Your Ex-Spouse and Discharging Divorce Debts in Bankruptcy

Divorce is one of the top three events causing a bankruptcy filing. The other two are  income loss and medical problems. Debt owed to an ex-spouse may help determine the chapter of relief you select when you file for bankruptcy. When the Bankruptcy Code was amended in 2005, a couple of provisions were added that very broadly excepted debts arising from a divorce proceeding from discharge. Here are some general rules you need to know.

Domestic Support Obligations Can Never Be Discharged in Bankruptcy

Domestic support obligations, also called a DSO, can’t be discharged in either a Chapter 7 or a Chapter 13. See 11 USC 523(a)(5). These are support obligations owed to your ex-spouse for either spousal support or child support. Sometimes a party to a divorce is ordered to pay a former spouse’s credit card or attorney fees. Payments to third parties for the benefit of your ex can also be support depending on the circumstances, e.g., the wife was a stay-at-home mom and had credit card debt but no job to repay it so the husband is ordered to pay it.  This could very well be considered a support obligation and not a property settlement.

Property Settlements Cannot Be Discharged in a Chapter 7

11 USC 523(a)(15) excepts any divorce property settlements from discharge. Any debt owed:

to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit;

So that’s that. Basically any debts owed to an ex-spouse in a Chapter 7 aren’t discharged. Nothing needs to be filed. They are just automatically non-discharged. This includes any “hold harmless” provisions.

Property Settlements and the Chapter 13 Super Discharge

However, property settlements can be discharged in a Chapter 13.Check out  11 USC 1328(a)(2) which gives a list of debts that are not discharged in a Chapter 13. 11 USC 523(a)(15) isn’t mentioned. What does that mean in plain English and not legalese? Property settlements can be  discharged in a Chapter 13 when the repayment plan is successfully completed. If your case is dismissed or converted to a Chapter 7, the property settlement owed to the ex-spouse remains.

Before you jump into a Chapter 7, consider filing a Chapter 13 if you owe a property settlement to an ex-spouse which you cannot afford to repay without help.

“X” also stands for:

 

photo by: Steve Snodgrass

“Q” Is For Questions About Bankruptcy

These are some of the most frequently asked questions about bankruptcy that I get from clients on a regular basis.

What is the difference between Chapter 7 and Chapter 13?

In a Chapter 7, you basically file for bankruptcy, show you are unable to repay your debt, and your debt is discharged. A Chapter 13 requires a payment plan of up to 60 months. Most everyone wants to file a Chapter 7. Get in, get out, and get it over with. But not everyone can do this. In order to file a 7, your income has to be under certain amounts. If you make too much money (if there is such a thing), then the Bankruptcy Court  expects you to make some efforts to pay back something to your creditors.

If I file a 13, do I have to pay back all my debt?

Nope. You make your best efforts for the length of the plan to pay back as much as you can. If you don’t pay it all back, the balance is forgiven.

Is this like a 1099c? Will I have to pay taxes on the forgiven debt?

The discharged debt is not taxable income and you will not pay income taxes on it.

What will my Chapter 13 payment be?

I have no idea until I review your income and expenses. The basic formula is this: Net income minus reasonable and necessary expenses = bankruptcy payment. Keep in mind, the Court will expect you tighten your proverbial belt and what you think is reasonable and necessary expenses may not be the same in the Judge’s eyes.  A lawyer experienced in 13s will be able to give you a pretty good idea of what your budget should look like in order to be approved.

If I file a Chapter 7, will I lose everything?

No. In Michigan we can use the federal exemptions which are pretty generous and, like most of my clients, you will most likely be able to keep all your stuff.

My spouse doesn’t want to file but I need to. Can I do it without my spouse?

Yes. Your spouse doesn’t have to file with you. However, the non-filing spouse’s income is still taken into consideration in determining eligibility for a Chapter 7 or a Chapter 13. Even if they don’t file. Even if all the debt is yours and you incurred it before you even met your spouse. My advice to someone getting married is if you are thinking about a bankruptcy and you don’t want to bring your debt baggage into the marriage, file before you say “I do.”

There are lot more but these are a good start. If you don’t see yours, let me know and I may add it.

Chris McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info. We help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.

“Q” also stands for:

 

 

 

photo by: the.sprouts

“M” Is For Mortgages In Bankruptcy

UoMGCHow bankruptcy affects the mortgage on my clients’ houses is a major concern. Clients either very much want to keep their house or they want to get dump it. Not a lot of middle ground. Because of the recession and real estate crash, most houses are underwater and this is particularly true where I practice. The equity in the houses in Downriver Michigan in cities like Taylor, Southgate, Allen Park, etc. has been wiped out by the drop in home prices. I bet anyone who bought a house or refinanced within the last decade likely has a house worth less than what is owed.

What is a mortgage?

This may seem basic but bear with me. A mortgage is nothing more than a lien on a house. The lien secures the loan. If you don’t pay the loan, the lender is allowed to foreclose on the house. Here is the one thing most people don’t understand. The lender gives the borrower a loan. The borrower gives the lender a mortgage. The bank does not give you a mortgage. Most people use the words interchangeably and say things like “I have to pay the mortgage.” I do it, too. But it’s wrong. You pay the loan. The loan is the written agreement evidencing the debt and contains your obligation to repay the lender. The mortgage is a lien which allows the bank to recover the house to satisfy an unpaid loan.

Bankruptcy and mortgage treatment in a Chapter 7.

Chapter 7 bankruptcy discharges your debts. This includes the loan the bank gave you to buy the house. So unless you reaffirm your mortgage, the debt is discharged. You don’t have to pay the loan back. This doesn’t mean you get to keep your house free and clear. Remember that mortgage/lien you gave the bank, well if you don’t pay the loan, the bank will foreclose and recover the house. So the bottom line is you don’t need to reaffirm the loan to keep the house. You can decide to pay your monthly payment and stay in the house. You can decide to walk away from the house and let the bank recover it. You can stop making payments right away or you can wait months, even years, after your bankruptcy is closed. There is nothing the lender can do to you unless you reaffirm the loan and, trust me, there is no good reason to ever reaffirm a home loan. A Chapter 7 bankruptcy filer really holds all the cards when it comes to what happens to the house.

Bankruptcy and mortgage treatment in Chapter 13.

A Chapter 13 requires the debtor to file a reorganization plan which states their intention regarding their repayment of debts. This includes the treatment of home loans. Either the debtor must keep the loan and keep making payments or surrender the house. This is a bit different than in Chapter 7 where you can retain the collateral and continue making payments without reaffirming personal liability on the loan. But there is one thing you can do in a Chapter 13 than you cannot do in a Chapter 7. You can strip off any unsecured lien. If you can show your house is worth less than the principal balance of the primary mortgage, any junior mortgage or home equity line can be stripped. Remember the lien you gave the bank? Well, in a Chapter 7 you can’t take it back but you can in a Chapter 13. For example, your house has three mortgages on it. The primary mortgage is $120,000. The home equity line is $40,000 and the home improvement loan for some windows is $8,000. If the house is worth less than $120,000, the Chapter 13 can strip off the other loans. After completion of the repayment plan, you will only owe the balance of the first mortgage. The other liens are gone. Most people don’t want to file 13s but this is a huge benefit that you can only get in a Chapter 13.

“M” also stands for:

 

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info. We help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.

 

“H” Is For Harassment By Creditors

HCreditor harassment, obnoxious phone calls to your house and job, lawsuits and garnishments overwhelm and stress people out. Ripping open your paycheck to see if there is a garnishment is not a good feeling.  Creditor harassment and debt collectors make ridiculous threats to get you to pay. Creditors say harassing things like they will have you arrested or they will take money from your bank account if you don’t start making payments.

Lies, goddamn lies, and creditors.

Here are some of my favorites:

The threat:

  1. You will be arrested if you don’t start making payments.
  2. They will take the money from your bank account immediately.
  3. Your check will be garnished this week.

The truth:

  1. Debtor’s prisons no longer exist. I assure you a cop is not going to arrest you because Visa said so.
  2. Your bank will only allow a creditor access if you give them permission.
  3. Garnishment will only happen after you have been sued and there is a judgment. Even then it will be a lawyer, and not a debt collector, doing the garnishing.

Having said all of that, threatening calls and letters is a symptom of a much bigger problem: You can’t afford to pay your debt. That’s the real problem. Whether it is because of job loss, wage reduction, overwhelming medical debt, the result is the same. There are only two ways I know of that are guaranteed to work to stop the collections. Either pay off the debt or file for bankruptcy protection.

Bankruptcy and the automatic stay.

Once you file for bankruptcy, the “automatic stay” kicks in. Your creditors are no longer allowed to contact you, write you, call you, sue you, garnish you, seize your property, etc. When you file your bankruptcy petition, all of your creditors are listed. The bankruptcy court mails notices to the creditors to inform them of the bankruptcy. If the contact continues, the creditor is in contempt of court and can be sanctioned for violating the automatic stay. In some cases, a debtor will be awarded damages and attorney fees for having to enforce the stay against the willful violator.

“H” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

“F” Is For Fraudulent Transfer

The F LetterProperty transfer before filing bankruptcy is usually a bad idea and almost always causes more harm than good. Under Section 548 of the Bankruptcy Code, the Trustee may avoid or set aside a transfer of property made by a debtor if there is an actual intent to defraud, hinder or delay creditors or if the debtor was insolvent at the time of transfer and did not receive less than full value.

Fraudulent Conveyances and Bankruptcy

The typical examples include the transfer of a car  or real estate to a family member or friend. Let’s say you have a 1969 Camaro which is owned outright. You transfer the title to your brother to hold for you until your bankruptcy is over. Bad idea. The Trustee would likely sue your brother to get the car back. The exemptions you may have had to keep the car are gone. After all, your exemptions are for you and not cars owned by your brother. That backfired. Another example is selling real estate to a family member for less than what it is worth to someone you know. If you don’t get what it is worth and you give someone a sweetheart deal, it is probably a fraudulent transfer. Even a gift could be a fraudulent conveyance if you were insolvent at the time of the transfer.

State of Michigan versus Federal Law

The Bankruptcy Code gives the Trustee up to two years before the bankruptcy filing to avoid any transfers. Under Michigan law, a creditor has up to six years to set one aside. The Trustee can elect to use either the State or Federal law, whichever gives a bigger advantage.

Bankruptcy Lawyers Can Help

Because most bankruptcy filers can exempt all of their property and possessions, there isn’t any need to transfer property to another person to hold for you. An experienced bankruptcy attorney will know how to analyze the impact of any transfers. Keep in mind, you have a duty to disclose all transfers so please don’t wonder about not telling anyone. That’s a good way to lose the property and get denied your discharge.

“F” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

Creative Commons License photo credit: mikecogh

“A” Is For Contract Assumption

gimme a!Bankruptcy eliminates contracts as well as debts.

An “assumption” occurs when a debtor agrees to continue performing obligations under a contract or lease. When a debtor files for bankruptcy protection from creditors, not only are debts eliminated, but so are the underlying contracts. Think about it. Your credit card is based on a contract for extension of credit. Remember that credit card application? When you buy a car or get a cell phone you need to sign a contract. Purchasing a house with a mortgage loan? That’s right. You signed a contract to pay the note back at the closing.

To assume or not to assume…That is the question.

Some contracts are secured by collateral, like a house or car, and some aren’t, like a typical credit card. A debtor must list their intentions regarding these debts. There are only two choices: assume or reject the agreement. Most all debts and contracts are rejected. Some are kept. The most common contract or lease assumption is for auto loans. Most auto lenders will repo your car if you don’t sign an agreement assuming, or keep, the debt. The terms are usually the same as the purchase but sometimes the debtor can negotiate more favorable terms.

A debt I never encourage a debtor to assume is the home mortgage.  Basically, you don’t need to. Your house will not be foreclosed if you don’t assume the debt. You remain the owner. Just keep making payments and you can stay in the home. You may want to change your mind and walk away from the house in the future. Don’t lock yourself in by assuming a house loan. Definitely don’t sign a second or third mortgage note especially if your house is upside-down.

Why would you want to assume that?

The one debt that every debtor usually agrees that they will not assume is a credit card. Why in the world would you agree to repay one of those? After all, didn’t you file bankruptcy to get rid of those? Some filers get nervous though that they will never get another credit card again. It may surprise you, but most of my clients get credit card offers in the mail about the same time they get their discharge. I know. It sounds crazy but it’s true. I can’t think of a single good reason why someone would assume a credit card debt.

“A” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people Downriver  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, read The Bankruptcy Book.