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.
Use Chapter 7 to stop paying an unaffordable income tax payment plan when the tax owed is dischargeable. Use Chapter 13 when it’s not.
Tax Agreement Payments Too High
We laid out the problem last week. You’d entered into a monthly payment plan with the IRS or your state because you couldn’t pay what you owed. But now you don’t have the money to make the payments. Or you’re in a payment plan but will owe more income taxes soon, putting you then in violation of your payment agreement.
If you violate your tax agreement the IRS/state could then take aggressive collection action against you. Or you might be able to add an upcoming new income tax owed into your current tax payment agreement. But the increased monthly payment may well push you over the financial edge. But even if you think you could afford it, you’d be going backwards instead of making progress.
Chapter 7 Makes Sense When Your Tax Owed Can Be Discharged
If all, or most, of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d discharge (forever write off) all or most of the taxes you owe. You’d either owe no taxes or owe a small enough amount to be able to handle it with a new smaller payment plan.
But if you can’t discharge all your income taxes, or enough, through Chapter 7, Chapter 13 “adjustment of debts” is likely the better tool.
Chapter 13 Plan
A Chapter 13 payment plan wraps all or most of your debts into a single monthly payment. This payment includes any tax debts. This single Chapter 13 monthly plan payment is based on your actual budget. Some debts—such as taxes, and secured debts such as a home mortgage and vehicle loan—get prioritized. Usually you pay less on your other debts, often not much, sometimes nothing.
Dealing with income tax debts with Chapter 13 gives you the following advantages over Chapter 7:
Income taxes that don’t qualify for discharge do need to be paid in full, but on a very flexible schedule. You and your bankruptcy lawyer create a new plan incorporating all of your debts. This plan focuses your resources on your most important debts, including nondischargeable income taxes.
Usually you don’t pay ongoing interest and penalties. This saves you potentially lots of money. That’s particularly true if tax interest rates will rise in the near future along with other interest rates.
Other even more important debts—such as child/spousal support, or unpaid mortgage or home mortgage payments—can often be paid ahead of income tax debts.
The budget you enter into earmarks enough money to withhold from your paycheck or pay quarterly for the current year’s taxes. This enables you to break out of the endless cycle of being behind on your income taxes.
Chapter 13 handles income tax liens much better than Chapter 7. If there’s no equity supporting the lien, you can often get rid of the lien without paying anything for it. If the lien is partially secured, you will likely pay less to get rid of it than otherwise. Chapter 13 takes away much of the leverage of tax liens from the tax authorities.
You are protected throughout your entire 3-5-year Chapter 13 payment plan from tax collection. Bankruptcy stops all tax collection, including the recording of tax liens. In Chapter 7 this protection lasts only 3-4 months. Then you’re on your own dealing with any remaining tax debts. With Chapter 13 the protection lasts until the end of your Chapter 13 case. At that point you should owe absolutely no tax debt.
Filing bankruptcy allows you to unilaterally break your monthly payment agreement with the IRS and/or state. With Chapter 7 you may be able to discharge all or most of your tax debts. Or, discharging all or most of your other debts may make it possible to stay in your tax payment plan, if that’s your only significant debt. However, if Chapter 7 doesn’t help you enough, Chapter 13 gives you many other significant advantages (some listed above). Talk with an experienced local bankruptcy lawyer to figure out which is better for you.
Can’t afford your current IRS/state monthly payment plan? Have an upcoming additional new year of taxes to pay? Chapter 7 can often help.
Tax Installment Agreement You Can’t Afford
It’s a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you couldn’t just pay it off. You found out that the IRS let you pay that unpaid tax through a monthly installment plan. If you also owed state income taxes, you likely found out that your state taxing authority lets you do this, too.
So you set up the payment plan with the IRS and/or state. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay. So now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS/state monthly tax payment and other debts.
Tax Installment Agreement You Are About to Break
If you were desperate to have the money to pay the monthly tax payment (along with your other obligations), you may have arranged to withhold less from your paycheck during the current year. Or if you’re self-employed you may not have paid enough estimated quarterly taxes.
If so, you’ll likely owe income taxes again when your next tax returns are due. Assuming you couldn’t then immediately pay this new tax owed, this would likely be considered a breach of your current payment plan with the IRS/state.
At that point the IRS/state could terminate the monthly payment agreement. It could then take aggressive collection action against you, something you really want to avoid.
Or instead the IRS/state might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment. This only aggravates your problem of having more debt than you can handle.
Even if you could afford to pay an increased monthly tax installment payment, you’d be going backwards instead of making progress. The tax interest and penalties would add significantly to the amount you have to pay. You’re in vicious cycle and don’t see a way out of it.
Two Ways Out
But there ARE potentially two ways out: Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” We’ll cover Chapter 7 today; Chapter 13 next week.
Chapter 7 Discharge of Tax Debts
Which Chapter is better depends on many factors, but especially on whether your older income tax debts are “dischargeable.” This means whether the taxes can be legally, permanently written off in bankruptcy.
Some income taxes CAN be discharged. Basically, certain amounts of time must pass since the time the tax return for the tax was legally required to be submitted, and since the tax return was actually submitted. If you meet those conditions (and some other possibly relevant ones), the tax debt is dischargeable just like any ordinary debt.
When Chapter 7 Makes Sense
If ALL the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax return(s), you could likely enter into a fresh monthly payment plan for these taxes. You wouldn’t end up breaching your present payment plan because you would no longer owe anything on it.
If SOME of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may also make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is one that you could afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.
If Chapter 7 Isn’t Good Enough
If you can’t discharge all your income taxes, or enough, through Chapter 7, consider Chapter 13 “adjustment of debts.” We’ll explain in our blog post next week.
It’s much easier to prevent repossession by filing bankruptcy beforehand. But if you’ve already been repo’d, you now have to act very fast.
When Does a Lender Repossess a Vehicle?
When CAN a vehicle lender repossess your vehicle? Just about all vehicle loan contracts let the lender repossess the minute you are late on a payment. There may be a legal grace period, but not usually. This is also true for other breaches of the contract, such as if you let the vehicle insurance lapse. So usually a lender can repossess, without warning, when you are not in fully compliance with any contract obligations.
But most lenders don’t repossess right away. They’d usually rather have you make the payments so that they earn the interest on the contract. But they have the legal right to repossess, and sometimes act very fast.
So how much time do you have before your lender would actually repossess? That depends on your payment history and the repossession practices of the lender. It’s truly hard to tell how many days you can be late, or how long your insurance can be lapsed, before repossession.
Much Better to File BEFORE Repossession
Filing bankruptcy stops repossession from happening immediately. It literally stops the repo agent from taking your vehicle even if he or she has already started to do so.
The moment your bankruptcy lawyer electronically files your case the “automatic stay” goes into effect. This “stays,” or legally stops, virtually all collection efforts against you and your property. Specifically, filing bankruptcy stops the enforcement of lender’s liens against your property. A vehicle repossession is an enforcement of a lender’s lien on your vehicle, and so it is stopped. See Subsections 362(a)(4) and (5) of the U.S. Bankruptcy Code about the “stay… of… any act to… enforce any lien” against your property.
Filing a Chapter 7 vs. 13 Case to Stop Repossession
A Chapter 7 “straight bankruptcy” will stop a pending repossession. It will give you a bit of time to bring your loan current. Usually you’ll have no more than about 2 months, sometime less, seldom more. If your insurance has lapsed you’ll have to reinstate it pretty much right away.
Stopping repossession by filing a Chapter 13 “adjustment of debts” gives you lots more time to catch up on the late payments. Instead of a couple months under Chapter 7, under Chapter 13 you get as much as a few years to catch up. Also you may qualify for “cramdown” of the vehicle loan. If so, after stopping the repo you may not need to catch up at all. Plus you may be able to reduce your monthly payments and pay less overall for the vehicle than you would have under the contract. “Cramdown” is not available in Chapter 7. But even under Chapter 13, you still need to pay to reinstate any lapsed insurance quickly to be able to keep your vehicle.
Getting Back Possession AFTER Repossession
Whether you can get your vehicle back after it’s already been repossessed depends on timing and the bankruptcy Chapter you file under.
As for timing, you DO have to act fast. Otherwise it will be too late to get it back, even through bankruptcy.
Bankruptcy’s “automatic stay” stops the lender, at least temporarily, from taking the next steps after the repossession. That’s because those next steps are at least arguably part of the lender’s enforcing its lien on the vehicle, which bankruptcy stops. This may depend on your state’s laws and local interpretations of bankruptcy law. Your bankruptcy lawyer will talk with you about this in your conversation about the repossession.
The next steps after repossession usually involve selling the vehicle, often in an auto auction. Once your lender sells the vehicle, it’s too late to get back your vehicle through bankruptcy.
Chapter 7 vs. 13 in Getting Back Possession
Assuming you file fast enough, whether you actually getting your vehicle back often depends on whether you file under Chapter 7 or Chapter 13.
A Chapter 7 case will work only if you have a fair amount of money immediately available. You’d have to pay the repossession costs (of likely hundreds of dollars) plus bring the account fully current. If you’re not current on insurance you’ll also have to pay to reinstate it.
Even all that may not be enough. If your lender still doesn’t want to cooperate, it may be able to avoid giving back your vehicle. Whether or not it can be forced to depends on how your local bankruptcy court interprets the law.
Filing Chapter 13 is much more likely to be effective. That’s because it provides a legal mechanism for you to catch up on the back payments over a much longer period of time. This is done through monthly payments in your court-approved Chapter 13 plan. You will still likely have to pay the repossession costs up front. Plus you’ll have to be current on insurance. Then if your plan shows that you’ll catch up on the back payments, most lenders will voluntarily return your vehicle. If not, the bankruptcy court would likely order the lender to do so.
In the United States, 170 million consumers depend on a vehicle for daily activities. From trips to the grocery store to a daily commute to work, Americans rely heavily on having independent transportation. Unfortunately, when financial hardship strikes, lenders are quick to repossess their vehicles, even if payments are only one month behind, in some cases. The next part of ur “Surprising Benefits” series explains how filing for bankruptcy can stop a repossession from occurring or even return a repossessed car back to your possession.
If It Is Still in Your Possession
In the state of Texas, repo agents do not need to notify you before taking your vehicle. Realistically, if your payment is in default, even just by a short time, a repossession agency may already be looking for your car, truck, motorcycle, RV, or any other vehicle burdened with a loan. Filing for bankruptcy may be a viable solution to your situation. Bankruptcy places an “automatic stay” is on all collection attempts for all loans, including your vehicle. For many Americans, this stay is enough to catch up on payments, without including it in the bankruptcy process.
After It Is Repossessed
If the car is already repossessed, there is still a possibility of having the vehicle returned; but you must act fast. Lenders work quickly to send the repossessed cars to auction and often have them sold within two weeks. Once the vehicle is sold to a third party, it is too late to have it returned, and you may still owe money to your lender. Typically, the amount the car earns at auction goes toward the original loan balance and the debtor is responsible for the difference, which will include interest and repossession fees. Filing for Chapter 13 bankruptcy stops the sale of the vehicle, renegotiates the terms of the loan over the next three to five years, and returns the car to your possession. A lender may still hold the debtor responsible for the repossession fees. However, many find that preferable to losing the car entirely and still owing.
Ask an Attorney
If your vehicle loan is in default, there is a possibility that you are up for repossession. Depending on the bank and your past payment history, you may have a more extended amount of time, but this is not guaranteed. Stop the guessing game today by contacting a Schertz, TX bankruptcy lawyer. Law Offices of Chance M. McGhee understand how frustrating it is avoiding collection calls and the damaging impact losing a car can have on your career and your ability to put food on the table. Call us at 210-342-3400 today to schedule your free, no-obligation consultation to further explore your vehicle-saving options.
You may be able to reinstate your license in spite of one or more unpaid traffic tickets. It mostly depends on the traffic laws violated.
We’re deep into a series of blog posts about powerful, less familiar benefits of bankruptcy. One important one is getting your suspended driver’s license reinstated. Whether you can get your license reinstated through bankruptcy depends a lot on the reason for the suspension. Last week we covered suspensions for not paying a judgment from a motor vehicle accident while driving uninsured or underinsured. Today we cover suspensions for not paying one or more traffic tickets.
License Reinstatement Depends on Discharge of the Traffic Ticket(s)
Our last blog post showed how bankruptcy reinstates a license suspended because of an unpaid debt from an accident. These suspensions usually come from not paying a court judgment or debt from an uninsured motor vehicle accident. Usually such a debt can be legally written off (“discharged”) through bankruptcy. After bankruptcy takes away the reason for the suspension, the driver’s license can be reinstated.
It works about the same way with traffic tickets. If your license was suspended for not paying traffic tickets, a bankruptcy can sometimes discharge what you owe on those tickets. That could enable you to reinstate your license.
Not Available Under Chapter 7
Chapter 7 (“straight bankruptcy”) doesn’t work with traffic ticket suspensions. Chapter 7 doesn’t discharge “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit.” See Section 523(a)(7) of the U.S. Bankruptcy Code. A debt owed for a traffic ticket is a “fine” or “penalty” that you owe to the state, city or other local “governmental unit” whose police issued it to you. Because Chapter 7 doesn’t discharge traffic tickets, it cannot reinstate a driver’s license suspended for nonpayment of those tickets.
Need to File Under Chapter 13
However, Chapter 13 is different. It may be able to discharge the debt from your tickets. That’s because Chapter 13 does NOT exclude “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” from discharge. See Section 1328(a)(2) of the Bankruptcy Code. That Subsection lists the kinds of debts that Chapter 13 does not discharge. It refers to some but not all of the kinds of debts that Chapter 7 cannot discharge. The kinds of debts listed do NOT include the “fine” and “penalty” one referred to above—Section 523(a)(7). This means that Chapter 13 CAN discharge such “fines” and “penalties,” including certain traffic ticket debts. Since Chapter 13 can discharge traffic tickets, it may enable you to reinstate your license suspended for that reason.
Traffic Crimes vs. Violations or Infractions
Whether Chapter 13 can discharge the ticket debt depends on the nature of the law(s) you violated. Neither Chapter 7 nor Chapter 13 can discharge criminal fines or restitution. So the traffic ticket(s) must not be for a crime, but rather for a traffic violation or infraction. It can’t be for a misdemeanor or felony.
Chapter 13 specifically excludes from discharge “any debt… for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.” See Section 1328(a)(3). So did your license suspension came from breaking a traffic law requiring you to pay restitution or a criminal fine? If so that restitution or fine could not be discharged in bankruptcy, thereby not enabling your license to be reinstated. But if your ticket(s) are from traffic violation(s) or infraction(s), those could be discharged and your license reinstated.
This Can Be Unclear and Feel Arbitrary
What’s the difference between a dischargeable non-criminal traffic violation or infraction and a nondischargeable criminal fine? This is often not clear. None of these words are defined in the Bankruptcy Code. Whether breaking a traffic law is considered non-criminal or criminal can be quite arbitrary. It can turn on the coincidence of the words used in your state’s statutes or your local jurisdiction’s ordinances.
Generally, the more serious a violation of the traffic laws, the more likely that violation would be considered criminal. On one extreme, parking tickets are most likely not criminal. On the other extreme are serious violations that would likely be considered criminal, such as reckless driving, hit and run, and evading arrest. Your bankruptcy lawyer has experience with your local and state jurisdictions’ laws to advise you in making this crucial distinction.
License Reinstatement Procedure
Assume that Chapter 13 would discharge your particular traffic ticket debts. Under Chapter 13 the discharge of your debts does not happen until the end of the 3-to-5 year case. You may or may not have to wait that long to reinstate your license. It depends on local procedures.
Those procedures involve a number of authorities—the state or local court imposing the traffic fine, the state motor vehicles department reinstating your license, and the bankruptcy court discharging the traffic fine debt.
So, no question, this is complicated. Your bankruptcy lawyer will help in two huge ways. First, he or she will advise you whether you will be able to reinstate your license. If so, second, your lawyer will be aware of policies and practices of each of the authorities (or can research this), and guide your case through them efficiently. Then your license will be reinstated as quickly as possible.
The decision between filing for bankruptcy or foreclosing on your home is stressful. Neither is optimal when it comes to the immediate financial impact to your credit score, however, neither are late payments. Bankruptcy stays on your credit report for 10 years, while foreclosure typically rolls off in seven years. But, before you give in to losing your home, there are a few details worth considering.
Saving the Home
First, you must decide if you want to save the home. If you are behind by a month or two, contact your lender. The foreclosure process is expensive for banks. In many cases, your lender will work with you. Options to consider include:
Make up the late payments;
Restructure the loan; or
Request a forbearance.
The Foreclosure Option
First, consider that foreclosure is very serious to future mortgage lenders, more than a bankruptcy that did not include the house. Additionally, foreclosure will drop your credit score by 200 or 300 points. Discuss the option of a short sale instead of foreclosure with your lender. With this option, the house is worth less than the principal balance of the loan, in which case, you may owe the remaining balance. In many situations, banks waive this difference. If a short sale is not an option, some banks accept “deed in lieu of foreclosure,” where you turn the house over to the lender and owe nothing. Explore these opportunities with your lender
How Bankruptcy Can Help
There are many options when filing for bankruptcy, each with unique benefits to suit your needs. Because you own a home and have income, Chapter 13 will probably be your best option. Rather than liquidating everything, Chapter 13 allows you to restructure your debt. As soon as you file, an automatic stay is placed on all accounts, effectively stopping all debt collection attempts. The stay also halts foreclosure proceedings, which may help you catch up on payments. Next, all of the creditor and lenders then convene with an appointed trustee to create a payment plan to repay the debt. This option allows you to keep your assets, including your home, and eventually get caught up on your mortgage.
Ask an Attorney
Mortgage lenders and collection agencies send correspondence that is intimidating and overwhelming. The calls and other communication can stop now. You can begin looking forward to a brighter financial future today. Discover if bankruptcy is the right solution for you by calling a New Braunfels, TX bankruptcy attorney. The Law Offices of Chance M. McGhee will take the time to carefully examine the details of your case and give you honest feedback on which bankruptcy option is best for you. Call 210-342-3400 today to schedule your free, no-obligation consult.
Bankruptcy does more than stop creditors in their tracks and then write off their debts. It can get a suspended driver’s license reinstated.
We’re continuing in this series of blog posts about the powerful but less obvious benefits of bankruptcy. Bankruptcy gives you immediate and long-term relief from your debts. But it can do other very important things you may not know about. Today we get into how bankruptcy can get a suspended driver’s license reinstated.
Reasons for Driver’s License Suspension
Whether your filing of a bankruptcy case can reinstate your suspended driver’s license depends on the reason for the suspension. Two of the most common kinds are suspensions are from:
1) not paying a judgment from a motor vehicle accident while driving uninsured; and
2) failing to pay traffic tickets.
This blog post focuses reinstating your license from the first one of these kinds of suspension. We’ll get to the second one next.
Judgment from a Vehicle Accident While Driving Uninsured
Let’s make clear how your license can get suspended in this situation. A person gets into a car accident while driving uninsured. The accident results in some property damage and/or personal injury for the other driver(s) or for passengers. The other driver or somebody else involved sues the person (usually through their insurance company). The person sued then gets a judgment against him or her from that lawsuit. That judgment legally establishes that the uninsured driver owes damages arising out of the accident. The judgment determines that the driver was at least partially at fault and must pay those damages.
If such a judgment was taken against you, your state’s laws likely gave you a very limited amount of time to pay that judgment. So what happens if you don’t pay it off within that time?
You guessed it: your driver’s license gets suspended. The idea is that you failed to fulfill your financial responsibilities as a driver. You legally owe a debt from an accident that you were at least partially at fault for. And it’s a debt that you didn’t pay, probably because you didn’t have insurance.
Bankruptcy Wipes Out the Debt, No More Reason for the Suspension
The good news is that by filing bankruptcy you can discharge (legally write off) that debt. As soon as you no longer owe that debt, the reason that your license got suspended is gone. So the license can be reinstated.
State vs. Federal Laws
But wait a minute. Doesn’t your state have the right to make laws about this and have them be respected by federal bankruptcy laws?
Yes, the state has a legitimate interest in keeping its roads safe. It can help do that by requiring drivers to have liability insurance. That way, vehicle accident victims are more likely to be compensated for their property damages and personal injuries. So states can use license suspensions as part of its incentive for drivers to have insurance.
But what if a state’s law specifically says that it can suspend a person’s driver’s license even if the person has discharged that debt in bankruptcy? Doesn’t that conflict with federal bankruptcy law’s granting of a full discharge of that debt? Discharging a debt is of limited benefit if you still can’t get your license back for not paying the debt.
The Supreme Court Has Resolved this in Favor of Debtors
This particular conflict between state and federal law is one that the U.S. Supreme Court addressed and resolved decades ago. In Perez v. Campbell the Court laid out the issue in one long sentence:
What is at issue here is the power of a State to include as part of this comprehensive enactment designed to secure compensation for automobile accident victims a section providing that a discharge in bankruptcy of the automobile accident tort judgment shall have no effect on the judgment debtor’s obligation to repay the judgment creditor, at least insofar as such repayment may be enforced by the withholding of driving privileges by the State.
402 U.S. 637, 643 (1971). In other words, can a state require a person to pay a debt from a vehicle accident in order to reinstate the person’s driver’s license, even after that debt was discharged in bankruptcy?
The Court decided this in favor of the debtors. A state cannot require payment of a bankruptcy discharged debt to reinstate a license. The state statute was in conflict with one of the main purposes of bankruptcy: to give debtors “a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt” [quoting an earlier Supreme Court opinion]. The Court concluded: “There can be no doubt… that Congress intended this ‘new opportunity’ to include freedom from most kinds of pre-existing tort judgments.” (402 U.S. 637, 648.) “We think it clear that [the state statute] is constitutionally invalid.” (At 656.)
If your driver’s license was, or is about to be, suspended because of an unpaid debt arising from an uninsured motor vehicle accident, see a bankruptcy lawyer. There’s a good chance you can reinstate your license—or prevent it from being suspended—through bankruptcy.
Bankruptcy usually does not get rid of liens against your assets. However, in many situations you can “avoid” a judgment lien on your home.
We’re on a series of blog posts about the powerful but less obvious benefits of bankruptcy. Bankruptcy can do much more than just give you immediate and long-term relief from your debts. Today we get into the extremely helpful way bankruptcy can take judgment liens off the title to your home.
The Problem Begging for a Solution
When a creditor sues you, most often it gets a judgment against you. If you do not respond to the lawsuit, the creditor gets a default judgment. That’s a court determination that you owe the debt. The judgment also usually includes substantial fees related to the lawsuit that you then also legally owe.
Even if you do respond, formally or informally, to the lawsuit and work out some kind of deal with the creditor, that deal often includes the creditor getting a judgment against you.
Either way, the creditor’s judgment against you usually results in a judgment lien against your home. That’s often true whether you owned a home at that time or not. For example, if you bought a home years later, a previously entered judgment lien could attach to it. Or if you are buying a home on a contract with the seller, including a rent-to-own, the judgment could attach to your right to the home. Sometimes a new or old judgment lien could even attach to your rights under a residential lease.
Any such judgment lien is separate from the debt you owe to that creditor. Bankruptcy can usually write off (“discharge”) debts but not liens. For example, if you are making payments on a vehicle, bankruptcy can discharge the debt but does not affect the lien that the creditor has on the vehicle. So unless you surrender the vehicle, you have to pay for the right to keep the vehicle. Similarly, bankruptcy may write off the debt that resulted in the judgment, but that could still leave the judgment lien on your home. This is a significant problem because you would likely have to pay to get rid of the lien when you sell or refinance the home.
Judgment Lien “Avoidance”
However, bankruptcy law does have a solution that works in many situations. As long as you meet certain conditions, you can “avoid”—undo—a judgment lien as part of your bankruptcy case. You may well be able to meet these conditions.
The Conditions for Judgment Liens “Avoidance”
You can take a judgment lien off your home by meeting the following conditions:
The judgment lien at issue is attached is your “homestead.” That’s the real estate or other property right that the homestead exemption protects for you under the law.
That lien must be a “judicial lien.” That’s defined in the U.S. Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
This “judicial lien” cannot be for child or spousal support or for a mortgage foreclosure.
The judgment lien must “impair” the homestead exemption. This usually means that the lien cuts into the equity protected by the applicable homestead exemption.
You were previously sued by a collection agency on a medical debt for $15,000. You didn’t respond because you knew you owed the debt. So the collection agency got a judgment of $15,000 plus another $2,500 for costs and fees, totaling $17,500. Then a judgment lien in that amount was recorded against your home.
You file a Chapter 7 “straight bankruptcy” case. It will discharge—forever write off-the $17,500 debt. But without lien avoidance the judgment lien would survive.
You owe a $200,000 mortgage on your home, which is worth $210,000. So you have equity of $10,000. The judgment lien attaches to that $10,000 of equity.
In your state you have a $25,000 homestead exemption—protecting the first $25,000 of equity in your home. Since you have less equity than that, the full $10,000 of your equity is protected by your homestead exemption.
The judgment lien “impairs” (or absorbs) the full $10,000 of equity in your home. This equity is all protected by the applicable homestead exemption. Therefore, the judgment lien impairs the homestead exemption.
Because all of the conditions are met in this example, your bankruptcy lawyer could successfully file a motion to “avoid” the judgment lien. You’d permanently be rid of both the $17,500 debt and the judgment lien on your home.
Avoid the risks or persuading or negotiating with the Chapter 7 trustee by solving your preference problem through Chapter 13.
Our last several blog posts have been about the problem of preference payments:
3 weeks ago we introduced the problem resulting from paying a favored creditor before you file bankruptcy
2 weeks ago we discussed avoiding the problem by delaying filing your case or persuading the trustee to do nothing
Last week was about negotiating with the trustee to pay off the preference money yourself
Today we get into how to solve this problem by filing a Chapter 13 “adjustment of debts” case instead of a Chapter 7 “straight bankruptcy” one.
When Filing a Chapter 13 Case May Be Worthwhile
A Chapter 13 case is very, very different from a Chapter 7 one. For starters, instead of taking about 4 months a Chapter 13 case almost always takes 3 to 5 YEARS. Using it to resolve a preference is almost never a good enough reason to file a Chapter 13 case.
But Chapter 13 CAN be better than Chapter 7 in many situations. It can accomplish a lot that Chapter 7 can’t. So if you already have a good reason or two to consider a Chapter 13 case, using it to solve a preference problem as well may push you in that direction.
Let’s say you have an expensive vehicle loan that you’re a month behind on. Chapter 13 would allow you to cramdown that loan. That would reduce your monthly payments and the total you would pay. Plus you wouldn’t have to catch up on the missed payment. Yet you’re on the fence as you wonder if the disadvantages of Chapter 13 outweigh these savings. So if you have a preference problem that Chapter 13 would deal with, that could push you into deciding on Chapter 13.
When You Really Need to Use Chapter 13
The Chapter 7 solutions don’t always work:
You often don’t have the luxury of delaying your bankruptcy filing enough so that more than 90 days has passed after the preferential payment. (Or a full year has passed, if the payment was to an “insider” creditor)
The trustee may pursue your previously paid creditor in spite of your bankruptcy lawyer’s efforts to dissuade the trustee.
You may not have the ability to pay off the trustee yourself. Or you may owe too much to pay it off fast enough to satisfy the trustee.
So you’re looking to file bankruptcy and your lawyer advises you that none of these three are going to work. Then, if you want to avoid having a Chapter 7 trustee chasing your prior-paid creditor, consider the Chapter 13 solution.
How Does Chapter 13 Fix a Preference Problem?
Chapter 13 solves the preference problem by enabling you to pay the trustee within your payment plan. You pay enough extra money into your Chapter 13 plan to pay what you would have paid a Chapter 7 trustee. But you have significant advantages in doing it this way.
But first an example to show how this works. Assume you paid off a debt of $2,500 to your sister 60 days before filing bankruptcy. You’d gotten a tax refund and she desperately needed the money. You’d put her off for years and then had promised to pay her from the refund. Now you’re about to have your home foreclosed on so you can’t wait to file bankruptcy. If you filed a Chapter 7 case the bankruptcy trustee would force your sister to return the $2,500. She’d get sued if she didn’t. You absolutely don’t want that to happen. So you file a Chapter 13 case—which you be doing anyway to save your home. Your lawyer calculates your Chapter 13 payment plan to pay an extra $2,500 beyond what you would otherwise need to pay. You pay that extra amount over the course of your 3-to-5-year case. This may increase your monthly payment somewhat, or it may extend the length of your case. But your sister would not have to pay back anything. The trustee would have no need to even contact her.
Advantages of Using Chapter 13
1. When you file a Chapter 7 case hoping to persuade the trustee not to pursue your prior payee, you may not know if that’ll work. Or if you hope to negotiate payments to the trustee, you don’t know if that will work. The trustee may want to try to get the money out of your payee after all. Or your trustee may reject your offer in order to get the money faster from your payee. Using Chapter 13 takes away these risks. The system allows you to use your Chapter 13 plan to pay what’s needed.
2. Chapter 13 gives you much more time to pay what you need to pay. A Chapter 7 trustee’s job is liquidation. He or she is under pressure to wrap up your case quickly, and so will pressure you to pay quickly. Ask your lawyer but generally a Chapter 7 trustee won’t give you more than a year to pay up. And he or she may simply require you to pay it all in a lump sum. In contrast, under Chapter 13 you have 3 to 5 years to pay.
3. You have more control over where the money goes, and when. Chapter 13 is often used to pay creditors that you want to or need to pay. For example, if you owe a recent income tax debt or back child support, it’s much better to have those debts paid through a court-ordered Chapter 13 payment plan.
4. You have more control over when debts are paid. If you have a debt or two that needs to be paid quickly, that can often be paid first. For example, if you need to catch up on a car payment (because it doesn’t qualify for cramdown), your plan may front-load money there. The extra money you are paying because of the preference can be put to better use early in your case.
Creditors know how to work the system to get the money owed to them. In some cases, creditors have the courts put a lien on debtor’s possessions without the owner’s consent or knowledge, granting the creditor a legal claim over the property. By placing a lien on real estate, a vehicle, or personal property, a creditor secures payment of the money owed, sooner or later.
Buyers will not purchase items without a clear title, and a lien makes any title unclear. Although a creditor has the option to sell the property, such as in foreclosure, most wait until the debtor chooses to sell the property. At that point, seller pays the debt out-of-pocket or uses part of the purchase price to repay the debt. Fortunately, in Chapter 7 bankruptcy, you may be able to avoid the whole ordeal by getting rid of the judgment lien altogether.
Consensual Versus Non-Consensual Liens
Liens are placed on property both with and without consent. If consent is given, it happens at the origination of the creditor-debtor relationship. For example, either the debtor is asking for money to purchase property, such as a home or a vehicle, where the bank would then own the property, and the purchaser makes payments to the financial institution; or the debtor is asking for a financial loan and offers property they already own as collateral.
Alternatively, if someone wins a judgment against another party in court and money is owed, a judge may grant a judgment lien, which frequently happens with unpaid debt. This is an example of a non-consensual lien.
Through judgment lien avoidance, you can permanently remove a judgment lien. If this occurs during bankruptcy, you will own the property, free-and-clear with no other payments. Lien avoidance is recommended, if possible, even if you do not intend to keep the property long-term, as you can then sell the property to pay for other things. To qualify, the following must be true:
The lien is a court-issued money judgment;
There is exempt equity in part of the property; and
Property loss impairs the exemption.
Reduce Courtroom Surprises
Many filers do not realize they have any liens on their property. Others discover partial claims. Sometimes, debtors do not have equity during the bankruptcy filing, but that changes down the road. In all of these circumstances, a New Braunfels, TX bankruptcy attorney can help. If there is a lien on your property and you have little, no, or even negative equity, the Law Offices of Chance M. McGhee will explore all of your options. Call us today for your free, no-obligation consultation at 210-342-3400.