Practical Bankruptcy: Keeping Non-Exempt Assets through Chapter 13
Chapter 13 can be the best way to protect assets. All the more so if you are led there for other reasons, especially for “priority” debts.
The last blog post was about using Chapter 7 “straight bankruptcy” to keep non-exempt assets by negotiating a “buy-back” monthly payment plan with the bankruptcy trustee. But that’s only appropriate if the non-exempt asset is low enough in value that the debtor would be able to pay off the trustee in matter of months. Usually around a year of payments is the maximum amount of time that Chapter 7 trustees allow.
Furthermore, there is no rule that says that the trustees must allow a debtor to make monthly payments. A trustee could insist on seizing and selling a non-exempt asset, so there is always that risk. This risk would be avoided in a Chapter 13 “adjustment of debts” case.
Also the Chapter 7 route assumes that the debtor has no other good reason to be in a Chapter 13 case. But often there are such reasons. Then the asset-protection feature of Chapter 13 becomes an extra benefit for going that route.
One of the common reasons to file under Chapter 13 is to pay a “priority” debt over time while under the protection of the ongoing “automatic stay.” This dovetails very neatly with the asset-protection feature, as the illustration below will show. Child/spousal support arrearages and recent taxes are the most common examples of “priority” debts which can (and must) be paid through a Chapter 13 case ,and are done so under much more favorable conditions than paying such debts without bankruptcy protection.
Here’s an example of protecting an asset under Chapter 13.
Saving the Family Retreat
Lisa just closed a sole proprietorship business that she struggled for 6 years to keep afloat. She owes a lot of taxes: $11,000 of income taxes spanning from 2009 through 2012 tax years, and $8,000 in unpaid withholding from employee wages for the last 10 quarters before closing the business. She also owes back child support in the amount of $4,500. None of these taxes or support payments—totaling $23,500–could be discharged in either a Chapter 7 or Chapter 13 case. As “priority” debts, they would have to be paid in full in a Chapter 13 case, but without any additional interest or penalties. Under Chapter 13 these “priority” debts could also be paid in a single combined monthly payment based on Lisa’s budget, with as much as 5 years to pay them off. They would be paid ahead of and generally instead of her other unsecured debts.
A year ago Lisa inherited from her older sister, her only other sibling, a very modest cabin—really just a two-room shack, without running water—more of a camping spot than a vacation home. Lisa and her sister spent countless weekends and summer vacations there and in the surrounding hills and lakes with their parents when they were growing up, and thereafter with her own two kids, who are now very young adults. The cabin sits on a very small plot of land, and is not in a very desirable location. But it is something that she absolutely wants to keep in the family, to be able to hand it down to her own kids who have their own fond memories of the place. There is no one else in the family who has any money who could buy it from her. It is worth $25,000.
Lisa recently started working as an employee in the same industry as her prior business, and is paid reasonably well in a job that she expects to be reliable for the reasonably foreseeable future.
The Chapter 13 Solution
In a Chapter 13 case, among other requirements, the unsecured creditors must receive as much as they would have received in a Chapter 7 case. If Lisa had filed a Chapter 7 case, the bankruptcy trustee would have taken the family cabin since in her state there is no exemption for a second home or real estate other than the debtor’s homestead. The cabin would have been sold for about $25,000. Deducting a realtor’s commission and other costs of sale, let’s assume that a net amount of about $21,500 would have gone to the trustee for distribution to the creditors.
So on advice of her attorney Lisa files a Chapter 13 case, with a plan proposing to pay $495 per month for a little less than 5 years. That would, as required, pay off all her income and withholding taxes, and cure her child support arrearage—her “priority” debts, again totaling $23,500. Plus there would be enough to pay the Chapter 13 trustee fees and whatever remaining attorney fees not paid by Lisa when she started her case.
By arranging in her plan to pay this $23,500 amount, Lisa is simultaneously also fulfilling her requirement to pay her unsecured creditors at least as much as they would have been paid under Chapter 7 though sale of the cabin, the $21,500 noted two paragraphs above. She is “killing two birds with one stone:” paying her mandatory “priority” debts and protecting her cabin.
Because Lisa’s plan complies with Chapter 13 law, the bankruptcy judge “confirms” the plan. Then, after making all her agreed payments, at the completion of her case the rest of her debts will be discharged. She will have paid off all the taxes and caught up on her support, and will have fulfilled her obligation to her creditors for retaining the family cabin. So she will owe nobody anything, and the cabin will continue to be in her name.