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Recent Blog Posts
Leases that Are Actually Secured Purchases
A "lease" of furniture or other consumer goods may actually be a disguised purchase. If so, through "cramdown" you can pay much less on it.
Our last blog post was about your bankruptcy options on leases of personal property—such as furniture or electronics. Your basic options are either to “accept” the lease or else “reject” it. When “accepting” the lease you keep possession of the property and must accept ALL of the lease’s terms and obligations. When “rejecting” the lease, you surrender the property and ALL of the remaining lease debt is discharged—legally written off. It’s all or nothing.
But what if that lease is really just a disguised purchase over time, with the “leased” property as collateral? If so, that may give you some major advantages. There can be a big difference in the bankruptcy consequences leasing something instead of buying it on time.
Unexpired Leases and Other Executory Contracts in Bankruptcy
Unexpired leases and executory contracts can continue on after you file your bankruptcy case. What are they and what makes them special?
Debt Contracts
Most debts arise out of a written contract. You sign a credit card application agreeing to pay according to the stated terms. Go to a new doctor and you sign a form agreeing to pay for all services to be provided. Buy furniture, appliances, or electronics at a retail chain store after agreeing in writing to pay for the goods purchased. Buy a vehicle and sign the lender’s loan document. Buy a home and sign dozens of mortgage documents.
In all these situations the creditor provides you money, goods, or services which you agree to pay for. At that point the creditor has finished performing its obligation. Now you are supposed to perform your side of the bargain—to pay the debt.
Executory Contracts and Unexpired Leases
Statutory Liens
Statutory liens on your home cannot be gotten rid of in bankruptcy like judgment liens often can. So it’s important to know what they are.
Statutory Liens Are Rare, Sort of
There’s a good chance you don’t have any statutory liens on your home. But you may.
- Has the IRS or your state recorded a tax lien against your home for unpaid income taxes?
- Have you had a dispute with a roofer or some other kind of building contractor resulting in a contractor’s or mechanic’s lien?
- Are you late on monthly dues or special assessments to your homeowner association, resulting in a lien against your condo?
These are the most common kinds of statutory liens on your home.
What Is a Statutory Lien?
The U.S. Bankruptcy Code says that “the term ‘statutory lien’ means [a] lien arising solely by force of a statute on specified circumstances or conditions.” (Section 101(53).) A statutory lien is essentially created automatically, by operation of a statute, without further action by a court.
Objecting to a Proof of Claim to Defeat a Creditor
If your liability dispute with your creditor spills into your Chapter 13 case, the bankruptcy court may be a good forum to fight it out.
Our last three blog posts were about objecting to a creditor’s proof of claim in a Chapter 13 case. Today we look at situations when this is the most important part of your case.
Bringing a Liability Dispute to the Bankruptcy Court
It’s not unusual that a dispute with a single creditor forces a person into bankruptcy. Often it’s just one otherwise ordinary creditor which is more aggressive than the others, suing you ahead of the others, and then garnishing your paycheck or bank account.
Sometimes it’s not just any extra-pushy creditor, but rather one that you’ve been fighting for quite a while. The fight you are having with that creditor may be the main reason why you filed bankruptcy.
Maybe you were in a serious vehicle accident, and did not have enough insurance coverage. You are being accused of causing the accident but don’t believe you were its primary cause. Because of major injuries to others you potentially owe hundreds of thousands of dollars.
Objecting to a Creditor's Proof of Claim in Chapter 13
If you object to a creditor’s proof of claim in your Chapter 13 case, and prevail in that dispute, you pay nothing on that debt.
Our last blog post was about what happens to creditors who fail to file a proof of claim on time in a Chapter 13 "adjustment of debts" case. The creditor’s debt receives no payment through your Chapter 13 plan, and the debt is discharged—written off.
There’s another way to achieve this same result. Your bankruptcy lawyer can object to a creditor’s proof of claim if you don’t owe the debt as stated.
If the Creditor Does Not Respond to the Objection
Creditors sometimes file proofs of claim that are clearly not legally valid. Your debt may no longer be collectable because the statute of limitation has expired. An ex-spouse may owe the debt on which you’re not liable. Someone with the same name as you may owe the debt instead of you.
In these and similar situations your lawyer would likely file an objection to the proof of claim. Otherwise the legally invalid debt would be treated as a legitimate one. That illegitimate claim could share in whatever you are paying other similar debts under your Chapter 13 payment plan.
Creditor's Failure to File a Proof of Claim in Chapter 13
If a creditor doesn’t file a timely proof of claim on a debt in your Chapter 13 case, you pay nothing on that debt.
Our last blog post was about Chapter 13 “adjustment of debts” cases in which you don’t pay anything on any of your “general unsecured” debts. In parts of the country where that’s allowed, those debts are fully and forever discharged after you pay nothing. That’s a pretty good debt “adjustment.”
But that can happen only in certain circumstances, with certain combinations of debts, assets, income and expenses. What’s much more common is a Chapter 13 case in which you would pay nothing only to certain creditors. That happens often because creditors regularly fail to file their proofs of claim on time with the bankruptcy court.
Sometimes that has little or no effect on how much you pay into your Chapter 13 plan before it’s completed. But sometimes it makes a huge difference. It could potentially save you lots of money, or even significantly shorten the time you’re in your payment plan.
Potentially Pay Nothing to Most Creditors in Chapter 13
In some jurisdictions you can pay nothing to your "general unsecured" creditors, if all your money goes to paying higher priority ones.
We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13. We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.
A Conventional Chapter 13 Plan
The U.S. Bankruptcy Code’s official name for Chapter 13 is "Adjustment of Debts of an Individual with Regular Income." In most cases that "adjustment" means you must pay something to all or most of your creditors.
Here’s the way it usually works. You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining "disposable income." That remaining amount is usually what you pay into your Chapter 13 plan each month.
In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your "general unsecured" debts get what’s left over.
The Financial Effect of Surrendering Collateral in Chapter 13
If you are concerned that in a Chapter 13 case a debt resulting from surrendered collateral will cost you more, often it won’t.
Secured Debts in Chapter 13
In a Chapter 13 “adjustment of debts” case you have the option of keeping or surrendering collateral.
Whether it’s your home, your vehicle, or any other collateral, Chapter 13 gives you powerful tools for keeping that collateral.
But in spite of that, sometimes the best option is still to surrender that collateral. You may have overextended yourself buying a vehicle whose payments and insurance you can no longer afford. Or you’ve learned that it’s a lemon and not worth the constant repair costs. Or you bought a home that you’re so far behind on that it’s not worth the cost and effort to catch up, even if Chapter 13 gives you a lot of time to do so.
Secured Debts Turned into Unsecured Ones
Secured Creditors' Proofs of Claim in Chapter 13
If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan.
Secured Debts
A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.
Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)
Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien. Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.
"Pre-Petition" and "Post-Petition" Debts in Chapter 13
There are various ways of dealing with debts that arise during the course of your Chapter 13 “adjustment of debts” case.
On Monday we wrote about debts that arise before filing a Chapter 7 case and those that arise after filing. Those that arise before filing—“pre-petition” debts—are included in the “straight bankruptcy” Chapter 7 case. If they are the kind of debts that can be written off in bankruptcy (“discharged”), then they are. Those debts that arise after filing—“post-petition” debts—are not included and are not discharged.
A Chapter 7 case usually takes only about 4 months to complete. There is nothing in the law preventing you from incurring new debts at any time. On the other hand a Chapter 13 “adjustment of debts” case takes 3 to 5 years. You are usually not allowed to incur new debts during that time except with court or trustee permission. Also, your payment plan is based on a budget that usually does not have room for paying any new debts. So Chapter 13 presents some special issues in dealing with pre-petition and post-petition debts.
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