There are several reasons that a potential client might consider a Chapter 13 verses a Chapter 7 even if they are eligible to file a Chapter 7 bankruptcy case.
A Chapter 13 bankruptcy allows you to restructure your debt such as paying back mortgage arrears. For example, if you are $50,000 in arrears in your mortgage you can spread that payment over 60 months to repay in a Chapter 13 plan. A Chapter 13 bankruptcy might also potentially lower a car payment by lengthening the payment terms or lowering your interest rate.
A Chapter 13 bankruptcy also allows certain debts to be discharged which are not dischargeable in a Chapter 7 bankruptcy such a property settlement /division of asset award in a divorce case. This is distinguishable from alimony and child support awards which are not dischargeable in either bankruptcy Chapter. A divorce attorney fee award is also not dischargeable in either Chapter of bankruptcy if the attorney secured an alimony or child support award.
Another debt that is dischargeable in a Chapter 13 and not a Chapter 7 is “willful and malicious injury to property” such a criminal mischief. This is also distinguishable from damage caused by driving under the influence which is not dischargeable in either a Chapter 7 or a Chapter 13 bankruptcy. If you have any questions about whether a particular debt is dischargeable it is best to consult with a bankruptcy attorney for guidance.
You must list your personal injury case as a potential asset for the bankruptcy trustee.
In a Chapter 7, the trustee can collect 100% of what a debtor gets from their personal injury settlement. This applies to any dates of accident that occurred prior to filing the bankruptcy petition where the statute of limitations has not expired.
If you have already hired a lawyer to represent you in your personal injury case, you would want to ask them how much you might expect to receive from the personal injury case and how long will it take for it to settle or go to trial. You might decide to either wait until your personal injury case settles and use it for reasonable expenses before filing your bankruptcy case so the trustee cannot take it.
Alternatively, you might decide to not wait and file your bankruptcy case and forgo your settlement proceeds. It works a little differently in a Chapter 13. The trustee in a Chapter 13 case is entitled to at least 50% of your settlement proceeds whether your accident happened before you filed your case or while your case is pending.
Usually, the Chapter 13 trustees will agree to let the debtor keep 50% of the net proceeds of the case, where the Chapter 7 trustee’s will take 100% of the proceeds. When you consult with your bankruptcy attorney definitely let them know about your personal injury case. You wouldn’t want to file the case and then unexpectedly have the trustee take your money. Also, communicating with your personal injury attorney is also critical.
Let’s say you file your bankruptcy case in August 2023, the trustee can keep you case open until April 2024 to potentially intercept your tax refund (if you do not have exemptions that can cover it).
The trustee cannot take “earned income credit” which is a tax credit given to people who meet certain criteria for their dependents. There is also a formula for how much the trustee is allowed to keep which depends on the date your case gets filed. If you file July 1st then the trustee would only be entitled to 50% of your refund less EIC. For this reason, the trustee will usually only keep cases open to get tax refunds if its later in the year vs. in January when they would barely be recovering anything.
If you have enough exemptions left, we can also exempt your tax refund for the following year. Sometimes we suggest getting your property or car appraised, since it might allow you some extra money to put towards your exemption for the tax refund.
If you are in a Chapter 13, it is required to supply your tax return each year to the trustee and turn over your tax refund. However, if you do need your tax refund to pay for a necessary item such as a medical procedure, tires, house repairs, etc. we can ask the trustee for permission to retain your refund. As long as, you provide supporting documentation, the trustee will normally allow you to keep your tax refund.
The short answer is yes, it can. You are obligated to disclose the last twelve months of profits and losses from gambling on your bankruptcy petition. If you do receive winnings and it’s listed on your tax return as income, that also needs to be shown on the bankruptcy petition for the last two years. Gambling can affect your ability to file for bankruptcy.
The first issue is whether you have taken out credit lines or personal loans for the purpose of gambling. This is a good faith issue in terms of whether you intended to repay your creditors or if you were purposely going to default. The objective of borrowing money hoping you would make more gambling will not be a valid excuse. Similarly, having a gambling addiction would not be a valid excuse either.
The trustee’s perspective is that if you have $12,000 a year spent on gambling that is $1,000 per month that you should have used to pay your unsecured creditors. The case law also supports this as well. A Chapter 13 might be an option if you have gambled since you are trying to pay creditors back to some extent. Otherwise, depending on the amount you gambled you might have to wait a year of no gambling to file your Chapter 7 bankruptcy case.
If it’s minimal like a few hundred dollars that is less of a concern. However, if you plan to file for bankruptcy, abstain from any type of gambling so you do not compromise your case.
There is something called a right to set off. This means that a banking institution can take money from your checking or savings account to make a payment on another debt such as a credit card or car loan that you owe the bank. If you are behind on your payments the terms of the contract will allow the bank to do that. It is completely legal. If you are filing for bankruptcy and cannot afford the credit card payments, it is advisable to get a new account at a banking institution where you don’t owe them any money. That is one reason why banks offer credit or incentives to use their bank.
Once a bankruptcy is filed, the automatic stay under the bankruptcy code should limit the bank’s right to a set off. Once your bankruptcy is filed, the law prohibits a setoff of any debt that arose prior to the filing of your bankruptcy petition from any creditor. However, it is still a safe practice to use a bank where you have no credit lines. There are still occasions where creditors violate the automatic stay and while we can get it corrected, it can take some time to do so. There are so many banking options, it is better to be safe than unable to pay your bills or mortgage payment because the bank took their offset. .
If you have any questions about whether a creditor took inappropriate action, reach out to us for assistance and we are happy to evaluate the circumstances.
