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Terry L.
Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2568
Experience:  Better Business Bur 15yrs bankruptcy experience. Chicago Bar
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I am a single woman in California with an income of about $48k

Customer Question

I am a single woman in California with an income of about $48k annually. My home was foreclosed on Nov 2007 so now I rent.
Faslo Solutions caught up with me & would like to collect $43k for a 2nd mtg I had initially with Indy Mac Bank. Additionally, I owe $60k to the IRS for 2005 and $3700 for 2007. I have been paying on installment since 2007 & the interest is breaking me.

I spoke with an atty who stated I could discharge the taxes & the 2nd mortgage with a Ch.13 so I paid all his fees & the filing fee. Although I've completed my BK paperwork, I have not returned it yet because I'm worried about this accuracy of the advice I've received. I've read recently that I cannot in fact discharge the old taxes I owe with a
Ch13. When I looked for reassurance from him on that, he is condesending & seems bothered that I asked. He insists Ch 13 will take care of the taxes & the 2nd mortgage. Can you tell me if this is correct?

As an alternative would it be fool-hearted thinking on my part to try & make a deal with FASLO & the IRS to settle rather than file a humiliating BK that I'm not even sure will solve my problem?
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  Terry L. replied 3 years ago.

Terry L. :

Hi and thank you for your question. In the future, you can request me to answer any further questions.

Terry L. :

Chapter 13 will pay back a percentage of the consumer debts, including the 2nd mortgage deficiency.

Terry L. :

As for income taxes, they are also included in the chapter 13.

Terry L. :

If the tax is more than 3 years old, filed on time and accurately, and not assessed in the last 240 days, then they can be paid at the unsecured rate of your chapter 13 plan

Terry L. :

If the taxes are less than 3 years old, then they will be paid 100% thru the chapter 13 plan.

Terry L. :

so, if these taxes were filed in 2005 and 07, then you should be able to pay them at the unsecured rate.

Terry L. :

In many cases, that can be as low as 10cents per dollar.

Customer:

Hello Terry, I don't understand what you mean when you say "they can be paid"

Terry L. :

Chapter 13 is a debt repayment plan.

Terry L. :

You consolidate debt over 3-5 years.

Terry L. :

Consumer debt, including the 2nd mortg, are paid back, usually at a discounted rate - say, 10% of the claim.

Terry L. :

the remainder is discharged.

Terry L. :

does that make sense?

Terry L. :

if you are filing chapter 7, debts are just eliminated, not repaid. you said ch13, so I assumed that you were filing chapter 13.

Customer:

It's different than how the atty explained it to me. He said the trustee totals up the whole of my assets which is about $6k & then makes a payment plan over 3-5 years where I pay the amount of my remaining assets ($6k) fro the proveledge of being able to keep them.

Terry L. :

Yes, it is the same theory.

Terry L. :

You pay back enough of your unsecured debts to protect those assets.

Customer:

Here is my frustration. I have been paying for years on this IRS debt getting nowhere near the balance. I would like to not spend the next five years still paying. I can't even afford to pay the amount I'n currently paying $400.00 per month.

Terry L. :

So, if you have $6000 in un-exempt assets, your chapter 13 plan would pay back 100% of any secured debts (cars, furniture etc) 100% of priority tax debt and child support (if the taxes don't meet the rule I stated above), then they would pay back $6000 of the remaining debts. If you owe exactly $6000 in other debts then you would have a 100% plan. If you have $60,000 in unsecured debts, then you would have a 10% plan. The plan percentage varies, based on the assets like you described, as well as what your monthly disposable income is. the remaining unpaid balances of the unsecured debts are discharged at the end of the case.

Terry L. :

did you timely file the taxes in 2005 and 07 for which you owe?

Customer:

Is there any reason you can see why I couldn't file Ch 7 and be free of this debt in it's entirety & be done with it, as opposed to having it drag out for 3-5 years?

Customer:

Yes I did file timely in 05 & 07.

Terry L. :

were they assessed in the last 240 days?

Customer:

They were assesed further back than 240 days>

Terry L. :

If you have $6000 in unexempt assets, the chapter 7 trustee could liquidate those assets to pay to your creditors. (You may be able to offer a cash payment to avoid liquidation).

Terry L. :

otherwise, you may be a ch7 candidate, but you must review the means test calculation with your attorney

Terry L. :

The means test can disqualify debtors from ch7 if they make too much income based on their family size and location.

Customer:

Will a Ch 7 discharge a 2nd mtg & IRS debt?

Terry L. :

2nd mortgage yes

Terry L. :

taxes: must be income tax, for a tax year 3 years before the bankruptcy, filed accurately, and filed more than 2 years before the bankruptcy case, and not assessed in the last 240 days.

Terry L. :

if meets these requirements, then they will discharge in ch7

Customer:

Okay so- the IRS agreed with the 05 return that stated I owed them 57K. It's not higher with interest & penalty so tehy consider that an accurate filing correct?

Customer:

I meant it's NOW higher with penalty & interest. Sorry!

Terry L. :

I cannot give you specific legal advice in this forum, this does not create an attorney client relationship, you need to discuss the matter with your attorney to see if it meets the rules for dischargeability. Thank you for understanding

Terry L. :

Talk to your lawyer to see if the ch7 is a feasible option.

Terry L. :

As I mentioned, you have to "pass" the means test to qualify for chapter 7, and you'd lose assets too.

Terry L. :

So, you may be better off in the chapter 13, you'll still pay the same amount as you would lose in the chapter 7.

Customer:

I understand. I guess the crux of my question is this:

Customer:

Which of these Chapters 7 or 13 takes care of both my problems without putting me into a payment plan.

Terry L. :

Chapter 7 discharges debt, but, as you described, you'll lose $6000 worth of assets.

Terry L. :

Chapter 13 repays $6000 to the unsecured debts, to protect the assets.

Terry L. :

If you don't want a payment plan, then you lose assets.

Terry L. :

if you want to protect the assets, then you are in a repayment plan

Customer:

But at least in the Ch 7 the loss would be immediate & overwith as opposed to being dragged out for 3-5 years?

Terry L. :

Its the same difference.

Terry L. :

If you don't care about the assets, then the ch7 is quicker, true.

Terry L. :

If your asset that isn't protected, like your car, then you lose your car.

Terry L. :

It depends on what assets that are unexempt

Terry L. :

Those are what are liquidated.

Terry L. :

Either way, the creditors will get 6k.

Terry L. :

either monthly, over 3-5 years, or thru a liquidation.

Terry L. :

You need to review your assets, and exemptions with the trustee if you are trying to do chapter 7.

Terry L. :

excuse me, with your attorney (not the trustee)

Terry L. :

talk to your lawyer to see if the chapter 7 is even available.

Terry L. :

Your income is right at the median income for 1 person in Ca, so you may have to make sure that you pass the means test first, before even getting to this issue

Terry L. :

if you do not pass the means testing, then ch7 isn't an option

Customer:

Or if I choose not to file either Chapter & try to settle with the 2nd mortgage people & the IRS there might be a possibility that I could arrange payments with them directly without suffering the BK. In your experience have you seen settlements done with 2nd mtg holders?

Terry L. :

If you are having issue paying $6000, you probably won't get a settlement worth reviewing. Any discount is income to you which you'll be taxed on as well.

Customer:

So they would send me a 1099 which I would have to report on my taxes as income correct?

Terry L. :

you got it

Customer:

So there is "some" good news. If I pass the means test, I should be able to file a Ch 7.

Terry L. :

If you pass the means test, then ch7 may be available, but you'll lose $6000 in assets to liquidation

Terry L. :

I don't have many clients willing to lose assets, so they usually do ch13.

Terry L. :

but that is your choice.

Terry L. :

Talk to your lawyer to review what you'll lose if you qualify for ch7

Customer:

It sounds like there is no way around a 3-5 year payment noose. I there a penalty if I pay it off sooner?

Terry L. :

It depends on the terms of your plan.

Terry L. :

Each plan has different terms for early payoff.

Customer:

I I choose not to file BK now & sell some of my assets, how much time must pass before I could file later on without scrutiny of the sale of any assets.

Customer:

If I choose...sorry

Terry L. :

you have to disclose the liquidation for a year on the statement of financial affairs.

Terry L. :

You must get fair market value and spend down proceeds on necessities too, the court will scrutinize these transactions.

Customer:

what does spend down proceeds on necessities mean please?

Terry L. :

cash for the sale of the items is an asset too, so you must spend the $6000 proceeds on your monthly living expenses to avoid scrutiny after 1 years

Customer:

I understand so I can't bank the cash from any sale.

Terry L. :

It would be liquidated instead of the asset, yes.

Terry L. :

You should meet with your lawyer to review the exemptions and possibility for ch7, and then you can plan your case accordingly with their advice on how to maximize your protections.

Customer:

My lawyer at the moment is not giving me all the info I need that's why I'm writing you. It's tough when you've paid your fees up front & then are not getting the service you paid for. I'm sure you understand.

Terry L. :

Then you need to go sit down with your lawyer. Don't take no for an answer.

Terry L. :

do you have any final bankruptcy questions?

Customer:

Thank you! Now that you have answered my questions about the Ch 7 eligibility, means test etc. I should request him do a means test. I feel more empowered now so I appreciate your help. One last thing though, is it true that Ch 13's are more profitable for lawyers because within the repayment plan, a continuing fee exists which goes to the attorney. In essence, the receive a sort of residual income stream from the filer?

Terry L. :

It is a flat fee where I practice, your fee agreement controls. They are usually approved by the court as well. Chapter 13's are much more time consuming and complex, and usually cheap for the amount of work the attorney must do!

Customer:

Okay. Thank you for your time.

Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2568
Experience: Better Business Bur 15yrs bankruptcy experience. Chicago Bar
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