Chance M. Mc Ghee | San Antonio Bankruptcy Attorney .+Add.Feed Info1000FOLLOWERS
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.
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.
Bankruptcy prevents or stops only certain limited divorce/family law proceedings. Others, including collection of ongoing support, continue.
Our last several blog posts have been about creditor collection actions stopped or not stopped by a bankruptcy filing. Today we get into divorce and family court related proceedings and debts.
Family Court Proceedings
The bankruptcy law that stops creditor collections immediately when filing bankruptcy is called the “automatic stay.”
The automatic stay doesn’t just stop creditor phone calls, wage and bank account garnishments, and vehicle repossessions and home foreclosures. It also stops most creditor lawsuits from being filed and prevents ongoing lawsuits from continuing. This makes sense because a creditor’s lawsuit is clearly part of its efforts to collect its debt.
However, there are certain kinds of lawsuits that have little or nothing to do with collecting a debt. Many of such lawsuits are in family or domestic relations court. Bankruptcy law creates exceptions to the automatic stay to allow certain specific family court proceedings. Such proceedings can be started or continued regardless of your bankruptcy case.
Each of these specific exceptions to the automatic stay makes sense. These proceedings mostly deal with personal matters not pertaining to collecting a debt or taking an asset from you. They include court proceedings
to establish the paternity of a child
to establish or modify the amount of child or spousal support
So, your ex-spouse/domestic partner or about-to-be ex-spouse/domestic partner can start or continue these specific kinds of proceedings regardless of your active bankruptcy case. So can somebody acting on his or her behalf (such as a state support enforcement department).
The Divorce Proceeding
The automatic stay also does not prevent or stop the divorce or dissolution of marriage proceeding itself. When you file a bankruptcy case it doesn’t affect an ongoing divorce proceeding or the filing of a new one.
But that’s not quite true on a practical level. The automatic stay DOES apply to and does stop what is a crucial part of most divorce proceedings. That’s the division of marital property and marital debt. If there is no marital property or debt being addressed in your divorce, if only the dissolution of the marriage is being adjudicated, then that proceeding can continue and the marriage can be dissolved, regardless of your bankruptcy case.
But if, as usual, there’s some property or debt to divide, the automatic stay stops that from going ahead.
The Bankruptcy Code excludes from the automatic stay “a civil action or proceeding… for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property… .” (See Section 362(b)(2)(A)(iv).)
That exception makes sense because of what bankruptcy deals with—property and debt. Chapter 7, especially, looks to your property and debts as of a certain point in time—your date of filing. It would not be a very sensible use of court time for two courts to be dealing simultaneously with your property and debts. The bankruptcy court would be dealing with a fluid situation as the divorce court shifted the debtor’s property and debts. So, a divorce court is stopped from proceeding on these issues while the automatic stay is in effect.
Collection of Child and Spousal Support
(We’ve addressed the special situation of child and spousal support separately in a recent blog post so we’ll be brief here.)
The automatic stay does not stop the collection of ongoing child or spousal support in either Chapter 7 or 13.
Chapter 7 “straight bankruptcy” also does not stop the collection of prior unpaid support. But Chapter 13 “adjustment of debts” can stop prior unpaid support collection, IF you act proactively and with consistency. You must:
continue paying any ongoing monthly support payments
arrange to pay all unpaid support current during your Chapter 13 payment plan
actually make the proposed and court-approved plan payments so that you do catch up on all unpaid support during your 3-to-5-year plan
Filing bankruptcy can stop a residential rental eviction. But only if you file your bankruptcy case is before a judgment of possession.
Our last blog post was about stopping the collection of unpaid spousal and child support by filing bankruptcy. Chapter 7 doesn’t stop collection of this special kind of debt. Chapter 13 does, but only temporarily unless you meticulously follow a number of requirements.
Today we get into the special rules about another very special kind of debt: unpaid residential rent. Somewhat similar to spousal and child support, if you meet certain requirements your bankruptcy filing can stop certain landlord collection actions—in this case, evicting you. But an eviction does not stop if you wait too long. Here’s how it works.
Keeping Possession of Your Rental
Bankruptcy’s “automatic stay” law makes it illegal for your creditors to take many actions against you and your property. There is a list of the kinds of actions that creditors can’t take as of the moment you file bankruptcy. Included on that list is for a creditor “to obtain possession of [your] property” or “to exercise control over [your] property.” (See Section 362(a)(3) of the United States Bankruptcy Code.)
Your “property” in this statute doesn’t just include the physical, tangible things that you own. “Property” has a much broader meaning. It includes “all legal and equitable interests… in property as of the commencement of the [bankruptcy] case.” (Section 541(a)(1) of the Bankruptcy Code.) “Property” includes intangible things like your rights in something of value.
This includes any “leasehold” interests you hold. That’s your right to occupy or keep possession of your rental property. The automatic stay stops your landlord from “obtain[ing] possession of” or “exercise[ing] control over” your rental residence. Your landlord’s attempt to evict you is stopped by your bankruptcy filing.
However, there is a crucial condition to this protection. Your landlord can’t take possession of the rental only if you do actually still HAVE a right to the possession. If you no longer have a right to possess the rental at the moment you file your bankruptcy, it’s too late. The automatic stay no longer helps you.
If you’ve legally lost the right to possess the rental, then you no longer have that “property” to protect.
How and When Do You Lose Your Right to Possession?
Each state has different rules about how and when a residential lease is terminated. So you need to discuss this with an experienced local bankruptcy lawyer.
The Bankruptcy Code does provide a little more help. It says that an eviction is NOT stopped if the landlord “has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.” (Section 362(b)(22).)
Has your landlord gotten “a judgment for possession” of your rental? If not, an immediate bankruptcy filing will stop the eviction. For example, if your landlord has threatened to, or even has begun, legal action to remove you from rental premises, but has NOT yet gotten a judgment for possession of the premises, your bankruptcy filing will stop that proceeding. It will stop the landlord from removing you, at least for now. But if the landlord HAS gotten a judgment for possession, filing bankruptcy will not stop the eviction.
A Final Possibility
However, even if your landlord has just gotten a judgment for possession there is one final possible escape. There is a procedure in bankruptcy which might allow you to avoid eviction. When filing bankruptcy you and your lawyer can file a special certification. It must assert the following.
You are “permitted [under state law] to cure the entire monetary default that gave rise to the judgment of possession.”
This cure of the default is allowed under your state’s law even after the landlord received a “judgment for possession.”
You deposit with the bankruptcy court clerk the full amount of any rent due, including up through 30 days after filing the case, and certify that you’ve done so.
If the landlord does not object, the automatic stay goes into effect and you can stay in the rental.
If your landlord does object, the bankruptcy court holds a hearing within 10 days about this. The court decides whether the landlord’s objection is valid or not. If valid, the landlord can immediately proceed with the eviction. If the objection is not valid you can stay in the rental. (Section 362(l)(1-4).)
Bankruptcy stops a residential eviction if the landlord hasn’t already gotten a judgment of possession on the rental. Under very limited circumstances even after such a judgment you might be able to beat the eviction. But by then the odds are stacked quite high against you. It makes infinitely more sense to file bankruptcy before an eviction starts, and certainly before the court decision goes against you.
Be aware that eviction proceedings are usually very fast. If you expect one, or it’s already been filed, you need to see a bankruptcy lawyer immediately.
Chapter 7 doesn’t stop collection of unpaid support, but may enable you to catch up. Chapter 13 does stop this collection, conditionally.
Our recent blog posts have been about situations when creditor collection actions are not stopped by a bankruptcy filing. An example is a criminal fine or restitution. A bankruptcy filing has no effect on your obligation to pay criminal debts or on the collection of those debts.
We’ve also gotten into situations when collections are stopped only temporarily, including when that’s long enough to solve your problem. An example is a recent income tax debt. A Chapter 7 bankruptcy filing stops tax collections only for a few months. But that should be long enough to start a monthly payment plan, especially one that you can now afford after getting rid of all or most of your other debts.
So today we get into one special kind of debt for which the debt collection either doesn’t stop at all, is stopped only temporarily, or is stopped permanently. If you are behind on child or spousal support, you have three options in bankruptcy.
Filing a Chapter 7 “straight bankruptcy” does not stop collections on unpaid support at all. But it may write off enough other debts so that you can catch up on support.
Filing a Chapter 13 “adjustment of debts” can stop collections on unpaid support. But that can easily become only temporary.
A Chapter 13 case can stop such collections IF you act very proactively and consistently.
We explain these today.
The “Automatic Stay” on Support Collections
Unpaid child and spousal support is a very special kind of debt. It is treated as an almost sacredly among debt. Without cataloging all the differences, you can never discharge (legally write off) a support debt. (See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code). It is the highest priority of the many so-called priority debts—meaning it must be paid ahead of all other debts. (See Section 507(a)(1) of the Bankruptcy Code.)
Unpaid support is special also in that you’re helped by the automatic stay only in to a limited extent. However that limited extent may nevertheless be extremely helpful.
Some Limited Help in Chapter 7
As we said above, the automatic stay does not even come into play under Chapter 7 as to unpaid support. But in the right situations Chapter 7 still helps by discharging all or most of your other debts so that you can afford to catch up on your unpaid support.
You or your attorney would negotiate terms for catching up with your ex-spouse or with the support enforcement agency. If getting rid of your other debts gives you the financial ability to catch up quickly on support, Chapter 7 could be a practical solution.
The Practical Problem
The problem is that your spouse or support enforcement may no longer accept terms that would work for you. Since Chapter 7 does nothing to stop your ex-spouse or support enforcement from continuing or starting collection efforts against you, you have no leverage and no protection.
Temporary Help in Chapter 13
Filing a Chapter 13 case DOES stop support collections at least temporarily. But your ex-spouse or the support agency can quickly file a motion asking to resume collections. The bankruptcy court would likely grant this motion unless you meet a set of requirements, and do so timely and extremely consistently. If you don’t, actions to collect on the unpaid support could resume quickly.
Permanent Help in Chapter 13
However, IF you DO strictly follow the requirement, the collection of unpaid support obligations IS stopped under Chapter 13. And this collection continues being on hold throughout the 3-to-5-year course of the Chapter 13 case as long as you continue meeting those requirements.
Here are those crucial requirements:
Your Chapter 13 payment PLAN shows how you will pay all the upaid support debt during the plan period.
You pay any future ONGOING monthly support payments on time. It’s especially important that you’re on time with the payments due shortly after you file the Chapter 13 case.
You actually DO pay your monthly Chapter 13 plan payments on time throughout the case. Otherwise you’re not paying the unpaid support debt as you committed to do in your plan.
If you follow these requirements to the letter your ex-spouse/support enforcement agency would not be able to get court permission to take any collection actions against you throughout the Chapter 13 case. Then by the end of the payment plan you’d be current on the support. Your problems on this front would be fully resolved.
If you’ve had more than 1 case filed and dismissed within the last year, you’ll need to show “good faith” to get automatic stay protection.
The Effect of ONE Prior Dismissed Bankruptcy Case
Our last blog post was about losing the automatic stay protection from debt collection, 30 days after filing bankruptcy. This loss of protection could happen as to ALL of your creditors, not just one particular one. It could happen if you had filed a bankruptcy case within 1 year before the filing of your present case, and that prior case got dismissed (thrown out and closed).
You could prevent losing this protection from debt collection by showing the new case is being filed “in good faith.” There are specific considerations laid out in the law for demonstrating “good faith.” See Section 362(c)(3) of the U.S. Bankruptcy Code.
The Effect of TWO or More Prior Dismissed Bankruptcy Case
If within the prior year you had more than one prior bankruptcy case filed and dismissed, the consequences are worse. At the filing of your current case there would be NO automatic stay protection from the beginning. You’d have no protection for even the first 30 days, as there’d be with just ONE prior case.
The law states that, with 2 prior dismissed cases within a year, the automatic “stay shall not go into effect upon the filing of the later case.” See Section 362(c)(4)(A)(i) of the Bankruptcy Code.
What’s the Purpose of These Rules?
About a dozen years ago Congress added the above provisions to Bankruptcy Code. At the time there was a perception that some people were abusing bankruptcy by filing multiple cases one after another. Some people would file a case to get automatic stay protection (such as to stop a home foreclosure), do nothing with the case until the court dismissed it, and then file a new bankruptcy case as soon as the creditor took some new action (such as scheduling a new foreclosure sale). Congress responded by taking away automatic stay protection in the circumstances outlined above.
How to Get the Automatic Stay into Effect?
So what do you do if somehow you’ve had two prior, dismissed bankruptcy cases within a year, and now really need to file a case again?
First, you could wait until a full year has passed after your most recent dismissed case. That would avoid this problem.
Second, you could at least wait until you had only one prior dismissed case filed within the prior year. Then the automatic stay protection would kick in right away with the new bankruptcy filing. You’d still have to demonstrate “good faith” filing of the new case to avoid losing the stay 30 days later. But at least you’d get the immediate protection.
Third, if you couldn’t wait you could file the new bankruptcy case. And at the same time you and your bankruptcy lawyer would also file a motion asking the court to “order the [automatic] stay to take effect.” Section 362(c)(4)(B). This motion has to be filed within 30 days of the bankruptcy filing. You’d want to file it without any delay to get the automatic stay imposed as soon as possible. Again, you’d have to demonstrate that the new bankruptcy filing was done “in good faith.”
How to Demonstrate “Good Faith”
What does a “good faith” filing of the new case mean?
The Bankruptcy Code lays out the requirements of demonstrating “good faith in some detail. It’s beyond the scope of the blog post to go through it all. Generally you need to show that you aren’t abusing the bankruptcy laws through your prior and present bankruptcy filings. This gets into the reason why the prior case(s) got dismissed, whether changes in personal and financial circumstances will make the present case successful when the prior one(s) wasn’t (weren’t), and whether any creditor previously asked for relief from the automatic stay and where that now stands.
Start off your first meeting with your bankruptcy lawyer by telling him or her about your prior bankruptcy filing(s). You’ll be informed about your options. Specifically, you’ll learn whether it makes more sense for you to wait to file your new case, or instead to go ahead and file the new case and the motion demonstrating “good faith.”
Either 1) wait one year to file your bankruptcy case after getting a prior bankruptcy case dismissed or 2) justify why the dismissal happened.
The last few blog posts have been about situations in which the automatic stay is temporary, but still very effective. These situations have involved individual debts or sets of debts—such as income taxes or student loans. The automatic stay’s protection from debt collection in a Chapter 7 case is temporary for debts which survive the bankruptcy case because the automatic stay expires once the case is completed—usually just 3-4 months after filing. But that may be fine with income taxes and student loans for reasons explained in the last two blog posts.
Today we get into a situation much more dangerous. Here the automatic stay protection from debt collection could be lost as to ALL your debts.
The Automatic Stay
We start first with a bit of background. One of the most important and immediate benefits of filing bankruptcy is the automatic stay. This is the federal law that stops creditors from collecting your debts immediately when you file your bankruptcy case. It protects you, your income, and your assets. The automatic stay usually provides this protection as long as your case is open. (See Section 362 of the U.S. Bankruptcy Code.)
This is a crucial to bankruptcy relief. You certainly don’t want to lose this tremendously important benefit of bankruptcy. You especially don’t want to lose it unexpectedly, just when you are most counting on it. Yet there is a situation this could happen, so you want to know about and prevent it.
Losing the Automatic Stay
You could file a bankruptcy case and lose his protection essentially without warning 30 days later. The situation at issue is if you are now considering filing a bankruptcy case and you filed one prior bankruptcy within the last 365 days, which was subsequently dismissed. (See Section 362(c)(3) of the Bankruptcy Code.)
Don’t immediately assume this does not apply to you. IF you didn’t even think about and take ANY action to file a case in the last 365 days then in fact this problem likely doesn’t apply to you. But be very careful. We have seen circumstances when a prior bankruptcy was filed and dismissed without the debtor being fully aware of it then and so without remembering it later when filing another case later.
Avoid Losing the Automatic Stay 30 Days After Filing
Assume that about 10 months ago you had filed a bankruptcy case. But immediately after filing you settled the debt that had pushed you into bankruptcy. So you didn’t take any further action on your bankruptcy case, and it got dismissed (thrown out and closed).
Now, many months later, your other creditors are causing you big trouble so you again file a bankruptcy case. You don’t consider the prior case to have been a real bankruptcy filing because you didn’t follow through on it. You consider the new case to really be your first bankruptcy filing. You may even tell your bankruptcy lawyer about the prior filing.
But that would be a mistake. As a result, the automatic stay would immediately go into effect with the current bankruptcy filing as usual. However, the automatic stay would automatically expire 30 days later. That is, it would expire unless by then you and your attorney would show the court that you meet certain conditions.
Those conditions involve justifying why the previous case was dismissed and why the present case is being filed. Depending on the exact circumstances, you may be able to justify filing a second case within a year. These circumstances involve the reasons for the prior case dismissal, and financial changes from the prior filing until the present one. (Again, see Section 362(c)(3).)
However, if you are not be able to convince the court, you’d be subject to ongoing debt collection from 30 days after filing until the debts were discharged 2-3 months later. That would make for an unexpected mess, and likely quite an expensive one.
So, make sure there was no prior filed and dismissed bankruptcy case within the last 365 days before the filing of your current case. If there was one, consider waiting for a full year to pass before filing the new case. If that’s not feasible, discuss with your lawyer whether your circumstances would result in your bankruptcy judge preserving the automatic stay because your prior filing/dismissal and new filing were justified.
Filing Chapter 7 stops a student loan garnishment and other collection activities. Then use “undue hardship” or focus on the student loan.
Our last blog post was about a Chapter 7 bankruptcy stopping a tax garnishment only temporarily. In that situation this was OK because it gave time to set up a payment program with the IRS/state. With the bankruptcy discharging (writing off) all or most other debts, the taxpayer could afford a reasonable monthly payment to pay off the tax debt over time.
Today we deal with a somewhat similar situation. Assume you owe a student loan that you don’t have the cash flow to make payments on. Here’s how this situation can be greatly helped through a Chapter 7 filing.
Student Loan Collection and the Chapter 7 Filing
Similar to the tax authorities, student loan creditors and collectors have extraordinary collection powers. In most situations they don’t need to sue and get a legal judgment against you to begin aggressive collection procedures. These can include wage garnishment, tax refund setoff, and Social Security benefit capture. (This is true of federal student loans; private student loan lenders must first sue you and get a judgment.)
Also like income tax debts, student loan collection is immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter if the student loan would not be discharged in the Chapter 7 case. During the 3-4 months that most consumer Chapter 7 cases last, you get a break from student loan collections.
The automatic stay statute stops “any act to collect, assess, or recover a claim against the debtor.” (See Section 362(a)(6) of the U.S. Bankruptcy Code.) More specifically it stops “the commencement or continuation… of a[n].. . administrative… proceeding against the debtor. (Section 362(a)(1).) This covers the non-judicial collection actions mentioned above that are administrative in nature. The Chapter 7 filing also specifically stops “the setoff of any debt,” such as a tax refund or Social Security setoff. (Section 362(a)(7).)
Dischargeability of Student Loans
Somewhat similar to income tax debts, student loans can be permanently discharged under certain circumstances. An income tax is almost always discharged as long as it meets certain timing conditions. (These are based on how long ago the pertinent tax return was due and was actually submitted.)
In contrast, the condition that almost all student loans must meet for discharge is much more ambiguous. And the condition, called “undue hardship,” is often quite difficult to meet. You can’t discharge most student loans unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8) of the Bankruptcy Code.)
While it may very much feel like your student loan(s) is (are) causing you a huge financial hardship, the federal courts have interpreted this phrase very narrowly. So “undue hardship” is, as we said, a difficult condition to meet to discharge your student loan(s).
What You Can Accomplish During the Chapter 7 Pause in Collection
The goal during the 3-4 months of no collection is to make that pause permanent. This can happen three ways.
First, IF you believe you do meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” soon after filing the Chapter 7 case in order to persuade your bankruptcy judge that you qualify for “undue hardship.” If you’d be completely successful then the pause in collection would become permanent because you’d no longer owe the debt(s).
Second, sometimes in this situation the judge gives only a partial discharge of your student loan(s). In effect the judge decides that repaying all of the loan(s) would be an “undue hardship” but paying back a portion would not be. In this situation you’d make arrangements to pay the student loans at a reduced monthly payment. Your student loan creditor(s) would agree to no further collection action against you as long as you made those payments.
Third, if you don’t qualify for “undue hardship” your Chapter 7 case would discharge your other debts. That should leave you better able to pay the remaining student loans. You’d make arrangements to make payments, maybe through one of the various payment-reduction programs potentially available to you. Assuming you’d do so, they by the end of your Chapter 7 case when the automatic stay would expire your situation would be resolved and you wouldn’t be facing student loan collection actions.
Avoiding Default and Preserving Options
Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely important for student loans. Again, there are various programs that help you deal with student loans, depending on exactly what type(s) you have. Some of these programs can be extremely helpful.
However, most of these programs require you to apply for them before you are too far behind on payments. So filing a Chapter 7 case sooner could enable you to take advantage of these programs. Whereas if you waited and filed later you may very well miss out because you’d no longer qualify.
Talk with an experienced bankruptcy lawyer about all this. Candidly, student loans are challenging to deal with, both outside and inside bankruptcy. You need a seasoned lawyer who understands the interplay between bankruptcy law and student loans, in detail.
Filing Chapter 7 bankruptcy stops an IRS/state garnishment and other collection activities, even if it’s for a tax you still have to pay.
We ended the last blog post saying that sometimes a Chapter 7 bankruptcy will stop a wage garnishment only temporarily. One such situation is if the IRS (or state tax agency) is chasing you on a debt you can’t discharge.
An Income Tax Debt You Can’t Discharge
You can’t discharge (legally write off) the tax debt usually because it’s not old enough. If you owe such a tax debt, and your paycheck (or bank account) is being garnished, filing a Chapter 7 case will only stop the garnishment for the length of time your case is active—usually about 3-4 months. The protection from collection called the “automatic stay” ends when you receive a discharge of your debts. (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code.)
The 3-4 Month Break in Collections Can Be Enough
For practical reasons the temporary nature of the protection is often not a problem. You could get much longer and better protection against the IRS and state on a debt you can’t discharge than you would under Chapter 7. You could do this by filing a Chapter 13 “adjustment of debts” instead. That would give you 3 to 5 years to pay a tax debt that you can’t discharge. Plus Chapter 13 gives you other benefits, such as usually income tax debts stop accruing further interest and penalties. But Chapter 13 also has disadvantages, including that it takes so much longer to complete.
So you would deal with a nondischargeable tax debt through Chapter 7 instead of Chapter 13 for a simple reason. You’ve decided that you could afford to pay that tax debt through monthly payments once you discharged all or most of your other debts. You’ve carefully reviewed your itemized budget with your bankruptcy lawyer. You know which, if any, other debts you will continue to owe. You know which debts will be discharged. From this you’d determine how much you could start paying the IRS/state every month. Your lawyer should be able to tell you whether that would be enough to keep your tax creditor happy.
Assuming you could afford the required monthly payment, you file a Chapter 7 case instead of a Chapter 13 one. Then, within a few weeks after filing you or your lawyer contacts the IRS/state to make monthly payment arrangements. Those monthly installment payments could start either before the completion of your Chapter 7 case or immediately thereafter. As part of the arrangements the IRS/state would agree not to garnish your paychecks (or take most other collection actions) as long as you make the agreed payments until you paid the tax (plus interest and penalties) in full.
The fact that Chapter 7 stops collection of non-dischargeable taxes only temporarily is not a problem as long as you are confident that you qualify for and can afford to pay the monthly payments the IRS/state will require.