Tag: tax

Bankruptcy can toll or extend the statute of limitations using Section 108(c)

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does bankruptcy’s automatic stay toll a statute of limitations for a creditor’s claim or judgment, or extend it in Calif and beyond. What to know.

When a bankruptcy is dismissed or discharged, is the statute of limitations tolled on an earlier claim by the automatic stay, and suspended? Or is the statute of limitations extended by a few weeks with just a little bit of time tacked on? The answer could make a big difference on how much time the creditor has the act on their claim, lawsuit, lien, or other collection actions.

Automatic Stay giveth, but what does it take away?

Extending time using Section 108
Live photo of someone extending time using Section 108

You probably already know there’s bankruptcy protection in 11 USC 362 called the automatic stay. In short, this means that once a bankruptcy is filed, all collections against the debtor have to stop. This is powerful and effective. In a typical case that successfully ends with discharge, the debt is no longer collectable, ever.

However, sometimes a Chapter 13 bankruptcy — sort of a years-long debt consolidation — doesn’t make it to discharge. If the case is dismissed, what happens to the statute of limitation timing on claims and judgments before the bankruptcy? Is the statute tolled (suspended), or is the timeline to collect extended?

Suspend: Tolling of the Statute of Limitations

Suspension would involve tolling the statute of limitations for the time in bankruptcy. A common example would be in California. Here, there’s a four-year statute of limitations for breach of contract. If three of those years have run, and then someone files Chapter 13 for two years before it’s dismissed, how much time remains to collect? If the statute was suspended or tolled, there would still be a year to file a law suit against debtor, post-bankruptcy.

Extend: Add some time to collect after bankruptcy.

Extension of time would be tacking on additional time to prosecute the case and file the lawsuit after the dismissal of the bankruptcy.

Let’s look at the law and see what it says for guidance.

Bankruptcy Code 11 USC 108

Section 108(c) of the Bankruptcy Code says:

…if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

What this means is that Section 108(c) kicks in regarding someone protected under Chapter 12 or Chapter 13 bankruptcies (1201 or 1301), so it wouldn’t apply in the more common Chapter 7 bankruptcy cases.

It also specifically says that the period to commence or continue an action against the debtor doesn’t expire until the later of (1) the suspension of the period; OR (2) 30 days after notice of the stay ended, which sounds like an extension.

What does this mean? Let’s go to the Bankruptcy Appellate Panel in the Ninth Circuit: “In simpler terms, unless the limitations period under applicable nonbankruptcy law would expire later, a limitations period that did not expire prepetition will expire thirty days after the expiration or termination of the automatic stay.” In re Brown, 606 BR 40, 47 (9th Cir BAP, 2019).

So, there’s both suspension and extension. Are both in play as both are in the statute, or is it just one used practically, depending on jurisdiction? As usual, we look to the courts for interpretation.

Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108
Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108

How the Courts have interpreted Section 108(c)

Differing opinions on suspend or extend

In the battle of suspend (toll) vs extend, the result seems to be specific to jurisdiction, facts, and the underlying nonbankruptcy law in play. The Supreme Court of the United States has weighed in: “Petitioners believe § 108(c)(1) contains a tolling provision. The lower courts have split over this issue.” Young vs US, 535 U.S. 43, 52 (Sup Ct, 2002).

Lower courts have made the same observation. “They [the parties] differ in interpretation, however, with CPI finding no separate federal basis for tolling state prescriptive periods and Rogers arguing that § 108(c) itself tolls the prescriptive period. We are not the first circuit to face this issue. Panels of both the Second and Ninth Circuits have examined the language and legislative history of this section of the Code. Unfortunately, they have created a potential split in result. Other federal courts have divided likewise.” Rogers v. Corrosion Products, Inc., 42 F. 3d 292, 296 (5th Circuit, 1995)

Statute of Limitations extended … A Little Bit

Some courts have used Section 108 to merely extend the statute of limitations. One example: “We hold that Section 108(c) of the bankruptcy Code extends a creditor’s right to bring an action through the pendency of a debtor’s bankruptcy case only for 30 days after the automatic stay expires by operation of law or is lifted by order of court.” In re Baird, 63 BR 60, 63 (WDKY, 1986).

While Section 362 doesn’t deal with time, Section 108 above has a few factors, and can extend contractual, statutory or judicial deadlines. Here’s the Second Circuit Court of Appeals: “…we observe that by its terms § 108(c) does not provide for tolling of any externally imposed time bars, such as those found in the two maritime statutes of limitations. The bankruptcy section only calls for applicable time deadlines to be extended for 30 days after notice of the termination of a bankruptcy stay, if any such deadline would have fallen on an earlier date.” Aslanidis v. US Lines, 7 F. 3d 1067, 1073 (2nd Cir, 1993).

A mere 30-day extension can be challenging for creditors, and good news for debtors, as it’s not always certain creditors will get notice of the bankruptcy dismissal in 30 days. If that’s the case, the 30 days can go quickly and then the debtor is safe from any claims brought from that creditor.

Suspended or Tolled Statute: California State Law CCP 356

Let’s start with this nugget of a quote:

“Although the automatic stay is a broad and powerful provision, it does not stay the passage of time.”

That is from Judge Sidney Weaver in the case Matter of Lauderdale Motorcar Corp., 35 BR 544, 548 (Bankr. Ct, SD FL 1983). Judge Weaver’s quote is consistent with the Second Circuit above in Aslanidis, and would seem to be very friendly to debtors. They can’t run out the clock in a bankruptcy, but a small 30-day window puts the odds in their favor.

But not so fast. Other courts (and state laws) have come to a different conclusion.

In California, the automatic stay suspends time for the SOL

Locally, in California, state law kicks in. We have CCP 356, which says: “When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.”

“A bankruptcy stay has been held to be a ‘statutory prohibition’ within the meaning of Code of Civil Procedure section 356.” Schumacher v. Worcester, 55 Cal.App.4th 376, 380 (1997) . Later, this was cited by another California court, which added: “The provisions of sections 362(a), 108(c), and Code of Civil Procedure section 356, as well as the relevant case law set forth above, enforce our conclusion that the automatic stay provisions applied here to toll the limitations periods.” Kertesz v. Ostrovsky, 8 Cal. Rptr. 3d 907, 914 (Cal Ct of Appeal, 4th Appellate Dist., 3rd Div. 2004), but note limitations in law construction that focused on the 1872 enactment date of Section 356. Inco Development, Court of Appeal of California, Fourth District, Division Two, August 4, 2005.

California law and the Discharge Injunction: also suspends time

That’s all well and good. It seems to be settled in California that because of CCP 356, the Automatic Stay of Section 362 suspends (that is tolls) the statute of limitations. But does CCP Section 356 have the same effect on tolling because of the discharge injunction of Section 524(a)(2)?

Surprisingly, the Ninth Circuit BAP says, yes, the discharge injunction also tolls and suspends time in California. To wit: “In sum, the Browns have not persuaded us that the discharge injunction is beyond the scope of C.C.P. § 356. To the contrary, we are convinced that the discharge injunction triggers the limitations period suspension provided for in the statute. Therefore, we reject the Browns’ principal argument on appeal.” Brown, 606 BR at 50.

But Beware Phillips v Gilman for Postpetition Fees and Costs in a Bankruptcy

When it comes to fees in a bankruptcy using nonbankruptcy statutes CCP 685.040 and 685.080, the Ninth Circuit BAP found that Section 108c doesn’t apply. Why? Because Section 108(c) involves seeking relief in a court other than a bankruptcy court; and that period must not have expired when the petition is filed. Both of these were missing.

The BAP of the Ninth Circuit ruled, “By their conduct, Creditors demonstrate that CCP § 685.080 did not require Creditors to act “in a court other than a bankruptcy court“; this fact alone renders § 108(c) inapplicable to their motions.” In re Gilman, 603 BR 437, 445 (9th Cir BAP, 2019). Further, “[b]ecause all of the fees were incurred postpetition, CCP § 685.080’s two-year period did not commence prepetition and, again, § 108(c) does not apply.” Id.

In short, as the Ninth Circuit Court of Appeals stated in an unpublished rejected appeal, “Section 108(c) does not apply here because Creditors filed their fee motions in the Bankruptcy Court for fees incurred after Debtor filed his bankruptcy petition.” Phillips v Gilman, unpublished, (9th Cir, 2020). The lesson? It’s in footnote 9 of the main BAP case: ” the bankruptcy court did not prohibit Creditors from filing CCP § 685.040 motions or memoranda at two-year intervals.”

The Ninth Circuit Extends for Judgments

Let’s go outside of California state law, but stay in the Ninth Circuit. What do we find there?

In 1989, the Ninth Circuit weighed in on the issue when it ruled that Section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate. Hunters Run, 875 F.2d 1425 (9th Circuit, 1989).

That settles it, then, right? Not so fast. The 5th Circuit Court of Appeals found 9th Circuit’s ruling “opaque” when it ruled: “Again, the general question was whether § 108(c) applied to the time limits of enforcement actions of liens. The court held that it did and that the time period was “tolled.” The court did not decide whether the “tolling” meant that the time period ceased to run, or simply that a thirty-day grace period existed under the statute if the time period had run.” Rogers, 42 F. 3d at 296-297.

The Hunters Run rule was discussed further in In re Spirtos, 221 F. 3d 1079 (9th Circuit, 2000), where the Ninth Circuit (not BAP) distinguished collecting on a judgment versus merely renewing a judgment. There, the Circuit Court recited what Hunters Run stands for, and then itself ruled the proposition that section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate.

More recently, in evaluating an ORAP lien, the Ninth Circuit held “that the period in which a creditor may execute on a lien constitutes the continuation of the original action that resulted in the judgment and is thus tolled during the automatic stay.” In re Swintek, 906 F. 3d 1100, 1102 (9th Circuit, 2018).

The IRS, taxes, and 108(c)

Generally, taxes, tolling, and the bankruptcy automatic stay

Taxes are a very tricky issue in bankruptcy, much of it involving timing. As a rule, taxes are not dischargable in bankruptcy. The exception is that they can be eliminated if enough time has passed for various benchmarks.

Section 6503(b) of the Internal Revenue Code states:

The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States . . . and for six months thereafter.

How does the IRC’s 6503 interplay with the Bankruptcy Code’s 108? Or put differently, what if someone is in a Chapter 13 during the three years the IRS has to collect taxes in their priority status of 11 USC 507(a)(8)?

The Ninth Circuit BAP, citing Baird above, and reviewing Congress’ legislative intent, found that, “…it is clear that Congress, by enacting Section 108(c), intended to activate Section 6503(b) and thereby suspend the running of the statute of limitations for tax collection during a taxpayer’s bankruptcy proceedings.” In re Brickley, 70 BR 113, 115, (9th Cir BAP, 1986). Section 6503, then, takes over for Section 108, and the result for the tax clock is that it’s suspended. (But see In re Gurney, 192 BR 529, (9th Cir BAP, 1996), allowing the court’s Section 105 powers for equitable tolling balanced against the policy to prevent tax evasion schemes, limited in In re Gardenhire, 209 F. 3d 1145, 9th Circuit, 2000).

The Ninth Circuit Court of Appeals found the BAP’s logic in Brickley persuasive, and followed it in In re West, 5 F. 3d 423 (9th Circuit, 1993). There, the 9th Circuit reviewed the 240-day rule of Section 507’s interaction with Section 108. Considering using bankruptcy for tax evasion, the Ninth Circuit concluded, “The debtors’ joint Chapter 13 case suspended the running of § 507(a)(7)(A)(ii)’s 240-day priority period from the date of the bankruptcy petition until six months after the case was dismissed. ” West at 427.

Equitable Tolling and the Statute of Limitations in Bankruptcy

Sometimes, courts find that it’s just fair to prevent someone from using bankruptcy in a tax evasion scheme. In those situations, equitable tolling is used to provide the taxing authority more time to collect the taxes.

In the Young case discussed above, a person filed a Chapter 13 bankruptcy during the three-year lookback period, and then a Chapter 7 in an effort to run out the clock. The Supreme Court found equitable tolling, finding the just result was stopping the clock (ie: suspending) and the statute of limitations during the bankruptcy cases.

In the Ninth Circuit, that was not the result when Brenda Jones filed a Chapter 13 bankruptcy, and then filed her California state tax return owing money. The Franchise Tax Board (FTB) didn’t protect its claim in the 13, and then years later, Jones dismissed her case and then filed a Chapter 7. The FTB wondered if it could maintain a postconfirmation tax claim if the prepetition property of the estate revested in the debtor at confirmation. Here, the Ninth Circuit Bankruptcy Appellate Panel distinguished from Young and found no equitable tolling because the FTB didn’t seek relief from the automatic stay or file a motion to dismiss in the 13 for its priority taxes. In re Jones, 420 BR 506 (9th Cir BAP, 2009).

Summing up

The bottom line is, well, there is no bottom line. Cases are all over the map, depending on the state, circuit, and underlying nonbankruptcy law. It would seem pretty straightforward that once a bankruptcy is dismissed, you just wait thirty days and hope you don’t get sued. However, there are many courts, states, and situations where the statute of limitations is tolled, that is stopped, while the bankruptcy and automatic stay is active.

And so the short answer, like most things in law, is, “it depends.”

tax refund check in hand - chapter 13

Tax Refunds & Returns in Chapter 13

Tax Refunds & Returns in Chapter 13

Can I keep my tax refund in Chapter 13? It depends.

You ask, “can I keep my tax refund in Chapter 13?” Maybe. Chapter 13 tax refunds can be the one thing that sinks a successful bankruptcy case if you keep them. Things are sailing along, and suddenly, things go sideways. Fortunately, there are solutions and ways to fix it and save your case, and ultimately, the discharge you’re working towards.

I’m a Los Angeles bankruptcy attorney, serving all of Los Angeles County and the Central District of California. For years, I have served as the Chair of the Chapter 13 Committee of the cdcbaa, the largest association of bankruptcy attorneys in Los Angeles representing debtors. I’ve successfully gotten hundreds of Chapter 13 bankruptcy cases confirmed, and led a very high percentage of them successfully to discharge. I’ll be writing specifically about practice in the Central District of California, using our forms, CDCA local rules, and other local practices. If you’re anywhere else, the following may not apply to you; seek a bankruptcy lawyer local to you. But if you’re in Los Angeles, Ventura, or Orange County, read on.

Chapter 13 Tax Refunds: the rule

tax refund and tax return
The tax refund and tax return may go to the Chapter 13 Trustee every year during the term of the plan

The general rule in Chapter 13 bankruptcy is that you must turn over tax refunds over $500 each year to the Chapter 13 trustee, unless it’s a 100% plan. Commit this key point to memory: if there is a tax refund in your Chapter 13 bankruptcy, don’t spend it until you talk with your attorney. There is a very good chance that you will need to send it to the trustee.

You are also supposed to provide to the Chapter 13 trustee your tax returns each year, and often also your paystub (or more) and W2, for income-tracking purposes.

Whether or not the plan is what we call a “hundred-percent plan” can make all the difference here. It can make your life easy and not cramp your style. Alternatively, it can require that you turn over that sizeable tax refund check each year.

What is a 100% Plan in Chapter 13

Keeping it basic, a Chapter 13 100% plan is where all the general unsecured debt gets completely repaid. Usually, this means that the credit card debt gets paid, dollar for dollar over the Chapter 13 plan term. In the Central District of California, bankruptcy attorneys refer to this as Class 5 debt (or Class 5A), or more frequently, unsecured debt, or simply, the unsecureds.

In Chapter 13, you don’t always repay all your debt

Reviewing something I wrote about in my main Chapter 13 article, the plan payment in Chapter 13 bankruptcy is often what you can afford, after reasonable and necessary household expenses. Or put in other words, a lot of times (not always), you are paying what you can afford, and not all of the debt. Because the plan payment is usually driven by ability to repay and not debt size, this can result in you paying only a fraction of your debt.

Example: you can afford $400 a month for 60 months, but your unsecured debt (credit card) is $48,000. $400 x 60 is $24,000, divided by $48,000 is 1/2, or 50%. That’s grossly simplifying most cases, but that’s a 50-percent plan. The other 50% gets discharged at the end if you stick to the plan and make all your payments on time. You never have to pay the discharged half, they can never bother you again.

On the other hand, if you have enough cash flow each month where, in sixty months, you can pay all your credit card debts (because the monthly payment is bigger or the unsecured debt is smaller), that might become a 100% plan, and unlock all kinds of benefits and wonders.

Why do I have to turn over my tax refunds in Chapter 13?

You need to turn over your tax refunds in Chapter 13 bankruptcy because it’s closing a loophole. You over-withheld all year long, making your monthly payment small, then with the refund, get back all that withheld income at the end of the year. If you think about it in this extreme example, paying the trustee a dollar a month because that’s all you can afford, then you get $12,000 tax refund on April 15 isn’t fair. It’s a sweet deal for you, the debtor.

However, the trustee will argue (and be right) that you should have adjusted your W4 to lower and withhold the proper amount, increased your take home pay, and the plan payment would increase by approx $1,000 a month. To avoid the over-withholding backdoor loophole, you must send in your tax refunds if it’s not 100% plan.

The Central District of California uses a form plan. In it, there’s a paragraph that spells out to the debtor what is expected with tax returns, and what happens with tax refunds. This is part of every Chapter 13 bankruptcy filed in the greater Los Angeles area, and then the debtor signs it, and is mailed a copy along with the Notice of 341(a) Meeting when the case is filed.

chapter 13 plan tax refunds
The CDCA Chapter 13 form plan paragraph on tax returns and tax refunds.

What if my Chapter 13 bankruptcy is a 100% plan?

If it is a 100% plan, you’re already repaying all your general unsecured debt. You cannot pay more than all. So, when the refund comes, should you give it to your trustee? Ask your attorney. But generally, as long as you’re at 100%, the bankruptcy doesn’t need the refund.

Note: if you have a 100% plan and your bankruptcy gets modified during the bankruptcy term to pay less than a hundred percent to the unsecured creditors, you may need to pay to the trustee the past refunds you kept, retroactively.

As long as the Chapter 13 bankruptcy is paying all the debts, as a rule, the tax refunds don’t need to be turned over.

Does the Chapter 13 Trustee garnish my tax refunds?

No, the Chapter 13 trustee doesn’t normally intercept or garnish your tax refunds. You have to manually send the funds to her, at her normal payment address.

I have to mail in the entire tax refund, or I keep $500?

It depends. Look at the Order Confirming your Chapter 13 Plan (or the last order on motions to modify it). Usually, in the Los Angeles area where the Central District is, you get to keep $500 of each year’s refunds, but have to turn over the rest.

Does a given year’s tax returns offset each other if I owe on one?

Usually, yes, you get to offset the same year’s return. An example of this would be: let’s say on the federal tax return you got a refund of $1500. On the state tax return of the same year, you owe $400. You’d subtract the $400 from the $1500 (and presumably pay the state), then subtract $500 if your Order Confirming allows you to keep that amount. The result? $1500-400-500 = $600 sent to the Chapter 13 trustee.

The Order Confirming is the Controlling Document in a Chapter 13

The judge’s order in your case is what matters. You have to do whatever the Order Confirming your Chapter 13 plan says you have to do. It is pretty specific on plan payment amounts, due dates, and the percentage that the general unsecured creditors are receiving. It usually is pretty clear about what happens with tax refunds. Read it closely.

Order confirming on tax refunds
Order confirming on tax refunds

Take a look at the above. It’s a paragraph from an actual Order Confirming Chapter 13 Plan from one of my clients. The Order Confirming says that it’s not a 100% plan, or the bottom checkbox would be checked. It says that all refunds go to the Chapter 13 trustee during the plan term. It says that you get to combine the state and federal tax returns. And it says the debtor gets to deduct $500. But again, read the specific language of the order which confirmed your case. Your mileage may vary.

Do I keep my tax refunds in Chapter 7 bankruptcy?

It depends. Chapter 7 is a different animal than Chapter 13 (see my article on different types of bankruptcies). As I wrote above, Chapter 13 is generally about paying back what you can afford, but you can’t usually make your take home pay artificially tiny and then pocket the refund. Chapter 7 is all about assets and stuff. The California bankruptcy exemptions allow for keeping a lot of things and money, up to a point. If you’re using the California homestead exemption, there’s a really good chance you won’t be able to protect your tax refund. See a bankruptcy attorney for specific advice about your unique situation.

I kind of skimmed above, what’s the rule on tax refunds again?

The general rule is this (say it with me): if you’re not paying back all your debt, you need to turn over your tax refunds to the trustee each year.

What about my tax returns then?

While we’ve been talking about tax refunds, you need to send the Chapter 13 trustee your tax returns each year also.

Why does the Chapter 13 trustee care about my tax returns?

When you send in your federal and state tax returns to the trustee each year, she’s reviewing a few things. First, she’s looking to see if you got a refund (see discussion above). Second, she’s looking to see your annual income, and comparing it to what you earned when you filed the case. Third, she may be looking for any windfalls you received the previous tax year.

If my tax returns show higher income, will my plan payment go up?

Not always, but maybe. See 11 USC 521(f)(3-4). Ask your bankruptcy attorney.

Oops, I forgot to submit my tax returns. The Chapter 13 trustee is filing a Motion to Dismiss.

Easy! Send the tax returns to her, usually accompanied with the other documents she’s requesting: a recent paystub if employed, a W2 for the most recent year, and a 1099, if applicable. Do this as quickly as possible and this should save your case. But beware, because…

Oh no! There’s a Motion to Dismiss because I failed to turn over my tax refunds

If your plan is less than 100% to the unsecured debt like credit cards, you need to send in your tax refunds each year to the Chapter 13 trustee. If for some reason you failed to do that, the bankruptcy trustee may file a Motion to Dismiss. This motion to the court and bankruptcy judge is seeking to end your bankruptcy, end the automatic stay protection, end your attorney’s representation, and leave you to fend off your creditors and debts outside the terminated bankruptcy case. It is very serious. But you have some courses of action:

Possible responses to a Motion to Dismiss for failure to turn over tax refunds

File a Motion to Modify Chapter 13 Plan

The first possible solution to Motion to Dismiss for failing to hand in your tax refunds is to file a Motion to Modify (also called MoMod). The Motion to Modify can ask the judge to retroactively suspend turning in your tax refunds for year(s) in question, despite the fact that you knew or should’ve known you were supposed to because you signed the Chapter 13 Plan and read the judge’s Order Confirming which required it.

This can be a difficult hurdle, and the facts and evidence matter. If the trustee is demanding $3,000 of tax refunds and you can point to a hospital bill where you were forced to pay $3,100 in cash that same tax year, that may be a reasonable expense which you can document with the evidence of the hospital bill and receipt that you paid it. Maybe the Chapter 13 trustee wouldn’t oppose your MOMOD and/or the judge would grant the Motion to Modify, and let you keep your tax refund.

Note that Motions to Modify are not guaranteed to work. There’s a lot of work that goes into MOMODs, and there will be legal fees approaching (or exceeding $1000) for the work to do a MOMOD. Weigh the pros and cons, including the likelihood of success. Consult with your bankruptcy attorney.

Respond to the Motion to Dismiss with a Payment Plan

As a rule, you should respond to the Motion to Dismiss the case with a response if you want to keep the case alive. If you don’t file a reply (technically, a response) to the trustee’s motion, it will be unopposed and the judge will likely grant it, ending the case, bankruptcy protection, and lawyer representation. If you are going to file a motion to modify, your response to the trustee’s motion should explain that. Here, though, you aren’t modifying, but requesting a chance to catch up and pay the tax refund in installments.

With the response, be very specific as to when the payments will be, and when the tax refund will be completely paid to the trustee. Ideally, you will turn over the tax refund before the hearing date. Being current by the hearing is your best chance at saving the case. Everything else is putting yourself at the mercy of the trustee, and the court.

Dismiss and re-file, getting a new 60 months

It’s definitely not ideal, but if the case gets dismissed, you can often re-file a new case. This will get you a new 60 months to repay debt, but also incur a new legal fee to prepare all the petition, schedules, compute and craft a new plan, and statement of financial affairs again.

Your best best is often to get current and turn over the tax refund to the trustee by the hearing, but again, ask your bankruptcy lawyer.

In short

A Chapter 13 bankruptcy case can have many twists and turns over the years between filing and discharge. One requirement is to turn over tax returns, and tax refunds, each year. If you are paying back 100% of your debt, life can be a lot easier. On the other hand, if you’re paying less than 100% of your debt, make sure you send in your tax refunds each year. If you forget, there may still be a way to save it. Failing to send in tax refunds for multiple tax years is a much harder sell, since it’s harder to trace the income to a particular expense. But if you’re able to make up the amount in payments, with the approval of the trustee and judge, you just may be able to save your case.

chapter 13 bankruptcy in los angeles

Chapter 13 Bankruptcy Ultimate Guide

Chapter 13 Bankruptcy – the Ultimate Guide

What is Chapter 13 bankruptcy? Chapter 13 bankruptcy is like debt consolidation, but better. It’s a solution for people who have some money to pay some of their debts back. In five years from now, paying minimums on all your debt, you’d still owe much of your debt. It’s because of that darned interest, and you’re barely paying principle. Chapter 13 bankruptcy fixes the interest problem.

Who am I? I’m a Los Angeles bankruptcy lawyer. For years, I have served as the Chair of the Chapter 13 Committee of the cdcbaa. I’ve successfully confirmed hundreds of cases for my clients, and led those cases to discharge. I’ve been on committees with judges, trustees, creditor lawyers, and other debtor attorneys that have worked on forms and rules changes for our entire district, and have hosted, moderated, or presented on panels on the topic of Chapter 13 bankruptcy to other lawyers. Here I share just some of what I’ve learned over the last twenty years to help people trying to learn about this mysterious area.

Chapter 13 Bankruptcy Definition: In Chapter 13 bankruptcy, you pay some (not necessarily all) of your debt back, cannot be sued, the trustee doesn’t take your stuff, and interest is frozen so you’re not on the minimum payment treadmill forever. It’s a way out with peace of mind.

What is a Chapter 13 bankruptcy?

Filing bankruptcy under Chapter 13 is for people who have some discretionary income. With this extra money each month, the consumer bankruptcy debtor can repay some or all of their debts.

Discretionary income is money left after their normal and usual monthly expense are deducted from monthly income. For this reason, a Chapter 13 is called a “Wage Earner Bankruptcy” The focus is having money to repay debts, which we call “budget surplus.”

60 Monthly Payments

Chapter 13 Bankruptcy
Chapter 13 bankruptcy gives you a way out where you can’t be sued and you’re not paying interest forever.

A big difference between Chapter 7 bankruptcy and bankruptcy chapter 13 is that there are monthly payment plans for the chapter 13 debtor. The Chapter 13 plan payments can even help you pay back tax debt, which in Chapter 7 is usually not discharged. Plan payments are made to the Chapter 13 Trustee over a period of (usually) 5 years.

What are these payments? These payments are usually to firstly, tax debt. Secondly, they go to whatever you may be behind on your mortgage payment, or sometimes your car loans. Finally, they’ll go to pay some or all of your credit card debt. Chapter 13 bankruptcy therefore is a good way to stop foreclosure and save your house, as well as stop creditor harassment. And of course, all the California bankruptcy exemptions still apply, so you can keep your stuff.

Chapter 13 was intended to give the person with income a chance to make affordable installment payments. This comes out of future income so that creditors get paid at least something. The good new for you is that there is no liquidation in Chapter 13. The Chapter 13 bankruptcy trustee doesn’t take things. Generally, you keep your stuff.

You’re going to want a skilled Los Angeles bankruptcy attorney to help you so you can make your payment plan no more than you can afford for your Chapter 13.

The Stuffy Definition: Wage Earner Bankruptcy

Chapter 13 of the Bankruptcy Code lets debtors under Court protection apply a portion of future earnings to the repaying some or all their debts over time. Creditors can’t do anything during this time to collect the debts. The automatic stay protects the debtor while a plan of repayment is carried out. It is similar to a Chapter 11 Business Reorganization. In fact, Chapter 13 is sometimes called “Consumer Debt Adjustment.”

Consumer Chapter 13 Bankruptcy Overview

You currently have enough extra money at the end of the month to pay your credit card minimum payments. This, of course, is getting you nowhere. You’ll have the same debt in 8 years, and will still be paying $700 or $1000 or whatever it is each month… forever. There’s a way to eliminate debts on your terms, likedebt consolidation.

Or you’re behind in your mortgage payments, and want to keep your home. And you have extra money each month you’d like to use to catch up, but the mortgage company won’t work with you. This is one advantage of Chapter 13 over other types of bankruptcies.

In either situation, you can take that money you have left at the end of the month and start reducing the debt you owe so that you’re out of debt in 60 months.

Chapter 13 Bankruptcy Process

The process for filing Chapter 13 is a maze-like process, and you will want to have an attorney by your side. The paperwork involved is truly overwhelming, and the time is much greater than a Chapter 7 bankruptcy.

Preparing the Petition and Plan

Bankruptcy Petition

Like any bankruptcy case, you will need to have a bankruptcy petition for the court. This is often 30-50 pages thick and lists your debts, possessions and other information in a very particular order and fashion.

Payment Plan

The payment plan is the key to a Chapter 13 bankruptcy, and what sets it apart from a Chapter 7 bankruptcy. It sets out all the ways which the debt will be handled during the administration of the bankruptcy by the Chapter 13 Trustee. How much unsecured debt will be paid? Are you going to keep paying on the car, or give it back for a voluntary repossession? What about the mortgage: will it be caught up if you’re behind to avoid foreclosure, or if so, how long will it take to pay the arrearages that you’re behind?

In short, a lot of precise and important calculations go into the bankruptcy plan payment with the aim of determining the number that matters most to the debtor. This number, of course, is the monthly payment. You’ll pay this monthly payment for 60 months (yes, that’s 5 years). By definition, you’ll be able to afford it. A good bankruptcy attorney can ensure you are able to make the payment, but that it’s also something that can be accepted by the bankruptcy trustee and creditors.

Court Involvement

Filing the Bankruptcy Papers

After these are ready, the bankruptcy petition and payment plan are submitted to the U.S. Bankruptcy Court. The papers are filed and the case gets a number and the ball is rolling.

The Meeting of Creditors (341A)

Like a Chapter 7 bankruptcy, you must go under oath with penalty of perjury regarding the facts that are contained in your bankruptcy petition. You will need to appear in bankruptcy court to answer some brief questions. This is the 341(a) Meeting of Creditors.

Confirmation

After the bankruptcy court date, your attorney will need to return to court. This involves making sure that the numbers all add up, your chapter 13 payment plan is fair to both you and your creditors, and of course, to accept your next monthly payment. If all goes right, your plan will be “confirmed,” your plan is accepted and everything is on automatic pilot.

After Bankruptcy Court

After confirmation, from this point forward, you will just mail your monthly payments to the chapter 13 trustee. There usually are a couple of restrictions, such as notifying the trustee if you get a change in your income. Further, you’re not to get more than $500 on any future debt without permission. Something to remember: any extra money above and beyond your normal monthly expenses goes to the bankruptcy for debt. Consequently, the bankruptcy court and trustee follow anything that changes the formula of your confirmed plan. This is why the Chapter 13 trustee needs to see your tax returns, and gets any tax refund.

Read my in-depth article about tax refunds in Chapter 13bankruptcy.

Calculating the Bankruptcy Plan Payment

Chapter 13 Plan Payment, Generally

The Chapter 13 bankruptcy plan payment is often whatever you can afford. That is, it’s what’s left after your projected monthly income and reasonable and necessary expenses. By definition, the bankruptcy plan payment is affordable, and typically less than paying all your credit cards directly.

However, that’s not always the case. There are other factors that can set the “floor” of your Chapter 13 plan payment amount. Of course, if you can afford more than your floor, you normally pay what you can, up to the full amount of your unsecured debt , which I’ll call the “ceiling.” Somewhere between the floor and ceiling is your Chapter 13 plan payment amount.

Factors that can affect the bankruptcy plan payment

There are lots of things that can raise the “floor” and impact what your Chapter 13 bankruptcy plan payment. These exact figures aren’t usually known without some research or work.

  • the result of the long B22 form which analyzes all your pay stubs and income the past six months
  • while no one takes your assets in Chapter 13, they factor in what you would’ve lost in Chapter 7
  • the amount of your priority tax debt (both state and federal taxes)
  • the value of your financed car which is old enough that you can cram down and pay only what it’s worth, not the loan amount
  • the amount of mortgage arrearages, including all late fees
  • current value of any judgment liens on your residence
  • balances of all your credit cards bills, including nonpriority IRS and FTB debt
  • how much you owe in unpaid property tax debt
  • and more

Can you say with any certainty the values of any of these variables, let alone all of them? Of course not. Heck, even the answer to the first bullet point about the B22 often isn’t known until I see all your paystubs and bank statements. The bottom line is that while the ceiling is fixed to “all,” the floor of what you pay for your bankruptcy plan payment can rise or fall based upon the responses to all these and other factors.

So what’s my Chapter 13 plan payment amount?

Few of these factors are known for sure at the bankruptcy consultation. Consequently, anyone at the first meeting who predicts with any confidence your projected Chapter 13 plan payment amount is potentially ignorant, misleading, or both. The one exception is when someone says you need to pay all your debt, what we call a 100% plan, but even then, we’re not always sure of the exact balances of all your debts. Having a 100% plan can make it more sensible to sell a home in Chapter 13, give you less stress and more disposable income, and help you keep your tax refunds in Chapter 13.

However, in my best effort to help you, I can say this: while the above factors can throw a wrench into the works, your Chapter 13 bankruptcy plan payment is often based upon whatever you can afford, using average income minus reasonable and necessary living expenses.

Can I later reduce or change my Chapter 13 payment

Usually, yes, you can petition the court to reduce your plan payment in Chapter 13 if there’s a change of circumstances. This is done by a Motion to Modify, and needs to get approval from the trustee and, of course, your bankruptcy judge.

In bankruptcy, what’s allowable as a reasonable living expense?

People ask, since the Chap 13 plan payment factors in reasonable living expenses, what’s considered “reasonable?” Answer: whatever someone wearing black robe says it is. Ok, I kid (sort of). The truth is that what is considered reasonable types and amounts for expenses is often the type of thing debtors’ attorneys and the Chapter 13 trustee and creditors fight over. It typically is resolved by a bankruptcy judge. To make it even more complicated, the result is extremely fact-specific; what works for someone else may draw an objection here, or vice verse. An experienced bankruptcy lawyer will know what generally gets objected to and what is allowed. Let’s talk.

Why do I need a Chapter 13 bankruptcy lawyer

Chapter 13 bankruptcy cases are ones in which it is hard to be successful. Judge Johnson of the Central District of California (where Los Angeles is situated) has researched the topic. In his standing order, Judge Johnson finds that nationally, only 33% of Chapter 13 cases succeed. Locally, however, it’s much more rare. The judge finds that in the Central District of CA, only 3% of Chapter 13 bankruptcy cases succeed. He also found that this number drops to 0% when there’s not a bankruptcy attorney helping the debtor.

CDCA Low Chapter 13 Success Rates

Quoting the bankruptcy judge:

“A review of the Court’s records a few years ago indicated that only 3% of Chapter 13 cases in this district resulted in a completed plan with Chapter 13 debtors making all plan payments.”

That’s not a typo: 3%.

Judge Johnson Chapter 13 bankruptcy research
Chapter 13 bankruptcy is tough. Go with someone who knows what they're doing.

There’s no doubt that Chapter 13 bankruptcy is difficult to learn and navigate for the Los Angeles bankruptcy filer. Anyone who wanted to do one would need a bankruptcy lawyer to even out the odds of success. You’d want a bankruptcy attorney who had experience with Chapter 13. Not just experience, but success with these challenges.

Los Angeles bankruptcy attorney Hale Antico has Chapter 13 success

Bankruptcy filing statistics show that from 2008 to 2011 there was a peak of Chapter 13 filings.

Between 1/1/2008 and 12/31/2011, Los Angeles bankruptcy attorney Hale Antico filed 177 Chapter 13 cases.

Successful cases take 5 years to earn a discharge; unsuccessful cases end sooner.

Between 12/31/2013 and 12/31/2017, there were 104 of these earlier Chapter 13 bankruptcy cases which received discharges.

104 divided by 177 is 59%.

Or viewed differently:

Chapter 13 Bankruptcy Success Rates

The stats say you need an attorney for Chapter 13 bankruptcy. But not just any 3% successful bankruptcy lawyer. It would be a good move to go with one of the best bankruptcy attorneys whose success rate is almost double the national average, and 20 times higher than the local success rate.

Summing up Chapter 13 Bankruptcy

All in all, Chapter 13 bankruptcy is a successful debt consolidation where you pay a fixed payment for a fixed term. Everything after the term that didn’t get paid is discharged. Filing it freezes interest. Creditors can’t sue you. You just pay back what you can. This is often cheaper than what you’re currently paying all those minimum payments combined before the bankruptcy. Why? Because without bankruptcy all those minimums only go to interest. Chapter 13 bankruptcy works to get you out of debt.

Read my article of things to do (or avoid!) before you file bankruptcy. We’ve helped thousands of people in Los Angeles file bankruptcy. We’d be honored if you’d let us put our success to work to help you, too.

Contact us now.