It’s tax time and the hunt goes on for tax deductions to lower your income tax hit.

Tax deductions lurk in the most unlikely places.

If your Chapter 13 plan is catching up home loan arrears, look at your trustee’s annual report for some deductible mortgage interest.

Most likely, the lender’s filed proof of claim in the bankruptcy case is interest on the loan which accrued but was not paid before the case was filed.

Lender’s claim loaded with interest

Until very late in most 30 year mortgages, a substantial amount of each monthly  payment on your home loan  is interest.  That mortgage interest can be deducted if you itemize deductions.

For reasons that I can’t explain, mortgage lenders do not seem to provide a 1099 for mortgage interest paid through the trustee.  But then, the whole business of accounting for mortgage payments made through Chapter 13 seems to be beyond most loan servicers.

How to find the deductible amount

All Chapter 13 trustees have information available on line for debtors whose cases they are administering.  Usually, the instructions for how to access the information about your case is provided at the 341 meeting.

Find the section of the trustee’s site that shows disbursements or payments.  Locate the claim filed by your lender, or its servicer.  The report will show how much has been disbursed on that claim.  You’ll have to isolate what’s been paid in the last tax year.

If you can’t sort the information for disbursements in a given period, you can look at the ledger of all disbursements;  flag and total the payments to your lender.

Making a record

The IRS relies on 1099 forms sent to them, with copies to the taxpayer, to verify your right to the deduction.  Since the lenders don’t seem to acknowledge Chapter 13 payments as interest, you’re on your own to back up your claim for a tax deduction.

I suggest that you get a copy of the bank’s proof of claim, print off the trustee’s disbursement records, and save them along with a copy of your plan with your supporting tax documents.  You’ll want to be able to back up your tax deduction.

Other deductions hiding in the underbrush

The same principle, that payments by the trustee are really payments attributable to you, the tax payer, applies to any deductible taxes or business expenses that the trustee has disbursed.  There is no reason to let those tax deductions go to waste.

Happy hunting.

Image courtesy of bethanne.

One of the most stubborn myths about bankruptcy is the one which says that chapter 13 requires full payment of all your debts over 60 months.  If true, this would indeed rule out chapter 13 for most consumers.  After all, what good would come from being granted 60 months to pay off all your debts?  If you can’t afford your payments now, how in the world could you afford your payments if you had only 60 months to pay them?  This myth about paying your debts in full in chapter 13 is, happily, only a myth.

In fact, the law says something quite different: in chapter 13, your monthly plan payment is based on what you can afford.  Then, and at the end of the chapter 13 case (either 36 or 60 months), all the remaining balances on your debts are wiped out, just like in chapter 7.

You might wonder how that can be fair to your creditors, but the answer is easy, and the law gives it full recognition – your creditors were slated to get absolutely no payment in a chapter 7, weren’t they?  So how could it be unfair to pay them a dividend consisting of what you can offord, in a chapter 13?  This is especially true when the law requires that you pay what you can afford into your chapter 13 plan, after paying all your reasonable monthly living expenses.

And no, there isn’t any catch-22 lurking in chapter 13.  Congress would not have bothered to enact chapter 13 if you had to pay more than you could afford as a monthly payment, because no one would be ever file chapter 13 if that were so.  Also, lawyers wouldn’t steer clients into chapter 13 if the monthly payments were not possible for clients living in the real world to pay.

So think about it — maybe chapter 13 wouldn’t be such a bad idea for you after all.  There’s no means test to worry about, you can get rid of more debts in a chapter 13, and your case is often subject to less scrutiny by creditors than a case under chapter 7.  And whatever your reason for choosing chapter 13, you can be sure it will solve your debt problems just as effectively as a chapter 7.

Photo used by permission from Fried Dough.

It is a real accomplishment to complete your Chapter 13 case.  In an environment where jobs come and go, unexpected expenses can pop up and more than two-thirds of all Chapter 13 plans fail, anyone who fulfills the terms of his Chapter 13 plan should take pride in this milestone.

Be aware, however, that making trustee payments for five years may not be enough to get your Chapter 13 discharge.  As I previously wrote on this blog, every Chapter 13 debtor must obtain a Financial Management certificate and submit through counsel a certificate of completion for this post-filing educational course.  If you do not submit the certificate, your case will be closed without the issuance of a discharge thereby potentially leaving your exposed to post-bankruptcy collection actions.   If you choose to ask the court to reopen your case so that you can file the financial management certificate you will incur additional time and cost.

A second possible hurdle arises from Bankruptcy Code Section 1328.  This Code Section precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid.   In the Northern District of Georgia, where I practice, every Chapter 13 debtor receives a Section 1328 certificate to complete as their case winds down.

If you state on your certificate that a domestic support (i.e. child support or alimony) was not paid, then the judge will have to hold a hearing to determine whether your failure to pay is beyond your control or not.  If the judge finds that your failure to pay these domestic support obligations is not excusable, your case will close and you will not get your discharge.

Sometimes it can be tempting to ignore an issue if no one is saying anything and no pressure is being applied.   In the case of child support in Chapter 13 you cannot ignore the obligation even if the custodial parent or child support enforcement is saying and doing nothing.  Otherwise you could end up with a sterling five year payment history in your Chapter 13 but no order of discharge to show for your efforts.

Bankruptcy!  I don’t want to file bankruptcy!

Hey, if you do want to file, there is something wrong with you.

But you want to keep your house?  Avoid foreclosure?

Which option hurts more:  losing your home, or, filing bankruptcy?

We humans make decisions based on our emotions:  we shy away (or run, if you are like me) from what hurts, and seek what gives us pleasure.

In spite of what I have had state court judges tell me, that there no longer is any stigma to filing bankruptcy, that is not how my clients feel.

It feels like a complete failure; breaking promises, dishonorable.

Some people cannot face the perceived shame of filing bankruptcy and kill themselves.

I am not emotionally invested in my client’s decisions on these matters, other than my strong desire that they benefit from my assistance.

Either way, you need to do the cold calculations, a real budget, how much do you have to work with, how much will it cost to do what you want to do.

There is always a  money trade off with these choices, for instance, if you meet with me and tell me keeping your house is priority number one, if I said would you pay $1 million dollars for your house, I bet you would say no.

In the old days, back when homes were worth more than we owed on them, (gosh, seems like a long time ago, doesn’t it?) most Chapter 13 bankruptcy cases were filed to stop a foreclosure and give you time to catch up on the missed payments, up to five years.

These days, most Chapter 13 bankruptcy cases are still filed to stop home foreclosure, but, in a quite different way:  lien stripping.

This option is only available if your home is worth less than what is owed on the first mortgage, and you have two, or more, mortgages.  Many of my clients are able to file a Chapter 13 payment plan, and make a plan payment that is equal to, or even less than, their second mortgage payment.

Which is scarier, foreclosure, or Chapter 13 bankruptcy?

Consult an expert bankruptcy attorney before you decide.

image credit:  dreamstime

When a creditor obtains a court judgment against a debtor, wage garnishment can be soon to follow.  Most persons subjected to wage garnishment will consult a lawyer to see if it can be stopped, and many of those will file either chapter 7 or chapter 13 bankruptcy to stop the wage garnishment.  While stopping a garnishment through an immediate bankruptcy filing is often a good idea, care must be taken to avoid filing bankruptcy too soon.

This might sound a bit strange — after all, if one’s wages are being garnished, and if filing bankruptcy will put an end to this hemorrhage of dollars into the creditor’s pocket, shouldn’t the bankruptcy lawyer be asked to sprint to the courthouse with the bankruptcy petition?  Wouldn’t a speedy bankruptcy filing bring the paycheck right back to where it should be?  Yes, but often there more to this question than meets the eye.

Section 522(h) and section 547 of the bankruptcy law allows a debtor to recover money involuntarily taken from him or her in the ninety days preceding the bankruptcy filing.  These sections apply to wage garnishment, and they are often used to recover money garnished before a bankruptcy filing.  Of course, this results in a happy bankruptcy debtor, who has just discovered that he or she actually made money, in a sense, by filing bankruptcy and the recovering the garnished funds.

However, there is a catch: section 522(h) and section 547 can only be used in this way if $600.00 or more was garnished before the bankruptcy filing.  To put it another way, if $600.00 or more was garnished before the bankruptcy was filed, then all the funds can be recovered by the debtor; if less than $600.00 was garnished before the bankruptcy was filed, then the creditor gets to keep the money.

As you can now see, this is where the bankruptcy debtor needs to get the timing right.  It might be a mistake to file the bankruptcy right now if, for example, $550.00 has been garnished from the paycheck, because then the debtor will be unable to the money back.  Often, in this example, if the debtor can stand to wait until one more paycheck is garnished, then the total garnished before bankruptcy can be manipulated legally into a figure exceeding $600.00.  This will often allow the debtor to recover every penny of the garnished funds.

The possibility of recovering garnished funds will mean that a decision has to be reached between the debtor and the bankruptcy lawyer regarding exactly when to file the bankruptcy case.  Filing the case too soon would be a shame, if less than $600.00 has been garnished and if waiting a short time would enable the debtor to recover the money.

Furthermore, the strategy discussed here makes sense only if the debtor can claim the recovered funds as exempt in the bankruptcy.  If no exemptions are available to allow the debtor to retain the funds, then waiting to file the bankruptcy is probably a bad idea and will result only in further suffering for the debtor.  And, of course, if more than $600.00 has already been garnished, then waiting to file bankruptcy will not help the debtor either.

The point is simply this: discuss the timing of the bankruptcy filing with your lawyer to avoid filing the case too soon to meet the $600.00 threshhold, and avoid missing the chance to recover the wage garnishment.

You want to save your home. Which is the best way to stop a foreclosure, get caught up on your monthly payments, and save your home? Is it loan modification? A workout? Or a bankruptcy?

A recent article, “The Home Ownership Experience of Households in Bankruptcy” by Professor Sarah W. Carroll, of the University of Pennsylvania Law School and Wenli Li, of the Federal Reserve Bank of Philadelphia, provided the first in-depth analysis of the home ownership experience of home owners in Chapter 13. Its conclusions mirror what most bankruptcy attorneys’ personal experience has been: Chapter 13 is one of the most effective ways to let you save your home.

The study followed homeowners who filed for Chapter 13 between 2001 and 2002 in New Castle County, Delaware, from the time of their filing to October 2007. (Since most Chapter 13 plans last five years, this was a fair trial period.) After analyzing the data, it found two important results:

First, the Chapter 13 filing was not always the solution: 27.9 percent of filers lost their houses in foreclosure despite filing for bankruptcy. This is typically a result of poor cashflow. If job loss, or illness continues and there is not enough money coming into the household, the house will be lost regardless of filing bankruptcy or not. Many of the homeowners in this group will end up converting their cases to one under Chapter 7, so that they can wipe out any personal liability for the mortgage(s), as well as most of their other debts.

However, when compared with homeowners who did not file, debtors who filed for bankruptcy were able to stay in their homes for, on average, 27.7 additional months, over two years. This figure includes those who ended up losing their homes.

So, if you’re behind on mortgage payments, consider a Chapter 13–it may let you stay in your home a lot longer than other options.

The full article can be found here.

The words Mortgage Modification and/or Mediation and Bankruptcy were never used in the same sentence because we all know that a debtor in Chapter 13 bankruptcy cannot use the Bankruptcy Code to modify a primary mortgage on their residence.  However, in the wake of this economic challenge, the winds of change are blowing, and we are starting to see cracks in the old walls.  Now, Bankruptcy Judges are creating the changes they wish to see.

In Orlando, Florida, the Bankruptcy Judges, Chapter 13 Trustee, Debtors Attorneys and Creditors Attorneys started a mediation program to assist debtors who wanted to save their homes.  Under the current Bankruptcy Code and existing case law, this may be impossible under certain circumstances, however, there is nothing in the Bankruptcy Code or existing case law which prohibits the parties from a mutually agreed modification of the mortgage.  So far, the program has seen a great deal of success.

Mediation is an alternative dispute resolution process where the parties come together in a totally open atmosphere.  There is confidentiality without fear of reprisal.  The parties meet across a conference table and each side gets to present his or her version of the issues and possible solutions under the guise of an experienced mediator.  The mediator is a neutral third party who is there to help the parties come to a mutual agreement.  The mediator is not there to assist the parties in the presentation of their arguments.

The best part of mediation for the debtor is that a mediation may present the one and only time that a debtor can express himself and the problems that they have been having open and honestly without fear that their words will hurt them to a person who is a decision maker from the mortgage company.  I know that many individuals who are behind on their mortgages express their anxiety and stress about having to deal with the mortgage company and never speaking to the same person, or that the person who they are speaking with was not a decision maker.  Mediation provides the debtor with a forum for clarifying the issues and really laying out a plan for a modification concurrent with their existing Chapter 13 Plan.

The program is now spreading to the other three divisions of the Bankruptcy Court in the Middle District of Florida (Tampa, Jacksonville, and Fort Myers).  Of course, each Bankruptcy division will have its own uniqueness about it, but the overall goal of each program is allowing a debtor to mediate his or her mortgage claim while still maintaining the protections of the Bankruptcy Court.

By using the program designed by the Bankruptcy Court, the benefits will receive outweigh any detriments in my opinion.  A debtor who chooses this path will have the opportunity to demonstrate to the mortgage company why keeping their home in a Chapter 13 bankruptcy is not only reasonable but financially a good decision.  Likewise a creditor shall have the opportunity to see the debt0r’s financial position and why the creditor will be paid first before any other unsecured creditors.

I believe it is a win – win for the debtors and creditors.

In Re Vandenbosch answers the question of whether a Chapter 13 Debtor must include their social security benefits in the determination of monthly income in Southwest Florida.  In the past, debtors were required to use their social security to repay creditors claims in their bankruptcy plans.  This was a very unfair practice in my opinion, and therefore, The Dellutri Law Group decided the issue needed to be heard by an appellate court.

In a very recent opinion, Judge Steele of the U.S. District Court in Fort Myers, Florida overruled the Bankruptcy Court decision to include Social Security Benefits into Disposable Monthly Income.  In the case of In Re Vandenbosch, one of the issues on appeal was whether a debtor who receives social security benefits must include those benefits as part of their income in the determination of available monthly income.  Judge Steele ruled that a Chapter 13 debtor does not have to include their social security benefits in the calculation of monthly income.Disposable monthly income is determined by looking at a Chapter 13 debtor(s) income from all sources and then subtracting all of their ordinary and necessary expenses.  The money leftover is the debtor’s disposable monthly income.  In a Chapter 13, the debtor or debtors must turnover all of their income to the Chapter 13 Trustee for distribution to the unsecured creditors.

When the debtor’s disposable monthly income included social security benefits, this put the bankruptcy code at odds with the social security statute.  The social security statute clearly states that benefits are exempt from creditor’s claims.  Logically, it seems that these exact same benefits should not be used to pay the claims of creditors during a bankruptcy proceeding.

In a prior post on Bankruptcy Law Network, Attorney Wendell Sherk, noted the exact same issue before the 8th Circuit Bankruptcy Appellate Panel.  The 8th Circuit came out with the same conclusion, that social security should be excluded from disposable income; however, the Court there did not look at the bad faith issue.  Judge Steele found no bad faith in the Vandenbosch decision.

Why and How Bankruptcy Courts came to the determination that social security benefits should be included in disposable income was shocking to me.  Now that the issue has been decided by Judge Steele many other people, senior citizens on social security included, should be looking at the benefits of Chapter 13 bankruptcy.

Without having to include their social security benefits into the determination of disposable income, a person or couple who receive social security benefits repayment plan could look much different now than they did a couple of months ago.

Section 1322 of the Bankruptcy Code allows a debtor to assume an unexpired lease, such as for an apartment or car, in their Chapter 13 case. This right is subject to the provisions of Section 365 of the Code, which provide:

If there has been a default in an executory contract or unexpired lease of the debtor, the [Chapter 13 debtor] may not assume such contract or lease unless, at the time of assumption of such contract or lease, [he]–

(A) cures, or provides adequate assurance that [he] will promptly cure, such default [other than, in general, a nonmonetary default];

(C) provides adequate assurance of future performance under such contract or lease.

I’ve edited the section to highlight the point I’m making in this article, which is that to assume a defaulted lease in Chapter 13 a debtor must cure or convince the Court that he will “promptly” cure the default. Moreover, the debtor must convince the Court that he will be able to make the regular payments going forward. The latter will usually be satisfied by evidence of post-petition payments and a feasible plan. However, the first requirement is a bit more murky.

Most Chapter 13 debtors will want to do it this way: Insert plan provision assuming their desired lease and pay out the arrears over the plan term. However, if challenged by the lessor, such a provision may not be considered a “prompt” cure within the meaning of Section 365. There has been little litigation on this issue, but some courts have examined the issue of what constitutes a prompt cure under these circumstances. For example, the court in the case of in re Reed, 226 B.R. 1 (Bankr.W.D.Ky. 1998) held that a six-month cure was required to assume a defaulted car lease and satisfy the requirement of promptness. Other courts have held that longer cures are permissible. See, e.g., in re Coors of N. Miss., 27 B.R. 918 (Bankr.N.D.Miss. 1983) (three years).

If a court is inclined to allow only a short cure period, a real problem is that in most jurisdictions (including here in Massachusetts) plan confirmation and accompanying distributions will take longer than any short cure period. There are ways to deal with this in the face of pressure from the lessor. Two approaches would be to file a motion for an interim distribution to the lessor from the trustee or to carve out direct payments to the lessor before plan confirmation in addition to regular lease payments. Either approach should work as long as the debtor has sufficient income to make the regular lease payments plus the cure payments (either via the trustee or directly) in the amount of time that the court considers “prompt.” Like many terms in bankruptcy, and the law in general, what is “prompt” is a flexible term that, in practice, vests wide discretion in the court to do what it thinks is fair under the circumstances. Since a Chapter 13 debtor usually will need a car or home in order to earn a living and make plan payments, I expect that most courts will be generous in the amount of time they allow debtors to cure lease arrears.

2011 has been called “The Year of the Natural Disaster”.  We have seen deadly tornadoes, massive floods, billion dollar blizzards, devastating drought, East Coast earthquakes, and Texas wildfires…oh my!

Millions of Americans have had their lives seriously disrupted this year.  Many of them were in Chapter 13 bankruptcy cases at the time of the disaster, and had to not only to pick up their lives, but also had to decide what to do with their Chapter 13 case.

Chapter 13 cases usually last between 3 and 5 years.  When you file a Chapter 13 you don’t always know what will happen in your life in the upcoming years.  Often there are unplanned events that cause the best Chapter 13 plans to fail, or need serious adjustment, which is one of the great advantages of a Chapter 13 over other forms of bankruptcy.

Such is the case in my area of the Southern Tier of New York State, where we had our second “500 year flood” in the last 5 years.  Here are some examples of the issues some Chapter 13 Debtors have had since the September 8^th flood:

1. The flood damaged three properties belonging to one Chapter 13 debtor.  She had severe damage to her residence, and suffered a near total loss to a rental property and to her business property.  She must now make decisions on what to do with each of the properties.  She had flood insurance for $203,000 on her residence, but the insurance company will only give her 50% of that figure and estimates are $147,000 for the repair.  She has been told to get an SBA loan for the remaining cost, but because she is in the Chapter 13, SBA will not loan to her.  The other two properties were being partially paid in the bankruptcy.  She will probably have to modify her Chapter 13 plan to surrender these properties.
2. One couple had no flood insurance for the damage to their finished basement.  FEMA said they would not help because their particular damage came from water runoff from the hills, not directly from the flood.  They will have to do all of the needed clean up and repair out of pocket, but all of their disposable money is designated to go to the Chapter 13 Trustee.  They have asked and received permission to skip their September and October payments to the Trustee, but that is not going to be enough to cover the costs.
3. Another couple had more damage to their home than FEMA is willing to give them, so they will have to walk away and file a modification to their Chapter 13 plan to surrender the property and stop paying arrears in the plan.
4. One Chapter 13 debtor is not paying mortgage arrears in her plan, but still owes close to what the house was worth prior to the flood.  She is hoping that her house is condemned so she can get a buy-out.  In the meantime her family has moved into her Mother’s house and wants to use the FEMA money she received to fix up her mother’s house so they can live in it permanently.   They also lost a car in the flood and want to use the insurance money to replace the car, if the trustee will allow it.
5. One couple had flood insurance and received $10,000 to replace their furnace, hot water heater and electrical system.  The insurance check was made out to them and their bank, but their bank will not release the money without making them go through many additional procedures because they are in a bankruptcy case.
6. One unfortunate woman had planned to sell her home and get a smaller home.  She had received permission for the sale from the bankruptcy court, and had a closing scheduled two days after Tropical Storm Lee came through.  The closing was cancelled and the home was destroyed.  FEMA gave her $33,000, which is only a fraction of what she had expected from the closing.
7. An elderly Chapter 13 couple received $26,000 from FEMA to make home repairs.  Instead, they want to walk away from their seriously damaged home and use the money to move into a senior housing unit.
8. Another Chapter 13 debtor who had flood insurance also received a two party check to her and her mortgage company.  The bank will not disperse any money until all of the work is completed, but she can’t come up with any money to lay out for the repairs.  To make matters worse, the property is a duplex and cannot be lived in until it is fixed up and approved by the town code department.  She not only has to live with her family, but has lost her rental income which she needs to keep up with her payments to the trustee.
9. One problem several Chapter 13 debtors are facing is that a month after the flood, they are still waiting to hear from FEMA and/or their town as to whether there will be any buyouts offered for their condemned former residences.

Many of the millions of people who were affected by natural disasters this year will be speaking to bankruptcy attorneys to find out their options.  Others, may feel that they shouldn’t consider bankruptcy under any circumstances.  If you know people like that, do them a favor and suggest that they find out all they can about ALL of the options open to them.  A trained, experienced bankruptcy attorney can help people through many of the difficult times that inevitably follow a natural disaster.