Thanksgiving Week: Giving Thanks for Special Chapter 7 Tools and Tactics
Chapter 7 gets rid of judgment liens and older income taxes, lets business debtors avoid the “means test” and lets you keep a vehicle loan.
Here are 4 aspects of Chapter 7 bankruptcy worth being thankful for this Thanksgiving week.
Discharge of Older Income Tax Debts
You can be thankful that in a Chapter 7 “straight bankruptcy” case some income taxes can be “discharged” (permanently written off) just like most other debts. Yes, federal and state income taxes can be gotten rid of as long as the tax you owe meets a few conditions. Usually you only need to meet two conditions:
1) that the pertinent tax return was due at least 3 years before the bankruptcy filing date (plus any extra time if an extension to file the tax return was granted); and
2) that that tax return was actually filed at least 2 years before the bankruptcy filing date.
So, if all the income taxes you owe fit these conditions, you can discharge all the taxes along with the rest of your debts. Or if you have some older income tax debts that fit the conditions and some more recent ones that don’t, by filing a Chapter 7 case you can discharge the older ones, and then either make arrangements with the IRS/state to pay off the newer taxes through a reasonable monthly payment plan, or to settle or compromise those remaining taxes.
Vehicle Loan Reaffirmation
You can be thankful that, if you don’t want it to be, Chapter 7 bankruptcy need not be an all or nothing procedure. Although you generally must treat legally similar creditors the same, a vehicle loan is special because the debt is secured by a lien on your vehicle. You have a choice of either surrendering the vehicle and discharging the entire debt, or keeping your vehicle and excluding the vehicle loan from being discharged.
You exclude the vehicle loan from discharge by entering into a reaffirmation agreement. That’s a document you sign and file at the bankruptcy court in which you state your voluntary intention to remain liable on the vehicle loan debt. This ability to be selective about how you treat your vehicle loan in a Chapter 7 cases gives you some crucial practical flexibility.
Business Debts Allow You to Avoid the “Means Test”
You can be thankful that, if you are concerned about passing the “means test” because of your income level, you don’t need to mess with that test if the amount of your business debts is larger than the amount of your consumer debts.
The “means test” is essentially an income and expenses test designed for the purpose of determining if you have the “means” to pay a meaningful portion of your debts. If did have the “means,” you could not proceed with a Chapter 7 case. Instead you likely would be required to file a Chapter 13 “adjustment of debts” case. You would not be discharging all or most of your debts in a matter of 3 or 4 months in a Chapter 7 case, but rather would be required to pay as much as you could to your creditors over a 3-to-5-year Chapter 13 case.
But because the “means test” was intended for consumer bankruptcies not business ones, you can avoid taking the “means test” altogether if your debts are not “primarily consumer debts.” That means simply that if the total amount of your business debts is larger than the total amount of your “consumer debts,” you don’t have to take or pass the “means test.”
To be a bit clearer, consumer debts are those “incurred by an individual primarily for a personal, family, or household purpose.” The focus is on the purpose for which you initially incurred the debt. So, if you use what might otherwise seem like a consumer debt for business purposes, it’s counted on the business side of the equation. And again if you don’t have “primarily consumer debts” you can skip the “means test” and file a Chapter 7 case.
“Avoidance” of Judgment Liens
A judgment lien is lien which usually attaches to your home whenever a judgment is entered against you by a creditor through a lawsuit. Once a creditor has gotten a judgment lien, under certain circumstances it can “execute” on its judgment lien, resulting in a forced sale of your home to pay the underlying debt.
You can be thankful that can be prevented by filing a Chapter 7 bankruptcy to discharge the underlying debt (preferably before the judgment lien attaches to your home). More to the point, even after the judgment lien has attached, it can often be gotten rid of forever through the judgment lien “avoidance” procedure.
The real estate to which the judgment lien has attached must be one for which you qualify for a homestead exemption. The judgment lien at issue must “impair” the homestead exemption, which broadly means that it eats into the equity protected by the homestead exemption. For example, consider a $200,000 home with a $160,000 mortgage, a $50,000 homestead exemption, and a judgment lien of $20,000. The $40,000 of equity in the home ahead of the judgment lien ($200,000 – $160,000 = $40,000) is all protected by the homestead exemption. The entire $20,000 judgment lien is all “impairing” this protected $40,000 equity, and so that judgment lien can be “avoided.”
As a result, under Chapter 7 the underlying $20,000 debt would be discharged and the related judgment lien on your home would be “avoided” and released. Both the debt and the lien on your home would be gone.