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Lowering Payments on a Chapter 13 Repayment Plan
For many people, filing for bankruptcy is a fresh start in life. If you have filed for a Chapter 13 bankruptcy, you are still technically paying off your debts, just in a manner that is more manageable for you. A Chapter 13 bankruptcy consolidates all of your debt and creates a repayment plan that lasts for three to five years, depending on your situation. Your monthly payment amount is more than just taking the amount of debt to be repaid and dividing by the number of months you are required to pay. The amount that you are ordered to pay each month is the result of a formula that takes into account your income, assets, debts, and expenses. For some people, this number is a manageable payment. For others, it can be a burden or become one because of a variety of situations.
Qualifying for a Modification
Not everyone can qualify to get their Chapter 13 repayment plan modified. The courts will not entertain a request to modify your plan just because -- you have to have a legitimate reason/need for the modification. The most common reason modifications are granted to Chapter 13 repayment plans is because of changed circumstances. These circumstances must be significant enough to severely limit your ability to meet the terms of your current repayment plan. Examples of a significant change in circumstances include:
Catching up on Support through Chapter 13
Chapter 13 gives you a powerful, reasonable, flexible, and even calm procedure for catching up on your past-due child or spousal support.
The last two weeks we’ve shown how Chapter 13 can stop the collection of unpaid child and spousal support. First we talked about how this benefit is much better than Chapter 7 can provide. Then we focused on the ongoing conditions you must meet to keep up this protection.
But there’s a second benefit of Chapter 13 that deserves attention. It doesn’t just stop the collection of unpaid support. Chapter 13 provides a powerfully flexible way to catch up on that support debt.
Why This Is a Huge Benefit
Whatever child or spousal support you owe at the time of your bankruptcy filing, you can’t write off (“discharge”). It’s among the relatively few kinds of debts that bankruptcy does not discharge under any circumstances. See U.S. Bankruptcy Code Sections 523(a)(5) and 101(14A). So you have to pay it, whether you file bankruptcy or not. Whether you file Chapter 7 or 13 or any other kind of bankruptcy.
Conditions for Stopping Support Collections in Chapter 13
Chapter 13 immediately stops the collection of past-due child or spousal support. But to keep that protection you must meet some conditions.
Last week we showed how Chapter 13 stops the collection of unpaid child and spousal support, while Chapter 7 doesn’t. But we ended by emphasizing that anyone can quickly lose this huge benefit of Chapter 13 “adjustment of debts”. Avoiding this requires strictly complying with some conditions. These conditions are arguably sensible ones. But you need to know and understand them so you don’t lose this crucial Chapter 13 benefit. Because these conditions are so important we focus today’s entire blog post on them.
Ongoing Child and Spousal Support
But before we get to these conditions we need to make a strong point. We’re talking here about child and/or spousal support that is unpaid, past-due, at the time of the bankruptcy filing. This past-due support is different from ongoing support.
Purchasing a House after Bankruptcy
The American Dream is the belief that anyone can succeed in life as long as they work hard and persevere. For many, success includes purchasing and owning their own home. The process of buying a home can be a confusing process and includes many financial and legal procedures. For those who have gone through bankruptcy at some point in their lives, purchasing a home can be even more difficult and confusing. There may be limitations to how much you can borrow from a lender or how soon you can buy a home, but it is not impossible.
Check Your Credit Report
Before you begin to apply for mortgages, you should pull a copy of your credit report. Your credit report will contain detailed information about your credit history, including your borrowing history and information about your bankruptcy. You should carefully look over this report to make sure that everything is correct on the report and that there are no mistakes that could make your report look more unfavorable than it really is.
Unpaid Child and Spousal Support in Chapter 13
Chapter 13 DOES stop the collection of unpaid child or spousal support from your after-filing income and other assets. Chapter 7 does NOT.
Last week we discussed situations in which Chapter 7 would help if you’re behind on child or spousal support payments. We made clear that Chapter 7 “straight bankruptcy” provides only limited help. Mostly it gives you relief from your other debts so that you can concentrate on catching up on support. Chapter 13 “adjustment of debts” is a much more powerful option when Chapter 7 is not enough.
The Main Benefits of Chapter 13 When Behind on Support
Chapter 13 takes much, much longer than Chapter 7, and is generally more expensive. But it provides some remarkable benefits compared to Chapter 7. These benefits can make the longer time and greater expense of Chapter 13 more than worthwhile. The main benefits of Chapter 13 are that:
Unpaid Child and Spousal Support in Chapter 7
Chapter 7 does not stop the collection of child or spousal support, nor provide any procedure to pay the support. It may still help enough.
If you are behind on child or spousal support payments Chapter 7 may or may not be a good solution.
Chapter 7 “straight bankruptcy” is the most common type of consumer bankruptcy case. It is more likely to be a sensible solution if 1) the support isn’t being collected aggressively and 2) you don’t owe terribly much. Why? Because:
1) Filing Chapter 7 does not stop collection of unpaid child or spousal support. Chapter 13 can.
2) Chapter 7 does not give you a procedure for catching up on the support. Chapter 13 “adjustment of debts” does so.
So why would you file a Chapter 7 bankruptcy if you were behind on support?
Filing Chapter 7 When Owing Support
Chapter 7 is usually the most straightforward type of bankruptcy. A case lasts only about 4 months from when your bankruptcy lawyer files it to when it’s completed. A Chapter 13 case involves a formal payment plan that almost always takes 3 to 5 years to finish.
A Chapter 13 Plan to Pay Income Tax
Here’s an example of a Chapter 13 payment plan to pay income tax, showing how you pay what you can afford and avoid some interest, penalties.
Today we put the facts of last week’s blog post into a Chapter 13 plan, showing how it actually works. You’ll see how Chapter 13 saves you money and avoids stress as you pay off your priority income taxes.
The Example: The Tax, Interest, and Penalties
Assume you owe $10,000 to the IRS for income taxes from the 2016 tax year. That’s for the tax alone without the penalties and interest. Plus you owe interest of $1,200 (currently 5% annually), $2,000 for a failure-to-file penalty (which the IRS assesses at 5% per month of being late), and $1,650 for a failure-to-pay penalty (calculated at 0.5% per month). So including the current interest of $1,200 and a total of $3,650 in penalties this $10,000 tax has turned into a total debt to the IRS of $14,850. And the interest and failure-to-pay penalty just keep on accruing.
Can You Incur More Debt During a Chapter 13 Repayment Plan?
If you have gotten a bankruptcy, the one thing you do not want to do is to incur more debt; being unable to pay your debt is the reason you filed for bankruptcy, right? Chapter 13 bankruptcy repayment plans usually last anywhere from three to five years, meaning you must be financially responsible during that time period or you could risk having your case dismissed and being responsible for repaying your debts in full. While it is a good rule of thumb to avoid taking on any further debts during a Chapter 13 bankruptcy, sometimes taking on more debt is unavoidable and is a necessity. Incurring new debt during your Chapter 13 repayment period is possible, but there is a certain way you must go about it.
Reasons for Incurring New Debt
Sometimes, life can be unpredictable. Even though you were probably not planning on taking on any new debts during your Chapter 13 repayment period, things can happen and can put you in a situation where there is no other option. Generally, incurring new debt during a Chapter 13 repayment period is frowned upon and is only permitted when the debt is for something that is considered a necessity. Common reasons for incurring debt during a repayment plan include:
Paying Income Taxes through Chapter 13
Chapter 13’s advantages in paying off your priority income taxes become clearer when you see what you don’t have to pay.
Last week we got into the advantages of paying priority income taxes through a Chapter 13 “adjustment of debts” case. Those are the usually-recent income taxes which cannot be written off (“discharged”) in bankruptcy. Today we show more clearly how Chapter 13 can be tremendously helpful with income taxes.
The Example: The Tax Breakdown
This example expands on one we introduced last week. Assume that you owe $10,000 to the IRS for income taxes from the 2016 tax year.
In addition there’s a failure-to-file penalty of $2,000 for filing 4 months late without getting an extension. The IRS assesses that penalty at 5% per month of being late. So here, 4 months at $500 per month = $2,000.
Priority Income Tax Debts under Chapter 13
Chapter 13 gives you huge advantages for paying off your priority income tax debts. You’re protected while you pay what you can afford.
Last week we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.
Recent Income Taxes Can’t Be Discharged
The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.
There are two conditions determining whether a tax debt can be discharged. (There are a few other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:
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