Chapter 13 Bankruptcy

Chapter 13 is also known as a wage earner’s bankruptcy. It is available to individuals with a regular source of income (even if the income is from family contributions, and not from income earned from employment or from a business). Self-employed persons and business owners also may file for Chapter 13; however, corporations cannot file for Chapter 13. In order to file a Chapter 13 case, a person must owe less than $1,081,400 in secured debts and less than $360,475  in unsecured debts.  The debtor must file a plan with the Bankruptcy Court, in which you identify for the court and the Chapter 13 Trustee which creditors you intend to pay, and how much you intend to pay them. 

It is the job of the Chapter 13 Trustee to review the plan, and receive and disburse all plan payments made by the debtor. The Trustee also will review and analyze your proof of income, so he/she can determine whether or not you can afford to pay what the plan says you’re going to pay. The Trustee also wants to make sure that you are proposing to pay as much as you can afford to pay to unsecured creditors. The types of income documents a trustee will review include, but are not limited to: pay stubs, tax returns, profit and loss statements, and bank statements. It is the obligation of a debtor in Chapter 13 to devote all disposable income (i.e., gross income, less taxes withheld, and necessary living and/or business expenses) to fund the plan.  

 The goal of the Chapter 13 Trustee is to maximize your payments to unsecured creditors.  My job, as your bankruptcy attorney,  is to protect your rights, and to minimize your payments to unsecured creditors.

Once you have established to the Trustee’s and the court’s satisfaction that you are using all of your disposable income to fund your plan, and that you have provided for the payment of all required plan obligations (i.e., typically, mortgage arrears, property taxes, income taxes, and/or car payments), you are ready to confirm your plan. Each month (even before the plan is confirmed), the debtor begins making his or her plan payments.  Generally, the Trustee will not disburse any money until the court confirms the debtor’s plan. Once the plan is confirmed, the Trustee will begin paying creditors according to the terms of the plan.

A unique advantage of Chapter 13 cases is LIEN STRIPPING—that is, the ability to avoid, or strip, a junior mortgage, tax or judicial lien from one’s residence provided that the value of the property is less than the amount owed on the first mortgage lien.  In that event, the junior lien is actually unsecured—just like a credit card—because there is no equity in the liened property to which it can attach. A lien without equity is like a bucket without water—it is empty. Because it is an empty lien, it can be avoided. The homeowner can discharge thousands of dollars in future mortgage payments.

One of the biggest advantages of Chapter 13 is that the debtor gets to keep all of his or her property (if he can afford to pay for it) and the debtor gets to control his or her own financial fate. The Chapter 13 Trustee is NOT concerned about selling the debtor’s assets as is the Chapter 7 trustee; in this district, the Chapter 13 Trustees confine their conduct to distributing plan payments to creditors.

Chapter 13 is a perfect way for homeowners who have fallen behind on their house payments to save their homes by curing their mortgage arrears. The same is true for car and truck owners who have fallen behind on their vehicle payments. If the vehicle already has been repossessed, the Chapter 13 will enable the debtor to recover the repossessed vehicle, providing that it has not been sold by the creditor. Chapter 13 is great for paying back taxes because Chapter 13 stops all interest and penalties from accruing on priority or unsecured taxes.

Another great advantage of a Chapter 13 is that a debtor who is making payments to a secured creditor for a car, truck, boat, a major appliance, furniture, and/or other such item may only have to pay the creditor the value of the property on the date the bankruptcy was filed. In other words, if the lien against a piece of property exceeds the value of the property, it may be possible to “cram down” the lien to the value of the property, leaving the unsecured portion of the debt to be discharged. 

In Chapter 13, a debtor can shed burdensome debt by terminating a lease of real or personal property, and by surrendering the unwanted property. Debtors also can recover possession of property which has been repossessed, if such property has not been sold by the creditor.

Discharging Taxes in Chapter 13

The rules for discharging taxes under Chapter 13 are the same as under Chapter 7;  however, in Chapter 13, there is much more flexibility than in Chapter 7.  Chapter 13 allows the debtor a) to pay priority income taxes without interest (i.e., no interest from the date the bankruptcy is commenced), b) to discharge all accrued non-pecuniary penalties (i.e., typically, those for failing to file tax returns or for failing to pay the taxes owed), and c) to stop further penalties from accruing. Priority taxes are those recent taxes which accrued in the three years prior to the bankruptcy being filed. Chapter 13 provides options to settle tax liability not available in Chapter 7.  Chapter 13 allows the debtor to discharge older taxes.

Chapter 13 not only allows a debtor to pay a secured tax liability (i.e., a tax liability which is secured by a lien on the debtor’s property), but it enables the debtor to reduce the amount of taxes to be paid by cramming down the tax lien to the value of the property, or by stripping off the tax lien entirely. The result is that the amount of tax that exceeds the value of the property can be discharged if the tax is otherwise unsecured, while the debtor pays only the secured portion of tax lien. Stripping or cramming down tax liens often allows a debtor to propose an affordable plan, and to emerge from bankruptcy at the end of the plan with no tax debt and no tax lien.

The same rules apply for individuals operating unincorporated businesses. Taxes often are a considerable challenge for business owners who do not set aside money to pay monthly or quarterly taxes. The trust fund portion of employment taxes is not dischargeable in bankruptcy; in California, sales taxes generally are dischargeable.  Both may be paid through the Chapter 13 plan. Often filing Chapter 13 will enable a business owner to survive and to stay in business, while successfully reorganizing his debts and tax liabilities.

Offer in Compromise: The non-Bankruptcy Option for Resolving Tax Problems

Sometimes bankruptcy may not provide the best option for resolving tax problems; this is especially true where the tax liability to be discharged is priority taxes, and the amount of priority tax liability to be paid is greater than the debtor can afford to pay over a 60-month plan. For example, a debtor owing $60,000 in taxes to the IRS would have to pay at least $1,000 per month to the IRS for 60 months, plus trustee’s fees. If the debtor cannot afford such a high payment, then Chapter 13 may not be a viable option.

Such a debtor may be able to negotiate a settlement with the taxing authority for a fraction of what is owed if he or she can demonstrate to the satisfaction of the taxing authority that the taxing authority would never be able to collect more than what the debtor is offering to pay. This is called an OFFER IN COMPROMISE; it is an agreement between the debtor and the taxing authority to agree to compromise the tax debt in full. When debtor completes his payments under the offer in compromise the tax liability is satisfied and the tax lien is released.


 

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Richard Mark Garber at 818-762-8120 and I will be more than glad to offer you my advice.