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Chapter 7 bankruptcy can temporarily stop student loan collections. Here are several ways it can stop these collections permanently.
Bankruptcy gives you tools to deal with special debts—including those you can’t easily write off. Last week we got into income taxes. Today we discuss student loans, focusing on this special kind of debt in Chapter 7 “straight bankruptcy.” Next week, we’ll cover student loans under Chapter 13 “adjustment of debts.”
Let’s assume you owe a student loan that you can’t afford to pay. Here’s how Chapter 7 can help.
Student Loan Collection
Student loan creditors and collectors have extraordinary collection powers. Often they don’t need to sue you first and get a legal judgment against you, as most creditors must. These creditors and their collectors have very aggressive collection procedures available to them. Besides the usual garnishment of bank accounts and paychecks, these special creditors can often grab your tax refund or a portion of a Social Security benefit check.
The “Automatic Stay” from a Chapter 7 Filing
Student loans are special in a number of ways. However, just like ordinary debts, student loan collections are immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter whether or not the student loan would be discharged (written off) in your Chapter 7 case.
The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.” (Section 362(a)(6) of the U.S. Bankruptcy Code.) (A “claim” is a “right to payment”—essentially, a debt. See Section 101(5).) More specifically, the “automatic stay” stops “the commencement or continuation . . . of a[n] . . . administrative . . . proceeding against the debtor. (Section 362(a)(1).) “Administrative proceedings” include the non-judicial collection actions mentioned above that don’t include a lawsuit. The Chapter 7 filing also specifically stops “the setoff of any debt” owed to you, such as a tax refund or Social Security setoff. (Section 362(a)(7).) So, filing bankruptcy stops all student loan collection actions.
This break from collections lasts throughout the 3-4 months that most consumer Chapter 7 cases take to finish. But unless you deal with the student loan appropriately in the meantime, after that its collection can continue.
Dischargeability of Student Loans
Bankruptcy permanently discharges (legally writes off) some student loans. A dischargeable student loan must meet just one condition, albeit a tough and confusing condition. The student loan must cause you an “undue hardship.” As the Bankruptcy Code puts it, you can’t discharge a student loan unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8).)
What does “undue hardship” mean? How much harder must it be than just a simple “hardship”?
You may feel like your student loans are causing you a great financial hardship. However, the federal courts have interpreted this phrase very narrowly. The details are beyond the scope of today’s blog post, but just keep in mind this condition is quite challenging to meet.
During the Chapter 7 Break in Collections
During the 3-4 months of your Chapter 7 case you want to take steps to make the temporary break in collections a permanent one. Here are three ways to accomplish this.
If you and your bankruptcy lawyer believe you meet the “undue hardship” condition, your lawyer would file an “adversary proceeding” during your Chapter 7 case. That’s a specialized lawsuit designed to determine whether you qualify for “undue hardship.” If you persuade the bankruptcy judge that you do, the student loan debt would be permanently discharged. Then the temporary break in collections would become permanent. There would be no more collection on a debt once you no longer legally owe it.
The bankruptcy judge may give you only a partial discharge of your student loan(s). In this situation the judge is determining that repaying all of the loan(s) would cause you an “undue hardship.” But paying back only a portion would not. So you’d make arrangements to pay the remaining student loan debt, probably at a reduced monthly payment. As long as you made the payments your student loan creditor would take no further collection action against you.
If you don’t qualify for a full or partial “undue hardship” discharge, your Chapter 7 case would still at least discharge all or most of your other debts. That should leave you better able to pay the remaining student loans. Hopefully you’d be in a position to make payment arrangements. This may be done through a payment-reduction program which are available for various student loans. If so, then your situation would hopefully be resolved by the end of your Chapter 7 case. Then, at the time that the automatic stay would expire you won’t be facing any more student loan collections.
Avoiding Default and Preserving Options
Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely helpful. It could maybe even be critical. That’s because you can only qualify for most student loan workout programs before you are too far behind on payments. So filing a Chapter 7 case before you’ve fallen too far behind could allow you to take advantage of these programs. But if you waited too long you could lose out, and be seriously disadvantaged.
It’s really crucial to talk with an experienced Louisville bankruptcy lawyer about all this. Student loans are complicated and often very challenging to deal with. This is true both outside and inside bankruptcy. You need a lawyer on your side who deeply understands both bankruptcy law and student loans.
Bankruptcy can help you permanently stop income tax collection. That’s true even with more recent taxes that cannot be written off.
The Automatic Staying, and the Discharge, of Income Tax Debts
Sometimes people are surprised to learn that filing bankruptcy gives you power over income taxes. It does so in two big ways. First, filing bankruptcy stops the IRS and state from collecting your tax debts—either temporarily or permanently. This is the “automatic stay” applicable to pretty much all of your creditors. Second, bankruptcy permanently writes off (“discharges”) some income tax debts—generally older taxes.
If all the income taxes you owe qualify for discharge, then your situation is quite straightforward. You file a Chapter 7 “straight bankruptcy” case, which stops any ongoing tax collection during the case. Then 3-4 months later, near the end of the Chapter 7 case, your tax debt is discharged. The “automatic stay” protection against tax collection ends. But you no longer need to worry about tax collection because you no long owe any taxes.
Or if instead you file a Chapter 13 “adjustment of debts” case (for reasons other than the tax debt), there’s a similar result. The dischargeable income taxes are treated just like your other “general unsecured” debts. They only get paid to the extent you can afford to do so, if at all, during your case. Often, during the 3-5-year Chapter 13 payment plan most or all of your available money goes elsewhere. It goes towards priority debts like child/spousal support or more recent taxes. Or it goes to catch up on a home mortgage or vehicle loan payments. Regardless how much, if any, you pay on the dischargeable taxes, at the end of your case the rest is discharged. So, as with Chapter 7, you then owe no more on those taxes so you don’t need to worry about any more tax collection.
The Expiring Automatic Stay and Nondischargeable Income Taxes
But what happens if some or all of your income tax debts do not qualify for discharge? The “automatic stay” does still go into effect as to those nondischargeable taxes. Your filing of a Chapter 7 case gives you a break from most collection actions of the IRS and/or state. If:
you are being garnished, that would stop
the IRS/state was about to record a tax lien against your home, that would be prevented
you are being pressured to enter into a monthly tax payment plan, that pressure would stop
But this break from collection would not last long. The “automatic stay” expires in a Chapter 7 case at “the time a discharge is granted.” (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code about the expiration of the “automatic stay.”) In just about all consumer Chapter 7 cases the bankruptcy court grants the discharge only 3-4 months after case filing. So you get a break but not much of one.
So what do you do if you have income taxes that would not be discharged in a Chapter 7 case?
The Chapter 7 Solution
If you filed a Chapter 7 case, it may discharge enough of your other debts that you could afford to enter into a monthly installment payment plan with the IRS/state for the remaining tax debts. The discharged debts may include some older, dischargeable income taxes, leaving you with less tax liability to still pay.
If discharging other debts leaves you in a position to pay your remaining tax debts over time, you (or your lawyer) should contact the tax authority immediately after the discharge to make payment arrangements. It may make sense to make contact even earlier so that the IRS/state knows your intentions. Ask your Louisville bankruptcy lawyer about the best timing.
You might also qualify for a reduction in the surviving tax debt amount. The IRS has a procedure for “offers in compromise” to settle a tax debt by paying less than the full balance. Most states have similar procedures. These are somewhat complicated to go through. You should not enter into such an attempt without getting solid legal advice about your chances of being successful.
The Chapter 13 Solution
Your financial situation after a Chapter 7 discharge may not allow you to pay off the remaining income tax debts through a tax payment plan. You may not have enough cash flow to pay it off fast enough to qualify. Furthermore, interest and tax penalties will continue to accrue, requiring you to pay substantially more over time.
You may also not be a good candidate for getting a reduction in the tax amount through a “compromise.”
So if instead you file a Chapter 13 case, the protection of the “automatic stay” remains in effect throughout the 3-to-5-year length of the case. This gives you up to 5 years to pay off the nondischargeable income taxes without any tax collections against you. This allows you to pay off those taxes under very flexible terms. You can often pay other even more urgent debts—like child support or home mortgage arrearages—ahead of the taxes.
Usually you don’t have to pay any additional interest and penalties. That alone could save you a significant amount, enabling you to pay off the tax faster and easier.
Also, the IRS/state can’t record a tax lien against you during the Chapter 13 case. That takes significant leverage away from the taxing authority. And if a tax lien had already been recorded against you, Chapter 13 usually can deal with it very favorably.
Overall, if a Chapter 7 would leave you too much at the mercy of the IRS/state, Chapter 13 is often a good alternative.
Neither Chapter 7 nor Chapter 13 stops ongoing child/spousal support payments. But Chapter 13 CAN stop collection of support arrearage.
Filing bankruptcy stops—or “stays”—the collection of most debts. (See Section 362(a) of the U.S. Bankruptcy Code about the “Automatic Stay.”) Then at the end of the bankruptcy case most debts are discharged—legally written off. (Sections 727 and 1328 of the Bankruptcy Code.) At that point the creditor is permanently forbidden to collect the debt.
However, filing bankruptcy doesn’t stop the collection of certain specific types of debts. And it only temporarily stops the collection of other types. These tend to be the types of debts that bankruptcy does not discharge.
Also, with some debts, whether collection is stopped depends on whether you file a Chapter 7 “straight bankruptcy” or instead a Chapter 13 “adjustment of debts” case.
The special debts for which collection does not stop or may stop only temporarily include:
ongoing monthly child and spousal support
child and spousal support arrearage
recent income taxes
debts incurred through fraud
Again, these tend to be debts that do not get discharged in bankruptcy. However, bankruptcy does provide tools for resolving such special debts permanently. Today we’ll show how this works with ongoing child/spousal support and support arrearage. We’ll cover the rest in the next couple of weeks.
Ongoing Child and Spousal Support
We need to distinguish between ongoing child and spousal support and support arrearage.
Ongoing support is what the divorce court requires you to pay on a regular basis, usually monthly. It is a type of obligation treated with more respect than likely any other consumer debt in bankruptcy.
Accordingly, filing bankruptcy does not stop the collection of ongoing support. If you are paying support voluntarily you need to continue paying it. If you are paying through a payroll deduction or a garnishment, it will continue.
As for support arrearage, neither Chapter 7 nor 13 can discharge this kind of debt either.
However, the automatic stay can stop collection of support arrearage, but only in a Chapter 13 case. Filing a Chapter 7 case will not stop support arrearage collection actions.
This ability to stop support arrearage collection through Chapter 13 filed through your Louisville bankruptcy lawyer can be extremely helpful. If you are behind on support payment, especially if you are significantly behind and its collection is financially hamstringing you, filing the more complicated Chapter 13 may well be worthwhile for this reason alone.
It’s extremely important to be aware that after filing your Chapter 13 case you can lose this automatic stay protection about collection of support arrearage. To prevent renewed collection, 1) you must keep current on your ongoing support, 2) your Chapter 13 plan must show how you will pay all the support arrearage during the case, and 3) you must consistently make your Chapter 13 plan payments so that you are in fact making continued progress towards paying off the support arrearage. If you don’t do any of these, your ex-spouse or support enforcement agency can quickly get the bankruptcy court to give permission to re-start collection of the support arrearage.
Chapter 7 can sometimes help you deal with unaffordable income tax payment plan. But Chapter 13 is often a better way to escape a tax mess.
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 Louisville 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 Louisville bankruptcy lawyer to figure out which is better for you.
Breaking an IRS/state income tax payment plan usually has very bad consequences. But filing bankruptcy lets you escape a tax payment plan.
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 escape, 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, you would be in default 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.
When 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. Your Louisville bankruptcy lawyer can also advise you on the best choice for you.
File bankruptcy before your lender takes your vehicle. But if you couldn’t, bankruptcy may still get back your just-repossessed vehicle.
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 Louisville 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 Louisville 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.
Bankruptcy may be able to reinstate your license suspended for unpaid traffic tickets. Depends on whether the laws violated are crimes.
We’re deep into a series of blog posts about powerful, less familiar benefits of bankruptcy. One important one is reinstating your suspended driver’s license. Whether bankruptcy can reinstate your license 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 bankruptcy can legally write off (“discharge“) such a debt. After bankruptcy takes away the reason for the suspension, the driver’s license is ready for reinstatement.
It works about the same way with traffic tickets. If your license suspension was 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 the law could consider that violation to be 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 Louisville 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 requires legal help. Your Louisville 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.
Bankruptcy can reinstate your suspended driver’s license. Depends. Can likely if it was suspended for an unpaid debt from an accident.
We’re continuing a 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 reinstate a suspended driver’s license.
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 license suspensions happen 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 Louisville bankruptcy lawyer. There’s a good chance you can reinstate your license—or prevent it from being suspended—through bankruptcy.
Usually you can’t change a secured debt into an unsecured one, even in bankruptcy. But you often CAN remove a judgment lien from 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.
You can avoid the risks involved with dealing with the Chapter 7 trustee if you resolve 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 preference 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)
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 Louisville bankruptcy 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.