Benefits of Chapter 13 Bankruptcy Over Chapter 7

Chapter 13 bankruptcy is a Debt Reorganization Plan commonly known as “wage earner” in Tennessee.  All of your debts are combined and the Chapter 13 trustee is paid who disburses the payments.

A common question is why would I need to file a Chapter 13 bankruptcy instead of a Chapter 7?

The first reason is to stop the student loan collectors from garnishing your wages and your tax refund.  Student loans are paid through the plan that usually lasts 5 years.  The student loans accept the amount we calculate for their share of the plan and it prevents them from instituting collection procedures for 5 years and the debt is actually paid down.  Also penalties and late fees stop, however, interest still accrues.  The Chapter 13 bankruptcy can enable you to determine a permanent settlement and be free of garnishments for up to 5 years.

The second reason for filing Chapter 13 bankruptcy is to enable you to retain your residential home and an affordable repayment plan.  Filing for Chapter 13 bankruptcy allows you to place the amount you are behind by into the Chapter 13 repayment plan and the mortgage company will pay the same way as other secured creditors by the Chapter 13 trustee.  At the end of the plan, the mortgage will be current and since the remainder of your unsecured debt will get discharged, you’ll be able to afford to make the monthly payments.

For example, if your house payment is $500.00 a month and you’re behind by $3,000.00.  The $3,000.00 would go into the Chapter 13 debt payment plan, the $500.00, which is your regular payment, would also go into the plan so the trustee would essentially be distributing the $500.00 of your regular house payment plus the amount necessary to repay the mortgage arrearages.

The third reason to chose Chapter 13 over Chapter 7 is to pay delinquent child support. While child support can not be discharged in bankruptcy, the arrerages can be paid over the life of the plan (usually five years). This will prevent collection efforts as long as the case is active.

The fourth most common reason to consider filing for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy is having too high of an income to qualify under the means test, which is required to qualify to file for Chapter 7 bankruptcy.  While you may feel that you need or at least want to file Chapter 7, making a little too much money can disqualify you from this type of bankruptcy.  The other way you can be forced to file Chapter 13 Debt Reorganization is if your income exceeds your expenditures.  It would take an analysis from a bankruptcy lawyer to learn if this is a factor.  The means test is a government calculation, which is allegedly supposed to be a test line.  The government’s calculation is based on your income and Internal Revenue Service created living expenditures depending on family size, then create a determination of a Chapter 7 or Chapter 13.  The means test is a calculation using the financial information and expenditures, is designed to determine based on your income or means whether you should be able to qualify for a Chapter 7 bankruptcy.  However, just because you have too much income to qualify for Chapter 7, does not mean that you are not eligible to file bankruptcy all together.  This is one case where Chapter 13 bankruptcy may be the best option.

It is very important to understand, that even if you do not qualify to file for Chapter 7 bankruptcy due to your income, or you’re behind in your mortgage payment and you want to save your house, filing Chapter 13 bankruptcy can help you save your house, your car and stop wage garnishments.

The Importance of Filing Tax Returns

Failing to file a tax return can prevent the consumer from being able to discharge the debt if they ever seek bankruptcy relief.  As a general rule, taxes that are due 3 years or less from the date the bankruptcy petition is filed are not dischargeable and will still be owed once the individual receives the discharge.  But the return has to have been filed at least 2 years before the bankruptcy case is filed.  The return can even be filed late as long as the 2 years have passed.  And that’s a good reason to file tax returns as soon as possible.  If it’s ever necessary to file bankruptcy, it will be very helpful if those returns were filed at least 2 years ago.

However, if an individual doesn’t file a tax return when it is due and the IRS sees income on a W-2 or 1099, the IRS can estimate the amount of tax they think is owed by preparing a Substitute For Return.  Once the IRS estimates the tax they think you owe on their Substitute For Return, they will send a deficiency notice.

The consumer can then file the real return and will probably owe considerably less than estimated.  But, for bankruptcy purposes, the IRS Substitute For Return does not qualify as a return for that 2-year rule.  Even worse, some bankruptcy courts have held that any return filed by a taxpayer after the IRS has prepared a Substitute For Return does not qualify as a return for bankruptcy purposes.  That means that once the IRS prepares a Substitute For Return for a specific year, it will never be discharged in bankruptcy court. For these reasons ,it is important to  file tax returns even if the consumer owes and cannot pay it.


Stopping Foreclosure by Filing Bankruptcy

If a consumer falls behind on their mortgage payments, and the lender accelerates the loan and initiates foreclosure proceedings, a Chapter 13 bankruptcy (wage earner) is often the only realistic way to save the home from a foreclosure sale.

Unless the homeowner can pay all unpaid mortgage payments, late fees, legal fees and foreclosure costs prior to the foreclosure sale, the lender will often proceed with foreclosures while offering loan modification options under HAMP or other programs, which may or may not stop the foreclosure. Many consumers rely exclusively on loan modification programs until it is too late and they are facing a foreclosure sale.

One thing that is very important to remember is that unless the lender agrees to stop the foreclosure by entering into a loan modification, the law firm conducting the foreclosure will be proceeding. This causes a great deal of confusion. It is a good idea to know about Chapter 13 bankruptcy, which can be a viable alternative for many people, even if they wish to attempt a loan modification.

Chapter 13 bankruptcy is the only way to immediately stop a foreclosure process and require the mortgage holder to accept payments on the arrearages over a period of time. In addition to saving a consumer’s home, Chapter 13 provides other benefits of discharging unsecured debts (like medical bills or credit cards), resolving tax problems, and reducing the monthly payments owed on secured debt such as car notes and furniture notes.

Post-Bankruptcy Filing Financial Management Course – What to Expect

After filing a bankruptcy case, the law requires the debtors to take a financial management course, which is done either online, by telephone or in a classroom.  If a debtor does not take this course, the bankruptcy court will close the case without a discharge.  Since the discharge is the motivation for filing a bankruptcy case, it is essential that this course be taken. 

In order to better explain to my clients what to expect, I took this course from a provider called StandSure.  They charged $15.00 for the course, which seems about average for other course providers in this area.  I found the course to be informative. 

The course begins by asking questions about what people already know about finances, such as what a budget is, or about money management.  After that, the course explains that the financial management course requirement and the budget management, the importance of setting goals, how to set goals, the difference between short term, medium term and long-term goals. The course explains the percentage of an individual’s income that should be devoted to each item in their budget. For example, mortgage or rent should be no more than thirty percent of the household income. Then the course provider discusses money management (thinking about what you want as opposed to what you need; the importance of comparison shopping; budgeting your money by tracking your spending, then reviewing your spending, and then creating a budget by taking into account your income; fixed and varied expenses, and learning to balance your checkbook; the importance of avoiding payday loans and title loans; information about insurance and the importance of saving money.  The course provider then goes on to explain all about credit listing the different types of credit; secured and unsecured credit.  The course provider discusses the importance of comparing credit offers and then explains the concept of predatory lending.  Credit discussions then explains FICO and credit scores, as well as the impact of bankruptcy on an individual’s credit report.

The course provider listed several websites that provided free financial information to consumers and then provides a nice summary of consumer protection laws.  Finally, the course gives a thorough summary of the changes of the bankruptcy law since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  At the end of course, you receive a Certification of Completion.  I found the course to be very informative and I thought it was a lot more interesting and a lot more useful than the prebankruptcy credit counseling course.

I recently read Dave Ramsey’s book regarding financial management after bankruptcy. I and several lawyers in the West Tennessee area agree that it was rather condescending. This makes me reluctant to recommend that particular course.