Portland Bankruptcy Law Group

Discharging Income Taxes through Chapter 7 Bankruptcy

posted on 4.26 @ 11:09 pm

You CAN “discharge” some income taxes, and be relieved of the legal liability for those taxes, in Chapter 7. But any tax debt you are trying to discharge has to meet a number of strict conditions. What are those conditions?

There are four main conditions.

But before describing those four, please clearly understand that this whole area—dealing with tax debts in bankruptcy—is a complex one. We are presenting the information in these blogs to you because the better you’re informed, the more in control of your situation you’ll feel. But part of being well informed is understanding when you definitely need an attorney’s help. Meaning that part of our job is to make very clear when you do. This is definitely one of those areas.

And now, on to those four main conditions for discharging income taxes.

1. Have three years passed since the tax return was due?

Every income tax debt has a due date for the filing of its tax return. That makes calculating whether or not you’ve met this condition very straightforward. But remember the important twist here: if you asked for an extension of time—from April 15 to October 15, usually—the three-year period does not begin until the extended due date for filing the tax.

2. Have two years passed since the applicable tax return was actually filed?

It does not help that a tax is old unless at least two years have not passed since the return was in fact filed. Plus the tax return must have been filed by you, NOT by the IRS or the Oregon Department of Revenue. Such a “substitute for return”—the common procedure in which the tax authority essentially files a tax return on your behalf based on whatever information it has available—that does not count as a filed return to start this two-year period running.

3. Have 240 days passed since assessment of the tax?

Assessment is the tax authority’s formal determination of your tax liability, usually through its review and acceptance of your tax return. In most situations an income tax assessment happens within a few weeks after you file the return. So this 240-day requirement is meaningless then because that period expires long before the above three-year and two-year ones. But sometimes the amount of a tax is in dispute because of a tax audit or litigation in Tax Court, which delays the assessment. By the time the accurate tax amount is assessed, the above three-year or two-year time periods may have passed. That’s where this condition comes into play, only allowing the tax to be discharged if the bankruptcy case is filed more than 240 days after the date of assessment. Also, this 240-day period is put on hold while a taxpayer’s “offer in compromise” is pending. That’s a settlement proposal you make to the tax authority to pay less money or agree to certain payment terms. The idea is that the time should not expire while the government is considering your offer.

4. Have you filed a fraudulent tax return or intentionally tried to evade the tax?

Even if all the required time periods have passed, if you were dishonest on your tax return—failed to include some of your income, for example–or tried to avoid paying a tax some other way, that tax cannot be written off in bankruptcy.

These four conditions should give you a good idea whether any or all of your income tax debts can be written off in a bankruptcy. And in some cases applying these four conditions will tell you one way or the other. But in other cases different considerations can come into play. What if the IRS recorded a tax lien against your home and on your personal possessions? How would a prior bankruptcy affect these timing rules? What about your appeal of a tax? What is considered an honest mistake on a tax return instead of an intentional tax evasion?

Bankruptcy can definitely discharge income taxes in the right combination of circumstances, but you need to have an experienced attorney apply all the pertinent rules to your case.

Can I Keep My Income Tax Refund If I File a Chapter 13 Case?

posted on 4.13 @ 6:01 pm

A Chapter 13 case gives you greater flexibility about what you can do with your current income tax refund than a straight Chapter 7 one does.

As we said in our last blog, if you file a Chapter 7 bankruptcy after the beginning of the year when you’re due a tax refund, and before you receive and appropriately spend it, your trustee is going to be very interested in that refund. It’s your money that the government is simply holding for you until you claim it. That’s true even if you haven’t yet filed your tax return, and don’t know even know the amount of the refund. Whatever the amount, it’s still your money—you just haven’t yet claimed it or calculated the amount by filing the tax return. So unless that refund fits within an exemption, or is small enough to not be worth the trustee’s bother, the trustee is going to get that refund.

Chapter 13 is usually not so rigid.

In a Chapter 7 case, assets that are not exempt—including the non-exempt portion of any tax refund—simply go to the trustee to be distributed to creditors (after the trustee is paid a fee out of it) according to a very rigid formula. In Chapter 13 in contrast, you may be able to use that refund in two very beneficial ways.

First, you may be able to get permission to use the refund, or a part of it, for a necessary, one-time expense. A common example is to pay for a vehicle repair so that you can commute to work. The proposed expense usually needs to be an extraordinary one, a necessity over and beyond your standard monthly budget. And it helps if the expense is mission-critical—you can’t pay your Chapter 13 plan payments without a job and a vehicle that will get you there reliably.

Second, if you are required to pay all or part of the refund to the trustee, in a Chapter 13 case you usually have greater control over where that money will go. We may be able to specifically designate, through some direct language in your Chapter 13 plan, where some or all of that refund would go. Or in other situations, we may well be able to nudge that money in a particular direction that may be more favorable to you, within the latitude provided by Chapter 13 law. For example, a vehicle that you need to keep could be paid off faster than otherwise. Or a child support obligation may be caught up more quickly, perhaps buying peace with your ex-spouse sooner.

But there is a potential downside to Chapter 13 when it comes to tax refunds—future refunds. While Chapter 7 fixates on what assets you have in your possession or have a right to as of the moment your case is filed, Chapter 13 by its very nature is also interested in your future income during the three to five years that you are expecting to be in the case. And for most purposes future tax refunds are considered future income. So, most of the time that means that you must turn over your tax refunds to the trustee while you are the case, to be paid out according to the terms of your plan.

But that may not be a bad thing:

If you usually get large tax refunds, your withholdings very likely need to be adjusted so that you can put that money to use during the year for your regular living expenses. This can be especially helpful if your budget is tight. This would reduce the size of the refunds going to the trustee, minimizing this problem. However, if you’ve relied on this method of “forced savings” to pay for certain larger expenses, changing this will take some adjustment.
Sometimes a year or two into a Chapter 13 case you may need to get permission to use that year’s tax refund for a new special expense, such as, again, for a necessary vehicle repair that costs more than your budget provides.
Even if your refunds simply go to the trustee during the course of your case, sometimes that extra money flowing in is very helpful, or even crucial. Depending on your circumstances, this extra money may:
- finish your case faster;
- pay important creditors more quickly, foiling their efforts to repossess your vehicle or other collateral; or
- prevent your case being thrown out by enabling you to pay it off within the mandatory maximum 5-year period.

Can I Keep My Income Tax Refund If I File a Chapter 7 Bankruptcy?

posted on 4.02 @ 4:48 pm

Whether you can keep your tax refund in a “straight bankruptcy” is mostly a matter of timing.

To make sense of this, first here’s some essential background information.

As of the time your Chapter 7 bankruptcy is filed, everything you own legally becomes part of your “bankruptcy estate.” In most cases, all of those “estate” assets stay in your possession and you remain the owner because those assets are “exempt,” or protected.

That “bankruptcy estate” includes not only your tangible possessions, but also intangible assets—ones that you can’t physically touch, such as money owed and not yet paid to you. If your Chapter 7 case is filed at a time when a tax refund is owed to you, that anticipated refund is an intangible asset of your “estate,” although one that may be protected by an exemption.

So timing determines whether a tax refund is part of your “bankruptcy estate,” and, to the extent that it is, whether you can keep part or all of it is determined by your exemptions.

Timing

What does an income tax refund usually consist of?—your overpayment of payroll withholdings to the IRS and/or the Oregon Department of Revenue during the course of the tax year. So, right after your last paycheck of the year is processed and the last withholding taken from your salary or wages, you have made your last overpayment related to that year’s refund. As a result, even though nobody knows the amount of your refund until your tax return is prepared a few weeks or months later, for bankruptcy purposes that refund is all yours as of January 1 of the new year.

So if your Chapter 7 case is filed after the end of the year but before you have received and spent your tax refund, that refund belongs to your “bankruptcy estate.” That means that the trustee can take it from you if it is not exempt, or can keep the portion that is not exempt. To be clear, this is also true if you have received the refund but still have the check itself or the money from the refund check when your case is filed.

You can avoid having the refund belong to your “bankruptcy estate” by filing your tax return and receiving and appropriately spending the refund before your Chapter 7 case is filed. DO NOT do this without very specific advice from your attorney. The bankruptcy trustee is very interested in any money you receive and precisely how you spend it before filing bankruptcy. It is all too easy to cause major problems if this is not done very carefully.

Exemption

If your bankruptcy is filed so that the refund is an asset of your “estate,” whether or not it is exempt depends on how large the refund is and how much of an exemption is available.

The exemption in Oregon for cash and money owed is quite modest—only $400 per person, or $800 for a married couple filing a joint case. But even that is reduced by any cash or money you have in any checking or savings accounts at the time your case is filed, which you also need to protect. So you can see that the exemption is not very helpful if you are expecting a relatively large refund.

However, to the extent that your refund results from the Earned Income Credit, in Oregon that part of the refund is completely exempt. For many people that can be a major part of their refund, and in fact is often is the entire reason they are getting the refund. So it may be able to protect part or all of your refund.

Even if the refund, or a part of it, is not exempt, the Chapter 7 trustee may still not claim it if he or she determines the amount available is not enough to open an “asset case.” That is, after subtracting any exempt portion, the remaining amount might be small enough that the trustee decides that the benefit of dividing that amount among your creditors is outweighed by the effort and cost involved. It’s just too small to be worth the hassle. You might hear the trustee say at your meeting with him or her that the amount is “insufficient for a meaningful distribution to the creditors.” This threshold amount varies over time, and from one trustee to another, so this is something we will discuss carefully with you if it applies to your case.

Warning

Although we’re focusing now on this because it’s tax season, the same principles apply year-round. Frankly, it can be a little harder to wrap your brain around this as applied to filing a bankruptcy later in the year, after getting and spending your prior year’s refund and long before you start thinking about getting the current year’s refund the following spring. But if you think about it, 3/4ths of the way through the year you’ve had 3/4ths of a year of tax withholdings deducted from your paychecks and forwarded by your employer to the tax authorities. So, assuming that about the same amounts are withheld throughout the year, for bankruptcy purposes about 3/4ths of your refund had likely accrued by 3/4ths of the way through the year. So a bankruptcy filed on, say October 1st, needs to take that into account. Most Chapter 7 trustees don’t push this issue much until the last quarter of the year, when that much more of the refunds have accrued. But be sure to tell us if you have a history of relatively large tax refunds or are anticipating a refund the following year.

If I Have Filed Bankruptcy, Can I File a Bankruptcy Again?

posted on 3.16 @ 7:11 pm

As most people have heard, if you filed a bankruptcy case in the past you have to wait a certain number of years before you can file a new one. The question of how many years of a wait depends on whether the earlier case was a Chapter 7 or 13 case, and also on whether the new case will be a Chapter 7 or 13 case.

Filing Chapter 7 after earlier Chapter 7: 8 YEARS. If you filed an earlier Chapter 7 case, and received a discharge (legal write-off) of your debts in that case, and now want to file another Chapter 7 case, you have to wait 8 years. That 8-year period is counted from the day that prior case was filed with the Bankruptcy Court, NOT when it was finished, until the new case’s filing date.

We emphasize that this rule only applies if that earlier Chapter 7 case was completed up through the discharge of your debts. Almost all consumer bankruptcy cases result in the granting of a discharge, so it is unlikely that your prior case did not. But in rare situations cases get dismissed (thrown out), and so do not result in a discharge. In that case, the 8-year time period was never triggered, and you can file anytime. If you still have any of the paperwork from your earlier case, bring it in and we’ll look it over. If you don’t still have the paperwork or it’s incomplete, we can usually find what we need through our electronic access to the Bankruptcy Court. Just be sure to tell us that you had an earlier case.

Filing Chapter 7 after earlier Chapter 13: 6 YEARS. If you filed and received a discharge in an earlier Chapter 13 case and want to file a Chapter 7 case now, you have to wait 6 years from the day that earlier case was filed to the day this new case is filed.

Same as above, this restriction does not apply if your old Chapter 13 case did not make it all the way to the discharge. This is much more common in Chapter 13 than Chapter 7, so this is something we want to be sure about. So again bring in whatever you have on that earlier case, and we’ll also check with the court records.

Notice here too that the six-year period starts at the FILING date of the old Chapter 13 case. Since successful Chapter 13 cases can take as long as 5 years, and sometimes even a few months longer, as a result the time between the completion of such a case and the point when a new Chapter 7 can be filed could be as short as a year or so

Filing Chapter 13 after earlier Chapter 7: 4 YEARS. If you filed an earlier Chapter 7 case and received a discharge in that case, and now want to file a Chapter 13 case, you have to wait 4 years. And yes, that’s 4 years from filing date to filing date.

Filing Chapter 13 after earlier Chapter 13: 2 YEARS. If you filed an earlier Chapter 13 case and received a discharge in that case, and now want to file another Chapter 13 case, you have to wait 2 years. One last time, that’s 2 years from earlier filing date to new filing date.

There’s an important twist to these last two time periods, which we’ll cover in our next blog but are mentioning here to avoid being misleading. It arises quite rarely, but adds another weapon to our arsenal of options. In fact you CAN file a Chapter 13 case earlier than the 4-year and 2 year time periods we just told you about. But if you do so YOU DON’T GET A DISCHARGE of your debts in that new Chapter 13 case.

Multiple Bankruptcy Filings Can Disqualify You from the Crucial “Automatic Stay”

posted on 3.02 @ 11:15 pm

The automatic stay protects you and your property from your creditors when you file bankruptcy. But you can lose that key benefit of bankruptcy under certain rare circumstances. Because those circumstances are at least in part under your control, this blog will help you avoid them.

In our last blog we wrote about the automatic stay, and listed four special classes of debts or legal procedures which are excluded from the protection of the automatic stay—criminal fines and fees, certain domestic relations proceedings, child and spousal support, and certain procedures by the taxing authorities. But today we’re talking about a situation in which the automatic stay doesn’t just fail to apply to some specific creditors. It does not get triggered by the filing of your case AT ALL, as to ANY of your creditors. Or the automatic stay gets triggered with the filing of your case as usual, but then it automatically expires after 30 days unless the court affirmatively extends it.

So what are those circumstances that you absolutely want to avoid?

As the title of this blog indicates, these dangerous circumstances involve previously filed bankruptcy case(s) filed in your name within one year before the filing of your new bankruptcy case. So if you have not had any prior bankruptcy cases filed within the last year, which were then dismissed, then you don’t need to worry about this.

But before you stop worrying, be careful: think back over the last year and make sure about this. Sometimes people file a bankruptcy on their own, thinking that they can handle it without an attorney, or because there is some creditor emergency. Then they fail to finish the paperwork or pay the filing fee or show up to the hearing, so their case gets dismissed. A few months later they figure they didn’t “really file” because the case never got anywhere. Or a similar thing might happen if you were represented by an attorney but there was not good communication between you and the attorney’s office, resulting in a case getting filed and then dismissed. If there is any realistic chance that either of these occurred for you, be sure to tell us so we can check the court records.

So here are the rules about this:

1. IF you filed TWO OR MORE prior bankruptcies in the year before the one you are about to file, AND those prior cases were dismissed, the automatic stay does NOT go into effect at all with the filing of your new case. The automatic stay MAY go into effect AFTER the case is filed, but only if the bankruptcy judge is convinced that certain standards have been met.

2) IF you filed ONE prior bankruptcy in the year before the one you are about to file, and that prior case was dismissed, the automatic stay EXPIRES 30 days after the filing date, unless the bankruptcy judge is convinced that certain standards have been met before then.

The purpose of these rules was to stop “serial bankruptcy filers,” those who filed multiple bankruptcy cases. This was usually done to repeatedly delay a foreclosure or some other creditor action, which was seen as an abuse of the bankruptcy process. The specific standards which would then have to be met to convince the judge to impose or preserve the automatic stay are beyond the scope of this blog, but have to do with proving the lack of such abuse. They involve justifying why the previous case(s) was (were) dismissed, and/or showing how your circumstances have changed so that the present case won’t get dismissed.

Again, these circumstances don’t often occur. But since the consequences can be very harsh, be sure you talk with us about any possible prior bankruptcy filings at the very beginning of our first meeting.

Special Creditors Who Are NOT Stopped by a Bankruptcy Filing

posted on 2.17 @ 6:16 pm

Filing a bankruptcy stops every act by your creditors to determine or to collect their debts against you or your property. That is, except for those by certain kinds of creditors chasing very specific kinds of debts. Because this protection from your creditors—called the “automatic stay”—is usually such an effective and anticipated tool against your creditors, it’s very important to know when it doesn’t apply. The last thing you want is to count on a creditor being stopped only to find out that it isn’t.

Before getting into these exceptions, we emphasize that for most people the automatic stay DOES apply to ALL their creditors. In those cases the filing of their bankruptcy case DOES put a stop to ALL collection efforts by their creditors.

On the other hand, the kinds of debts NOT covered by the automatic stay are not that rare. You might have one of them. They include the following:

1) Criminal: If you owe a criminal fine or restitution, or have to pay probation or other ongoing crime-related fees, a bankruptcy filing does not affect your obligation to pay these. And if at the time your bankruptcy case is filed, you are in the midst of a criminal proceeding, that will continue, whatever stage it is at– indictment, criminal trial, or sentencing. This includes not just felonies and misdemeanors, but also lesser matters like traffic infractions that you might not think of as “criminal.”

2) Divorce and family court: Your ex-spouse, or about-to-be ex-spouse, or somebody on his or her behalf, can start or continue a variety of divorce and family court proceedings against you regardless of your bankruptcy filing. These include legal procedures to establish paternity of a child, determine or change the amount of child or spousal support to be paid, settle child custody or visitation issues, address domestic violence disputes, and even dissolve the marriage. A divorce case IS stopped by a bankruptcy to the extent that it deals with the division of property between the spouses—meaning the division of BOTH assets and debts.

3) Child or spousal support: If you owe ongoing support, no matter what kind of bankruptcy you file the person to whom you owe it can continue collecting it. If you owe back support AND file a Chapter 7 case, the person to whom you owe the support CAN STILL continue or start collecting it. This includes not only collection through wage withholdings and garnishment of bank accounts, but also through seizure of a tax refund and suspension of a driver’s license, an occupational or professional license, or even a hunting or other recreational license. In contrast, a Chapter 13 filing can stop these aggressive methods of collecting back support.

4) Taxes: Taxing authorities have to stop their collection efforts against you on taxes that you owe at the time your bankruptcy case is filed. However, your bankruptcy filing does NOT prevent them from starting or finishing a tax audit, sending you a notice that you owe taxes, demanding you to file your tax returns, or assessing your taxes.

These are by no means the only exceptions to the automatic stay, but are the most common. If you are involved in a court proceeding or are the target of collection efforts by the criminal or taxing authorities, or by an ex-spouse, be sure to tell us when you first contact us. These special creditors often have an influence on your best legal course of action, so we need to know about them quickly.

Flexibility in the Length of Your Chapter 13 Case

posted on 2.04 @ 11:39 pm

In our last blog we told you how your “income” determines whether your Chapter 13 Plan will be scheduled to last 3 years or 5. You have just a little bit of say about what your “income” is for that purpose, and thus about how long your case will take to finish. However, you and your circumstances have a lot more say about how long your case actually does last, based on how much your budget says you can afford to pay into your Plan, and how successfully you end up making the payments as scheduled.

Your “income”—that is, the very specialized definition of that term that we explained in our last blog—sets the initial ground rules. But if those ground rules say that you may do a 3-year Plan, you are still allowed to set up your Plan to take longer IF it is in your best interest to do so. So, if your budget does not leave you enough money each month to pay into your Plan the amount that you would need to finish in 36-months, you are allowed to lower the Plan payments and stretch them out over a longer period. This doesn’t generally cost you any more or give any more money to the creditors (except maybe a little more interest, and that happens only in certain cases).

This flexible aspect of Chapter 13 also applies if your circumstances change during the course of your case. If your income qualifies you for a 3 -year Plan, and your initial budget shows that you can afford to pay what you need to within the 3 years, a year or two later your circumstances may change so that you cannot pay as much into your Plan. Your Plan payments could then be lowered and stretched longer, as long as a total of 5 years if necessary.

For better or worse this flexibility does not extend beyond a maximum of 5 years. Your Chapter 13 Plan cannot be set up to last more than 5 years, neither at the beginning nor by amendment if circumstances change. That’s why a Plan that starts as a 5-year one cannot be stretched any longer. In some circumstances the payments may be reduced, as long as all the obligations under the Chapter 13 case are accomplished within the original 5 years.

Common sense says that if you do not make all the payments required by the Plan as approved by the bankruptcy judge, your case will not be completed within the time originally expected. As you can imagine, if you miss Plan payments your creditors aren’t getting paid when they thought they would, so they won’t be happy. Those with collateral—vehicles, real estate—may well want to be allowed to repossess or foreclose on the collateral. Your case could go in various unintended directions, including how long it would take to complete, assuming that it could still be completed. If the case does survive, there’s a good chance that this would happen through an “Amended Plan,” which would have a new payment schedule and a new anticipated completion date.

What Determines the Length of Your Chapter 13 Case?

posted on 1.20 @ 7:00 pm

You might have heard that Chapter 13 cases are supposed to take from three to five years to complete. That’s a big difference. What decides how long it is going to be?

There are three main things that determine the length of your case:

1. Your recent total income

2. Your present and anticipated budget

3. How consistently you will make your Chapter 13 Plan payments

We’ll cover the first one of these in this blog, the other two in the next one. In each of these three you have at least some theoretical control over the length of your case, a theme we’ll come back to.

When we just said that “recent total income” is the first thing that determines the length of your case, we’re talking about a very particular definition of “income.” First, this income is calculated by looking at the precise amount of income received in the 6 FULL calendar months before your Chapter 13 case is filed.

Second, this income does not just include taxable income, but also income from virtually any source: regular wages and salaries, bonuses and commissions, all business or self-employment income, pension or retirement, child and spousal support, rental or any other kind of investment income, and any other sources. For most purposes, the only kinds of money that do NOT count are payments received under Social Security, both retirement and disability benefits.

Third, the total income of this 6-month period is divided by 6 to average these and arrive at the so-called “Current Monthly Income.” Multiply that by 12 to come up with an annualized income amount. Then compare that amount with the published current Median Income for your state for the size of your family. If your annualized income amount as described here is LESS than the applicable Median Income, then you qualify for a 3-year Chapter 13 case (or a Chapter 7 case, if that is the better option). If your income is the same as or MORE than the Median Income, then you are stuck with a 5-year case. Here are the current Median Income amounts for Oregon:

Family Size Median Income

1 $42,877

2 $52,316

3 $57,429

4 $66,616

For larger families, add $7,500 for each additional family member of the household. These amounts are for bankruptcy cases filed on or after November 1, 2011; the next adjustments will likely be in March 2012.

So, being over or under these Median Income amounts, even just slightly, determines whether you are required to pay into your Chapter 13 case for three years instead of five years, a huge difference in time and money.

Considering this major impact, let’s finish by going back to what I called “some theoretical control” that you may have over the length of your case. Most people don’t have much control over how much income they receive in the six months before filing bankruptcy, but sometimes they have just enough control to get below the Median Income. By a combination of reducing or delaying some source of income and careful timing of the filing of their case, this rather artificial kind of “income” can in some cases be reduced to be less than the applicable Median Income.

This will make the most sense with an example. Let’s say that 5 months ago you received an unusual chunk of money—a back support payment, a bonus from work, an insurance settlement, or from cashing in some retirement fund. As long as the date that you received those unusual funds is within the last 6 full calendar months, it is artificially increasing your “income” for purposes of calculating the mandatory length of your Chapter 13 case. But if you are able to wait until that unusual payment is no longer in the 6-month look-back period, this will likely lower your “income,” possibly low enough to slide under the crucial Median Income amount, enabling you to do a 3-year case (or file a Chapter 7) instead of a 5-year one.

This can come up in all kinds of ways, not just money from a single lump sum. When you come in to talk with us, if you are a good candidate for Chapter 13 we will calculate your “income,” see if you are close to the Median Income amount, and if so will discuss with you whether it would be in your best interest to change the timing of your filing.

Creative Uses of the Homestead Exemption

posted on 1.07 @ 2:47 am

If you file a bankruptcy as an Oregon resident, the homestead exemption protects the first $40,000 of equity in your home, $50,000 if you’re married and both of you are on the deed to the property. With the slide in home values of the last several years, most people thinking about bankruptcy don’t have more equity than these amounts. Many have no equity at all, and so they may think they are not helped by the homestead exemption at all. But this exemption is more flexible and powerful than you might think, as the following examples show.

1. Broad definition of “homestead” creates opportunities:

The homestead exemption covers a lot more than equity in the conventional stand-alone house. If you have an ownership interest in and are living in a manufactured home, whether or not you own the land it sits on, and whether or not it is permanently attached to the land, any equity you have in that home (up to the same $40,000/$50,000 limits) is exempt. That also applies to a floating home or houseboat, as well as a mobile home, again as long as actually living in it when your bankruptcy case is filed. In fact you don’t even need to be living there as long as it’s the home of your spouse, or “dependent child” or “dependent parent.”

This exemption may apply even after you’ve sold your homestead: the proceeds of that sale are protected by the homestead exemption as long as your intent is to use those proceeds to acquire another homestead, and in fact you do so within one year.

Even if you own NO real estate at all, but have paid in advance on a residential lease, your “leasehold interest” is also protected. So is any money you’ve paid in advance on a month-to-month rental—first and last month’s rent and any refundable deposits.

2. Judgment lien avoidance:

If there’s a judgment against you, that judgment very likely creates a lien against your real estate. Liens usually have to be paid eventually, and may give the holder of the lien the power to foreclose on your real estate in order to force you to pay. If that real estate is your home, AND if the amount of equity in that real estate (before accounting for the judgment lien) is no more than the applicable $40,000/$50,000 limit, then either a Chapter 7 or Chapter 13 bankruptcy will likely enable you to “void” that judgment lien—take it permanently off the home’s title.

Overall, what’s important is that with the continued slide in market values in most neighborhoods of Portland and the surrounding areas, the protection provided by the homestead exemption has effectively expanded. Homes that may not have been fully covered by the exemption may well now be covered, and judgment liens that could not have been fully avoided may now be avoidable.

Don’t Surrender Your Vehicle or Let it Get Repossessed Before Talking with a Bankruptcy Attorney

posted on 12.24 @ 12:10 am

You may figure that with a vehicle loan it’s a take-it-or-leave it proposition—that in bankruptcy you either keep the car and keep on making payments on it, or you surrender it and get to write off any unpaid balance. The above is generally true, in a “straight” Chapter 7 bankruptcy.

But, in a Chapter 13 case you may be able to keep a vehicle you thought you couldn’t afford to pay for. Under certain conditions, you could pay less each month AND pay less over time, and at the end still own the vehicle free and clear.

Hanging onto a vehicle that you desperately need, but can’t afford the monthly payments on, puts you into a dreadful predicament. This is especially true if you have already fallen behind, and are worrying about your vehicle disappearing courtesy of the repo man. You know the contract requires you to make the payments or you lose the vehicle. You might even be trying to find a cheap replacement vehicle, talking to friends or relatives, but really worried sick about getting an unreliable vehicle. On the other hand, a part of you might also be looking forward to letting go of the vehicle you really can’t afford. That’s especially true if the vehicle is worth less than the loan balance.

But what if you could reduce what you have to pay for the vehicle down to fair market value? And lower the payments to an amount you could afford, while at the same time reducing or eliminating what you have to pay to your other creditors? We call that a “cramdown.”

You can do a vehicle loan cramdown in a Chapter 13 case if you meet two main conditions:

1) you got your vehicle loan more than 910 days before the Chapter 13 case is filed (that’s just about two and a half years); and

2) at the time your Chapter 13 is filed, your vehicle is worth less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan. We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the payment amount needed to pay off that smaller balance, sometimes at a lower interest rate than the contract rate, and often on a longer remaining term, which often results in a radically reduced monthly payment. You pay that each month as part of your Chapter 13 Plan.

So what happens to the “unsecured portion” of the debt—the part beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts. How much that part gets paid depends on everything else going on in your case. But in many situations, you do not need to pay anything more to your unsecured creditors as a result of your vehicle loan cramdown. The same amount you would otherwise pay to your unsecured creditors—if you are required to pay anything at all—would just get divvied up among them differently.

One more sweet twist: if you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t have to catch up on that arrearage. It’s just part of new reduced “crammed down” obligation. You just make your new Plan payments, and not need to worry about scraping up the missed payment.

As you can see, before you surrender a vehicle or allow it to be repossessed, you need to see if you qualify for a cramdown. If you do, and we show you what the monthly payment would be reduced to, and how much less you would be paying for the vehicle over time, THEN you can make an informed decision about whether this cramdown makes it possible and worthwhile to keep that vehicle.

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