Thanksgiving Week: Giving Thanks for Special Chapter 13 Tools
Chapter 13 protects you from collection of back child/spousal support and income taxes, & can save you a ton of money on your vehicle loan.
Here are four very powerful tools of Chapter 13 “adjustment of debts,” none of which are available under Chapter 7 “straight bankruptcy.”
1. Stop Aggressive Collection of Support Arrearage
If you fall behind on your child or spousal support payments, your ex-spouse and the state’s support enforcement agency have some extraordinary ways of getting money out of you and/or pressuring you to pay up. In most states this includes not just garnishing your wages and bank accounts, but also suspending your drivers’ licenses (personal and commercial), as well as suspending occupational and professional licenses.
The protection from collections by creditors that applies to virtually all debts under Chapter 7 does not apply to support arrearages. Whatever your ex-spouse and/or the support enforcement agency are doing to pursue you now would not be stopped by a Chapter 7 filing. Nor would any other collection action they may try to do to you in the near future.
But filing a Chapter 13 case WOULD stop any current collection of support arrearage. And any future efforts to collect would be prevented as well, if you and your attorney submit a Chapter 13 plan with appropriate wording and you comply with its terms.
You do have to immediately start making the regular monthly support payments from the time you file your Chapter 13 case (assuming that you continue to owe them). You also have to pay the full amount of the arrearage during the course of the three-to-five-year Chapter 13 plan. If you don’t do either of these things, your ex-spouse or the support enforcement agency will likely be able to start or restart collections efforts against you.
But if you do follow the rules, Chapter 13 can be an excellent way to catch up on support arrears while being protected from the support enforcers.
2. Protection from IRS/State Collection
Similarly, if you owe income taxes that are not old enough and/or don’t meet the other conditions for being “discharged” (legally written off in bankruptcy), Chapter 13 give you the opportunity to pay them over the three-to-five-year plan, and will protect you from the taxing authorities throughout that time.
Contrast this with how this would work in a Chapter 7 case. If you have income taxes that would not be discharged in a Chapter 7 case, the protection from the taxing authorities’ collection of those taxes abruptly ends only about three or four months after your case is filed. In some situations you may be able to make reasonable payment arrangements directly with the IRS/state to take care of those taxes. But if you can’t afford what the taxing authorities require, or if your circumstances change so that you can no longer afford what you’d earlier agreed to pay, you would have no protection from their collection whims. And interest and penalties would continue accruing.
Under Chapter 13 your monthly payment amount to all your creditors is based on what your budget says you can afford. Payment of the taxes can usually be delayed while you pay creditors that are even more important to you—such as to save your home or vehicle. If your financial circumstances change, you would generally be able to adjust the terms of your plan to accommodate those changes, all the while protecting you from your tax creditors. Interest and penalties would stop accruing in most cases as soon as the case is filed.
If you owe a fair amount of taxes that would not be discharged in a Chapter 7 case, Chapter 13 is often the safest, calmest, and cheapest way to take care of those taxes.
3. Discharging NON-Support Divorce Debts
Chapter 7 essentially treats all divorce-based debts the same—they cannot be discharged. That includes child and spousal support obligations as well as other divorce-based obligations.
But Chapter 13 is different.
Even Chapter 13 can never discharge a support obligation. Support payment changes can only be made through the divorce court, and even then usually can only change future support obligations, not past ones.
But you may have other, non-support divorce-based obligations. You may hear them referred to as “property settlement” obligations, because they involve the division of marital property and/or marital debt. For example, your divorce decree may have required you to pay your ex-spouse a certain amount to make up for you getting more of the marital property (such as the more expensive vehicle). Or the decree may have required you to pay certain marital debts (regardless who was legally obligated to the creditor).
Although these kinds of non-support property settlement obligations cannot be discharged in a Chapter 7 bankruptcy, they can be in a Chapter 13 one.
They are treated like your other “general unsecured” debts in your Chapter 13 plan. So you generally only need to pay this pool of debts to the extent your budget allows you to do so. And then at the successful completion of your case the unpaid portion is discharged. You often pay only pennies on the dollar, and sometimes nothing at all.
So if you owe a substantial amount to your ex-spouse in non-support property settlement debt(s), look to discharge them through Chapter 13.
4. Vehicle Loan “Cramdown”
Under Chapter 7, if you have a vehicle worth less than the debt against it, you almost always have to “reaffirm” the full balance of the loan if you want to keep the vehicle. That means that you’d be legally liable on that balance in spite of filing bankruptcy—even if later you couldn’t make the payments and had to surrender the vehicle.
Or if you were behind on your vehicle loan payments, you’d have to quickly catch up after filing a Chapter 7 case if you wanted to keep the vehicle.
Both those problems can often be handled very effectively under Chapter 13. If your vehicle loan is more than 910 days (about 2 and a half years) old, and your vehicle is worth less than you owe on it, under Chapter 13 you can keep your vehicle through a process that has come to be informally known as “cramdown.”
In this process the vehicle loan amount is divided between the portion that is secured by the value of the vehicle, and the remaining unsecured portion. Only the secured portion has to be paid in full through the Chapter 13 plan. But it is usually paid at a reduced interest rate, and often the term of the loan is extended, resulting in what can be a much reduced monthly payment.
If you were behind in your payments at the time you filed the Chapter 13 case, you would usually not need to catch up at all.
The unsecured portion of the vehicle loan (the amount in excess of the vehicle’s value) is treated like the other “general unsecured” debts in your Chapter 13 plan. So you generally only need to pay this pool of debts to the extent your budget allows. And then, at the successful completion of your case, the unpaid portion is discharged. You often pay only pennies on the dollar, and sometimes nothing at all on the unsecured portion of the vehicle loan.
“Cramdown” may reduce your monthly vehicle payment by hundreds of dollars a month, and can often save you many thousands of dollars over the remaining life of the loan.