As discussed in a previous post, the automatic stay prevents creditors from pursuing a debtor for payment or from foreclosing on a debtor’s property. However, the automatic stay is not fool proof. Creditors may file a motion with the bankruptcy court for relief from the automatic stay. If the motion is granted, the stay will not longer apply to that particular creditor and as such the creditor may resume collection efforts against the debtor, including foreclosure. In a Chapter 11 case, if the debtor’s only asset is a single piece of real property, there are special rules which apply. This type of Chapter 11 case is termed a “Single Asset Real Estate” case. One of the special rules in these types of cases is that, within 90 days of the filing of the case, the debtor must either propose a Plan of reorganization (that is, propose how it will handle its debts) or begin paying its secured creditors at least the interest owed to them. If the debtor fails to do so within the 90 days, the secured creditor (the mortgage company, for example) has a right to relief from stay. These rules are provided in 11 USC §362(d)(3). As you can see, Chapter 11 cases are complex. It is therefore extremely important for a debtor to have experienced Chapter 11 counsel. An attorney that only handles Chapter 7 and Chapter 13 cases will likely not know these, and other special rules which apply to Chapter 11 cases. An oversight of §362(d)(3) by an inexperienced attorney can be very costly to a debtor trying to reorganize his debts.
When a debtor files any type of bankruptcy, a “automatic stay” is created which prevents all creditors from pursuing the debtor. That is, creditors cannot call or otherwise contact the debtor to ask for payment, they cannot sue the debtor (and any pending lawsuits are immediately halted), they cannot collect on a judgment and they cannot foreclose on any property of the debtor. As the description implies, this “stay” of the creditors is automatic. The filing of the bankruptcy case alone, and nothing else, creates the stay. So, even if a creditor does not know of the bankruptcy filing, any action the creditor takes against a debtor can be cancelled.
For example, let us assume that there is a lawsuit pending against a debtor who has not yet filed for bankruptcy. The debtor decides not to file an Answer in the lawsuit and therefore the creditor requests that a default be entered against the debtor. Before the default is entered, however, the debtor files for bankruptcy. The next day, before the debtor has a chance to inform either the creditor or the court in which the lawsuit is pending of the bankruptcy filing, the court enters the default against the debtor. Sometime later, for whatever reason, the bankruptcy gets dismissed and the debtor now wants to file an Answer in the lawsuit. Normally, once a default is entered, the debtor (or defendant) can no longer file an Answer. However, in this case, since the bankruptcy was filed prior to the default being entered, the automatic stay prevented the default from being effective. Although neither the court nor the creditor knew of the bankruptcy, the default must be set aside.
Some time ago, our office represented a client in this exact situation. We filed a motion to set aside the default entered against our client after the client had filed for bankruptcy. Although the creditor opposed our motion, the Judge recognized that due to the automatic stay being in effect on the date the default was entered, the default was ineffective. We won the motion, and our client was able to file his Answer and defend the lawsuit.
In addition to debts such as a mortgage, line of credit and credit cards, many bankruptcy debtors are also behind on their tax obligations. The question often comes up: Can taxes be discharged in bankruptcy?
The answer to that question can be complicated. For instance, some tax debts can be discharged while other tax debts cannot. If you run a business, for example, and owe sales tax, that sales tax can never be discharged in bankruptcy. On the other hand, ordinary income tax can be, depending on various factors.
If you owe the IRS (or your State) for income tax, you may be able to discharge that debt in bankruptcy. First, you must understand how taxes are treated in your bankruptcy. There are essentially three types of debts for bankruptcy purposes: secured debt (such as your mortgage and car loan,) unsecured debt (such as credit cards and medical bills,) and priority debt (such as taxes.) If you are filing a Chapter 7 these different types usually do not make a big difference (but they still must be scheduled correctly on Schedules D, F and E, respectively.) In a Chapter 13, however, the type of debt can make a big difference. Since you are paying back at least some of your debts in a Chapter 13, the amount of each type of debt can determine how much you would have to pay into your Chapter 13 Plan.
Putting aside scheduling and treatment of debts, the conditions for discharging income tax debts are as follows:
1. The debt has to be for an income tax that was due at least 3 years prior to the filing of your bankruptcy petition. As an example, if you file your bankruptcy on May 1, 2012 then any taxes you owe for 2008 (which were due on April 15, 2009) may be discharged, but taxes for 2009-2012 cannot be discharged; and
2. You must have filed your income tax return at least two years prior to the filing of your bankruptcy petition. Taking the above example, if you filed your tax return on time (on or prior to April 15, 2009) and file your bankruptcy on May 1, 2012, then you have satisfied this 2-year rule. But let’s assume that you did not file your 2008 income tax return on time. Instead, you filed it late — let’s say on November 1, 2011. In that case, you must wait until November 2, 2013 (two years since the filing of the return) to file your bankruptcy if you want that tax debt to be discharged, even though it was due more than 3 years prior.
Things get more complicated if you owe for multiple years, some of which meet the above two requirements and some which do not. These are complex issues which can easily get confusing and not handled properly without the right guidance. The bankruptcy forms may seem simple and straight forward, but they are not. If you are contemplating filing for bankruptcy, call us for a free consultation.
The most common types of bankruptcy filings for consumer debtors are Chapter 7 and Chapter 13. Both of these types of bankruptcy cases have certain qualifying requirements. This article discusses the requirements for a Chapter 7 bankruptcy.
In 2005 Congress revamped the Bankruptcy Code, adding certain requirements for consumer debtors. For example, no matter what type of bankruptcy you file, if you are an individual (as opposed to a corporation or other entity), you must complete a Credit Counseling Course prior to filing your petition, and additionally complete a Debtor Education Course after your case is filed and before you receive your discharge.
In addition, in Chapter 7 cases, you must now pass the Means Test. In this Part I of a series of articles on the Means Test, we will look at the Median Family Income.
The Means Test examines your household income (and certain allowed deductions) and compares it to the Median Family Income as published by the Census Bureau. This number is updated every year and is specific to the State in which you file your bankruptcy. For example, as of the writing of this article (May 2012), the Median Family Income in California is $49,188 for a household of one person, $63,481 for a two-person household and $77,167 for a four-person household. This means that if you are married and have two children (under 18), and you and your wife make less than $77,167 combined per year, you will automatically pass the Means Test and qualify for a Chapter 7. If, however, you make more than that amount, you may still be able to qualify for a Chapter 7 bankruptcy after certain deductions are taken (this will be discussed in a future article). On the other hand, if after all the deductions are taken, your income is still above the Median Family Income, you will most likely not qualify for a Chapter 7, but may still be able to file a Chapter 13 (depending on certain other criteria).
Several questions often come up as to the calculation of the household income:
Q: Do the qualifying figures change whether my spouse is working or not?
A: Your income is calculated as to your entire household. If you are the only one working, you will enter that income into the Means Test. If both you and your spouse are working, then your combined income is used.
Q: What if I file the bankruptcy on my own, without my spouse, what figures are used?
A: Whether you file the bankruptcy on your own or jointly with your spouse, the figures used in the Means Test do not change. Your combined household income is used in the Means Test no matter whether you file alone or jointly. Further, the Median Family Income figure is based on your State and family size, and does not change depending on whether or not you file the petition jointly.
Q: What if I am married and have more than 2 kids (family size is larger than 4)?
A: Assuming you file your petition in California, for each additional member of the family add $7,500 to the Median Family Income figure. For example, if you are married and have 3 children, the Median Family Income for the purposes of the Means Test is $$84,667.
Q: Are only parents and children counted as family members?
A: If you are taking care of an elderly parent, for example, that person could potentially count as a member of the family for the purposes of the Means Test.
The above discussion gives you a general understanding of how the Income portion of the Means Test is calculated. In future parts of this series of articles, we will examine other portions of the Means Test. As always, before making any decisions or filing for bankruptcy, you should discuss your specific situation with a qualified bankruptcy attorney.
For More Information:
- United States Department of Justice: Means Testing
- Summary of Means Test Changes (the figures used in the Means Test change from time to time, most recently on May 1, 2012)
It is not uncommon for a new client to come into my office and tell me, “I need to file for a Chapter 7.” My first question to such a statement is always “Why?” The response varies, but has a common theme: “Because I can’t pay my bills.”
Not being able to pay your bills is, of course, a factor in making the difficult decision of filing for bankruptcy. Once making that decision, however, the next decision is whether to file for Chapter 7 or Chapter 13 (other chapters also exist, but they are not relevant to most consumers). While this decision may be made for you — based on, for example, the amount of debt you have — often you will qualify for both chapters. In that case, you must decide which will be more beneficial to you.
The major and most basic difference between these two varieties of bankruptcy protection available to most consumers is that, in a Chapter 7, you effectively “raise your hands and quit,” informing your creditors that you simply have nothing left. If you do not own a house or other property, and your income is just enough to make ends meet but not enough to save each month, then a Chapter 7 will probably be the right choice for you.
In a Chapter 13, on the other hand, you essentially tell your creditors that, while you do have some limited means to pay, you cannot pay all of them everything you owe. In filing a bankruptcy under Chapter 13, you propose a payment Plan, under which you promise to pay a certain amount each month to the Chapter 13 Trustee (assigned by the court and an employee of the Department of Justice), who then will distribute these funds to creditors. You will do so for 3 to 5 years and each of your creditors will get a portion of its debt paid off. At the conclusion of the Plan, any remaining
debts are wiped out.
So which chapter is right for you? While you should not decide the answer to this questions without speaking to a qualified bankruptcy attorney, the simple answer is that if you have no assets and
little income, you would probably end up in a Chapter 7. On the other hand, if you have assets, or your income is above the qualifying maximum income for a Chapter 7, a Chapter 13 may be right for