A Chapter 13 does not negotiate your debts. When you file a Chapter 13 bankruptcy, your creditors get notified as part of the process. The creditors have 9 weeks to file a claim.
If they do not file a claim, they don’t get paid any distribution and that debt still gets discharged. You do not necessarily pay 100% of your debt back in a Chapter 13 bankruptcy. The amount of the payment is based on your income and expenses. They look at your gross income, the payroll deductions, and the disposable income in your budget.
There is another basis for determining your payment called the means test which uses some of your actual expenses, while other expenses are compared to the IRS guidelines for your household size and county where you live. For example, it would list what the food budget should be for a household size for four people living in Hillsborough County.
The means test will arrive at an amount of what you would need to pay to your unsecured creditors during your Chapter 13 plan. The amount of the plan is not discretionary, it’s not negotiated, rather there is a precise formula for determining the payment.
You want to be sure to capture and account for all of your expenses to get your payment as low as possible. Whatever the amount, your creditors will receive a pro rata distribution which is paid monthly by the trustee and at the end of your plan the total amount of your debt is discharged.
An insider payment is when you borrow money from a friend or family member and repay them within twelve months prior to filing your bankruptcy case.
The significance of an insider payment is that the trustee can make you pay the bankruptcy estate the same amount of your insider payment in order to get your bankruptcy discharged. For example, six months prior to filing your bankruptcy case, you repaid your mom $5,000. Because you chose to repay your mom instead of using that money to pay your creditors the trustee will require you to pay him/her $5,000. The trustee in turn takes that $5,000 and uses it to pay creditors.
Your other option is to wait to file until the twelve months have expired since the time of your insider payment. We strongly recommend not repaying friends or family members during your bankruptcy process to avoid this as an issue in your case.
An insider payment is different from a gift because it is a repayment. Any gifts over $600 to any one individual two years prior to filing your bankruptcy case or any charitable donations need to be disclosed as well on your paperwork.
Any insider payment regardless of the amount of the repayment is required to be disclosed. If you have any questions about an insider payment and how it may potentially affect your bankruptcy case, it is best to consult with an attorney to determine the best time to file your case.
If you are currently in a loan modification, it would not be affected by your bankruptcy proceeding. If you are behind on your mortgage payments, its best to have a plan of action when your case is filed, with the direction you want to take.
One option is to try work something out directly with the lender to see if they will allow you time to get your payments caught up, modify the loan, defer payment temporarily, or put what you owe on the back end of the loan. I will usually caution people to set a deadline because with each passing month of you not paying your mortgage, the amount of late fees, potentially attorney’s fees, and arrears continues to grow.
Unfortunately, the lenders do not always timely respond and if you want too long for a result then you might find yourself unable to keep your home. If the lender isn’t working with you, some other options would be to sell the home if it has equity or surrender the home if it has no equity. With inflation being so high currently, most people living in the Tampa area do have equity in their homes.
If you want to stay in your house, a Chapter 13 will afford you two options. You can pay back the arrears over a 60-month period. This is helpful because instead of coming up with say $15,000 within 3 months, you would have 60 months to get the payment current and spread it over a longer period of time. You also have a guarantee that the lender cannot foreclose on you while you are in an active bankruptcy. Another option would be to attempt a loan modification in a Chapter 13 case.
It is often more helpful to do so within the jurisdiction of the bankruptcy court because the lenders have time deadlines to respond so it ensures a result. We would need to look at your debt to income ratio and if you have done a loan modification the past to determine if you are a good candidate.
For this segment we are providing an explanation of what the” present ability to pay” or “undue hardship” standard means. If you are reading this blog, you probably do not feel like you have the current ability to pay your student loans. The undue hardship/present ability to pay is a standard looked at by the Justice Department and the Department of Education to determine if you can afford to pay back your student loans.
If your expenses exceed your gross income (the amount you make before taxes or payroll deductions are taken out) you are presumed to lack the present ability to pay. These might not be your actual expenses, but rather expenses that are specified in the IRS guidelines. Where your expenses for items such as food, housekeeping supplies, apparel, medical expenses, etc. are below the amount allowed by the IRS National Standards and your net income does not cover those expenses you cannot maintain a “minimal standard of living”. Keep in mind your actual expenses may vary from what the IRS guidelines find to be reasonable. Similar guidelines operate in the means test of the bankruptcy petition.
For example, pet expenses are not considered. There are limitations on transportation expenses which includes gas, insurance, and vehicle maintenance. If you do have a reasonable expense that exceeds the IRS standards, those can be considered. You must have a persuasive reason why your expenses are higher than the IRS guidelines.
For example, higher medical expenses due to an ongoing medical condition or higher transportation expenses because you live far from work. In addition to National Expense Allowance Standards, there are also Local Standards. If your actual expenses exceed the local standard amount, the Department Attorneys should generally limit your allowable expenses to the standard amount.
If you have reasonable expenses that are not yet incurred such as currently living with a family member, but moving to an apartment in the future those expenses are considered. If you have sufficient discretionary income to make a full student loan payment as required under your loan agreement, then you are deemed to have the ability to pay and have no undue hardship.
The standards are a bit tricky so its helpful to consult with an attorney to determine if you qualify for partial or full discharge of your student loan. Stay tuned for our next segment on the “future ability to pay” standard.
There are three types of tax debt. The first type is unsecured priority tax debt which is not dischargeable in bankruptcy. That includes recent tax debt within the last three years.
The second type is unsecured non-priority tax debt. This type of tax debt is dischargeable in bankruptcy. This would include tax debt for returns that were due and filed over three years ago or assessed by the IRS over 240 days prior to filing your bankruptcy case. We can verify the date the tax got assessed by the IRS if you obtain an account transcript.
Interestingly, there are times when the tax return was timely filed over three years ago, but the IRS assesses the tax liability years later. This often occurs during an audit where additional tax debt is assessed.
Tax debt will not be dischargeable if the taxes haven’t been timely filed or filed within two years of filing for bankruptcy. Fraud or tax evasion would also be grounds for having your debt be non-dischargeable.
The third type of tax debt is secured tax debt where the IRS files a lien against your property. This occurs less frequently. We recommend contacting the IRS Insolvency Unit approximately 60 days after receiving your discharge to confirm that your tax debt is discharged.
We have clients who move here from other states who are behind on their state income tax. Fortunately, we don’t see this issue too often since Florida has no state income tax.
State income tax essentially follows the same rules as federal income taxes in terms of whether those taxes would be dischargeable or not in a bankruptcy. If you have specific questions about your outstanding tax debt, feel free to contact my office.
