The majority of the time when a discharge is not timely entered, it is due to a clerical oversight either by the Bankruptcy Trustee or the Court Clerk. If you used an attorney to file your case, contact your attorney and inquire as to the status of your case. If you did not use an attorney (or used a cheap attorney that abandons you have the trustee meeting) contact the Bankruptcy Clerk of Court where your bankruptcy petition is filed and inquire as to the reason why no discharge has been entered. If lack of discharge was due to a clerical oversight, the Court Clerk can fix that in a matter of days.

By Matt Berkus

I have a fairly strong personality and conviction, but even I have a hard time with spending temptation. We all say it to ourselves, what is another $2 here, or $5 there. I deserve that glass of wine after work, or I just don’t feel like making dinner. Well, it does add up. My “excuse” is convenience. As an attorney, I am very sensitive to time and I value every minute and try to be as efficient and effective as possible. But in reality, if I don’t spend the time now to conserve money, I may have all the time I want in the future, but no money.

The Solution

Remove the ability, remove the temptation. It really is true that common sense is not all that common. The solution is surprisingly simple. Don’t carry with you any means to pay for anything; it’s the only way I found that actually works. When you get home tonight, remove all your credit cards, debit cards, ATM cards from your purse or wallet. If you have more than $20 cash, deposit it back into your checking account. If less than $20, just spend it down; sort of ease into going cold turkey on spending. This exercise may be a real eye opener and will test you; it is very likely you may feel the psychological symptoms of withdrawal. On the weekend, feel free to put back the cards and run your errands, but during your work week, leave your spending ability at home.

Now, if you truly are addicted to miscellaneous spending, this exercise may require further changes. If you eat out for lunch every day, you will need to start preparing lunches and bringing lunches and snacks with you. But other than that, most of the miscellaneous day to day spending is lifestyle fluff and certainly not a necessity. Also, you will need to give a little forethought to buying gas for your car when you notice fuel getting low.

One final point, if your first instinct is to scoff at this solution and you start coming up with excuses not to do it, that is called denial. So, if you say something like, “what about emergencies;” you more than anyone need to try this exercise for a week.

By Matt Berkus

Authorized Users are just that, authorized by the primary borrower to use an account. If the primary borrower files bankruptcy, in most states, that act absolutely, positively has no impact on the Authorized User. The Authorized User is not liable for the debt and the bankruptcy absolutely should not appear on the authorized users’ credit report. However, in some states, a spouse can be liable for a debt if the debt was incurred for a family purpose, but generally, an authorized user is not responsible for the account.

Co-signers, on the other hand, are in big trouble if the primary borrower files bankruptcy. A co-signer, as the name implies, signed for the loan; the co-signer essentially acts as a guarantor for the primary borrower. If the primary borrower files bankruptcy or otherwise defaults, the lender may pursue the cosigner to the full extent of the law for the debt. The primary borrower’s bankruptcy should not appear on the co-signer’s credit report, but the lender will seek payment from the co-signer.

If the primary borrower files chapter 13 bankruptcy, the cosigner is protected from collection activity while the chapter 13 bankruptcy is active. This protection is known as the Codebtor Stay and is authorized under bankruptcy code section 1301, but is only applicable if the debt in question is consumer debt. However, unless the debt is paid in full within the chapter 13 bankruptcy, once the bankruptcy is discharged, the creditor will pursue the cosigner.

Word to the wise, if you cosign a debt, be darn sure you can pay it. After all, there is a reason the lender is asking for a co-signer, the lender views the primary borrower as high risk, as should you.

By Matt Berkus

Presently, as of 10/2011, the debt limits are as followed

Unsecured Debt: $360,475

Secured Debt: $1,081,400

There are, of course, other eligibility requirements; but the debt limits can be a stumbling block, when, for example, a debtor has a large 2nd mortgage he is trying to eliminate in chapter 13 bankruptcy; that 2nd mortgage becomes unsecured debt for purposes of debt limits.

There are different timelines depending on which chapter of bankruptcy you previously filed, also the timelines run from the filing dates, not the discharge date. Here are the rules:

-Chapter 7 to Chapter 7 = eight years (727(a)(8))

-Chapter 13 to Chapter 7 = six years (727(a)(9))

-Chapter 11 to Chapter 7 = eight years (727(a)(8))

-Chapter 7 to Chapter 13 = 4 years (1328(f)(1))

-Chapter 11 to Chapter 13 = 4 years (1328(f)(1))

-Chapter 13 to Chapter 13 = 2 years (1328(f)(2))

The timelines listed above relate to discharged first bankruptcies, this post is not about refilling a case that was dismissed.

As a side note, Deuteronomy 15:1 commands that debt be forgiven every seven years.

By Matt Berkus

Foreclosures, short sales, and modifications take time. Anyone who has beat his head against the wall trying for a mortgage modification can attest that for most people, it can take many months and sometimes over a year. Foreclosures in most states take about 9 months and in the areas hardest hit by the real estate bust (Nevada, Florida, Arizona, etc) foreclosures are taking one to two years.

The Mortgage Debt Forgiveness act relates to the tax implications of forgiven mortgage debt. If your home forecloses (or you short sell), and the home is worth less than the balance due on the mortgage obligations, and the bank decides to forgive the debt, the IRS treats that amount as taxable income. So if you owe $200,000 on your home, and the bank forecloses and sells the house for $150,000, that $50,000 difference is taxable income (I know, you’re surprised). The Mortgage Debt Forgiveness Act exempts the deficiency from being taxable income if the deficiency results from a foreclosure or short sale of a primary residence between calendar years 2007 to 2012. But, banks are not required to forgive mortgage debt; in most states, banks can try to collect the balance from you.

As you can see, if you live in a state with a prolonged foreclosure cycle, you could be hit with a nasty tax bill if the foreclosure finalizes in 2013. So, if you have any inkling that you will be walking away from your home, get that process started.

Given the banks’ inherent reluctance to modify mortgages in the first place, I can certainly imagine that as the expiration date looms closer, the banks will delay modifications and start laying off the employees in those departments. So unless HAMP gets extended, there is probably only a 9 to 10 month window from today to attempt a modification. Long term, the jury is out on whether the homeowners that received modifications will ultimately avoid foreclosure or short selling their home.

However, there are still options. Bankruptcy eliminates mortgage deficiency balances; so long as you file bankruptcy in the same tax year as the foreclosure/short sale, you not only eliminate the deficiency, you eliminate its status as taxable income; you kill two birds with one stone. Also, bankruptcy can completely eliminate 2^nd mortgages and HELOC’s. Although bankruptcy cannot modify the terms of your first mortgage, bankruptcy can eliminate your other debt, possibly eliminate your 2^nd mortgage to give you the best opportunity to keep your home and financially recover.

By Matt Berkus

The IRS filed a substitute for return on my behalf but later I filed the original tax return, can that tax debt be discharged in bankruptcy?

Answer:

If the taxpayer replaced a substitute for return with a taxpayer filed return (an original return), that tax becomes eligible for discharge in bankruptcy assuming all discharge rules are otherwise satisfied.

If a taxpayer goes long enough without having filed a tax return, the IRS will eventually file a tax return on behalf of the taxpayer so the IRS can assess a tax and collect. This IRS filed return is called a Substitute for Return. This outcome is not good because a substitute for return only provides a minimal deduction, so the tax due is usually inflated. In general, it is always advisable for the taxpayer to file a return and replace the substitute for return filed by the IRS.

Certain taxes can be discharged in bankruptcy, see this article. One of the rules is the 2 year rule. The 2 rule states that to discharge income tax in bankruptcy, the required tax return must be filed 2 years or more before the bankruptcy filing date (Bankruptcy Code 523(a)(1)(B)(ii)). It is well settled that a Substitute for Return does NOT count as a filed return for purposes of the 2 year rule. So, to discharge an income tax debt related to a substitute for return, the taxpayer must file an original tax return and wait 2 years to file bankruptcy [assuming all other discharge rules are satisfied].

By: Matt Berkus

The CURRENT fees are as follows:

Chapter 7: $299

Chapter 13: $274

As of November 1, 2011, the NEW fees will be the following:

Chapter 7: $306

Chapter 13: $281

For cash strapped debtors, Bankruptcy Rule of Procedure 1006 provides an option to pay the filing fee in installments and in some circumstances (very low, low, income) waive the filing fee. But beware, if you opt to pay the filing fee in installments and miss a payment, then your bankruptcy case is automatically dismissed.

By Matt Berkus

Other notable chapter 9 filers include Orange County, CA and Vallejo, CA. Many commentators are speculating that several major cities may need chapter 9 relief in the near future.

Historically, chapter 9 bankruptcy is used by smaller towns or municipalities after suffering an adverse judgment or loss of its major economic center (e.g. factory closing). For example, Westfall Township, PA filed chapter 9 after it lost a lawsuit against a real estate developer and the court awarded the developer a judgment of $20,000,000. Westfall had a population of less than 2,500, so its tax base was too small to pay that judgment. The Wall Street Journal cites James Spiotto of the firm Chapman and Cutler stating that there have been 48 chapter 9 bankruptcies since 1980.

Chapter 9 bankruptcy is fairly unique in the bankruptcy code; it doesn’t operate like other bankruptcies. The court does not liquidate assets or interfere with city government; the city can even incur more debt (assuming someone is willing to buy the bonds) after the bankruptcy is filed; and there is usually little involvement by the U.S. Trustee. In essence, chapter 9 bankruptcy is a forced negotiation. It is used to bring all the parties to the table to work out a plan that everyone can live with; meaning, for the town to wrest favorable concessions from its creditors. Ultimately, the bankruptcy judge will give final approval to any chapter 9 plan.

By: Matt Berkus

One of the requirements of chapter 13 bankruptcy is that the debtors have a regular source of income, but the code does not specify any minimum. So, the question is one of practicality, not legality. As is my custom, I tried to come up with some objective, easy to follow rules; the three “C’s.” The 3 C’s represent the ascending chances of success a debtor has in chapter 13 bankruptcy depending on their income. The criteria below are applicable to mortgage payments in the range of $1,000 – $2250 per month.

Confirmable: For a single person, with no car payment, gross monthly income should be at least double the mortgage payment, but they need to be out hustling for a higher paying job. If the debtor’s income is at least double the mortgage payment, we can usually craft a confirmable chapter 13 plan. Confirmable means that we can get the plan approved by the court, but the debtor needs to be seriously disciplined to live within a tight budget.

Confident: For a married couple or for a single person to have a confident chapter 13 plan, gross monthly income should at least be triple the mortgage payment. Confident means that baring a drastic change in income, the chapter 13 plan should succeed.

Comfortable: For a comfortable chapter 13 plan, the debtor’s gross monthly income should be at least quadruple the mortgage payment. Comfortable means that the debtor should have no issue completing the chapter 13 plan.

There are lots of creative ways to file a chapter 13 bankruptcy to save a house; cases have been filed where the person had zero income but a very high likelihood of employment in the near future. But as a goal, to have a successful chapter 13 bankruptcy, the debtor should aim for having gross income that is at least 4 times her mortgage payment.

Matt Berkus