It goes without saying that these are unprecedented times. The world economy has been devastated as a result of the Covid-19 pandemic. Tens of millions of people in this country have lost their jobs.
I often file either chapter 7s or chapter 13s for individuals that own houses. Most of the time, the individual who files wants to keep their house. And most of the time it is easy for the debtor to keep their house in the bankruptcy. The key issue is the amount of equity in the house: the difference between what the current fair market value of the house minus the amount of money owed on the mortgage(s).
The two main bankruptcies for individuals are chapter 7 and chapter 13. In general, if an individual is looking to obtain a fresh start and obtain debt relief by filing a bankruptcy, chapter 7 is preferable to a chapter 13. The threshold matter for determining whether someone qualifies for a chapter 7 versus a chapter 13 is what kind of debt that the debtor has.
No!!! In the summer of 2009—after the economy collapsed due to the rampant fraud and corruption of Wall Street—General Motors filed a chapter 11 bankruptcy. Not only did this bankruptcy filing for GM help the owners of GM (the shareholders), it helped all the employees, and all of the companies that do business with GM, and everybody who has a retirement account that has GM stock.
In some circumstances a chapter 13 bankruptcy is a better strategy for dealing with past due taxes. Indeed, as my last blog post explained, a Chapter 7 case can be a powerful tool in dealing with past due taxes. A chapter 7 stops, at least briefly, any pending IRS or Oregon Department of Revenue (ODR) paycheck or bank account garnishment, and most other collection actions. And, most importantly, a Chapter 7 case can either: 1) discharge (legally write off forever) certain, usually older, income tax debts; or 2) discharge enough of your non-tax debts so that—after your Chapter 7 case is completed— you can afford to enter into a reasonable monthly payment plan with the IRS and/or the ODR on the taxes that can’t be discharged; or 3) a combination of the above two—discharge some of your tax debt, along with some or all of your other debts, so that you can afford to enter into a monthly payment plan with the IRS and/or ODR on the taxes that can’t be discharged.
A Chapter 7 bankruptcy can be a very powerful strategy for dealing with past due income taxes. A Chapter 7 can stop a tax garnishment, discharge older tax debt, and allow you to pay off newer taxes. A Chapter 7 will stop the IRS, the Oregon Department of Revenue (ODR), and/or any other state or local tax entity from garnishing your bank accounts and paychecks. The filing will stop a threatened tax lien from being recorded against your home and will stop threatening letters and phone calls for at least 90 days after the filing, and, in some cases, forever.
Income tax debts CAN be “discharged” (permanently written off) if they meet certain conditions. These conditions may be quite easy to meet.To write off income taxes under either Chapter 7 or Chapter 13 takes meeting four conditions. Two of these conditions are very seldom a problem. That means that most likely you can discharge a tax debt if you meet the other two conditions. And you will likely meet these other two conditions sooner or later. It’s mostly a matter of time.
As previously discussed, Oregon law now allows residents to choose between using the Oregon exemptions or the federal exemptions when filing a bankruptcy. In most situations, the federal exemptions are significantly better than the Oregon exemptions. Only if a debtor owns a house with significant equity will the Oregon exemptions be better for the debtor than the federal exemptions. If you had to pick the single federal exemption that will help the most people, it’s likely the wildcard exemption. That’s especially true for people who either don’t own their own home or don’t have any equity in their home.
Exemptions are very important. One of the crucial considerations in bankruptcy is whether all of your assets are “exempt,” or protected by the law from your creditors. If all your assets are exempt, then you can keep everything that you own if you file a Chapter 7 “straight bankruptcy.” Whether your assets are exempt also affects how much you would pay to your creditors and how long you would do so if you file a Chapter 13 “adjustment of debts” case. This consideration can also greatly influence which of these two options are better for you.
In Oregon, banks have traditionally chosen to non-judicially foreclose on homes after a period of default on the mortgage payments (non-judicial foreclosures can be quicker and less costly than judicial foreclosures). There is no law that requires the bank to foreclose within a certain period of time. Indeed sometimes many months or years pass before the bank gets around to beginning the foreclosure process.