October 21, 2014

Purchase of A New Car Prior to Bankruptcy Filing — Beware the Trustee

One issue which comes up periodically when contemplating the filing of a bankruptcy is whether to purchase a new car prior to filing the case. Most chapter 7 debtors say that they need to purchase a car before the filing of the bankruptcy because they feel their credit will not allow them to purchase a car after the discharge. Most chapter 13 debtors say that they need a new car now, so they can survive the five year chapter 13. Generally, our experience has been that chapter 11 debtors rarely express these concerns. In each case the debtor intends to pay for the vehicle and retain it.

There is an Arizona statute, A.R.S. § 28-2133 which provides for the procedures relating to the recordation of a lien on a vehicle title. Essentially, what the statute means is that a creditor must perfect its security interest within 30 days of a new buyer taking possession of a vehicle, or the security interest may be set aside. The full text of the statute is as follows:

28-2133. Index and filing of liens, encumbrances or instruments; constructive notice

A. The department shall maintain an appropriate index of all liens, encumbrances or title retention instruments filed as provided by this article.

B. The filing and issuance of a new certificate of title as provided in this article is constructive notice to creditors of the owner or to subsequent purchasers of all liens and encumbrances against the vehicle described in the certificate of title, except those that are authorized by law and that are dependent on possession. If the documents referred to in this article are delivered to a registering office or an authorized third party provider of the department within thirty days after the date of their execution, the constructive notice dates from the time of execution. Otherwise, the notice dates from the time of receipt and filing of the documents by the department as shown by its endorsement. For the purposes of this subsection, the time stamp on the documents that is administered by the registering officer or authorized third party provider of the department electronically or otherwise is conclusive as to the time and date of delivery of the documents.

C. The method provided in subsection B of this section for giving constructive notice of a lien or encumbrance on a vehicle required to be titled and registered under section 28-2153 or a mobile home required to be titled under section 28-2063 is exclusive, except for liens dependent on possession. A lien, encumbrance or title retention instrument or document that evidences any of them and that is filed as provided by this article is exempt from the provisions of law that otherwise require or relate to the recording or filing of instruments creating or evidencing title retention or other liens or encumbrances on vehicles of a type subject to registration under this chapter.

D. Notwithstanding any other law and except as otherwise provided in this subsection, the failure of a motor vehicle dealer as defined in section 28-4301, a finance company or the department to complete the paperwork within thirty days as prescribed in subsection B of this section shall not result in the loss of the vehicle for either the lienholder or the person who purchased the vehicle. This subsection does not limit or negate the powers of a trustee under 11 United States Code section 547 or any successor statute.

So what, you may ask, has this to do with someone who decides to file for a bankruptcy and buys a car prior to the filing of the case? For a chapter 7, it means that if your new car lienholder DOES NOT properly perfect its lien within 30 days of taking delivery of the vehicle, then the Chapter 7 Trustee can get a court order that 1) voids the lienholder’s lien and 2) allows the Trustees to sell your car. You will get nothing, and no exemption proceeds from this action by the Trustee. The Trustee will use this money to pay a percentage to unsecured creditors who file claims in your chapter 7 case.

For a chapter 13, it means that if your new car lienholder DOES NOT properly perfect its lien within 30 days of taking delivery of the vehicle, then the Chapter 13 Trustee can get a court order that 1) voids the lienholder’s lien and 2) allows the Trustee to divert all the money that you would have paid to the car creditor through the chapter 13 plan to pay general unsecured creditors who file claims. You still get to keep the car in a chapter 13 and at the END of the case you get the title. If you do not finish the chapter 13, then the lien is restored if the case is dismissed. If the case is converted to chapter 7, the lien avoidance will be handled by the chapter 7 Trustee.

Bottom line is that you should seriously consider whether to file a bankruptcy after purchasing a new vehicle. You should definitely check to see if the lienholder has timely (no later than 30 days after delivery) filed its lien with the motor vehicle division. If you choose to file bankruptcy shortly after purchasing a new vehicle, it is extremely important that you contact competent bankruptcy counsel to guide you through the process so that your vehicle is not lost or put at risk of loss without your knowledge.

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September 26, 2014

Bankruptcy Protection For Private Student Loans

Private student loans are currently nearly impossible to discharge in bankruptcy. Legislation proposed by Sen. Tom Harkin (D-Iowa) as part of a larger higher education package would allow private student loans to be discharged in bankruptcy. Reform to the current student loan bankruptcy laws has to be addressed due to the size and scope of the debt amounts current student loan holders have.

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The original motivation for reigning in dischargeability of student loan debt centered around preserving government loans, with proponents of reform painting bleak scenarios about federal educational aid drying up if the discharge status quo carried the day. The first student loan reforms took place in 1976 as an amendment to the Higher Education Act and required that debtors wait five years from the beginning of their repayment period, or demonstrate undue hardship, before their student loans were eligible for discharge in bankruptcy. The five year bar was later extended to seven years and in 1998, the laws were changed so that governmental student loans could never be discharged absent a showing of undue hardship. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made all educational loans, public and private, nondischargeable absent a showing of undue hardship (an impossible standard to meet as interpreted by courts across the country).

With one-in-three students loans considered delinquent and often affecting a student’s ability to make purchases in the future, the bill could offer much-needed reprieve for college students left with mountains of both federal and private student loans. However, the likelihood of the bill moving forward this session is slim, the WSJ reports.

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September 18, 2014

HOMESTEAD EXEMPTION PROCEEDS — BEWARE THE TRUSTEE

One issue which comes up when contemplating the filing of a bankruptcy is the homestead exemption. Normally the issue is fairly straight forward. Arizona’s Homestead Exemption, ARS. 33-1101provides: Homestead exemptions; persons entitled to hold homesteads

A. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:

1. The person's interest in real property in one compact body upon which exists a dwelling house in which the person resides.

2. The person's interest in one condominium or cooperative in which the person resides.

3. A mobile home in which the person resides.

4. A mobile home in which the person resides plus the land upon which that mobile home is located.

B. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed one hundred fifty thousand dollars in value.

C. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person's interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemption at a time may be held by a person under this section.

There is no requirement to file any paperwork with the county recorder if you only have one home that you live in. If you have more than one home, you may wish to consider filing a homestead declaration with the county recorder where you live.

Although the homestead exemption appears to be rather straightforward, there are issues which may arise. One of those issues comes up when a debtor sells their home BEFORE filing bankruptcy, or AFTER filing bankruptcy. It is possible to exempt, or hold safe, the proceeds from the sale of one’s homestead, however there are strict requirements that have been developed through case law. A debtor who sells a home should place that money in a special bank account that has ONLY homestead proceeds. No other monies should be co-mingled in the account. To co-mingle could result in a loss of the exemption to the Trustee or to creditors.

A very important rule, which goes to the purpose of the homestead exemption, is that one who sells a home and does segregate the homestead proceeds must use the proceeds to purchase another home within eighteen months after receiving the proceeds. Failure to use the proceeds to purchase another home could result in the loss of the exemption and a trustee’s move to confiscate the funds for the benefit of creditors.

Bottom line is that the homestead exemption is very important and allows one to exempt up to $ 150,000.00 in equity for the purpose of a home. If you choose to sell your home before, or shortly after the filing of a bankruptcy, it is extremely important that you contact competent bankruptcy counsel to guide you through the process so that your homestead proceeds are not put at risk of loss.

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September 3, 2014

WHY WOULD ANYONE FILE A CHAPTER 13 BANKRUPTCY?

As followers of this Blog know, Chapter 7 is the most common type of bankruptcy. This is the bankruptcy that discharges your debts. In exchange for that, a trustee is appointed who liquidates certain assets to pay your debts. However, you get to keep other items, i.e. the trustee cannot take them. These include your home with equity of up to $150,000, your car with equity of up to $6000, most household goods and appliances, a computer, and retirement plans.

A Chapter 13, on the other hand, is a reorganization bankruptcy where you pay your disposable income to the trustee for 3-5 years in order to obtain your discharge. Debts do not necessarily have to be paid in full. Disposable income means the income you have left over after paying your reasonable living expenses such as house payment, food, utilities etc. Paying $1000 per month to play golf would not be a reasonable expense.

When looking at these 2 types of bankruptcies, many clients ask me why someone would ever file a Chapter 13? After all, who would want to make payments for 5 years in a Chapter 13, when there are no payments in a Chapter 7 and you get your discharge in 4-5 months? The answer is that you can accomplish things in a Chapter 13 that you cannot do in a Chapter 7. Here are some of the reasons someone would file a Chapter 13 rather than a Chapter 7.

1) If your income is very high, the bankruptcy code may say you do not qualify for a Chapter 7.

2) A Chapter 13 can pay your taxes in full over 5 years, making IRS take payments that you can afford.

3) A Chapter 13 can stop a house foreclosure and allow you to make up the back payments over time.

4) Many of my self-employed small business clients file Chapter 13 because it allows them to keep their business. In a Chapter 7, it is very likely that the Trustee will take over or shut down your business.

5) In a Chapter 13, the trustee does not take any of your assets, you get to keep them all. I had a client who owned a sand rail. This was not exempt and the trustee would have taken it in a Chapter 7. We filed a Chapter 13 for her and she got to keep it.

6) Divorce debt (but not child support or spousal maintenance) can be discharged in a Chapter13 only. It cannot be discharged in a Chapter 7.

The Chapter 13 can be a powerful tool to allow you reorganize your finances and should never be overlooked when one considers their bankruptcy options. That is why we offer a free 1.5 hour consultation so we can explain the bankruptcy process to you, look at your individual situation, and advise you of all of your options, both bankruptcy and non-bankruptcy. You will then have the necessary information needed so you can make the appropriate informed decision on what is right for you.

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August 22, 2014

“So What?” TAX REFUNDS AND CASES UNDER CHAPTER 7 & 13

During our initial bankruptcy consultation we go out of our way to advise potential clients that they will likely be required to turnover income tax refunds to their bankruptcy trustee. Many potential clients choose to delay the filing of their bankruptcy until they have filed tax returns, and received and spent tax refunds. Clients who retain our firm are again reminded of the requirement to turnover tax refunds to the Trustee.

However, sometimes the case is filed and the client collects and spends the tax refunds without consulting counsel. The usual explanation is “I am bankrupt, I needed the money for... insert a compelling, important reason.” When the requirement is again brought to the client’s attention we sometimes hear “So what? What can the trustee do about it?” This is an important question, and the answer is of critical importance.

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CHAPTER 7 TRUSTEE:
If a debtor refuses or fails to turnover a required tax refund (or required portion thereof) to the chapter 7 Trustee, the Trustee can file a motion with the court seeking to prevent the discharge of the debtor’s debts. If a discharge of debts has already been ordered, the chapter 7 Trustee may seek to have the discharge order revoked (set-aside). If the discharge order is revoked, the debtor can then be pursued by her/his creditors as if no bankruptcy had been filed.

CHAPTER 13 TRUSTEE:
If a debtor refuses or fails to turnover tax refunds in a chapter 13 case, the chapter 13 Trustee may prevent the entry of a discharge order or seek to have the discharge order revoked. If the debtor has not completed the regular monthly plan payments, the debtor may seek, through counsel, to have the turnover of the refunds waived. It is very important to acknowledge that there must be a very compelling, documented reason for the waiver. The Trustee and/ or the Judge will consider the circumstances and make a decision. The debtor will then have to comply or the chapter 13 case may be dismissed.

Potential bankruptcy filers should be aware of the requirement to turn over tax refunds to the trustee and prepare their affairs accordingly.

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July 22, 2014

NINTH CIRCUIT BAP PROTECTS BUSINESS OWNERS

The Ninth Circuit Bankruptcy Appellate Panel recently made a ruling that will protect business owners in bankruptcy from what has long been an injustice. The Court ruled in Sachan v. Huh, 2014 WL 936803 that debts that are the result of an agent or employee’s fraud can be discharged unless the debtor participated in the fraud. Here is why this ruling is important.

I filed a bankruptcy case some years ago for a client who owned 3 convenience stores in Kingman, Arizona. Unfortunately, the bad economy forced him to file bankruptcy due to the large business debts regarding the stores. Normally in a Chapter 7 bankruptcy he would have received a discharge of all of his debts, which would have allowed the client and his family a fresh start. But in this case there was a problem.

In bankruptcy, fraud debts cannot be discharged. This makes sense, as bankruptcy is set up for the poor but unfortunate debtor who incurs debts that he honestly cannot pay. If the debtor has debts obtained through fraud (Ponzi schemes, lying on loan applications, stealing money from his employer), he should not be able to escape these debts in bankruptcy. This is what happened to my debtor in his case. He had a manager who ran one of the stores. Unbeknownst to my client, the manager was ripping off the gasoline company. The manager would order gas for the pumps, divert the gas after delivery to his own personal tanks so he could sell it himself, and then the manager failed to pay the gas company. The manager then skipped town, leaving my client with an unpaid $100,000 bill to the gasoline company.

Clearly, the manager scammed the gasoline company. My client knew nothing about this. When he filed bankruptcy, however, the gasoline company argued to the judge that even though my client had no participation in the scam, he was automatically guilty of fraud, because he was the employer and the fraud of his employee (the manager) counted has his fraud. The bankruptcy judge thought this was unfair, but said he had no choice but to rule against my client, because the law at that time said that the fraud of an employee or agent is always imputed to the principal (owner of the business). Now, thanks to the Sachan case, this legal precedent has been overruled and my business clients can get the fresh start in bankruptcy they deserve without being saddled with the frauds of their employees.


Harold E. Campbell, Esq.

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November 8, 2013

11 U.S.C. § 523(a) and Debtor’s Prison in the United States of America.

So they taught you in school that there was no debtor’s prison in the great nation of the United States of America, did they? Well, of course, most school children know there’s no debtor’s prison here, but are they correct?

Debtors prisons are as old as humanity. The Bible deals with the idea in Matthew 18:23-35. In this biblical story, servant A is called before his king. Servant A owed a great deal of money to the king. The king ordered that Servant A be sold into slavery, with his wife and children also to be sold, all to pay the debt. Servant A begged and the king showed mercy, cancelling his debt. Later Servant A came across Servant B, who owed a small amount of money to Servant A. A grabbed B by the throat and yelled at him to pay what he owed. B begged A to have mercy and give additional time to pay. A had no compassion and had B thrown into debtor’s prison. As these stories go, A’s fellow servants ratted him out to the king and the king was very, very unhappy with A, calling him wicked and essentially telling him that his soul would burn in the eternal fires.

Debtor’s prison is not a fun place. Essentially, it’s a jail where you are placed until your debt is paid. Since you are in jail, you can’t pay your debt and someone must come to your aid, a benefactor or loved one. None of these in the U.S.A.?

As a bankruptcy attorney, I have been fond of telling people we don’t have debtor’s prison in our country. When I decided to do this article, I did some researched and was appalled to learn that I had been incorrect. Here’s what I learned:

According to the American Civil Liberties Union “Across the country, in the face of mounting budget deficits, states are more aggressively going after poor people who have already served their criminal sentences and jailing them for failing to pay their legal debts. These modern-day debtors' prisons impose devastating human costs, waste taxpayer money and resources, undermine our criminal justice system, are racially skewed, and create a two-tiered system of justice.”

According to the World News Daily,
“The ACLU did a study in 2010 revealing the use of debtors prison practices in five states, Louisiana, Michigan, Ohio, Georgia and Washington. That led to a comprehensive study by the ACLU of Ohio, released just this month, on the widespread practice of jailing people for debt.”

What these articles, and other research, reveal is that the practice of sending people to jail for their past due charge card debt is not happening, but people can be, and are, sent to jail for contempt of court, only to be released upon the payment of certain debts. These include past due child support or alimony (11 U.S.C. § 523(a)(5)); fines, penalties and forfeitures payable to and for the benefit of a governmental unit (11 U.S.C. § 523(a)(7)); and orders of restitution under title 18, United States Code (11 U.S.C. § 523(a)(13)).

These are just some of the things that can wind you up in jail if you fail to pay them, and is not, by any means, an exhaustive list. The trick is usually that you are summoned to appear in court to explain why you have not paid the debt. Upon receipt of the summons you fail to appear, and a bench warrant is put out for your arrest. Typically you are arrested for the failure to appear, but often you are not released until the debt, or a portion of it, is paid. Its fairly common in Arizona, particularly amongst sheriff Joe’s officers, that people are picked up on warrants for failure to appear on child support or alimony issues, now referred to as domestic support obligations.

The rub is that if the debt falls within one of the exceptions to discharge set forth in 11 U.S.C. § 523, you may not be able to prevent a run in with the law by filing for bankruptcy relief. And although the debt might not be dischargeable in a chapter 7 bankruptcy, keep in mind that an excellent bankruptcy attorney may be able to restructure the non-dischargeable debt in a chapter 11, 12 or a chapter 13 plan, and get you protection through the use of the “automatic bankruptcy stay”.

So the next time some smart friend or neighbor tells you that you don’t have anything to worry about “because there is no debtor’s prison in the U.S.A.”, refer them to this blog so they may be educated.

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October 23, 2013

FORECLOSURE SCAM ARTIST GETS 11 YEARS IN FEDERAL PRISON

Here is a good example of why you need a reputable bankruptcy attorney to help when you have financial troubles with your house. A fraud artist who claimed to help distressed homeowners stave off foreclosures has been sentenced to 11 years in Federal prison after he was finally caught in Waterloo, Canada. Here was his scam.

Mr. W would solicit homeowners who were facing foreclosure on their home. He told them that for a fee (usually $700) he could legally delay the foreclosure. After he was paid, he would get a list of people who had filed for bankruptcy in the homeowner’s state. He would then prepare a phony deed that would transfer a fractional share of the homeowner’s home to someone who had filed bankruptcy. After recording the deeds, he would mail them to the bank or lender foreclosing on the house informing them that they were stayed from doing the foreclosure because the owner (the person in bankruptcy who never knew about the phony deed) was in a bankruptcy. The bank would then postpone the foreclosure for several months until it finally figured out in the bankruptcy that the bankrupt really had no interest in the home. When the unwitting debtor in bankruptcy would finally disavow that he owned part of the house, Mr. W would then just pluck another name from the bankruptcy database and start this process all over again. In this manner, he filed fraudulent foreclosure documents on 824 homes, using at least 414 bankruptcies filed in 26 judicial districts. He collected about $1,200,000 from clients during the life of the scheme. Needless to say, the homeowner ended up losing his house in the end. Mr. W. pleaded guilty to bankruptcy fraud and identity theft. He received a sentence of 11 years in prison, was ordered to pay nearly $60,000 in restitution and was ordered to forfeit about $100,000 of property previously seized by law enforcement.

What do we learn from this? If it sounds too good to be true, it probably is. If your home is in financial trouble and in danger of foreclosure, a chapter 13 bankruptcy reorganization can often save your home. You do this by going to see an experienced bankruptcy attorney. You do not go see Mr. W.

At Campbell & Coombs we offer a free consultation to people who are in danger of losing their home to see if a Chapter 13 reorganization can help.

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October 4, 2013

To Trust or Not To Trust- Does a Trust have any effect on your bankruptcy?

One item that is often overlooked by persons considering filing bankruptcy is that handy trust that someone said you had to have years ago. Remember, the “My Family” living trust that you created a few years ago? You might have placed a car, a house, or even a bank account in the trust. Then when you look to file bankruptcy, you have forgotten all about it. Often, this is not caught by the bankruptcy attorney until you begin providing things like bank statements and car titles. It is, however, an important matter for discussion before you chose to file bankruptcy, and then before you chose which chapter to file.

Question 10b. of the Statement of Financial Affairs (among the initial bankruptcy documents filed in any bankruptcy case), requires the debtor to respond to the following: “b. List all property transferred by the debtor within 10 years immediately preceding the commencement of this case to a self-settled trust or similar device of which the debtor is a beneficiary.”

Question 14. of the Statement of Financial Affairs requires the debtor to respond to the following: “Property Held for Another Person. List all property owned by another person that the debtor holds or controls.”

On Schedule B, the debtor is required to list the following assets, which may include an interest in a trust:

19. Equitable or future interests, life estates, and rights or powers exercisable for the benefit of the debtor other than those listed in Schedule A - Real Property.

20. Contingent and noncontingent interests in estate of a decedent, death benefit plan, life insurance policy, or trust.

35. Other personal property of any kind not already listed. Itemize.

You get the point. If you have an interest in any type of trust, it has to be reflected in your bankruptcy documents somewhere. A trust may show up as an asset, or you may simply be a beneficiary of a trust that you have no control over whatsoever.

How can you be effected if you have a Trust? There are different types of Trusts. If yours is a self settled Trust, you may have transferred personal assets to the Trust prior to filing your bankruptcy. This could result in your inability to claim those assets as “exempt”, thus losing them to the trustee. It might result in the Trustee suing the Trust to recover the asset if it was transferred without consideration. Many complications are possible. There may be ways to eliminate some of the problems created when you transfer assets into a Trust pre-bankruptcy, but you will need to speak with an attorney to discuss your particular situation.

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September 12, 2013

CHAPTER 13 DEBTORS MAY KEEP SOCIAL SECURITY INCOME

Consumer Bankruptcy News in its November 2012 edition reports that Chapter 13 debtors may keep their social security income. The Bankruptcy Code says Social Security income is not included in a debtor’s “disposable income.” The 10th Circuit Court of Appeals ruled in Anderson, Trustee, v. Cranmer (In re Cramner), that neither recent Supreme Court decisions or the Bankruptcy Code require that Social Security income be committed to Chapter 13 plan payments.

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In In re Cranmer, the Chapter 13 trustee asserted that the debtor would receive more than $87,000.00 in Social Security income over the life of his plan and objected to the debtor’s plan on that basis. The 10th Circuit rejected the trustee’s argument stating that Bankruptcy Code Section 105(10A)(B)’s definition of “Current Monthly Income” specifically excludes benefits received under the Social Security Act. Therefore, Social Security income is not included when calculating disposable income.


The 10th Circuit found additional support for its conclusion in the Social Security Act, which shields payments made pursuant to the Act from “execution, levy, attachment, garnishment, or other legal process,” or from “the operation of any bankruptcy or insolvency law”.

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September 6, 2013

TAXES OWED TO THE IRS: OFFERS IN COMPROMISE VS. BANKRUPTCY

We see many people in our office who owe back taxes to the IRS. If you ignore the IRS, they will levy your wages or bank accounts, leaving you with no money. There are several options you have to deal with this situation.

1. Installment agreement- You can enter into an installment agreement with IRS to pay off the tax. Interest will still accrue so this may take a very long time, but at least you will know that there will be no levies as long as you are current on your payments. This is the least attractive option. Our office can help you in obtaining an installment agreement.

2. Offer in Compromise- This is what all the ads you see on television or hear on the radio are referring to when they talk about the “New IRS Programs” or “The Fresh Start Initiative”. The Offer and Compromise (“OIC”) is not a new program and has been around since the 1990s. An OIC allows you to pay a smaller lump sum in full satisfaction of the tax debt. It is all formula driven: you must pay to the IRS as much as they would get if they sold basically all of your property and you pay them your monthly disposable income multiplied by 12. Disposable income means your monthly gross income less certain stingy expenses the IRS allows you. The key here is to manipulate the formula so IRS has no choice except to accept the OIC, something IRS seems to try and avoid. When doing an OIC it is important that you choose a reputable local attorney or accountant who has OIC experience. Most of the companies advertising on the radio or internet are out of state and I have never had a client give me a positive comment about them. They tend to take a large retainer from you after making big promises without ever reviewing your case, and then are unable to deliver. When you meet face to face with a local attorney, he can tell you what your chances for success are right then. Sometimes the numbers just do not work for an OIC.

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3. A chapter 7 bankruptcy can discharge tax debt if it is for a tax year over 3 years old, it is over 2 years since the return was filed (you must have filed a return) and it is over 240 days since the tax was assessed. This is often a good way to go because you are dealing with a judge rather than a low level IRS employee.

4. If the tax is not old enough for a chapter 7 discharge, or it is 941 civil penalty tax, which can never be discharged in a bankruptcy, a chapter 13 bankruptcy is available. In this bankruptcy you pay off the tax in full over 5 years with equal monthly payments, but without interest.

The important thing to remember here is that just because you owe the IRS, you are not helpless and at their mercy. All of the above options can help you with your IRS debt. Most local attorneys and accountants offer a free consultation (just like we do here at Campbell & Coombs) to go over your case and analyze all your options.

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September 5, 2013

WHAT IS A "LIEN STRIP" AND HOW DOES IT WORK?

When the real estate market crashed, starting in 2007, we had many homeowners stuck in a situation where their homes plummeted in value so much that there was no equity at all. Thousands of homeowners walked from their homes, allowing the properties to be foreclosed upon.

A lien strip is where the lien of a lienholder, other than the first mortgage, is stripped and ultimately changes the status of the obligation owed to the lienholder from “secured” to “unsecured”.

The legal authority for lien stripping in Chapter 13 is 11 U.S.C. § 1322(b)(2). and 11 U.S.C. § 1328(a). § 1322(b)(2) allows a wholly unsecured lien on a debtor’s principal residence to be modified. § 1328(a) allows any unpaid portion of the claim to be discharged as an unsecured debt.

In order to properly “strip” a lien (be it a second mortgage, third mortgage, or a judgment lien), the value of the debtor’s home must be less than the amount owed on the superior mortgages or liens.

A commonly misunderstood aspect of lien stripping is understanding what is going on. If you owe money to someone, it is an “obligation”, or something that you are supposed to pay. Many companies that you incur an obligation to want to be extra sure they get paid. In order to do so, they make you give them a “lien” against your property. There are, therefore, two parts to each obligation owing on your home. Usually, homeowners sign a note, which is the obligation, and a deed of trust, which is the lien. A chapter 7 bankruptcy can wipe out your obligation to pay a mortgage, but it does not wipe out the lien. If you do not pay, the lienholder can foreclose and take the property back. In other words, the lienholder can use the property that you gave them a lien on to satisfy the obligation, even though you might not technically owe it anymore.

In chapter 13, we have different rules, so we can get rid of the lien. Typically, a lien strip requires a special lawsuit, called an “adversary proceeding”, which is filed against your lienholder. Often there are differences of opinion as to the value of your property, and the issue could wind up going to trial in front of a bankruptcy judge.

Ultimately, if you are approved for a lien strip, it means that your obligation to the creditor is treated as unsecured (you do not necessarily have to pay all of it, and may pay only a small percentage of what is owed). The catch to the lien strip is that, in order to preserve it, you must finish making all of the required payments in your chapter 13 bankruptcy. Once the chapter 13 bankruptcy is completed, by fulfilling all of the requirements of your plan and stipulated order confirming plan, a discharge can be entered in the chapter 13. Additionally, the judge will sign a final order stripping the lien. This order should be recorded with your county recorder in order to preserve it for the real estate records.

If your chapter 13 case is not completed, you will not get the benefit of the final order stripping lien. So, if your chapter 13 case is dismissed, no lien strip. You still owe the lienholder and they may foreclose if you do not pay them. If you convert your chapter 13 case to a chapter 7 case, no lien strip.

The concept of lien stripping in chapter 13 appears to be to give a fresh start to the homeowner debtor who puts his or her best efforts forward to try and pay their debts, but cannot pay all of them. As housing prices increase, lien strips will become less and less popular, eventually disappearing all together.

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