I make it a habit to advise clients to move their bank accounts prior to filing a Chapter 7 or Chapter 13 if they also owe a debt to their current institution. This is especially true if they bank with a credit unition. The reason is that there are some actions the bank or credit union can take that will make a debtor’s life difficult. These are legal restrictions of services and NOT a vioaltionof the automatic stay that a bankruptcy provides. The In re Spearman (W.D. Ky 2017) makes this very clear.
A bank or credit union likely will have a policy that allows them to stop providing certain services to customer if the customer files bankruptcy or otherwise negatively impacts the bank through their actions. The most common service that makes life difficult is the cessation of any electronic access to the debtor’s accounts. This means no online access to statements or to view their accounts. It also means no more use of a debit card at a store, restaurant, ATM, etc.
What a bank or credit union cannot do is deny access to the funds in your account. If there is money in a checking or savings account, they have to give it to you. They have to honor checks written on that account (so long as funds are available) and they have to let you show up in person and withdraw funds. They must tell you what is in your account if you come to a branch.
Are you dreading writing a significantly sized checks to the state and Federal governments soon? Or, perhaps you a excited about the refund you are getting and what you plan to do with it. Either way, here are a couple brief bullet points of things to be aware of if you are also facing a potential bankruptcy:
- Avoid the temptation to NOT file your return. It really just delays the inevitable and there are some time limits that do not start to run until you have filed. If you may need to get a discharge on tax debt in a few years because it is mounting up, filing early and owing the IRS (or Kentucky) is better than waiting so that the debt actually can be discharged later on. If you use an accountant, though, be sure to check with them as well since there may be other considerations.
- Paying a lump sum of over $600 from that refund to any one creditor within 90 days of filing a bankruptcy creates a “preferential payment” that the trustee can go after. So, it may be just throwing money away and making the bankruptcy drag out longer. If that lump sum will actually solve your financial woes, then go for it.
Tremendously valuable information.
Based on experience, not only is the interest on Federal past due taxes lower, but they are also easier to deal with.
The prime rate of interest increased a quarter of a point to 4% effective March 16, 2017. Read on for information on how this affects chapter 13 plans in the EDKY, and what other interest rates are applicable to secured claims.
Generally the interest rate on secured claims being paid through a chapter 13 plan is prime plus a risk factor of 1 to 3 points. We often refer to this as the Till rate, named after the 2004 Supreme Court opinion which advanced the formulaic “prime plus” method of setting interest rates in chapter 13 cases.
The plan in the EDKY sets forth a “default” interest rate of the Wall Street Journal (WSJ) prime rate on the date of confirmation plus 2 percentage points. Thus, for secured claims that are not specifically provided for in the plan, or for those secured claims that are provided for…
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The temptation to use your tax refund to get that one creditor that is hounding you off of your back is understandable. However, if that does not solve your entire debt crisis, you may be wasting those funds. Paying off a single creditor would be like diverting the first boulder of an avalanche.
If you pay a single creditor more than $600 in the 90 days prior to filing a bankruptcy, that is considered a preferential transfer. Many people do this with that tax refund trying to make things better. But, the trustee can seize it and then neither that one creditor or you get the benefit of your tax refund.
Rather than that, talk to a bankruptcy attorney and see if those funds would be exempt (i.e. you get to keep it).
A few days ago I posted To File or Not to File talking about my decision making process when I consult with a client. When a client is filing because of business debt then there are other considerations. A business owner may opt for a personal bankruptcy because they cannot obtain a discharge of debt if their business filed a Chapter 7 and because Chapter 11s are incredibly expensive. So, I must decide if the owner debtor can filed a personal Chapter 7 even if their personal household income is healthy.
Some jurisdictions use a “totality of the circumstances approach that looks at both the numbers of creditors who are business creditors and also the amount of business debt. In Kentucky (part of the Sixth Circuit), it is a more mechanistic test as to whether 51% of the debt is business debt. If so, then even if the debtor does not pass a means test to do a Chapter 7, they can still file a Chapter 7.
A caveat to the rule above is that debts on residences are going to be consumer debts and not business debts. Another one is that student loan debts are consumer debts rather than business debts. So, even accounting for those debts, if there is 51% business debt and even if the household has a healthy income, the business owner can file a personal bankruptcy. The business itself will need to be dissolved and wapped up.
When you meet with an attorney to discuss your debt and the options for relief from the weight of that debt, he or she should engage in a decision making process. Some attorneys tend to keep that process to themselves (this is more of a style thing for the lawyer), and others, like myself, try to explain and educate the client. While I cannot lay out every twist and turn that the discussion may take with any particular situation, I will put forth a few basics.
I typically start with an overview of the debt which includes the numbers of different creditors as well as the amounts of debt. Part of this inquiry involves what debts are secured and unsecured. If there are secured debts (a lien or mortgage is filed on some sort of property), I look at whether the client is behind on those debts and whether they wish to keep the property securing the debt.
If there is one primary debt that is creating the financial consternation, then I pursue questions about whether there is any deal that might be worked out with them. Some creditors simply dig their heels in and refuse to accept payments or refuse to reduce the debt to a manageable level. But, if they will work with the debtor on a reasonable and feasible repayment plan, then that is often the best way to proceed.
However, if there are jseveral creditors where the debtor has fallen behind, working out multiple deals to avoid bankruptcy just will not work. There is always one creditor that throws a wrench into such a process; if any single creditor refuses to work out a deal, then working with the other ones becomes futile. The one creditor that refused to work something out and so files suit would create a snowball effect because insufficient funds would be available to successfully pay all the people who did negotiate a deal.
If the debtor is behind on secured debts and they want to be sure to keep the assets, then I must look at a Chapter 13 as the most likely way to make that happen. This leads to my second primary consideration of income. Regardless of whether a Chapter 13 is likely, I must look at the disposable income of the household (even if only one person is filing). This inquiry gives me two key pieces of information: 1) is there left over money after necessary living expnses are paid that can fund a Chapter 13 or a work-out deal, and 2) could the debtor qualify for a Chapter 7 instead.
At this point, I have a good idea of the recommendation I am likely to make. If there is only one creditor who is a problem and there are some spare funds to make payments, then it is good to attempt a work-out with them. If there are multiple creditors or the one creditor refuses negotiations, then a bankruptcy will be inevitable. If there are assets with liens that the person wants to keep or the household income is pretty high, then I probably steer towards a Chapter 13. In all other circumstances, a Chapter 7 serves best.
As a tangent to all of the above for business owners, I look at whether the debt is primarily consumer debt or primarily business debt.I will take this inquiry up in a separate post. But, this is a glimpes into the process I use to help people in debt trouble navigate their way to being financially healthy.
It is good practice for a Debtor’s attorney’s to always obtain all four years of returns prior to filing to avoid a hiccup. I often run into the challenge of my client not retaining copies ot their tax returns. This can be quickly remedied by having your client go onto irs.gov and apply for “Tax Transcripts” for the years in question.
This Tax Transcript is not to be confused with an Account Transcript. The Account Transcript provides various codes and dates of events over time for a given tax year. These codes can allow an attorney to determine what taxes can and cannot be discharged in a Chapter 13.
Frequently, debtors who seek bankruptcy relief under chapter 13 have not yet filed some of their tax returns with the IRS or state taxing authority. Section 1308 of the Bankruptcy Code gives chapter 13 debtors an opportunity to get those returns filed so they can deal with their tax debts in the chapter 13 case, but there are deadlines to be met and consequences for failure to comply. Until all tax returns for the previous four years are filed, the plan cannot be confirmed, and if the returns are not timely filed, the debtor’s case could be dismissed.
What tax returns are required? Section 1308 refers to “all tax returns.” This means not only federal and state income tax returns, but returns for state sales tax, state highway tax, employers’ state and federal tax returns, and all other returns the debtor has been required to file during the previous…
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In my practice, I have found it important to do just as this post advises: review claims filed carefully to make sure interest accrues only as allowed by law and for the attorney fees added in. Statue also guides the amounts that can be charged in attorney fees.
Furthermore, it is incredibly valuable to make sure the Debtor gets a copy of ALL active liens on their property just prior to filing the Chapter 13. And, after the bankruptcy is filed, to make sure the claims are filed on all of those liens. It just makes things nice and clean when the Chapter 13 concludes.
Property taxes on real estate in Kentucky constitute a statutory lien on the property. Under state law (KRS Chapter 134), the lien has priority over any other debt on the property. If the property were to be sold, property tax claimants are paid ahead of any mortgages or other liens. How should delinquent property tax claims be treated in a chapter 13 case? Practitioners first need to understand what happens to delinquent property taxes under state law.
When property taxes are unpaid as of April 15 and the sheriff files the uncollected tax claims with the county clerk, those unpaid tax bills, along with certain fees and costs, become certificates of delinquency which can be and frequently are sold to third party purchasers.
The purchaser of the certificate of delinquency is now the first priority lienholder. The lien secures not only the tax owed, but interest, penalties, fees, commissions, costs…
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As an attorney primarily serving debtors, many of whom are in Chapter 13 bankruptcies, these “Lessons Learned” are quite valuable. As for the first case described, that may not be the end of the road for those debtors. Depending on how severely their income was restricted and if/when they may have received a discharge in a prior bankruptcy, a subsequent Chapter 7 may give them a fresh start. However, if they could not afford the Chapter 13, they would need to surrender the motorcycle in the Chapter 7.
As for the second case discussed, I find that it is very, very common that debtors miss various deadlines. This happens most often in a Chapter 13 with reporting bonuses and with step-ups in payments. These increases in plan payments often occur because loan repayments on 401k loans are completed and this is planned for at the beginning of the Chapter 13. With the loan repaid, they have more income to devote to the plan. I strongly encourage my clients to create an electronic calendar, such as a Google calendar, and go ahead and input every deadline for the duration of their plan with reminders.
Attorney’s can advise and inform, but ultimately it is your life and livelihood, so be sure to be pro-active by being organized. Sometimes, disorganization was a factor that led to the financial challenge to begin with, so forcing this discipline of advance scheduling may help stay on track after the bankruptcy concludes.
When debtors cannot comply with terms of a confirmed plan due to unexpected circumstances, the noncompliance cannot always be fixed by modifying the plan or seeking court approval after the fact. This post is about two cases that were dismissed for reasons you might find surprising (but shouldn’t).
Case #1 – Keeping “Toys”: Debtors proposed a 100% plan in exchange for keeping a Harley and three vehicles. They only had about $7,000 in general unsecured claims, but they really wanted to keep their Harley and a truck they didn’t need, and they had a very good income at the time. Plan confirmed.
By month 50, the debtors’ income dropped because their employers cut back on hours and reduced hourly rates, and the debtors fell behind in plan payments. They tried to modify the plan to surrender the Harley, lower plan payments, and substantially reduce the dividend to unsecured creditors. …
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Most of the items in this Chapter 13 Trustee’s blog post pertains mainly to your Chapter 13 attorney. However, the section about obtaining a new car while in your Chapter 13 is very pertinent to you as a Debtor. This is no longer a streamlined process. Now, you will have to have a more in-depth communication with you attorney. Also, you will need to plan on spending more time shopping around for the least expensive car that will meet your needs and a reasonable interest rate.
You may think you are limited to the buy here/pay here type of car sales. However, most of the larger new and used car dealers are familiar with Chapter 13 issues and they will work with you. One of the things your car dealer needs to understand is that the new debt would not be discharged at the end of the Chapter 13 so it is “safe” to loan to you in that respect. It could be surrendered and discharged if you convert to a Chapter 7, but let’s not go there. No need to make your dealer nervous.
This post briefly discusses the following topics: Amended Federal Rules of Bankruptcy Procedure eff. 12/1/16; Motions to Incur Debt for Purchase of Vehicle; Motions to Compel Debtors to File Notices of Address Changes; and the 2017 Judge Joe Lee Bankruptcy Institute.
AMENDED FEDERAL RULES OF BANKRUPTCY PROCEDURE BECAME EFFECTIVE 12/01/2016: Of particular importance to creditors’ attorneys is Rule 3002.1(a), which governs notices relating to claims secured by a security interest in the debtor’s principal residence. The rule is now applicable to claims “for which the plan provides that either the trustee or the debtor will make contractual installment payments.” The amended rule also provides that unless the court orders otherwise, the notice requirements of Rule 3002.1 cease to apply when an order terminating the stay is entered.
All practitioners should note that Rule 9006(f) removes the 3-day additional time for taking action if service is by electronic means.
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- What your bank CAN and CANNOT do when you file bankruptcy
- Tax Time!
- Interest Rates on Secured Claims in Chapter 13 Cases in the EDKY
- CAUTION: Tax Refund
- When Business Owners Should File Bankruptcy
- To File or Not to File: Attorney decision making
- Deadlines for Filing Prepetition Tax Returns in Chapter 13 Cases
- Delinquent Property Tax Claims in Chapter 13 Cases
- Lessons Learned the Hard Way
- Miscellaneous Hot Topics in the EDKY
- ‘Tis the Season
- How to Choose a Bankruptcy Lawyer
- Alternate Debt Relief
- attorney fees
- Automatic Stay
- Business debt
- Cash Advances
- Chapter 11
- Chapter 13
- Chapter 7
- Credit Counseling & Debtor Education
- Debt solution centers
- Disposable Income / Budget
- Home Loan Modification
- Home loan modifications
- Means test
- Plan payments
- Pre-filing planning
- Preference / Preferential payments
- Proof of Claim
- Property (exempt
- reaffirm or surrender)
- Redeem / Redemption
- Security interests
- Student loans
- Tax Debts
- The estate
- Business & small business
- child custody
- child support
- Civil Procedure
- consumer bankruptcy
- consumer debt
- Debt collection
- dissipation of assets
- Estate Planning
- Family Law
- Life & Law
- Marital Assets
- Negotaion & conflict resolution
- property allocation
- Solo & Small Firm
- Visitation/Time sharing
- Words & Phrases