In a Chapter 13 bankruptcy, secured and unsecured loans are treated differently. In a Chapter 13 bankruptcy, secured debts (i.e., loans with a security interest, such as a loan on a house, car, boat, trailer, etc.) are treated in different ways.
Monthly Archives: February 2014
Stripping Away An Unsecured Mortgage In Chapter 13 Bankruptcy
Chapter 13 bankruptcies deliver many benefits to debtors. By electing to be in a voluntary plan, the debtor receives more rights than in, say, a Chapter 7 case. One of these rights is the ability to strip away wholly unsecured mortgages.
Many properties have more than one mortgage or secured loan against the property. These secured loans are ranked in a priority, depending on when they were recorded. Properties only have so much equity. That is, if the value of the property is greater than the lien(s) against the property, the property is said to have equity. Sometimes, a second or even a third lien on property has no equity in which it can attach. This is a situation where the lien is completely unsecured. In a Chapter 13 bankruptcy, this wholly unsecured lien can be stripped away from the property and treated as a general unsecured debt. Lien stripping allows you to get rid of the “wholly unsecured” liens on your property.
Suppose you own a house worth $150,000 and you have a $160,000 first mortgage. In this situation, you have no equity in the house, because the loan is greater than the fair market value of the house. Now suppose you had a second mortgage (or line of credit, or other judgment lien) against the house. This second lien could be stripped away from the property and treated as an unsecured debt in a Chapter 13 (or Chapter 11 case).
The stripped liens will receive the same treatment as your other unsecured debts (such as credit cards, medical bills, payday loans, etc.) in your bankruptcy. In many or most Chapter 13 cases, the unsecured creditors get very little, if anything. So, the end result is that at the conclusion of the Chapter 13 case, the lien go away and the lender will be required to remove it.
Read More: Tax Debts In A Chapter 13 Bankruptcy In Kansas City
Converting A Chapter 11 Bankruptcy Case In Kansas City
Not every Chapter 11 case ends with completion of the Chapter 11 plan. Sometimes, cases are converted to a different chapter of the bankruptcy code. This can happen for a variety of reasons, but most often the issue hinges on what is in the best interests of the debtor. Sometimes the circumstances that existed at the initial filing or at confirmation no longer exist. In these situations, dismissal of the case or conversion to another chapter can be an appropriate remedy.
As a matter of right, a Chapter 11 debtor can convert his or her case to a case under Chapter 7 in many situations. For other situations, court permission must be sought. Court permission would be needed if: (1) The debtor is not a debtor in possession; (2) The case was originally an involuntary Chapter 11 case (this is rare); (3) The case was previously converted to Chapter 11 from another chapter at the debtor’s request.
As a case progresses, sometimes it becomes clear that conversion to another chapter of the bankruptcy code will be necessary. If a feasible plan can’t be proposed or implemented, administrative costs are not paid, the confirmation order is revoked, the plan is in default, or some other unforseen circumstances intervenes, it is good to know that conversion is an option. In some situations, a dismissal of a case followed by a refiling under another chapter is also an appropriate remedy. Everything depends on the circumstances.
Read More: Executory Contracts And Unexpired Leases In Chapter 11 Bankruptcy In Kansas City
Voluntary And Involuntary Chapter 11 And Chapter 7 Cases In Kansas City
The vast majority of Chapter 11 bankruptcies are voluntary, in the sense that the debtor, not the creditors, initiated the filing. However, there are instances where a Chapter 11 petition is filed not by the debtor, but by creditors. Good cause must exist for this to happen. While some creditors may use the threat of an involuntary filing as a collection device, a creditor who filed an involuntary petition against a debtor without meeting the mandatory requirements would be sternly rebuked.
The only chapters under which an involuntary petition may be filed are Chapter 7 and Chapter 11. In a Chapter 7 case, relief comes in the form of a liquidation. In a Chapter 11, relief can be had in the form of a reorganization or a liquidation. Various factors are analyzed to determine which chapter is most suitable to file under.
Regarding grounds for filing, an involuntary petition should allege either one of the following grounds for relief: (1) the debtor is not paying its debts as they come due, unless they are the subject of a good faith dispute; OR (2) that within the previous 120 days before the bankruptcy petition was filed, a custodian was appointed or took possession of the debtor’s property (this is not common).
The first “ground” cited above is the most commonly alleged. It is vague enough that is has been the subject of dispute in various cases, and there is no clear-cut rule as to what constitutes “not paying debts as they come due.” Involuntary petitions are, usually, hotly contested by debtors. A variety of defenses and counterclaims can be alleged by a debtor who finds himself or herself the subject of an involuntary petition. They are quite complicated, and it is important to consult with an attorney to see just what your options are.
Read More: The “New Value Exception” To The Absolute Priority Rule In Chapter 11 In Kansas City
Student Loan Debts In Bankruptcy In Kansas City
It is often heard that “student loans can’t be wiped out in a bankruptcy.” This is not strictly correct. Although it is not the norm, student loans can be discharged in a bankruptcy as long as certain conditions are met. Bankruptcy law is complicated, and involves an interplay of federal and state law, as well as local procedures, and only an attorney knowledgeable in the case law of your location can truly help you.
In the first place, what is an “educational loan” or a “student loan”? An educational loan under Section 523(a)(8) is a loan: for an educational benefit or loan that was made, insured, or guaranteed by a governmental unit, or made under a program that is funded in whole or in part by a governmental unit or nonprofit institution; or it is a debt for an obligation to repay funds that were received as an educational benefit or scholarship.
Tax Debts In A Chapter 7 Bankruptcy Case In Kansas City
A Chapter 7 bankruptcy can be filed either by individuals or corporations. One of the issues that debtors in a Chapter 7 case often face is the problem of owing large amounts income taxes. These income taxes can be either federal, state, or local. To complicate matters further, we often have situations where people have not filed their tax returns for several years. Sometimes the tax authorities will have put liens on properties or have begun to garnish wages of debtors. Trying to figure out the treatment of tax debts in bankruptcy is basically impossible with the help of an experienced attorney. Here’s the IRS’s information page on Chapter 7 bankruptcy, which is so arcane as to be nearly hopeless to decipher:
Luckily, there are better ways of approaching the problem. First, it is important to understand that the IRS (as well as state and local tax authorities) are subject to the automatic stay of bankruptcy, just like any other creditor. When a case is filed, they can’t continue their collection efforts against a debtor. They must stop garnishments and other debt collection activity.
Income tax debts (not sales taxes, withholding taxes, customs duties, property taxes, or other types of taxes) can be discharged in a Chapter 7 bankruptcy if these conditions are met:
- (1) The most recent due date for filing of your tax return for the tax in question must be more than 3 years old;
- (2) You must also have filed a tax return for each tax year which you have back income taxes, at least more than 2 years prior to filing your bankruptcy case;
- (3) The IRS or state taxing authority must also have “assessed” the tax at least 240 days prior to the date you file your bankruptcy case. Assessment generally refers to when you are told you owe the income tax.
- (4) You cannot have filed fraudulent returns, or have willfully evaded the tax. (This is very rare. Most people do not get accused of fraud or evasion by the tax authorities).
Although these requirements are easy to list, in practice they are extremely complicated to analyze. This is something you should do with the guidance of an experienced bankruptcy attorney. For example, regarding requirements (1) and (2) above, the “date” requirements can be complicated to determine, because often people get extensions on their due date for filing a return. And, in some cases, people have unfiled or amended returns. For requirement (3), it is often not an easy matter to know when the taxes were actually assessed.
Section 523(a)(1)(B)(i) of the Bankruptcy Code provides that tax debts with respect to which a tax return or equivalent report or notice was not filed or given are nondischargeable regardless of when the taxes or the return was due. This is what it is so important for a debtor to simply file his or her tax return, even if the tax cannot be paid. Failing to file a return is s commonly encountered problem, but one that should be within the means of debtors. Disputes can arise on occasion as to what constitutes the filing of a tax return for the purposes of Section 523(a)(1)(B)(i). For a document to qualify as a “return”, generally:
- It must purport to be a return
- It must be executed under penalty of perjury
- It must contain sufficient information to permit calculation of a tax
- It must be an honest and reasonable attempt to comply with the tax laws.
See In Re Wagoman, 475 B.R. 239 (B.A.P. 10th Cir., 2012). In general, documents are deemed to be “filed” when they are delivered to and received by the IRS. In addition, the return should be filed by the taxpayer and not by the taxing authority. There are times when the IRS or some other taxing authority will file its own substitute “return” (which generally is completely inaccurate) if the taxpayer has not filed it himself or herself. It appears that the burden is on the debtor to make sure that returns are promptly and accurately filed.
Finally, things can get even more complicated if there are tax liens that have been filed either pre-petition or post-petition. Then we get in to the nuances between in personam liability and in rem liability.
The bottom line here is that income taxes can be, and are, discharged in a Chapter 7 bankruptcy all the time. But analyzing the factors discussed in this article is not as simple as it seems. You need an experienced bankruptcy attorney to help you resolve these issues. Even if the taxes don’t meet the requirements for dischargeability, there are often other avenues that can be used to reduce or lower the tax burden.
Tax Debts In A Chapter 13 Bankruptcy Case In Kansas City
Overland Park Bankruptcy Attorney
The federal tax code and the Bankruptcy Code are two very complicated documents. So you can expect that when you bring these two codes together, the interplay can get extremely complicated. This post will touch on the treatment of tax claims (federal, state, and local) in a Chapter 13 bankruptcy case.
We note first that tax claims are going to be handled differently depending on what type of bankruptcy someone is on. Each chapter (Chapter 7, 13, and 11) has its own separate and specific way to treat tax debts. So, it is very important to begin with this observation. Taxes might get treated one way in a Chapter 13 case, but in another way if a debtor files a Chapter 7 or Chapter 11 case.
When a Chapter 13 case is filed, the creditors are notified of the filing. Tax authorities have a certain period of time in which to file a proof of claim in the case. The proof of claim will show a breakdown of the tax debt. It may be classified as priority unsecured debt, priority secured debt, or non-priority unsecured debt. In other words, the taxes are broken down into different parts. Very often, the priority portion of the tax debt is small, and the non-priority unsecured portion (interest and penalties) is large.
In the Chapter 13 plan, it is a requirement that the debtor pay the priority portion of the tax claims in full, just like any domestic support obligation. However, the nonpriority unsecured portion of the tax claim is included along with all the other general unsecured creditors (credit cards, medical bills, deficiencies, etc.). And this pool of creditors often gets very little in a Chapter 13 case.
In other words, a debtor who has significant tax debt can end up wiping out a portion of his tax debt by doing a Chapter 13 case. He or she can end up paying back only a small portion of the total tax debt. This is a significant advantage. In fact, it is not often appreciated that bankruptcy is one of the most powerful and underappreciated tax management tools out there. You have more leverage and power than you realize.
Section 523(a)(1) of the Bankruptcy Code provides that the following types of debts of not dischargeable:
- Taxes that are accorded as priority taxes under 11 U.S.C. Section 507(a)(8)
- Taxes with respect to which a return has not been filed
- Taxes with respect to which a return was filed within 2 years of the bankruptcy filing date
- Taxes with respect to which the debtor filed a fraudulent return, or willfully attempted to evade or defeat.
If even one of the categories above applies, then the tax would not be dischargeable. Even if the tax happens to be nondischargeable, there are significant advantages to dealing with it through a Chapter 13 or Chapter 11 plan: the tax would be broken down into priority, secured, or general unsecured components, and these different categories would be treated differently. Often the general unsecured portion gets little or nothing. This can get very complicated. In a Chapter 13 case, there will typically be a situation where some of the debt is classified as priority (and is paid through the plan) and some of it is general unsecured (and it is treated the same as all the other general unsecured debt, like the credit cards, medical bills, etc.) In most cases, the general unsecured portions of tax debts in Chapter 13 cases receive little or nothing. The nondischargeability provisions of Section 523(a)(1) and 523(a)(7) are self-exectuting, meaning that it is not necessary for the state or federal income tax authority to file an objection or a request to determine the dischargeability of the debt, or even to participate in the debtor’s case by showing up in court. (A proof of claim would still have to be filed, of course, for the creditor to be paid).
It is important to mention here how critical it is for a debtor to file a tax return in a timely fashion, even if the tax cannot be paid. Delaying or ignoring this responsibility is one of the major problems encountered in this area. A clear way of summarizing the what we have discussed here is the following. These types of taxes will be treated as general unsecured claims in a Chapter 13 bankruptcy case:
- The debt is for income taxes. Payroll taxes, witholding taxes, excise taxes, and other types of taxes do not qualify.
- The return was due at least three years ago. The return should have been due (including all valid extensions) at least three years before you filed for bankruptcy.
- The return was filed at least two years ago. You must have filed the tax return at least two years before filing for bankruptcy. This is one of the reasons why it is so important just to get the return filed, even if the tax cannot be paid.
- The taxes were assessed at least 240 days ago. The taxing authority must have assessed (recorded you as owning the tax) the tax against you at least 240 days before you filed for bankruptcy.
- There was no fraud or willful evasion of taxes. This requirement is self-explanatory.
Again, to emphasize a critically important point, even if a tax does not meet all of the above requirements and is not dischargeable, there are huge advantages to paying it back in a Chapter 13 case: no liens, no garnishments, some of the tax (general unsecured portion) may be wiped out, and peace of mind from knowing that it is being taken care of. Filing a Chapter 13 case is an underappreciated tax management tool, in fact. Experience has shown that the so-called “offers in compromise” that the IRS theoretically offers are only extremely rarely granted. For the vast majority of people with serious tax issues, a bankruptcy presents a much better alternative.
Please keep in mind that the rules regarding taxes and Chapter 13 are very complicated. This article touches on some major themes, but it is critical to consult with us if you have tax issues or questions. Every case is different, and there may be additional complications when people ask for extensions, have missed returns, offers in compromise, etc. It is very important to speak with an attorney at the earliest opportunity, as the tax authorities are unaware of the legal rights you may have. Very often, there will be multiple ways to solve your problem that will need detailed planning and explanation to achieve.
Read More: Tax Debts In A Chapter 7 Case In Kansas City
The Order Of Priority Of Claims And Interests In A Chapter 11 Case In Kansas City
When a Chapter 11 case is filed (business or personal), the debtor’s schedules will list all of the debts and assets. Debts are categorized by priority, in the sense that some debts are accorded more favorable treatment than others. When the debtor’s plan of reorganization is filed, the plan will describe the proposed treatment of the different categories of debt. In a Chapter 11 disclosure statement and Chapter 11 plan, the different categories of debt will be specified with some particularity.
The two main objectives of the Bankruptcy Code are to give the debtor a fresh start and to distribute equally to unsecured creditors what is available of the debtor’s property in a liquidation, or to pay each creditor a pro rata share of their debt according to a payment plan under Chapter 11, 12, or 13. Secured creditors either get their collateral or the value of the collateral in cash. If the collateral is worth less than their claim, then the claim is bifurcated into a secured claim covered by the collateral and an unsecured claim for the remaining portion. The secured claim is paid in full while the unsecured claim receives a pro rata share of any payments to unsecured creditors.
We have found that creditors often do not properly understand the nature of their debt and their treatment in the plan of reorganization, and this can on occasion lead to unnecessary disputes over plan confirmation. The priority of claims and interests carries importance if a “cramdown” type of plan is being proposed. A debtor must be mindful of the absolute priority rule in these situations.
Under the Bankruptcy Code, claims and interests are entitled to payment in the following ranking of priority:
1. Secured Claims. These are claims where the creditor has a lien on some collateral.
2. Priority Unsecured Claims. These are given explicit rankings in detail in the Bankruptcy Code (11 U.S.C. 507(a)). Basically we have here: expenses of administration, maintenance and support claims, unsecured tax claims of the government, and some other uncommon categories.
3. Nonpriority Unsecured Claims. These are general unsecured claims, such as medical bills, deficiencies on repossessions or foreclosures, unsecured lines of credit, payday loans, credit card debts, and private loans. They are often grouped into subcategories in a plan of reorganization.
4. Interests of Equity Security Holders. These are not often encountered, and comprise the interests of shareholders or stockholders. Examples would be holders of preferred stock or common stock.
There are some claims that have priorities above the priority claims listed above that mostly apply to business debtors. Some higher priorities, called super priorities, are listed elsewhere in the Code. For instance, Section 507(b) gives a higher priority to a secured claimant for any lack of adequate protection given by the trustee or the court so that the debtor or trustee could use the creditor’s property contingent on the promise by the trustee or the court that the creditor will not lose any value from its use. If the adequate protection turns out to inadequate, then the difference will be paid as a super priority claim.
A proper understanding of these categories and their priority is important for both debtors and creditors in a Chapter 11 case. Each of these categories will have a hierarchy of rights and privileges in a Chapter 11 plan, and voting rights associated with their position. Not understanding the nature of these rights can lead to unnecessary confusion, and may even impact the ability of a creditor to receive any distribution in a plan of reorganization.
Read More: The Appointment Of A Trustee In A Chapter 11 Case in Kansas City
Appointment Of A Trustee In A Chapter 11 Bankruptcy In Kansas City
In the vast majority of Chapter 11 bankruptcy cases, there is no Trustee as in a Chapter 7 or Chapter 13 case. The debtor is called a “debtor in possession” because he in effect acts as his own “trustee”, to state it one way. He retains control of the assets and business operations during the course of the case. However, there are some situations (described in 11 U.S.C. 1104(a)) where a trustee can actually be appointed after a case is filed:
1. For good cause, such as seriously derelict management of assets before or during the pendency of a case, or
2. If the appointment of a trustee is in the best interests of the estate.
Of course, these situations are not often encountered. In deciding whether to appoint a trustee under the “best interests” rule, the court would have to weigh a number of factors. The final analysis would have to balance the expense of appointing a trustee against the possible savings of the assets of the estate. As a practical matter, the appointment of a trustee in a Chapter 11 bankruptcy case is only going to happen in unusual circumstances. But it does happen, and it is interesting to note the legal effect of such a development:
1. The trustee can now have an active role in running the company, if this is a corporate Chapter 11 case.
2. The debtor’s exclusive right to file a plan is now replaced by the possibility of a proposing his own plan of reorganization.
3. The trustee is vested with the authority to bring actions (adversary proceedings) against other parties on behalf of the business.
4. The debtor loses his exclusive right to convert to a Chapter 7 case (11 U.S.C. 1112(a)).
Because the incidence of a trustee being appointed in a Chapter 11 case is rare, this is not the type of issue that is commonly encountered. However, it is important to be mindful that it does exist. A party seeking such an outcome would have to make a strong showing that a trustee appointment would be to the estate’s benefit, and this is normally an uphill battle.
Property Of The Chapter 11 Bankruptcy Estate In Kansas City
When we speak of the “property of the estate” in a Chapter 11 case, we are speaking of all the legal and equitable interests of the debtor in possession. A Chapter 11 bankruptcy filing is a very powerful tool, and in some ways the property of a Chapter 11 estate is broader and more far-reaching than the estates for other chapters of the Bankruptcy Code, such as Chapters 7 and 13. This can can be a valuable tool for the debtor to use as part of his or her reorganization. In general, the property of the Chapter 11 estate will include the following:
1. All legal and equitable interests of the debtor in property as of the commencement of the case, with some exceptions.
2. All interests of the debtor in community property as of the filing of the case that is under control of the debtor.
3. Any interests in property recovered under certain provisions of the Bankruptcy Code (this is not common)
4. Any interests in property preserved for the benefit of the estate or, in certain situations, transferred to the estate.
5. Property that the debtor may become eligible to receive from an inheritance or bequest within 180 days after filing of the case.
6. Proceeds, rents, or profits from property of the estate.
7. An interest in property that the estate may acquire after the filing of the case. The conditions on this provision can be complicated, and will vary from debtor to debtor.
Although bankruptcy law determines what property of the debtor becomes part of the bankruptcy estate, non-bankruptcy law determines whether the debtor owns or has an interest in property. However, any ipso facto clauses in contracts that deprive the debtor of property because of insolvency or bankruptcy are void—if the debtor would have been entitled to the property except for the bankruptcy, then the property is included in the bankruptcy estate regardless of contract provisions or state law to the contrary.
It may also include post-petition property, depending on the chapter of the bankruptcy. Only property and income included in the bankruptcy estate is available to pay creditors. The bankruptcy estate is a new legal entity that is administered by the trustee or the debtor in possession for the equitable benefit of unsecured creditors of the debtor as of the filing date. Most of the property included in the estate is listed in the bankruptcy petition itself. What is and what is not estate property matters when it comes time to filing the plan of reorganization. The gist of of most Chapter 11 plans is to extend the time for the payment of debts, to effect a percentage reduction in the amount of of unsecured debts (which often receive some sort of fixed “pool” amount, or nothing), or both.
In a future post, we’ll talk about things that are not property of the bankruptcy estate. As with so many things, these rules can be nuanced and complicated, so it is critical to speak to your attorney about questions that may arise.
Read More: Interest Rates In Chapter 11 And Chapter 13 Cramdowns
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