All about debts
Secured debts are monetary obligations that are backed by a lien. The most common secured debts are mortgages and automobile loans. However, there are other types of debts that may fall into this category as well. The following are a few examples:
1. Liens on furniture and other household items. Let’s say you purchased your refrigerator or stove from Sears using a Sears credit card. It is very likely that you signed a sales slip granting Sears a lien on these items. Similarly, if you purchased a dirt bike on a Yamaha credit card, the lender probably has a lien. These liens do not have to be recorded anywhere in order to be effective. They are essentially considered “automatic liens” as soon as you signed the sales slip. In a Chapter 7 case, it is very unlikely that a creditor is going to be interested in taking back your furniture or appliances. However, when we prepare your bankruptcy petition, we still need to disclose that there is a lien on these assets. Depending on the amount that you owe and the significance of the asset, we may have you “reaffirm” the obligation to the creditor. (The concept of reaffirmation will be explained later.) Alternatively, we may simply advise you not to reaffirm the obligation if we feel that it is unlikely that the creditor will ever take any action to repossess it.
2. Real estate taxes, water charges and user fees. Real estate taxes automatically become a lien on your real estate as soon as they are assessed. In fact, real estate taxes are given such importance under the law that they actually take priority over your mortgage, even if the mortgage was recorded many years earlier. It is because of this lien that most banks require an escrow component to your mortgage. They want to make sure that the taxes are paid on time every year to prevent the accrual of a lien that could weaken the position of the mortgage obligation. If you are behind on any of your real estate taxes, it is important that you let us know.
Similarly, water bills and municipal trash collection fees (such as the City of Buffalo User Fee) automatically become liens on your property as they are incurred. If you happen to live in the City of Buffalo and are behind on these charges, it is extremely important that you let us know. The City of Buffalo has become incredibly aggressive in pursuing foreclosure action on unpaid taxes, water bills and user fees. In fact, last year they commenced more than 4,000 foreclosure actions, and some of these were for less than $1,000.00.
3. Money judgments. If a creditor takes the drastic measure of suing you for an unpaid debt, the creditor may eventually obtain a money judgment against you. This judgment gives the creditor certain rights, one of the most important of which is a lien against any property that you own in the county where the judgment is transcribed (recorded at the County Clerk’s office). Although obviously this is not a voluntary lien like a mortgage or car loan, it basically has the same effect on your property. If you attempt to sell or refinance your real estate, the judgment lien has to be paid off. If you are subject to any collection lawsuits, or know that you have money judgments against you, you should let us know. In most cases, we can remove judgment liens against your home. With the new bankruptcy exemptions, we might be able to remove them against non-homestead property as well.
If you are not sure whether there are any recorded judgments against you, you can contact your local county clerk’s office and ask them to do a search for any unsatisfied judgments against you. If the judgment lien is not eliminated during your bankruptcy case, you may be stuck with it for up to 20 years. Although it is possible sometimes to reopen your bankruptcy case to remove a judgment lien about which you were not aware, this is not always easy. For example, in Rochester, the Court will typically not allow a judgment lien to be avoided unless an appraisal or market analysis dated within one year of your bankruptcy filing is submitted. So, if we have to open your case five years after your bankruptcy, there may not be a properly dated appraisal available, and you may be permanently stuck with a lien that could have been completely eliminated if handled within weeks or months of your original bankruptcy filing.
It is the responsibility of the bankruptcy attorney to eliminate judgment liens against your home, but the attorney can only remove these liens if he or she knows about them. Remember, a quick phone call or trip to your local county clerk’s office will give you absolute certainty on this issue.
4. Federal and state tax liens. If you have unpaid federal or state income taxes, sales tax, or withholding tax, it is likely that the taxing authorities will eventually file a tax lien or “warrant” against you. In most cases, these liens are effective against all of your property, not just your real estate. There are no exemptions under state or federal law that protect you against tax liens. Therefore, if you have such liens, we must develop an effective strategy for you to deal with them. We are generally not too concerned about liens on personal property because we have yet to see the IRS or New York State enforce these liens against common household items. If the lien is against a vehicle of significant value or, of course, against your home or other real estate, then we will have to work with you to develop a strategy to pay the debt.
If the amount that you owe to the IRS or the State exceeds the value of your property, then we can probably eliminate the lien to the extent that it exceeds the value. The rest of the lien can be dealt with in the context of a Chapter 13 plan, or we can advise you how to set up payment arrangements with the IRS or the State to pay off any secured balance that survives the bankruptcy.
As the term implies, there are certain debts that are given priority over others in a bankruptcy case. It should come as no surprise that a claim by the IRS for a tax debt is treated better than a credit card claim. It is important that we discuss the priority debts that you owe because, in most cases, these types of debts cannot be discharged. Therefore, if they are causing an immediate problem (for example, you are being garnished by the IRS), you may be better off filing a Chapter 13 bankruptcy to give you up to five years to deal with the priority claim.
The most common priority debts encountered in a typical consumer bankruptcy case are as follows:
1. Income Tax Debts. Although many people think that tax debts can never be discharged in bankruptcy, it is actually possible to eliminate certain types of taxes in a bankruptcy case. The “discharge/ability” of taxes in general will be covered later. However, as a general rule, personal income taxes are both non-dischargeable and priority for the three years prior to the filing date. The three year period is measured from the due date for the tax bill rather than the date on which you filed the return. So, for example, if you owe taxes for calendar year 2007 and filed the tax return on time, the due date for the tax bill would have been April 15, 2008. On April 15, 2011, the tax debt would become dischargeable in either a Chapter 7 or Chapter 13 bankruptcy case. Until the three years pass, the tax debt cannot be discharged and it is considered a priority debt. The same general rule applies to state personal income taxes.
2. Sales Tax Debts. The second most commonly encountered tax debt is sales tax. Unfortunately, state sales tax can never be discharged in any type of bankruptcy case, and it remains a priority debt indefinitely. The Statute of Limitations under NYS law for tax debts is generally 20 years, but there are exceptions to this rule. If you have outstanding sales tax debt, we will often recommend that you file a Chapter 13 bankruptcy because at least the Chapter 13 process will allow you to stop the interest from accruing on the obligation. In addition, in many cases, the penalties that have accrued on the sales tax debt up to the date of filing can be discharged as well.
3. Payroll Taxes. If you own a business or owned one in the past, you may have outstanding payroll taxes. A distinction has to be made between taxes that you owe as the employer and those that you withheld from your employee’s paycheck. The employer’s share of the payroll tax can be discharged under the same three year rule mentioned above. However, taxes that you withheld from your employee and were supposed to turn over to the Federal or State Government are considered “trust fund” taxes. Like sales tax, they can never be discharged in a bankruptcy case, and they are entitled to priority status regardless of the age of the tax.
4. Child Support, Alimony and Maintenance. The bankruptcy laws provide very strong protection to individuals who are owed money for child support, alimony, and maintenance. These debts are always considered priority debts, and there is no statute of limitations under Federal or State law for the collection of these debts. If you file a Chapter 7 bankruptcy, these debts cannot be discharged. However, during the three months or so that the case remains open, there is a stay of enforcement for past due child support and maintenance obligations (not ongoing obligations). Although Chapter 13 can be used to spread out any child support, alimony, or maintenance arrears, as a general rule we find that state enforcement agencies provide payment arrangements that are just as good (and sometimes better) than those that can be arranged in a Chapter 13 case.
If you owe child support, alimony, or maintenance, the bankruptcy process will not be very effective to deal with these debts. However, as these obligations will survive the bankruptcy, it is even more important that you deal with your other unsecured debts so that you focus your efforts on repaying the non-dischargeable obligations. There is nothing worse than being slapped with a wage garnishment by a judgment creditor while you are already struggling to pay your child support or maintenance payments together with your other day-to-day living expenses.
GENERAL UNSECURED DEBTS
Just about every other type of debt not already discussed will fall into the category of “general unsecured claim.” This broad term encompasses all kinds of financial obligations that are not given any special status under the Bankruptcy Code. For most people, the vast majority of the debt that they are going to discharge will fall under this category. The most common unsecured debts include the following:
1. Credit card debts
2. Personal loans
3. Medical bills
4. Past due utility bills
5. Unpaid balances on repossessed or surrendered vehicles
6. Student loans
7. Parking tickets
8. Unpaid rent on prior apartments
9. Tuition charges
It is important to note that even though a debt may be unsecured that does not necessarily mean it is dischargeable. For example, student loan debts are considered unsecured debts but, as most readers are aware, they are almost never dischargeable in a bankruptcy case. In addition, even though most unsecured debts can be discharged, there are circumstances when a creditor might object, such as when the debt was incurred on the eve of the bankruptcy filing and the creditor can establish that the borrower had no genuine intention to repay it. The exceptions to discharge are covered in Chapter VII of this e-guide.
It is very common to meet clients that have co-signed debts. Sometimes, the client is the person primarily responsible for the debt, and they needed someone else to co-sign on their behalf so that they could obtain the loan. In other cases, the client has co-signed on behalf of a family member or a friend, and they are now seeking bankruptcy protection because the other person has defaulted on the obligation. The most common co-signed debts that we see are automobile loans and credit union loans.
Regardless of the nature of the debt, if there is a co-signer on the loan or account, this information must be disclosed in the bankruptcy petition. If the loan is being paid on time, then the co-signer will in no way be negatively impacted by the bankruptcy. So, for example, if a parent co-signed a loan on your behalf, the parents’ credit will absolutely not be hurt by your bankruptcy filing, so long as you continue to make payments on the loan after the bankruptcy. Remember, bankruptcy filing does not prevent you from paying a debt, it merely prevents the creditor from pursuing collection if you are not able to pay it.
By the same token, your bankruptcy filing will not assist the co-signer in any way. The co-signer’s obligation on the debt is completely independent of yours. So if you file bankruptcy, it is likely that the creditor will pursue collection against the co-signer. It is very common to see both co-signers on the obligation have to file separate bankruptcy petitions if the debt in question is significant. We commonly meet clients that have significant debts on automobile repossessions, sometimes as high as $20,000.00. In these cases, it is unfortunately sometimes necessary for both the primary borrower and the co-signer to seek bankruptcy relief because the debt is simply too high for either one of them to manage on their own.
The important thing to keep in mind about co-signed debts is that your bankruptcy filing will neither help nor hurt the co-borrower. Their credit will be exactly the same regardless of your bankruptcy filing.
LEASES AND OTHER EXECUTORY CONTRACTS
If you are leasing or renting an apartment, the bankruptcy filing does allow you to eliminate your obligation on the lease. In legal parlance, you may “reject” the lease agreement. If you have a vehicle lease that is near its termination date and you know that you are significantly over the allowed mileage or will incur wear-and-tear charges, it may be a good idea for you to give up the lease early so that you can be permanently relieved of any remaining obligation. Similarly, if you are leasing an apartment and are behind on the rent payments, the bankruptcy filing does give you the opportunity to walk away from the lease obligation without further payment.
If you wish to continue your vehicle lease or housing lease, the bankruptcy also gives you the option of “assuming” the obligation. This means that you are agreeing to abide by the terms of the original lease agreement. It also means that if something happens after your bankruptcy that prevents you from fulfilling the lease, you will be held responsible for the debt. So, for example, if you assume your vehicle lease and leave your job a few months later, the creditor does have the right to repossess the vehicle and then seek to collect any remaining balances that are due under the original lease agreement.
It is for this reason that you should carefully consider whether you are truly able to afford ongoing payments on any lease. We certainly would not want to see any client file a bankruptcy and then face new debts shortly thereafter. In most cases, our clients do decide to assume the lease, but there is definitely a significant number who make the decision to give up an expensive vehicle or apartment lease. They would rather come out of the bankruptcy process with as little ongoing debt as possible. Sometimes, giving up an expensive asset that you can do without is a very wise course of action.