A debtor filing bankruptcy can apply to the court to pay the filing fee in installments AFTER filing the petition. For example, the filing fee now for a Chapter 7 bankruptcy is $335.00. It can be really hard for a person to come up with that AND their attorney fees. Since their unpaid attorney fees would be discharged along with everything else in the bankruptcy, those nearly always have to be paid up front. But, the filing fees are a different matter since the court retains the power to dismiss the case if they go unpaid.
In the Eastern District of Kentucky, installment applications taking up to 120 days post-petition to pay the fees are routinely granted. However, there has been a shift in how the court handles those installments. Until recently, the clerks had a lot of latitude as to when those payments were made so long as they all were paid by the final deadline. NOW, though, if debtors run late on ANY of the installments, a Show Cause Order is being issued to make the debtor appear in court. If they cannot convince the judge that they have a good reason for running late, their bankruptcy may be dismissed.
So, if you are going the installment fee route and paying monthly payments of $83.75 for a Chapter 7, make sure you give yourself reminders. Also, you cannot pay by personal check. You either have to show up in person with exact change or you must mail in a money order for the exact amount. The courts system does not account for payments that are even a penny off. You can double or triple up (i.e. $167.5 or $251.25) or even pay it in full early. Just do not round up to $84.00.
I am glad to announce that Matthew D. Henderson will be joining Troutman & Napier, PLLC as an associate attorney. Matthew comes to us from the Fayette County Attorney’s office. Prior to that, he served as Judge Philpot’s judicial intern in Fayette Family Court. He will be bringing tremendous skills and knowledge in areas of criminal law and family law as well as estate planning and general litigation. With the addition of Matthew, Troutman & Napier, PLLC offers a full range of services and practice areas for our clients.
I posted awhile ago about a neighboring high-volume bankruptcy firms TV advertisements to “get your bankruptcy started for just $71.00″. I speculated on how they did that, but I have since learned what the deal is from a client who went to them first. She clearly was a candidate for a Chapter 7: below median income, no secured debt arrears, no priority debt, and nothing else that would lend itself to Chapter 13. However, she could not come up with the attorney fees to do the Chapter 7 right then. So, they offered to put her into a Chapter 13 with just $71.00 up front.
This seems like an acceptable approach. Basically the attorney is using the ability to have their fees paid through the Chapter 13 as administrative expenses. The up side for the debtor is that they get the relief from creditors including garnishment right away. The downside is that this is a much more expensive and involved process than the Chapter 7. Debtors need to be made aware of how much more they would pay in the long run for the Chapter 13 as compared to the Chapter 7 – sort of fair credit act kind of disclosure. Perhaps my colleague is giving that kind of disclosure – I have no reason to doubt that they are. If so, then I give them props for giving another option for debtors that needs relief from debt right away, but whom cannot afford the attorney fees.
The trustee’s office appears to be taking a closer look at expenses in Schedule J of Chapter 13 cases. Specifically, they appear to be pushing for decreasing recreational/entertainment expenses and miscellaneous expenses. Previously, this trustee’s office tended to utilize the standardized amounts provided for in the means test as a gauge. As a result, if a debtor reported a particular expense in excess of those amounts, I would encourage them to engage in “belt-tightening” in that area.
The interesting thing about those standardized expenses is people who make less money have lower expenses while people who make more money have higher expenses even when the family size is the same. In the prior approach, the trustee’s made some allowance for this dynamic. The trustee’s current approach seems to be to cram those relatively higher income families into the expense structure of the lower-income Chapter 13 families. Now, even if expenses fall within the standard allowance of the means test, the trustee is looking for deeper cuts.
On the surface, this seems fair – after all, why should richer people get to have higher expenses and still discharge their debts at the end? The problem comes down to human nature. Once people develop a set point of expenses, then it is extremely hard for them to do substantial cuts in those expenses. When one is talking about the extended timeframe of five years in a bankruptcy, well the likelihood of successfully maintaining extensive cuts drops dramatically.
So, what is the goal of Chapter 13? I suggest that we are best served when people successfully complete Chapter 13 plans. This will not happen when budgets are made so tight as to be unwieldy over time. Debtors will get into a tight spot with unexpected expenses and be unable to make their payments. This is not to suggest that people should get to engage in lavish lifestyles in a Chapter 13; rather, I suggest a balance between belt-tightening and sustainable budgets. Clothing makes for a good analogy: a really tight dress may look really trim and neat, but no one can wear it day in and day out. Rather, one needs slightly roomy clothes to go about their day-to-day business. Such an approach will increase Chapter 13 successful outcomes and, thus, increase the overall return to unsecured creditors.
I am an advocate for Chapter 13 bankruptcy because of its flexibility. Provision 11 USC Section. 1307(a) allows a debtor to convert to a Chapter 7 under certain circumstances. And, 1307(b) allows for the debtor to dismiss the case if they started out in a 13.
One reason for a voluntary dismissal came up just recently. The debtor’s situation had worsened. Ordinarily this would be cause for converting to a 7. However, they had also moved far away and it would cost more to come back to Kentucky for the Chapter 7 meeting of creditors than to dismiss here and file a new Chapter 7 there.
This information just released from the National Association of Consumer Bankruptcy Attorney’s (of which I am a member):
The Judicial Conference approved new filing fee increases effective June 1, 2014.
The administrative fee and a.p. filing fee increases are as follows:
The total new filing fee for each chapter will be as follows:
For filing a petition, or for filing a motion to divide a joint case, under Chapter 7: $335
For filing a petition, or for filing a motion to divide a joint case, under Chapter 12: $275
For filing a petition, or for filing a motion to divide a joint case, under Chapter 13: $310
For filing a petition under Chapter 9, 11, or 15: $1,717
While I often extol the virtues of Chapter 13 bankruptcy, there is one issue in them that can be most vexing to a Debtor in need of help. Nearly every Chapter 13 Debtor owns a car with a secured debt attached to it when they file. Previously I have talked about the benefit of being able to reduce the interest rate on high interest car loans through the Chapter 13 and even, when the debt is old enough, cram down the principal owed to the actual value of the car. These all remain true. However, there is a hidden danger to having a car loan in Chapter 13.
The danger lies in 11 USC Sect. 1235(a). This provision lists a number of things that must be true about a Chapter 13 plan for it to be confirmed. Conversely, if all the requirements of 1325 are met, the court must confirm the plan. Shaw v. Aurgroup Financial Credit Union, 552 F.3d 447 (6th Cir., 2009). The Sixth Circuit Court of Appeals has issued case law based on this code provision that severely restricts the flexibility of a Chapter 13 bankruptcy in this one area of car loans. Those decisions are In re Adkins, 425 F.3d 296, 300 (6th Cir.2005) and In re Nolan, 232 F.3d 528 (6th Cir.2000).
Essentially, these two court opinions determine that once a plan is confirmed and the car lender’s claim is allowed, then it shall always be a secured claim. This may not sound formidable, but here is how the scenario plays out: Debtor has a car worth $7,000.00 which is working okay at the start of the plan. The plan gets approved and the secured claim is filed by the lender for $7,000.00. Perhaps there is another claim for excess debt on the car that is treated unsecured, but that does not matter in this situation. A couple of years into the plan, the car starts messing up and it becomes more costly to fix than the car is now worth. The Debtor, who is paying all their disposable income into their Chapter 13 cannot get the car fixed. So, they seek to modify the plan, surrender the car, and purchase a more roadworthy vehicle. They can only manage this if they can reduce their plan payment. They can only reduce their plan payment if the deficiency of the car loan, what’s left after the car is surrendered and auctioned, is unsecured debt. However, In re Adkins and In re Nolan preclude this.
That $7,000.00 cannot be re-characterized as unsecured. Let’s say the loan after two years of payments through the Chapter 13 plan is now $6,000.00 but the car auctions only for $1,000.00. That leaves a $5,000.00 deficiency. That $5,000.00 remains a secured debt that MUST be paid in full during the remainder of the Chapter 13 plan. The Debtor still must pay the exact same amount in plan payments and thus cannot afford to buy another vehicle. Now they have no car but they still must pay for their surrendered car in full.
The Sixth Circuit used solid statutory construction and policy considerations in coming to this result. They wanted to keep a Debtor from being able to enjoy a car for a while and then shift the depreciation value to the creditor. However, because the creditor knows they will be paid in full regardless of what they do, they have no incentive to realize the actual fair mark value of the car that was surrendered. The Debtor cannot sell the car due to the lien in place and the because of the Chapter 13 bankruptcy so they are stuck. They might as well keep the car and make do for the life of the Chapter 13.
The main point in all of this is to do a careful assessment of one’s vehicles and car loans prior to filing. Going into a Chapter 13 with high value cars that also have a high debt load can leave one with almost no wiggle room for the life of the Chapter 13. It would be best surrender such vehicles prior to confirmation of the plan and obtain an inexpensive used car prior to filing. And, if they have cars with debt, the Debtor needs to have some comfort that the car will actually last the life of the bankruptcy.
This post is geared more towards attorneys practicing bankruptcy law, but it is useful to anyone trying to resolve income tax debt. I am following up on my last post about how to determine if income tax debt can be discharged in bankruptcy. First, as an attorney, you have to complete and have your client sign a Power of Attorney, Form 2848. Well, actually you have to back up a step further and obtain a CAF number from the IRS. You will need that CAF number in order to get anywhere with them.
Once the 2848 is completed, you send it in to the IRS so that they can either lose it or take weeks to process it. Oh, but do not worry, you can still proceed. You next want to get a Form 4506-T completed. You really should do this at the same time as the 2848 to save time. There are fax numbers of the back of the 4506 to send it to and you only have to try that fax number a dozen or so times. More recent years can be obtained by calling the automated number for the IRS, but the transcripts can only be sent directly to the taxpayer’s address if you go that route.
Once the Account Transcripts come in, you need to look for those “520″ codes I mentioned in the last post. If there are any on the transcripts, you will want to spend a leisurely afternoon on the phone listening to the Internal Revenue Services music interrupted by occasional transfers to different departments. Once you get to the right place, you will be grilled about who your are. They will look in the system and fail to find the 2848 that you had dutifully sent in per the instructions. Just go ahead and have a copy of the 2848 at hand because the person helping you will ask you to fax it directly to them.
Once that 2848 is in front of them, they will ask you to repeat information that is clearly spelled out on the form itself to “verify” things. It seems this only verifies that you faxed them the very same document they are looking at, but no matter. Now you are cooking with GAS – well, perhaps kerosene. It will just take a few seconds to get the closing code. If you want to forgo this whole experience, then look for a code “971″ and see it there is one whose dates corresponds to the “520″. If so, you are safest to assume that the closing code is 77.
PS: By the by, attorneys, this is a time intensive and liability laden analysis, so be sure to charge separately from the bankruptcy for this procedure.
PPS: Be sure to get your client’s dates of birth – the IRS sometimes asks for this to verify that you are whom you say you are.
I just finished an analysis of whether over $90,000.00 in income tax debt from 2003 to 2005 could be discharged for a client through bankruptcy. The surprise answer for them was that it would be discharged completely in a Chapter 7 or a Chapter 13. Many have the mistaken belief that income tax debt never goes away; even many attorneys assume you must pay it no matter how far behind you find yourself. The truth is, there is a series of time-based limits set on income tax debts and once those limits are reached, the tax is treated like any other unsecured debt in bankruptcy.
To know whether a tax debt can be discharged in bankruptcy, one must obtain an “Account Transcript” for each year in which tax debts are owed. This transcript has a series of three digit codes along with dates for those codes and sometimes dollar amounts listed. Certain codes matter more than other. For example, one must make sure there are no “320′s” because that indicates an assertion that there was fraud involved in the tax return filed. Then, one needs to ascertain the dates of any penalties assessed by scrutinizing codes 290, 294, 298, 300 and 304. These penalties are also subject to the time limits but have to be addressed separately due to different stating dates.
Another code that makes a huge difference is the “520″ code. A 520 event is one that may or may not cause a stand still (a “tolling”) of those time limits from running. Just finding the 520 code is not enough because one must CALL the Internal Revenue Service to find out what the “closing code” is. The closing code will be a “77″ or a “90″. The 77 closing code means the time between the 520 date and the following 521 or 522 closing date did toll the time making it take longer to be able to discharge the debt. There is also code “480″ that happens when there is an “offer in compromise” proposed. A 480 event also tolls the time until the tax debt can be discharged.
If you have done your best to pay your income tax debt and it is just too big a burden, go a an attorney who can analyze a Tax Account Transcript. Find out if you can get a fresh start even from income tax debt.
I am often asked by Chapter 13 debtors if they can pay their Chapter 13 off early. This is a problematic question with no one clear answer. It is problematic because certain property of the debtor continues to come into the Chapter 13 estate while the bankruptcy is pending. This is different from a Chapter 7 where the property of the estate is established and remains static at the moment the bankruptcy is filed. The clearest example of this ongoing inclusion in a Chapter 13 are wages and other earned income of the debtor.
Since ongoing wages and earned income of the debtor comes into the estate of the Chapter 13 so long as the case is pending, then one cannot use those wages to pay your plan off early IF you were not below the median income on the means test OR you are paying 100% of unsecured debts in the Chapter 13. This makes sense because the idea with a Chapter 13 is that you repay creditors to the extent that you reasonably can. So, if you end up getting promotions or a better paying job during the bankruptcy, then you could reasonably pay a higher percentage of your unsecured debts.
Some Chapter 13 trustees require a new budget (Schedules I & J) to be submitted each year. If they see a substantial bump up in disposable income, they then require the plan to be modified to pay a higher percentage of the unsecured debts. In the Eastern District of Kentucky, the trustee does not automatically require this. However, if you begin to pay ahead on your Chapter 13 plan, they well may pay attention and decide you must be making more money. This can trigger a demand from the trustee for a new budget and probably a higher plan payment.
There are some things that clearly and unquestionably CAN be used to pay off a Chapter 13 plan early. If you use property of the estate that was exempt at the inception of the bankruptcy, such as a 401k account, then there should be no issue if you fell below the median on the means test. However, there are other things that need to be investigated and carefully considered by your attorney. Therefore, I must abstain from listing those things that are in the grey area here lest I miss some peculiarity of your situation.
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- Expanding Services
- The scoop on the $71.00 bankruptcy ad
- Trending in Chapter 13 in the Eastern District of Kentucky
- It is Time to Go
- It is getting downright expensive to file bankruptcy
- Car Cares and the Chapter 13 Dilemma
- Phone Adventures or “How does one get an “Account Transcript” from the IRS?”
- Surprising Facts About Income Tax Debt and Bankruptcy
- The Ramifications of Paying Off a Chapter 13 Early
- Fast, free and sometimes fun info on Instagram (of all places!)
- How Creative Can One Get?
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