between bankruptcy law and tax law can be quite complex. The rule of thumb is that bankruptcy stops tax collection but not tax determination. But your situation may have nuances that could make that rule of thumb misleading. If you are in the midst of, or fear, tax collections, be sure to see an experienced bankruptcy lawyer to find out what would happen in your unique situation. And it really does make sense to do so as early as possible. Tax debts are very much an area where early and wise planning could save you a lot of money.
A landlord can take possession of a rental fast if you’re endangering the rental property or illegally using a controlled substance there. [
Bankruptcy Stopping Eviction
Two blog posts ago we got into how bankruptcy can stop a residential eviction. Basically, you can stop an eviction if you file a bankruptcy case before the landlord gets a judgment of possession. That’s a court’s decision that the landlord has the right to take possession of your rental. That means you no longer have a property right that bankruptcy law can protect. So after this judgment, the eviction can go forward (except under some unusual circumstances discussed in that earlier blog post).
Special Reasons to Evict
However, there’s a way for a landlord to quickly evict you even if you do file bankruptcy before the judgment of possession. The landlord could accuse you of one of two kinds of bad behavior:
“endangerment of [the rental] property”
“illegal use of controlled substances on [the] property”
If you take no action in response to the landlord’s filed certification, 15 days later it can proceed to evict. If the landlord started the eviction before you filed bankruptcy, it can finish it. If it hadn’t started before, it could now start and complete the eviction. Your bankruptcy’s usual protection against the landlord taking possession of your rental property would no longer apply. (See Section 362(m)(3).)
However, if you dispute what the landlord states in its certification, you can file an objection to it. You and your bankruptcy lawyer must file the objection at the bankruptcy court within 15 days of the certification’s filing. You’d have to object “to the truth or legal sufficiency of the certification.”
The bankruptcy court then holds a hearing within 10 days. It rules on whether “the situation giving rise to the [landlord’s] certification… existed or has been remedied.” If the court is convinced that the “situation… did not exist or has been remedied,” the automatic stay protection continues.
Otherwise, the court allows the landlord to immediately proceed with eviction.
Bankruptcy stops a residential eviction if the landlord hasn’t already gotten a judgment of possession. But if the landlord has grounds that you were a bad tenant as outlined above, then you can be evicted even if your bankruptcy filing happens before the judgment. You can fight back and still win if the facts are in your favor. If so then you are protected from eviction during the 3-4 months of your Chapter 7 bankruptcy case. That would hopefully give you time to catch up on your rent or cure whatever else is wrong. Or if necessary Chapter 13 would likely give you much more time to catch up or cure.