Fnal Thanks for Bankruptcy

There’s so much to be thankful for in bankruptcy. Here are five final huge benefits.

 

In the last two blog posts we covered the following ten benefits of bankruptcy to be thankful for:

 

#1: The Automatic Stay: immediately stopping virtually all collections procedures against you.

#2: The Discharge of Debts: permanently writing off all or most of your debts.

#3: Property Exemptions: protecting all of most of your possessions from your creditors.

#4: Limited Non-Dischargeability: the exceptions for the discharge of debts are reasonable.

#5: Vehicle Loan Reaffirmation:  voluntarily excluding this debt from discharge usually enables you to keep your vehicle.

#6: Discharge of Older Income Taxes: permanently writing off older taxes just like most other debts.

#7: Stopping Aggressive Collection of Support: using Chapter 13 to solve back child/spousal support problems, immediately and permanently.

#8: Non-Dischargeability Complaint Deadline: the relief of knowing that creditors have a very short time to complain, and then can’t thereafter.

#9: The Preference Law: discouraging creditors from being overly aggressive before you file bankruptcy, and if they are, potentially making them give up what they got out of you and paying it instead to a more important creditor.

#10: Vehicle Cramdown: keeping a vehicle by reducing the balance and monthly payments.

 

Here are the last 5 of many other very important benefits of bankruptcy worthy of thanks.

#11: Second Mortgage Strip:

Although residential property values have in the last year or so finally been heading up in most urban and suburban markets, there are still many people underwater—owing more than they owe. If you are underwater, and have a second mortgage, under Chapter 13 you may be able to avoid paying part or all of that second mortgage.

Your second mortgage can be “stripped off” your home’s title IF your home is worth less than the balance on your first mortgage (combined with any unpaid property taxes and any other liens senior to your 2nd mortgage). Stripping the second mortgage means that you would no longer need to pay the monthly second mortgage payment during your Chapter 13 case. Often you would pay little or maybe even nothing towards the second mortgage during your case. And at the successful end of your 3 to 5-year Chapter 13 plan, the entire remaining second mortgage balance would be permanently discharged (written off).

With the discharge of the second mortgage balance, and the stripping of its lien off your title, your home would be much closer to NOT being underwater. Your home would be both significantly less expensive to own and a much better financial investment.

Stripping a second (or third) mortgage, with its immediate and long-term benefits, is absolutely something to be thankful for.

#12: Protection for Co-Signers:

Bankruptcy provides two ways to protect a family member or friend who has co-signed a debt for you.

Under Chapter 7 “straight bankruptcy” you can discharge all or most of your other debts so that you can either pay the co-signed debt or pay your co-signer to the extent the creditor chases him or her.

Under Chapter 13 “adjustment of debts” the protection is more sophisticated. Through the “co-debtor stay,” creditors are immediately forbidden from pursuing your co-signer(s) as soon as your case is filed. They are forbidden from doing so throughout your 3 to 5-year case, unless a creditor asks the bankruptcy court for permission to do so. The court will not grant permission to the creditor to pursue your co-signer as long as you are eventually paying that creditor in full through your Chapter 13 plan (even if you’re not paying according to the terms of the creditor’s contract). Generally you are allowed to favor such a co-signed debt over many of your other creditors. As a result in some situations you would be paying no more into your plan than you would otherwise, and yet be thoroughly protecting your co-signer.

The ability to protect your co-signer—if that’s important to you—is something to be thankful for.

#13: Discharging Non-Support Divorce Debts:

Child and spousal support can never be discharged in bankruptcy, under either Chapter 7 or 13. Changes in support payment amounts have to be made through the divorce court, usually only applicable to the future, not to change support payments that were due in the past.

But there are other, non-support divorce-related obligations, the “property settlement” ones. Your divorce court may have required you to pay your ex-spouse a certain amount to make up for getting more of the marital property. Or you may have been required to pay certain marital debts—ones owed by your ex-spouse, owed by you, or by both of you.

These non-support, property settlement obligations in your divorce decree cannot be discharged in a Chapter 7 bankruptcy.

But they CAN be discharged in a Chapter 13 one. Assuming that they were not secured under the terms of the decree by a security interest in your property, your property settlement obligations are lumped together in your Chapter 13 plan with all your other normal unsecured debts. You pay these in your Chapter 13 case only as much as your budget allows, and then whatever is not paid is discharged at the successful completion of your case. In many cases, the existence of the property settlement debt(s) does not increase what you need to pay—the money you pay into your plan just gets distributed among the creditors differently. So you may pay only pennies on the dollar on your property settlement debt(s).

So if you owe a substantial amount to your ex-spouse in property settlement debt(s), being able to discharge them under Chapter 13 would be something to be thankful for.

#14: Timing Flexibility of Means Test:

Passing the means test either qualifies you to file a Chapter 7 case, or allows you to be in Chapter 13 case for three years instead of five. Either way it can save you many thousands of dollars, and get you out of bankruptcy years earlier.

The initial and most important part of the means test compares your income to the published median income for your state and family size. Most people considering bankruptcy have less than median income, so it’s not a problem. But if your income is higher, you may still be able to slip under the median income amount by taking advantage of how your income is calculated for this purpose.

It’s calculated by looking NOT at your previous twelve months of income or at the income on your latest tax return. Rather it fixates on the last six full calendar months before filing bankruptcy, AND includes almost all sources of money, including those you wouldn’t normally consider income (other than Social Security). Because of this timing fixation, your so-called income can go up and down every month. This makes it more likely that by timing your filing date, and maybe even lowering certain sources of income you have some control over, you can fit under your applicable median income, and so be able to file a Chapter 7 case or a shorter Chapter 13 one.

Because of the substantial cost and time you can save by passing the means test, this potential ability to manipulate the amount of your “income” is something to be thankful for.

#15: Ability to File Bankruptcy Again:

You’d certainly prefer to go through life without ever having to file bankruptcy, and most certainly without having to consider doing so a second time. BUT IF you need bankruptcy relief again after filing once before, it’s good to know when it would be available. Here is a list showing when you can file a new bankruptcy case, after filing a previous one, the length of time depending on the Chapters of the previous and intended new case:

#1:  If you are filing a Chapter 7 case now, and—

  • You filed either a Chapter 7 or Chapter 11 case earlier—then you have to wait 8 YEARS from the date your earlier case was filed to the filing date of your new Chapter 7 case.
  • You filed a Chapter 13 case earlier—then you have to wait 6 YEARS. (You don’t wait at all in the unusual event that in that earlier Chapter 13 case you paid 100% of your debts, or paid at least 70% and met some other conditions.)

  #2:  If you are filing a Chapter 13 case now, and—

  • You filed either a Chapter 7, 11, or 12 case earlier—then you have to wait 4 YEARS from previous filing date to the new filing date.
  • You filed a Chapter 13 case earlier—then you have to wait 2 YEARS.

If you do need the help of another bankruptcy case, its availability is something to be thankful for.

 

Leave a Reply