November 25, 2017

What Happens After Your Chapter 13 Plan is Confirmed?

When your Chapter 13 plan is confirmed, it means that the bankruptcy judge assigned to your case has formally approved your plan of reorganization and all creditors are bound to the terms of your plan.

In the Northern District of Georgia, a hearing on the confirmation of your plan will be scheduled automatically a the time you file your case. Usually, these hearings are scheduled for about 2 to 3 months from the date you file your case. Therefore, you can think of the first 2 or 3 months of your plan as a kind of probation period.

While in this probationary period, you have all the benefits of bankruptcy – namely the automatic stay that protects you from creditor action – while the Chapter 13 trustee watches to see if you have the capacity to meet your plan obligations. This is also the time when creditor claims are filed and either creditors or the trustee can object to your proposed plan. [Read more…]

What is the Secret to Making Your Chapter 13 Plan Work?

 

After 25+ years representing hardworking but financially struggling men and women in the Atlanta area, I can report to you that the #1 secret to surviving Chapter 13 is living below your means. This can mean you have to make some difficult choices.

Chapter 13 Trustees are Increasingly Demanding

When you enter Chapter 13, you need to eliminate the “wants” in your life in exchange for the “needs.” I advise my clients that if you find yourself meeting with a bankruptcy lawyer, everything needs to be on the table. And this includes your cars, home, furniture, jewelry and just about any other type of property you are financing. You will also find that your Chapter 13 trustee likely has a much more restrictive view of what constitutes a true “need:”

  • if you find yourself paying more than $300 per month for a car or truck, you need to consider giving that vehicle back to the creditor and buying a car for cash or financing a vehicle and keeping the payment below $300 per month
  • if you are financing vehicles, furniture or jewelry for your children or other relatives, you should be prepared to surrender that property and let your relative work out a deal on his/her own
  • if your budget includes out of pocket payments for your children’s college expenses, expect push back from the trustee. The trustee’s position will generally be that your child needs to use loans and grants to finance his/her own higher education and that your child may need to seek a less expensive education. Trustees generally do not agree with including someone else’s education costs in your budget
  • if your budget includes private elementary or high school for a child, you will need to produce evidence that your child has special educational needs that make public school insufficient
  • do not plan on keeping time shares or other non-essentials when you file Chapter 13

[Read more…]

Unfiled Tax Returns and Chapter 13

unknown tax liability and chapter 13 bankruptcyChapter 13 bankruptcy cases filed in the Northern District of Georgia cannot be confirmed by the bankruptcy court judge if the IRS or State of Georgia files documentation reporting unfiled tax returns.  The reason?  If you have unfiled tax returns, your potential tax liability is unknown.  Since Chapter 13 consists of a payment plan that must fit within five years, an unknown liability means that there is no way to calculate whether your proposed plan payment will work.

Further, prior to your Section341 hearing your Chapter 13 trustee will want to see a copy of last year’s tax return to (a) confirm that you have filed it, and (b) to cross check the annual income figure reported on Schedule B of your petition with the income figures shown on your tax return.

As you can see, therefore, your Chapter 13 cannot get past the trustee or the judge if you have unfiled returns.  Currently the IRS reports unfiled tax returns over the past 10+ years, so you should not assume that if your unfiled returns date back many years, you are in the clear.  In fact, the statute of limitations to determine when tax debt may be discharged in bankruptcy as stale does not begin to run until your returns have been filed.

What can you do, however, if you need to file Chapter 13 to stop a foreclosure, repossession or other emergency, and you have unfiled tax returns? [Read more…]

Chapter 13 Trustees Looking to Squeeze Every Last Dime from Debtors

Over the past couple of years I have noted an unsettling trend in my Chapter 13 casesTrustees in the Northern District of Georgia are scrutinizing budgets line by line and are objecting to budget items in an attempt to force debtors to increase their trustee payments.

I am even receiving objections to the total amount of expenses claimed.  In a recent case, for example, the trustee filed a supplemental objection a week before confirmation which asserted that the debtor’s total claimed monthly expenses were too high.  When I called, he pointed out four or five specific line items and I obtained and presented supporting documentation from my client.

My client advises me that he is literally having difficulty buying food and the trustee acknowledged that our claimed expenses were legitimate but he would not back off his objection because the total payout to unsecured creditors was less than 50 cents on the dollar.  There is no resolution yet, but we agreed to reset the confirmation until after the date that all claims are due – presumably some of the unsecured creditors will not file claims, meaning that the ones who do will receive a higher payout. [Read more…]

The Problem with 401(k) Loans and Consumer Bankruptcy

Most of the clients who I represent in Chapter 7 or Chapter 13 cases view bankruptcy as their absolute last resort.  Usually, by the time they get to me, these clients have exhausted every other alternative – they have borrowed money from relatives and friends, sold possessions on eBay and cashed out or borrowed against retirement plans.

All of these choices, by the way, create unintended consequences – if you are reaching that point of desperation where you are thinking about selling things, cashing out retirement plans, etc., I would rather that you call me  before taking any action because of the risk that you might unknowingly lose some of the benefit from your bankruptcy filing, or possibly disqualify yourself altogether.

Retirement plan loans such as 401(k) loans create a variety of issues and are almost always a bad idea in a bankruptcy context.   Presumably you borrow against your 401(k) because you need cash now, you expect to repay that loan in the near term, you want to preserve your 401(k) account for the future, and because you do not want the tax consequences associated with cashing out your 401(k).

Bankruptcy trustees, however, look at 401(k) loans in a different light.   They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors.    401(k) loan payments cannot be counted as allowable deductions in your means test calculations.   And both Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13. [Read more…]

Supreme Court Issues Important Ruling About Chapter 13

Supreme Court of the United StatesOn June 7, 2010, the United States Supreme Court released its decision in the case of Hamilton, Chapter 13 Trustee v. Lanning.   The Supreme Court rarely hears argument in consumer bankruptcy cases so the Lanning decision is big news to consumer bankruptcy lawyers.

The issue in Lanning is one that has troubled bankruptcy lawyers since 2005, when the “means test” was added to the Bankruptcy Code.   The means test functions as a test – do you have the “means” or disposable income to fund a Chapter 13 repayment plan?  If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7.

As one of the assistant United States trustees once told me – the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13.

In practice, the means test does not work very well in predicting who can make a Chapter 13 work.  One of the biggest complaints has to do with the mechanical nature of means testing.   To run a means test, I have to gather pay stubs from the past 6 months.  I then create a monthly average, which represents available income.  Next I prepare a means test budget, but I do not use actual expense amounts.  Instead, the means test tells me how much my clients are allowed to spend for food, medicine, utilities, etc.  And where do these budget numbers come from?  Means test numbers are based on IRS budgets used in delinquent tax repayment plans.  In other words, the means test budget allocations are not especially generous. [Read more…]

Can I Leave Selected Debts Out of my Bankruptcy Filing?

I get this question at least once a week – “I need to file bankruptcy but I don’t want to include my [mortgage] [car loan] [debt to my brother] [credit card co-signed by my company] [medical debt].   Let’s leave this debt off my petition.

Sorry – can’t do it.  As North Carolina bankruptcy lawyer Adrian Lapas writes in his recent post in the Bankruptcy Law Network blog:

When you sign your bankruptcy petition, you are certifying to the United States Bankruptcy Court, under penalty of perjury, that the petition and schedules attached to it lists all of your assets and all of your debts.  All means all!  You do not get to pick and choose which debts you list in your bankruptcy case.

Not only must you include all of your creditors but you may also have to include other “interested parties.”  In the Northern District of Georgia, for example, the Chapter 13 trustee requires all debtors who are subject to child support orders to include the custodial parent as a priority creditor in their Chapter 13 petitions.  [Read more…]

Why Tax Refunds Payable to the Chapter 13 Trustee Will Do Little to Decrease Your Plan Balance

At least two of the three Chapter 13 trustees in the Northern District of Georgia require a Chapter 13 plan provision which provides that any tax refund payable to the debtor during the term of the debtor’s plan shall be paid to the Chapter 13 trustee.   These trustees will object to any plan that does not include a tax refund provision.

Although I explain the implications this provision, many of my clients express shock and outrage when their expected refund of $3,000, $4,000 or more does not show up in their mailboxes, but instead ends up in the hands of the Chapter 13 trustee.  These clients, quite naturally, expect that the tax refund payment will reduce their Chapter 13 obligation and either reduce the term of their plans or possibly allow for a reduction in the regular monthly payment.

More recently one of my clients fell behind on his Chapter 13 plan and had to enter into a consent order with the Chapter 13 trustee to pay extra each month to cure the delinquency.   Shortly after the consent order was filed, this client saw a  $2,200 tax refund to to the trustee and he wanted to see that money applied to his delinquency and thus reduce the burden of his delinquency cure.

Unfortunately in both of these situations, my clients will not get the desired benefit from the “seizure” of their tax refunds.  The funds will go into the plan, but instead of reducing the balance or the term of the plan, they will increase the dividend payable to unsecured creditors [Read more…]

Does the Name on the Car Title Matter?

As a bankruptcy lawyer, I have to deal with the consequence of what I call “real world” activities.    In the non-bankruptcy world people make decisions that will save money and make life easier.  For example, blog reader Lou writes me with a question about car titles:

I might need to file chapter 13 in the future.  I filed a Chapter 7 in 2003 and now have a lot of credit card debt.  I have a house but I do not want to keep it. When the house goes into foreclosure the only property I will have in my name is 3 cars valued from $6000 to $8000 each.  I only own one of them.  The other two belong to my parents.  I got loans in my name for the cars because I got the best rates, but when they were paid off I never signed the titles over to my parents.  In a ch. 13 will all the cars be considered mine, or is there a way to prove that they belong to my parents?  My name is the only name on the titles.

It appears to me that Lou and his parents made a common sense decision at a time when bankruptcy was not a consideration.  Lou most likely qualified for better rates because he was working so he made a decision to help out his parents by applying for car loans in his name.   His parents have made all the payments so as far as they and Lou are concerned the cars belong to the parents.

Unfortunately this is not how the bankruptcy court will look at things.   [Read more…]

Unfiled Tax Returns – No Matter What the Reason – Create Havoc in Chapter 13 Cases

In Chapter 13 cases filed in the Northern District of Georgia, both the IRS and the Georgia Department of Revenue receive notice of your filing.  In my office, I include both the IRS and Georgia as "notice creditors" in every case filed.

Recently, I have had to deal with problems arising from "estimated liability claims" filed by either the IRS or Georgia in Chapter 13 cases.

The problem arises in the case of a debtor who did not file a tax return in a prior year because of very low or non-existent income.  I have had a number of clients tell me that their accountants or tax preparers advise them that the debtor did not need to file a tax return for years in which the debtor earned little or no income.

I do not know if this advice about not filing returns is correct or not as I am not a CPA or a tax preparer.  What I do know, however, is that if you did not file a return in a prior year, there is a good chance that the IRS or Georgia will file an estimated liability claim for those tax years in your Chapter 13 case.

This estimated liability claim will often be calculated based on your earnings for recent years.  In other words if you earned zero in 2003, but earned $50,000 in 2004, 2005 and 2006, then the IRS will assume that you earned around $50,000 in 2003 and they will estimate your liability for that period as well.  Their estimated liability claim will include tax liability, interest and penalties.

If the IRS files an estimated liabilty claim based on unfiled returns, your Chapter 13 case will include unanticipated priority tax debt and there is a good chance that the Chapter 13 trustee will not agree to recommend confirmation of your case because your tax debt is actually unknown.

I am currently working on several cases where we have had to ask for reset after reset to give the debtor time to file a return showing zero earnings and for the IRS to amend its claim.

If there are any years in which you did not file tax returns, I think it would be wise for you to consult with your tax preparer prior to filing Chapter 13.  I am now recommending to my clients that they advise their tax preparers about this estimated liability problem and file a return showing zero income so that their Chapter 13 plans will not be in jeopardy.

[tags] chapter 13 and taxes, estimated tax liability claims in bankruptcy, proof of claim, Georgia Department of Revenue, IRS claims [/tags]

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