Giving Final Thanks for Chapter 13 “Adjustment of Debts”

Chapter 13 helps if you owe divorce debts, have personal property collateral, are behind on property taxes, or owe old and new income taxes.

 

In the last two blog posts we covered 6 extremely helpful features available only under Chapter 13. Here are 4 more, to make it an even 10. Again, none of these come with Chapter 7 “straight bankruptcy.’

7) Write Off Non-Support Divorce Debts

Neither Chapter 7 nor 13 can “discharge,” or write off child or spousal support. But Chapter 13 can forever discharge non-support divorce obligations. So if you owe any of this kind of debt you should seriously consider filing a Chapter 13 “adjustment of debts.”

What are non-support divorce obligations?

These are usually related to the division of marital property or marital debts in your divorce degree. Non-support obligations are generally referred to in your divorce decree two ways:

• your obligation to pay your ex-spouse a certain sum of money because you got more than half of the marital assets (for example, for getting the vehicle with a higher value)
• your obligation to pay all of a debt (or set of debts) that you had jointly owed with your ex-spouse

For example, if the divorce decree says that you owe your ex-spouse $12,000 directly, and also must pay all of a joint debt of $4,000, under Chapter 7 case you simply could not discharge these two obligations at all.  After the case would be over, you would still owe these debts.

But under Chapter 13 you could discharge these two debts. You may have to pay a portion of them during your 3-to-5-year payment plan, but usually the percentage paid would be relatively small and sometimes you’d pay nothing. Then at the end of a Chapter 13 case the entire remaining amounts would be discharged, no longer legally owed.

 8) “Cramdown” Secured Debts (Other than Vehicle Loans)

We covered cramdown of vehicle loans two blog posts ago, and you can do the same with debts secured by other personal property. As long as you made your purchase more than a year ago, if you owe more than the value of what you purchased, through Chapter 13 cramdown you can in effect rewrite the terms of the debt to your advantage.

In cramdown the debt is divided into two parts, one part equal to the value of the collateral, the other part equal to the remainder of the debt. The first part is treated as secured, and the other part as unsecured.

Using an example of a refrigerator, let’s say you bought it at purchase price of $1,200 a year and a half ago for it but, with a delay in the first payment and a high interest rate, you still owe $950. The fridge was overpriced and depreciated quickly—you can’t sell a used refrigerator for much—so it’s now only worth $400.

In a Chapter 7 case you would likely be stuck with the original payment terms, including the full balance of $950, the high interest rate, and the risk that down the line you wouldn’t be able to make the payments and the fridge would still be repossessed, and you could still owe on the debt.

In contrast, through “cramdown” your Chapter 13 payment plan would have you pay $400 over the course of as much as 3 to 5 years, likely at a reduced rate of interest and usually a much lower monthly payment.

The unsecured portion—the remaining $800—would be lumped in with all your other “general unsecured” debts. These debts are paid only as much as you can afford to pay them during the length of your case after paying your secured debts, “priority” unsecured debts (such as recent income taxes and child/spousal support arrearage), and “administrative” expenses like your attorney fees and trustee fees. As a result often these “general unsecured” debts are paid only a few pennies on the dollar, or even nothing. And at the end of the case whatever hasn’t been paid gets forever discharged.

9) Catch Up on Home Property Taxes

If you are behind on your home’s property taxes Chapter 7 may help by getting rid of most of your other debts. But if you are facing a tax foreclosure, or a mortgage foreclosure, that would probably not give you enough time to catch up on the taxes.

Even a foreclosure isn’t right around the corner, you may need the greater help provided by Chapter 13 because:

• Even if your county or tax agency provides the option of an installment payment plan, you may not be able to afford the required monthly payments even after discharging your other debts.
• A payment plan may not available with your county/tax agency, the collection process has gone too far for you to be still eligible for it.
• You were in a payment plan but could not pay it as agreed.

The most likely scenario is that your mortgage lender is requiring you to bring the taxes current more quickly than you can, usually on top of threatening its own foreclosure.

Under Chapter 13, you can catch-up on your property taxes over a period of as long as 5 years. This reduces each month’s installment payment, making it more manageable. And during that time the tax agency would not be able to foreclose or take any other collection activity—saving you both worry and those extra costs—as long as you fulfill the terms of the court-approved Chapter 13 plan.

Practically speaking, Chapter 13 is usually a much better option if you are also behind on your mortgage payments. Most of the time if you are behind on property taxes that means that you are also behind on your mortgage(s). Being behind on the property taxes is just an additional form of default under your mortgage terms. So Chapter 13 is often the best way to catch up on your mortgage and your taxes at the same time. Because as long as you meet the terms of your court-approved plan, you and your home will be protected from foreclosure or any other collection efforts by both your mortgage company and the county/tax agency.

10) Deal Simultaneously with Older and Newer Income Tax Debts

If you owe more than one year of income taxes, some may meet the conditions for discharge and some may not. The conditions are mostly based on the passage of time so in general older taxes are more likely to be able to be discharged. In these situations a Chapter 13 case may well be better for you than a Chapter 7 one.

In a Chapter 13 payment plan all your creditors are dealt with in one package. This plan is proposed by you and your attorney, and after a limited opportunity for creditors to object, the plan is approved by the bankruptcy judge. Then all your creditors, including the IRS and state, have to comply with it. If you have other important debts that have to or you want to pay, and doing so fits within the rules, then the IRS and state have to wait their turn in line behind them. And they can’t take any collection action whatsoever on the taxes owed throughout the life of the plan as long as you follow the rules as well.  

The taxes that can’t be discharged (generally the newer taxes) must be paid within the 3-to-5-year plan, but usually without any additionally accruing interest and penalties. The taxes that can be discharged (the older ones) are treated like your other “general unsecured” debts. That means they are paid only if and to the extent that you have extra money after paying more important debts.

The dischargeable taxes usually do not increase the total amount you have to pay towards all your debts. That’s because usually you only have to pay a certain dollar amount of your pool of “general unsecured” debts, so having the taxes in this pool just reduces what the other creditors receive out of what you pay.

At the end of the Chapter 13 case you will have paid all the taxes (and any other debts) that you had to pay because they couldn’t be discharged. Whatever you haven’t paid of your dischargeable taxes and all other dischargeable debts are forever written off. So at that point you are tax-debt free and (except perhaps for a mortgage you chose to keep) are completely debt-free.