If you’re buried in debt, you need more than a bankruptcy attorney, you need a team that can guide you back to financial stability. At Wasson & Thornhill, we’re committed to not just providing expertise and support throughout the bankruptcy process, we’re committed to helping you rebuild your credit and take firm control of your financial future.
Bankruptcy gives you immediate and long-term relief from your creditors. But there are many other unexpected benefits of bankruptcy.
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 need financial 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 from us, your Louisville bankruptcy lawyers, will give you details about the following unexpected benefits of bankruptcy:
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 its suspension 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 its repossession
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.
To finish your case successfully, sometimes beyond paying your Chapter 13 plan you may need to pay a debt directly and do some other things.
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. Once the court confirms your plan, 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. You may hear your lawyer refer to this as 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 Louisville 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.
Although a Chapter 13 case lasts so much longer than a Chapter 7 one, it often has huge advantages. But you have to complete it successfully.
Once your Chapter 13payment plan gets approved at the “confirmation hearing,” your case is on its way. Now you have to comply with that plan to get the advantages that Chapter 13 gives you over Chapter 7. And you also need to finish the case to get some of the most important and long-term benefits. So, what else has to happen after plan confirmation to make sure that you complete your Chapter 13 “adjustment of debts” case?
Do Your “Debtor Education”
Besides completing a “credit counseling” class before filing bankruptcy, after filing you must also complete a “debtor education” class. These are both usually done online, although they can also be done on the phone.
Debtor education requires completing “an instructional course concerning personal financial management.” Section 111(b) of the U.S. Bankruptcy Code. If you don’t complete this, your Chapter 13 case will end without a discharge (legal write-off) of your debts. Section 1328(g)(1) of the Bankruptcy Code.
It’s too easy to forget about this requirement because there’s so much else going on. Debtor education can be done anytime during the case, but it’s smart to do it during the first month or two. The law is clear: “The court shall not grant a discharge . . . to a debtor” without having completed the “debtor education” class. Section 1328(g)(1). This means that you wouldn’t get a court order at the end of your case writing off your remaining debts. That’s likely one of the most important benefits of your Chapter 13 cases. After 3 to 5 years of carefully complying with all the rest of the Chapter 13 requirements, you obviously don’t want to mess up on this relatively simple one.
Avoid or Defeat “Nondischargeability” Complaints
Each of your creditors has until 60 days after your Meeting of Creditors to file a formal complaint objecting to the “dischargeability” of its particular debt. Creditors can only raise these objections on very narrow grounds. These grounds usually must relate to alleged fraud or misrepresentation by you in getting the debt. Or they can relate to your “willful and malicious injury” to someone or his or her property. If the creditor does not raise such an objection within this 60-day period, it can never do so after that. (This assumes that you listed the creditor in your schedule of creditors and it got notice of the deadline).
Creditors rather seldom file these complaints, because they seldom have the grounds to do so. However, if it does happen in your case it can cause a major headache. If a debt you expected to discharge can’t be, having to pay that debt can jeopardize your whole case. That’s because you likely wouldn’t have enough money to pay other debts that you’d want or need to pay.
Just because you get such a complaint doesn’t mean you can’t defeat it. If you have any concerns about any possible fraudulent or malicious behavior that a creditor could raise, talk with your Louisville bankruptcy lawyer about it as soon as possible.
Again, these objections to discharge don’t happen in most cases. Keep an eye on the 60-day deadline mentioned above. And be pleased when it passes without any creditor objections.
Pay Your Chapter 13 Plan Payments
It’s not likely you’d forget about your monthly plan payment since it’s at the core of your case. There is a court order approving the terms of your plan including the all-important payment amount. So we can’t emphasize it enough.
Be proactive. Be completely clear about the payment amount, and how and when to pay it. Keep a complete record of your payments. Track any scheduled increases or decreases in the payment amount. Do everything possible to make the payments. Otherwise you risk that your Chapter 13 case would be “dismissed” or thrown out.
If you can’t make the payment for any reason, inform your lawyer as far ahead of that happening as possible. Adjustments can often be made, but they take time to work out with your lawyer and legally implement.
(Our next blog post will be about what else you need to do to finish your Chapter 13 case.)
Most likely your Chapter 7 case will be completed successfully. But be aware of these essential steps to make sure it does happen.
You’ve filed a Chapter 7 “straight bankruptcy” case, which stopped all creditor collections actions against you. About a month later you’ve gone through the Meeting of Creditors with the Chapter 7 trustee. Now within two more months you will very likely finish the case and get a discharge of your debts. “Discharge” is the legal and permanent write-off of most or all of your debts. You’re getting close. But now there are 5 things you need to watch out for to get that discharge and finish your Chapter 7 case successfully. We cover the first 3 of these today, and then the other 2 in our next blog post.
1) “Debtor Education”
You completed a “credit counseling” class before filing bankruptcy, usually online but sometimes by phone. Similarly, after filing you must also complete a “debtor education” class. Or as the U.S. Bankruptcy Code calls it, “an instructional course concerning personal financial management.” See Sections 111 and 727(a)(11) of the Bankruptcy Code.
This is also usually done online, by phone or even, rarely, in person). The procedure is similar to the earlier “credit counseling” you did before filing the Chapter 7 case. The information provided in “debtor education” may actually be helpful to you and your financial life going forward.
No matter whether or not it is helpful, it’s mandatory. The law clearly says that if you don’t complete this requirement the court does not discharge your debts. It’s easy to forget; be sure not to.
2) Keep/Surrender Collateral
If you have any secured debts, you need to deal with the collateral. Your Chapter 7 documents included a Statement of Intention stating what you intended to do with the collateral securing each secured debt. You sign this document under penalty of perjury, and your Louisville bankruptcy lawyer sends a copy to every affected creditor. It gives you the following options:
It’s very important that you follow up on these intentions, especially if you want to keep the collateral. By law you have 30 days after the Meeting of Creditors to “perform [your] intentions with respect to such property.” Section 521(a)(2)(B) of the Bankruptcy Code. If that 30 days passes without you “perform[ing your] intentions,” the creditor can repossess or otherwise take back the collateral.
3) Address a “Dischargeability” Complaint
Most debts get discharged as long as they don’t fit some very specific categories. Examples of nondischargeable debts include child and spousal support and criminal debts. Others, such as income taxes and student loans, may get discharged depending on the circumstances. See Section 523 of the Bankruptcy Code for “Exceptions to discharge.”
As for debts that don’t fall within such non-dischargeable categories, creditors can still object to the discharge of the debt. Each creditor has until 60 days after the Meeting of Creditors to do so. Section 523(c)(1). Otherwise it forever loses its right to object.
A creditor objects by filing a formal complaint at the bankruptcy court. These complaints are not very common. That’s because the law allows such creditor complaints only on some relatively narrow grounds. Generally, a creditor must prove that the debt was incurred through your fraud or misrepresentation, or involves your “willful and malicious injury” of a person or property. Subsections 523(a)(2)(4)(6). If the creditor does not file a complaint within the 60-day period, then your debts are usually discharged immediately thereafter.
Next time we’ll cover the two other steps you need to be aware of to complete your Chapter 7 case successfully.
At the Confirmation Hearing (which you almost never need to attend) the bankruptcy judge “confirms” (approves) your Chapter 13 payment plan.
The Chapter 13 Plan
As we said last week about the Meeting of Creditors, a Chapter 13 case is all about “the plan.” The plan is your financial road map during the 3 to 5 years that you are in the case. It’s put together by you and your Louisville bankruptcy lawyer, outlining what debts you’ll pay, how much, and when. (See this Chapter 13 Plan form.)
At the Meeting of Creditors your Chapter 13 trustee discusses the plan with you and your lawyer. Sometimes a creditor or two are also there. The Confirmation Hearing is a month or so later. By that time any concerns or objections raised at the Meeting of Creditors should be resolved. If so, the bankruptcy judge signs an order approving the plan. That plan may be exactly as you and your lawyer first put it together or may have some changes negotiated with the trustee and/or creditors.
You Seldom Go
You must attend the Meeting of Creditors, but almost never go to the Confirmation Hearing. If you wanted you could go; it’s a bankruptcy court hearing that anybody can attend. But there would almost never be anything you’d need to do there other than to observe what happens. In rare circumstances your lawyer will recommend or ask that you be there for some special reason. If you have any doubt be sure to ask.
The Straightforward Confirmation Hearing
The goal of the hearing is to get the judge’s approval of the plan. That’s formalized by the judge signing a document (usually prepared by your lawyer) called the Order Confirming Plan. The trustee often signs off on the plan beforehand. Sometimes that happens verbally at the Hearing, if there have been last minute negotiations or changes. (See this sample Order Confirming Chapter 13 Plan.)
At a straightforward Confirmation Hearing any trustee/creditor objections would have been fully resolved before the Hearing. So the trustee reports to the judge that either there were no objections to the plan or they’ve been resolved. So the judge reviews the plan and approves it, usually signing the Order Confirming Plan. At that point your plan becomes legally effective and in effect becomes the law of your case. (Note that usually you have already been paying into your plan from when it was filed a couple months earlier.)
The Not-So-Straightforward Confirmation Hearing
For lots of reasons a Chapter 13 plan may not be ready for the judge’s approval at the Confirmation Hearing. For example:
The trustee may be objecting to an expense in your budget that you think is necessary and appropriate. The trustee wants to lower or eliminate the amount and increase your monthly plan payment. Your lawyer has tried to resolve this by negotiation but that’s not worked. So the bankruptcy judge needs to rule on it.
A secured creditor may be disputing the value of its collateral and so how much you should pay it.
A creditor could raise an objection for the first time at the Confirmation Hearing itself, one which cannot immediately be resolved. Creditors almost always raise any objections long before the Hearing, which happens about two months after your case filing. But their final deadline to object to your plan is at the Confirmation Hearing. So there are occasional surprises.
Plan Still Approved at the Hearing
The judge can sometimes make a ruling at the Confirmation Hearing, resolving whatever is preventing plan approval. Then the plan could still get confirmed, right at the hearing. Or sometimes the judge gives one of the parties a certain amount of time to object to a tentative ruling. If there is no renewed objection within that time, the judge would sign an Order Confirming Plan without any further hearing.
Or the judge could schedule an Adjourned Confirmation Hearing. This could happen, for example, after the judge tells an objecting creditor and you to try to settle the matter. If the parties do settle, they can report that to the judge at the Adjourned Confirmation Hearing. The judge could then confirm the Chapter 13 plan, with any agreed amendments, at the Adjourned Confirmation Hearing. Or that Hearing could possibly be cancelled if the parties filed appropriate paperwork at court beforehand.
Cases Requiring Special Adjudication
Sometimes the disputing parties are simply not able to settle their dispute among themselves. It’s too complicated for the judge to rule on it during the few minutes allotted at an Adjourned Confirmation Hearing. So the issue is addressed in a separate proceeding, with both sides making their arguments. This is a Contested Matter, or an Adversary Proceeding if it goes so far as requiring a trial. After the judge’s decision, he or she will either confirm the plan, or in sometimes instead dismiss the Chapter 13 case or change it into a Chapter 7 one.
Most Chapter 13 Plans Get Confirmed
Most Chapter 13 plans do get confirmed, either at the initial Confirmation Hearing or within a few weeks afterwards. You and your lawyer need to prepare the plan carefully. Any objections should be addressed right away instead of waiting until right before the Confirmation Hearing. Of course you as the debtor need to do what your plan says you’ll do. If all these happen, very likely your plan will be confirmed and your case will be on its way.
At the Chapter 13 Meeting of Creditors you, your lawyer, & the trustee discuss your payment plan and any creditor & trustee questions.
The Chapter 13 Payment Plan
The core of your Chapter 13 “adjustment of debts” case is the payment plan. The plan is a detailed outline of who you will pay, how much, and when. A Chapter 13 plan has to follow many legal requirements. (See Section 1322 of the U.S. Bankruptcy Code on the “Content of a plan.”) Sometimes there’s some disagreement about whether your plan follows those requirements. Often there isn’t.
Just about everything in the Chapter 13 process, including the so-called Meeting of Creditors, revolves around the plan. You and your Louisville bankruptcy lawyer propose the plan, then the trustee and creditors review and can object to it. Any such objections usually get resolved through negotiation, but sometimes require a ruling by the bankruptcy judge. Usually the plan, with or without any changes, gets approved, or “confirmed,” by the judge 2 or 3 months after you submit it.
The Meeting of Creditors
So let’s go back to the Meeting of Creditors, which happens about a month after filing your Chapter 13 case. It’s mostly you and your lawyer’s opportunity to meet with the Chapter 13 trustee to discuss your proposed payment plan. (See Section 1302 of the Bankruptcy Code about the Chapter 13 trustee.)
At the Meeting you find out if the trustee approves the terms of your proposed plan. By this time the trustee and his staff have reviewed the plan and its supporting documents. The trustee will ask you a list of standard questions. He or she may also have some questions about the plan.
Your lawyer will prepare you for the questions, most of which will likely be quite straightforward. The questions often are simply intended to confirm or clarify the information you have already provided in writing. Your lawyer will be there right next to you. In fact often a lot of the conversation during the Meeting ends up being between the trustee and your lawyer. That’s especially true when the discussion gets into more technical details of the plan. Your lawyer will advise and inform you before, during, and after the Meeting.
Often none of your creditors will attend the Meeting of Creditors. It can be just between you and your lawyer and the trustee and any assistants.
Creditors do have a right to attend. But if your case is very straightforward, your plan may well not have anything they can object to. Even if a creditor does have a concern, its lawyer often contacts your lawyer directly to work it out. Or it files a formal objection and then any unresolved disputes get worked out with and/or by the bankruptcy judge.
Even when a creditor or two does show up at the Meeting of Creditors, it’s usually not a bad thing. It gives you and your lawyer an efficient opportunity to address any concerns of the creditor. That can happen during the Meeting itself or sometimes right after in an informal conversation.
Be Sure You Attend
You are absolutely required to go to the Meeting of Creditors. Otherwise your case will get dismissed (thrown out). That would waste a lot of your time and money, and could restrict your ability to file bankruptcy again.
You will find out the date, time, and location of the Meeting of Creditors soon after filing your case. You might even find out from your lawyer on the day he or she files your case. Otherwise you’ll get a formal notice containing that information within about 10 days of the case filing. As soon as you know the date do everything you need to do to make sure that you will be there.
The Meeting is usually about 10 minutes long. You shouldn’t worry about it. If you have any concerns talk with your lawyer so that you are fully informed. Then go and get over this modest hurdle to a much more peaceful financial life.
In most Chapter 7 cases nobody opposes your discharge of debts. They get written off. But the trustee is one who might raise issues.
Last week we discussed the role of the Chapter 7 trustee in reviewing your assets at the “meeting of creditors.” Today we get into the other main job of the trustee, to, “if advisable, oppose the discharge of the debtor.” (See Section 704(a)(6) of the U.S. Bankruptcy Code.)
Discharge of Debts
“Discharge” is the legal and permanent write-off of your debts. It’s the primary purpose of filing bankruptcy, particularly a Chapter 7 “straight bankruptcy.”
You get two main forms of relief when filing a Chapter 7 bankruptcy: the “automatic stay,” and the discharge of your debts. The automatic stay is the protection from creditor collections that you get immediately upon filing your bankruptcy case. The discharge you usually receive about 3-4 months after filing. There’s not much point to filing most consumer Chapter 7 cases without the discharge of debts.
Opposing the Discharge of Debts
The overwhelming proportion of people who file a Chapter 7 case receive a discharge of debts. They get no opposition to it by anyone.
The Bankruptcy Code Section on the discharge of debts under Chapter 7 says, the “court shall grant the debtor a discharge,” before listing some exceptions. (See Section 727(a).) The listed exceptions do not apply to most people.
If there is any opposition it tends to be by a single creditor complaining about the discharge of its debt. This opposition would be based on your alleged inappropriate behavior as to just that specific debt. Such a creditor is not challenging your ability to get a discharge of your debts in general. It just doesn’t think you should avoid paying its one debt. Even these more modest challenges are relatively rare.
Challenges to the overall discharge of debts are based on your alleged wrongdoing about the bankruptcy process itself, not just as to one debt.
Wrongdoing that Causes Potential Opposition to Discharge
The exceptions to overall discharge essentially involve bankruptcy fraud. The bankruptcy system is quite generous about discharging debts, but can be harsh towards those who try to abuse the system. Fortunately it’s usually not at all hard to avoid engaging in bankruptcy fraud.
Here are the main types of bankruptcy fraud that could result in losing your ability to get a discharge:
The bankruptcy trustee is not the only person who could raise objections to your discharge. He or she is just the one who’s probably the most likely to do so.
According to the Bankruptcy Code, “[t]he trustee, a creditor, or the United States trustee may object to the granting of a discharge.” (Section 727(c)(1))
As we said earlier, creditors tend to be more interested in just getting their particular debt excluded from the discharge. It isn’t usually to a creditor’s advantage for ALL the debts to not be discharged. Then that creditor is once again competing with all the creditors to get paid.
The United State trustee is an agency—part of the U.S. Department of Justice—tasked with enforcing bankruptcy laws. So it can and occasionally does raise discharge issues on its own.
But the Chapter 7 trustee is the person who reviews your bankruptcy documents, actually meets with you briefly, and likely spends more time on your case than any other potential adversary. So he or she would be the most likely to see any indication of possible bankruptcy fraud.
At the Meeting of Creditors
The main, and usually only, opportunity for the trustee to meet you and ask questions directly is at the so-called Meeting of Creditors. The trustee presides at this meeting. Often none of your creditors appear. So then it’s just a meeting between the trustee and you and your Louisville bankruptcy lawyer. It usually does not last more than 10 minutes.
The trustee, or his or her staff, will have reviewed your bankruptcy documents, and likely some other financial paperwork, beforehand. He or she will have a list of questions for you to answer. Your lawyer will prepare you for these questions and help at the meeting as needed.
The focus of the meeting and of the questions is usually to determine if you have any unprotected assets for the trustee to liquidate. The trustee is often just verifying that you have no such assets.
There are seldom questions relating to anything about bankruptcy fraud. But once in a while the trustee may have seen or heard something that needs clarifying, and will ask you to do so. You will also usually get a broad question asking you to verify that you stand by the accuracy of all of your bankruptcy documents.
You and Your Lawyer
If you do get into any questions that indicate that the trustee believes you may have done something wrong, your lawyer will be there to help you.
Usually there are no surprises, at the Meeting of Creditors or anytime during the case, as long as you have been honest and thorough with your lawyer throughout the process.
Chapter 7 is designed to result in the discharge of all or most of your debts. All you have to do is use the system as it was intended. If you have any doubt about what that means or how to go about it, discuss it with your lawyer. You should feel comfortable that you will get the discharge that you are filing the Chapter 7 case to get. And you will have nothing to be stressed about as long as you share any concerns with your lawyer.
If you filed a recent bankruptcy case that was dismissed, either wait one year to file your new case or you must justify the prior dismissal.
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 you could lose the automatic stay protection from debt collection 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. In fact you somewhat understandably consider the new case to really be your first bankruptcy filing. You may not even tell your Louisville bankruptcy lawyer about the prior filing.
But that would be a mistake. 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 lawyer 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 court discharged your debts 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.
Chapter 7 will stop student loan collections. Then either write off the student loans through “undue hardship” or have time to deal with it.
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 Louisville 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 gives you a break from income tax collections, precious time to deal with a recent tax you must still 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 tax 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 Tax 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 Louisville 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 tax 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.