Giving More Thanks for Bankruptcy

Even though it’s already past Thanksgiving, there’s plenty more to be thankful for in the bankruptcy laws.

 

In the last blog post we covered the following five big 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.

 

Here are another 5 very important benefits of bankruptcy worthy of thanks.

#6: Discharge of Older Income Taxes:

Income taxes can be permanently written off just like most other debts, IF the tax owed meets a number of conditions. The two primary conditions are: 1) the relevant tax return was due at least three years before the bankruptcy filing date (plus any extra time if an extension to file the tax return was granted); and 2) the tax return was in fact filed at least 2 years before the bankruptcy filing date.

Under Chapter 7 “straight bankruptcy,” if whatever income tax you owe fits these (and a couple other usually not applicable) conditions, you can just discharge (legally write off) the tax along with the rest of your debts. On the other hand if you have some older income tax debts that fit the conditions and some more recent ones that do not, by filing a Chapter 7 case you can discharge the older ones and may be able to pay off the newer ones through a reasonable monthly payment plan with the IRS/state.

Under Chapter 13 “adjustment of debts,” if all of the taxes that you owe fits within the conditions indicted above, then those taxes are treated the same as your other simple debts. They are lumped together and paid, if at all, only to the extent that you can afford to do so, depending on what other debts have higher priority and what your budget allows. And if some of your tax debts meet the conditions for discharge and some do not, those that do not must be paid through the Chapter 13 plan. But you are protected from the IRS/state during the entire payment process.

Being able to discharge older income taxes, whether through Chapter 7 or 13, is certainly something to be thankful for if you owe taxes that meet the conditions for discharge.

#7: Stopping Aggressive Collection of Support:

There’s not much that can stop an ex-spouse or a support enforcement agency from using potentially severe collection methods—often including suspending your drivers’ licenses and even occupational and professional licenses—if you’ve fallen behind on your support payments. Even Chapter 7 can’t help here.

But Chapter 13 can. You DO have to immediately start making the support payments going forward (although potentially being able to lower or even end them through the divorce court). You also have to pay the full arrearage through the Chapter 13 plan. Nevertheless, a Chapter 13 case will stop the collection of back support faster and more effectively than probably anything.

If you are behind on your support payments, having Chapter 13 to fight back with is something to be very thankful for.

#8: Non-Dischargeability Complaint Deadline:

Creditors have limited grounds to complain about a debt being discharged, with the result that they seldom complain at all. And a very practical benefit is that you don’t have to wait long to see if any creditor will complain. The deadline for a creditor to file a formal complaint challenging the discharge of a debt arrives very quickly—only 60 days after the “meeting of creditors,” which means usually about three months after your bankruptcy case is filed.

This deadline is very strict. As long as the creditor got notice of your bankruptcy filing, once the deadline passes it can never complain again.

Having this quick deadline so you don’t have to wait long before you can rest easy is something to be thankful for.

#9: The Preference Law:

A “preference” under bankruptcy law CAN be a scary thing. It’s the rather unusual right of a bankruptcy trustee to require a creditor to pay to the trustee whatever the creditor received from you during the year before your bankruptcy case was filed.  That look-back period is actually only 90 days for conventional creditors, but a full year for “insider” creditors: relatives, business associates, friends, and anybody else you may be inclined to favor.

There are two reasons to be grateful for the preference law.

First, its purpose and effect is to discourage creditors to be overly aggressive in collecting against you when you may be on the brink of filing bankruptcy. Hard to tell how effective it is in this, but anything that may discourage creditors from gouging at you when you are down is a good thing.

Second, if a trustee forces a conventional creditor to disgorge some money you paid it—perhaps even money it got through aggressive collections method like garnishment—that money may get paid through the Chapter 7 process to a creditor you’d prefer to get paid, such as  recent income taxes or back child support.

These beneficial effects of preference law deserve being thankful for.

#10: Vehicle Cramdown:

If your vehicle loan is more than 910 days old (about 2 and a half years), and your vehicle is worth less than you owe on it, under Chapter 13 you can keep your vehicle through “cramdown.” The loan balance is “crammed down” to the fair market value of the vehicle. Besides effectively reducing the balance this way, the interest rate can usually also be reduced, sometimes the term of the loan extended, all resulting in what is often a radically reduced monthly payment. This may save you hundreds of dollars per month, and many thousands of dollars over the remaining life of the loan.

Being able to keep your vehicle while paying so much less for it is definitely worth being thankful for.

 

Leave a Reply