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Recent Blog Posts
Buy Much More Time for Your Home with Chapter 13
Filing a Chapter 13 case buys you time and flexibility for catching up on your mortgage arrearage. Lots more of both than in Chapter 7.
Two blog posts ago we said Chapter 7 buys some time with your home mortgage while Chapter 13 buys much more time. We then showed how Chapter 7 can help. Today we get into how Chapter 13 can be much better.
The Limits of Help from Chapter 7 “Straight Bankruptcy”
Chapter 7 is quick, but is limited in what it can do for your past-due mortgage. Mostly it can help get rid of other debts so that you can financially focus on your mortgage.
Chapter 7 helps with your mortgage only indirectly. If you’re behind on payments you’ll have to make arrangements with your mortgage lender to catch up. The bankruptcy case gives you no mechanism or protection in that catching up process. You’re essentially on your own, and at the mercy of whatever timetable your lender imposes on you for catching up.
Chapter 7 Permanently Prevents Tax Liens against Your Home
Filing a Chapter 7 case prevents tax liens from hitting your home, and so avoids a dischargeable tax from turning into one you must pay.
Our last blog post was about how filing a Chapter 7 case buys you time with debts on your home. It’s worth expanding on one of those Chapter 7 benefits, one that can go way beyond buying time. It could save you a lot of money, potentially many thousands of dollars.
The Dischargeable Income Tax Scenario
Filing a Chapter 7 bankruptcy can discharge certain, usually older, income tax debts. (See our blog post of this last September 22 about the conditions for writing off income taxes in bankruptcy.) If you file a Chapter 7 case before a tax lien is recorded on a dischargeable tax debt, then that will prevent the IRS or state tax authority from recording that lien against your home. The tax will then be discharged (permanently written off) about 4 months of your bankruptcy filing. After that the IRS/state can never record a lien or take any other collection action on the tax. It’s gone forever, and the threat of a lien against your home is also gone forever.
Buy Time for Your Home with Chapter 7
Filing a Chapter 7 bankruptcy case stops a foreclosure and buys some time to either arrange to keep the home or move in a peaceful way.
Chapter 7 “Straight Bankruptcy” vs. Chapter 13 “Adjustment of Debts”
Speaking very generally, Chapter 7 buys you some time with your home while Chapter 13 buys you much more time.
So the questions are: how much more time to do you need and will Chapter 7 buy you enough?
How Chapter 7 Helps
As to your home, your filing of a Chapter 7 case:
1. Stops a pending foreclosure sale of your home, at least temporarily, through the “automatic stay.” Your bankruptcy filing stops “any act to... enforce any lien against property of the estate.” “Property of the estate” includes essentially everything you own at the time of filing, including your home. See Section 362(a)(4) and (5) and of the U.S. Bankruptcy Code. How much time Chapter 7 buys depends on your situation, as we’ll get into a bit below.
Good Timing Can Shorten Your Chapter 13 Case by 2 Years
We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.
Chapter 7 vs. Chapter 13
Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.
But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.
Why Timing Can Be So Crucial for the Means Test
The timing of your Chapter 7 filing—a difference of even just a day or two—can affect whether you qualify for it based on your income.
How could filing your Chapter 7 a day or two earlier or later make such a big difference?
Usually it doesn’t. But sometimes it actually does. We’ll explain here.
The Point of the Means Test
One of the main goals behind the most recent major amendment to the bankruptcy laws in 2005 was to require more people to pay part of their debts through Chapter 13 payment plans instead of writing them off in a Chapter 7 “straight bankruptcy.” One of the main tools in the law for accomplishing this is the means test. This test uses a rigid financial test to determine who has the means to pay something to their creditors. This test is supposed to stop people from “abusing the bankruptcy system.” Those who have the means to pay a meaningful amount to their creditors in a Chapter 13 case are required to do so.
The Means Test is Based on Timing
Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.
The Means Test
To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.” That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”
You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.
Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.
Timing: Avoiding "Fraudulent Transfers"
Giving a gift, or selling for less than true value, can cause problems when done before bankruptcy, but usually only if the amount is large.
“Fraudulent Transfers” Are Uncommon
So-called “fraudulent transfers” do not come up in most consumer or small business bankruptcy cases. But they can sneak up on you. And if one does, it can be a real headache. So it’s important to know what it is, its crucial timing factors, and how to avoid it.
What’s a “Fraudulent Transfer”?
A fraudulent transfer is a reflection of human nature. If someone in financial trouble has an asset or money she wants to keep from her creditors she may be tempted to give it to someone so the creditors can’t reach it. Or she may be tempted to sell it for lots less than its worth.
The gift or sale may be to someone who would give it back later. Or the gift or sale may be to a friend or relative, keeping it within the debtor’s circle. The point is that the asset would no longer be available for her creditors to seize to pay the debts.
Timing: Avoiding Very Troublesome "Preference" Payments
Sometimes in bankruptcy doing the honestly right thing can cause you major problems. Making preference payments is a good example of this.
The Understandable Inclination to Pay a Favored Creditor
If you’re having financial problems and considering bankruptcy, you might feel compelled to first take care of a special debt. You may owe a relative or friend who is in real need of the money. You may feel deep and legitimate pressure to pay part or all of it in spite of your own financial problems. You may figure, accurately or not, that you won’t be allowed to pay this person after filing bankruptcy. Or for various reasons you may not want to involve this person in your bankruptcy case. You may not want to have him or her know about it. So you figure the best way to do that is to pay off or settle the debt beforehand.
But your intentions—good or otherwise—could significantly backfire, if you don’t know the law and don’t get good advice.
Timing: Qualifying for Cramdown on Personal Property Collateral
Chapter 13 cramdown doesn’t just work for vehicle loans. You can also cram down debt for the purchase of “any other thing of value.”
Our last blog post was about the cramdown of vehicle loans. Cramdown can significantly decrease your monthly payment and reduce how much you pay for your vehicle before it’s yours. To qualify, your loan has to meet some conditions. In particular the vehicle loan has to be more than 910 days old when you file your Chapter 13 case. (That’s about 2 and a half years old.)
But cramdown also applies to other kinds of purchase loans with collateral, not just vehicles. And instead of 910 days there needs to be only 365 days between your purchase and your Chapter 13 filing.
Cramdown on “Any Other Thing of Value”
In a Chapter 13 case you can do a cramdown on loans with collateral that is “any other thing of value.” (See Section 1325(a)(5) of the Bankruptcy Code, and the odd “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).) So you can often reduce monthly payments and reduce how much you pay for that “other thing of value.”
Timing: Qualifying for Vehicle Loan Cramdown
If your vehicle is worth less than you owe on it, with good timing cramdown could reduce your monthly payment AND the total amount you pay.
Vehicle Loan Cramdown
“Cramdown” is an informal term for one of the most tangible benefits of Chapter 13 “adjustment of debts” bankruptcy. You won’t find the term in the federal Bankruptcy Code, yet lawyers and judges use it all the time.
It refers to a procedure provided under Chapter 13 law for legally rewriting a vehicle loan. It results, usually, in reducing both the monthly payment and the total you pay for the vehicle. The more your vehicle is “underwater”—worth less than what you owe on it—the more you benefit from cramdown.
Secured and Unsecured Parts of a Vehicle Loan
Cramdown works by dividing the total amount you owe on your vehicle loan into secured and unsecured parts.
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