Chapter 13 of the U.S. Bankruptcy code, can be the last, and sometimes only chance to save your home. But when is Chapter 13 the right choice?
First, some basic facts about what a Chapter 13 can and cannot do. In most cases, a Chapter 13 won’t change the regular monthly payment you are required to make on your home mortgage (or mortgages, if you have more than one). Chapter 13 will not change the interest rate on your mortgage, or stop an adjustable rate from increasing your payment, or prevent a balloon payment from coming due. Shortly after filing Chapter 13, you will be required to resume making regular payments. In addition, you will be required to begin making payments on possible mortgage arrears. A chapter 13 gives you up to 60 months, to catch up on the arrears through their payment plan.
So, if you fell behind on your mortgage payments because you were out of work for a while, or you had unexpected expenses, or your income was interrupted by a tax levy, wage garnishment, or the like, Chapter 13 may be what you need. Chapter 13 will allow you to catch up over time. If you fell behind because you were overextended on other obligations, like car loans and credit card debts, Chapter 13 may allow you to restructure your debt so that you can afford your mortgage payments.
On the other hand, if your mortgage is behind because you just don’t have sufficient income to make the payments, Chapter 13 may not help. Your budget may be too tight because of loss of employment, a disability, or because the repayment terms of your mortgage has changed. If your income has decreased, or if your mortgage payment has been adjusted upward, you may not be able to take full advantage of Chapter 13.
However, chapter 13 can be a valuable tool to save your home in the right circumstances. An honest assessment of your situation, including the realities of your budget, is a vital part of assessing the feasibility of a successful Chapter 13 Plan, and should be part of the discussion with your attorney.
Will bankruptcy discharge my past-due income taxes?
It depends whether you file a Chapter 7 or a Chapter 13. In chapter 7 of the U.S.Bankruptcy code, you can wipe out federal income taxes if all the following are met:
(1) The IRS had not filed a prior tax lien on the assets you own (if they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts);
(2) You didn’t file fraudulently or try to evade paying your taxes;
(3) The taxes are more than three years old; and
(4) Tax deficiencies that were assessed on prior returns were assessed at least 240 days prior to the filing of the bankruptcy.
In a Chapter 13 case, you’ll pay the IRS through the chapter 13 payment plan. Prior to the first bankruptcy hearing, also known as the “meeting of the creditors”, you must file copies of your tax returns or transcript (including unfiled tax returns and any amendments while your case is open) with your case trustee, or any creditor who asks for it. If you do not, you risk an automatic dismissal of your case.
If a federal Notice of Tax Lien has been recorded before filing bankruptcy, it is highly recommended that you seek the advice of an experienced bankruptcy attorney as discharging taxes is far more complicated.
Do I have to pay taxes during my bankruptcy case?
The tax obligations of the person filing a bankruptcy petition vary depending on whether the taxes are dischargeable in the bankruptcy. If they do not meet the criteria mentioned above, they must still be paid. On the positive note; chapter 13 does provide you with a 60 month payment plan, that can be used to amortize tax debt. If you own a home, you must still pay your property taxes as well, since failure to do so may constitute a default on your home mortgage.
For a free consultation on how Chapter 13 or Chapter 7 can work for you, contact Paul Allen at the Law Offices of Paul M. Allen, Glendale office: (818) 334-5445 or Cerritos office, (562) 356-9931. Consultations are free, but only by appointment.
(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)