Trustee Garcia’s free financial management course has been discontinued.

All bankruptcy debtors must complete two counseling courses – one in credit counseling in order to be eligible to file bankruptcy and a second in financial management in order to be eligible to receive a discharge.

For years, Trustee King (retired) and his successor Trustee Garcia have offered a free financial management course to Chapter 13 debtors who have been assigned to them.  I have not charged my Chapter 13 clients for the financial management course on the assumption that they would enroll in this free course.

However, on account of dropping attendance figured, this free course is being discontinued.  The last course will be held in Oshkosh next month.  Accordingly, those who have not yet completed the second counseling course (or those whose cases aren’t even filed yet) will need to take the course through a different provider.

Source of Funds

There is a misunderstanding among a few people who elect to go through Chapter 13.  I want to emphasize “few” – this is by no means a common misunderstanding.  But I’ve had to debunk this myth one too many times, so it’s time to put this out there and clarify.
The Chapter 13 Trustee is NOT an independently wealthy individual who pays all of your debts for you, and then you pay the Trustee back over the course of your Chapter 13 Plan.
The Chapter 13 Trustee acts as a conduit for your payments to creditors.  You make payments to the Trustee, and the Trustee then redistributes those funds to your creditors in a manner (order of priority and amounts) that are dictated by the terms of the Plan, statutes, and other regulatory policies.
Your creditors are enjoined from pursuing you separately for their unpaid balances while you are in bankruptcy, until at the end when you ultimately receive your discharge from certain remaining unpaid balances.
If you default – if you make less than your full monthly plan payment or if you stop making your plan payments altogether – the Trustee simply will not have funds to pay your creditors.  It should not come as a surprise to anyone that individual creditor accounts show no recent payments from the Trustee if you have stopped making plan payments to the Trustee.

Trustee Garcia’s Financial Management Course

As a policy, my clients who file for Chapter 13 Bankruptcy are not charged for the second counseling course under the assumption that they will take the free version offered by Trustee Garcia’s office.  This policy has been in place almost as long as the course has been offered (back when Trustee King’s office implemented it) because it is (1) free and (2) better – in my opinion – than the online versions of the course that are available out there.

Due to declining attendance, Trustee Garcia’s office is considering discontinuing the course in the near future.  Although no final decision has been made yet, this is a possible and even likely scenario.  Those of you who have already filed your Chapter 13 bankruptcy case (Chapter 7 debtors are ineligible for the free course) but not yet taken the second counseling course, please do so immediately, before the program is discontinued.

Some 2017 dates have been announced.

Oshkosh location (Chapter 13 office):
Thursday, February 23, 2017             12:00PM – 4:00PM
Wednesday, April 12, 2017                8:00AM – 12 Noon
Monday, June 19, 2017                     12:00PM – 4:00PM
Friday, August 18, 2017                    8:00AM – 12 Noon
Thursday, October 12, 2017              12:00PM – 4:00PM
Monday, December 4, 2017               8:00AM – 12 Noon

Green Bay Location (NWTC):
Friday, January 13, 2017                    8:00AM – 12 Noon CC 145
Monday, March 20, 2017                   12 Noon – 4:00PM CC 145

7 Year Myth

Quite often, clients believe that a bankruptcy case will only remain on their credit report for 7 years and/or that 7 years is the period of time someone must wait before filing another bankruptcy case.
  • A bankruptcy remains on your credit report for up to 10 years.
  • Someone who files for Chapter 7 bankruptcy and receives a discharge must wait 8 years before filing for another Chapter 7 bankruptcy.

The source of confusion for the first one appears to be linked to a general 7 year rule about how long old debt can be reported on your credit report.  Generally speaking, if you file for bankruptcy, most if not all of the debts that were discharged in your bankruptcy should no longer show up on your credit report at all after 7 years, even though the bankruptcy case itself will linger and continue to be reported for another 3 years.
Your credit score, however, may rehabilitate much faster.  Depending on your financial circumstances, what – if any – debts survive your bankruptcy (either because you reaffirmed on them, or because they couldn’t be discharged), and how well you manage your credit after bankruptcy – many people find that their credit score has rebounded somewhat within about 12 months.
As for the 8 year refiling prohibition, please remember that 8 years assumes that both the first and second cases were Chapter 7 cases, and that the debtor received a discharge in the first bankruptcy case.  If there was no discharge in the first case (it was only filed, but dismissed without a discharge), then these time limits do not apply.  Other limits may apply, depending on how soon after the first case is dismissed you attempt to file the second case.
If either the first, second, or both cases are a Chapter 13, then that time period can be shortened from 8 years to 6, 4, or 2 years.  Also, you can be eligible to file a Chapter 13 case even if you’re not eligible to receive discharge.  And these questions get a lot more complicated if either the first case is converted from one chapter to another (which I cover extensively here).

Unfiled Claims in Chapter 13

No creditor who doesn’t file a proof of claim will be paid by a Chapter 13 Trustee.

Let me repeat that…

No creditor who doesn’t file a proof of claim will be paid by a Chapter 13 Trustee.

What does that mean?

Let’s say John Doe has 4 credit cards, one with Wells Fargo, one with Chase, one with Bank of America, and one with HSBC.  Let’s also say that each one has a balance owed of $5,000 – or a grand total of $20,000.

Let’s further pretend that John files a Chapter 13 Bankruptcy which proposes to pay 10% to each of his unsecured creditors.  If Wells Fargo, Chase, BoA, and HSBC all file claims, then each will get 10% of their claims, or about $500 each and a total of $2,000.

But what happens if BoA doesn’t file a claim?  Then there are only $15,000 in claims.  John still pays the $2,000 that his disposable income was calculated out to.  But now the 3 creditors who did file claims (Wells Fargo, Chase, and HSBC) all share that $2,000 – $667 each.  That means that each creditor gets paid 13% of their claims – except BoA who gets paid $0 because they didn’t file a claim.

What if BoA is the only creditor who files a claim?  Well, then John is still paying the $2,000 of disposable income, but now BoA is getting paid 40% of their $5,000 claim, while each of the other 3 creditors gets paid $0.

In short – John Doe pays the exact same amount – $2,000 – no matter which creditors file claims or how many creditors file claims.  But if certain creditors don’t bother to file claims – they don’t get paid, and the creditors that did file claims get paid a bigger share.

What if we keep the facts exactly the same, but instead of $2,000, John’s disposable income shakes out to $7,000 over the life of his Chapter 13 case?  $7,000 is 35% of $20,000, so if all creditors file claims, they’ll get 35%, or $1,750 each.

But now let’s say again that only BoA files a claim.  Their total claim is $5,000, which is less than the $7,000 in disposable income that John has to pay his unsecured creditors.  BoA gets paid their claim in full – at 100%.  Since there are no other claims to pay, his Chapter 13 Plan ends early, and he gets to keep the extra $2,000.  The other 3 creditors are shit out of luck.

Now, all of this is overly simplistic because we’re assuming nothing but unsecured and dischargeable creditors.  Let’s stop talking about hypothetical numbers and start discussing the issues that affect the analysis.

  1. In the above examples, we’re assuming that John Doe is eligible for a discharge.  If he is, then whatever is not paid to these 4 creditors (whether they files a claim or not) is wiped out upon receipt of the discharge.  These 4 creditors cannot pursue John for the unpaid balances after his bankruptcy is over.
  2. What if John isn’t eligible for a discharge?  Maybe he filed a prior bankruptcy case too recently.  Maybe he failed to complete his financial management course.  Maybe he fell behind on child support after his bankruptcy case was filed.  Or maybe he failed to make his plan payments and his case got dismissed.  Without a discharge, creditors can then pursue John for any unpaid balances owed after his bankruptcy is over – whether they filed a claim or not.
  3. If a debt is non-dischargeable (like a student loan) and they don’t file a claim, the debt is still non-dischargeable, which means the full balance and interest will be due when John exits bankruptcy.  Since student loans share the same dividend of funds as other unsecured creditors, it is in John’s interest to make sure his student loan creditors file claims so that they can at least get paid down a bit – and to reduce the amount of money his other dischargeable creditors can get their hands on.
  4. Remember the example where BoA got paid in full, John still had $2k in disposable income, but since the other 3 creditors didn’t file claims, they got paid $0?  Why don’t those creditors file claims then?  Because all creditors are under a deadline to file their claims.  Once that deadline has passed, they can’t file a claim – no matter what else may have changed about the debtor’s bankruptcy case.  If the creditor was not duly notified of the bankruptcy in time to file a claim, then their claim is likely going to be non-dischargeable.  But if they were duly notified and chose not to file claims on-time, it’s their loss.

Does paying in my tax refunds shorten my Chapter 13 case? And who gets that money?

All right, so many (but not all) people who file Chapter 13 Bankruptcy are required to turn over a portion of their tax refunds.  Tax refund policy varies from district to district.  In the Eastern District of Wisconsin, below median debtors are required to turn in one half of their net tax refunds each year that they are in bankruptcy (typically 3-5 years).
Why does tax refund money ever come in to a bankruptcy case?  Under Chapter 13, all “disposable income” (a term that elicits its own discussion for another time)  is required to be turned over to the bankruptcy estate for the benefit of creditors.  Tax refunds represent surplus disposable income that was withheld from someone’s wages (or other form of income) in excess of what should have been withheld.  Meaning, if the debtor had less money deducted from his paycheck (resulting in no tax refund), there would be more money on the paycheck to pay creditors.
Why not the full tax refund?  To provide an incentive for the tax payer to prepare his/her taxes in such a way as to take advantage of any eligible deductions and credits so as to maximize their tax refund.  The Trustee isn’t able to file or even amend your tax returns for you.  If the Trustee were to take the full tax refund, then there would be no incentive on your part to attempt to get any tax refund at all.  By only taking half, every extra dollar you manage to secure in tax refund money means 50 cents for you and 50 cents for the Trustee.
And why only below median debtors?  This is a matter of practical convention.  Below median debtors never reach part 2 of the Means Test which – among other things – requires that actual tax liability be estimated and calculated, rather than what is withheld from tax withholdings (as described on Schedule I, which all debtors must complete).  Since the Means Test ignores tax withholdings and focuses on actual liability, it is assumed (incorrectly, I might add) that the only way the debtor can afford to make plan payments as required under the Means Test is to adjust their withholdings in such a way that they do not receive a tax refund.
This is hardly ever true, and as I said – different districts have different approaches to tax refunds.
Who gets the money?  Well, technically, tax refund money is earmarked for unsecured creditors.  Since tax refund money isn’t reliable (we never know how much a debtor will receive in tax refunds during the pendency of a Chapter 13 Plan, or even if a debtor will receive any refunds), tax refund money cannot be relied upon to pay mandatory creditors holding secured or priority claims.
Most debtors, however, pay less than the full balance owed to their unsecured creditors.  How much they do pay is based primarily on income.  So tax refund money – if there is any – is a windfall for the unsecured creditors.
HOWEVER, the Trustee is required to pay secured and priority claims first, which means that most people who are in Chapter 13 bankruptcy – their first few tax refunds will actually go toward paying secured and priority creditors off a little faster than they would have been paid if depending only on regular monthly plan payments.  As a result, unsecured creditors will start getting paid a few months sooner than originally scheduled.  Those extra few months of payments eventually make up for the tax refund money which was earmarked for the unsecured creditors, but was physically turned over to the secured and priority creditors.
Which then answers the final question – does paying in tax refund money shorten the term of the Plan?  And the answer is usually “no”.  The amount paid to creditors is not fixed at the time your bankruptcy case is filed.  There is a preliminary amount which consists of all secured and priority creditors that have to be paid in full, plus some percentage toward your unsecured creditors.  Tax refund money merely inflates the amount of money going toward unsecured creditors.
Barring some other circumstance (or a plan amendment), your Chapter 13 Plan will continue for the full 3 or 5 years that you originally scheduled it for, and would only be shortened if your unsecured creditors would be paid in full.

New Median Income Levels

New median income levels (which are basically the starting – yet rebuttable – presumption of whether someone qualifies for Chapter 7 bankruptcy or needs to file under Chapter 13) go into effect April 1, 2016.  For Wisconsin residents, the new levels are as follows:
Household of 1: $44,817 (up $53)
Household of 2: $59,668 (up $71)
Household of 3: $69,492 (up $82)
Household of 4: $85,961 (up $102)
Each Additional Person: + $8,400 (up $300)

2015 Tax Returns

This is a yearly reminder that Chapter 13 cases filed after December 31, 2015 cannot be confirmed until the debtors’ 2015 tax returns are filed with the appropriate taxing authorities, even though they are not due to the taxing authorities until April 15, 2016.

Although a bankruptcy case can be filed without the tax returns (only confirmation of the plan is held up), it is STRONGLY advised that the tax returns be filed before your case is filed, because there often is information on the tax returns that are relevant to your schedules, Means Test, and even the calculation of your plan payment.

If you need to file a Chapter 13 bankruptcy soon, file your tax returns as soon as possible.

If you have already file a Chapter 13 bankruptcy and your case is still pending, remember that you must send a copy of your 2015 tax returns to your attorney so they can be forwarded to the Trustee.  If you are required to submit one-half of your tax refunds to the Trustee, you must do so immediately upon receipt of your refunds.  If you are unsure of whether you are required to submit tax refunds, call your attorney or consult your copy of the Chapter 13 Plan.

Alternatives to Bankruptcy: is Chapter 128 a good idea?

Most people don’t want to file for bankruptcy, even if they have to.  There’s a lot of stigma attached to bankruptcy, and so people try to avoid it except as a last resort.  In the process of trying to avoid bankruptcy, people try certain alternatives.  Some of them are wise efforts.  Others – not so much.
Generally-speaking, efforts to modify your budget and living without incurring additional debt are the best way to try to avoid bankruptcy without causing yourself more harm.
One of the more common tactics people use is to file a Chapter 128.  Is this a good idea?
Answer: it depends.  As with most complicated situations like this, your best options will always depend on the specific facts of your case.  No two people are identical, and what may work for one person is not always the best option for another person.  An experienced attorney can help you parse the pros and cons of various approaches to determine which is likely to be the best option for you.
That being said, it has been my experience that Chapter 128 is useful only in a small percentage of situations.  Here are some of the common reasons why:

  1. There is no eligibility for a discharge in Chapter 128.  Whatever debts you fold into the filing must be paid in full.
  2. All debts rolled into a Chapter 128 filing must be paid in full within a 3 year plan.
  3. Chapter 128s are ineffective against federal debts (like taxes or student loans) and not effective at preventing foreclosure or repossession.
  4. In contract, a Chapter 13 bankruptcy can be amortized out over 5 years with the possibility of a discharge, can cover federal debts, and can stop both foreclosure and repossession.
In short, Chapter 128 is a cheaper and simpler version of Chapter 13.  And while certain people with low amounts of debt or people who are ineligible for a discharge may benefit from Chapter 128, Chapter 128 offers fewer protections and has less flexibility where flexibility is important (you get what you pay for).  Accordingly, most people benefit from a Chapter 13 more than they do a Chapter 128, assuming Chapter 7 isn’t a viable choice for the individual (which it might be).

3 for 7

Days like today make me feel particularly proud of the work I do.
This morning, I represented seven debtors in Chapter 13 cases.  Three of them were my own clients. The other four – I was covering for two other attorneys who, due to scheduling conflicts, couldn’t attend the hearings themselves.  All three of my cases were recommended for confirmation.  All four of the other cases were adjourned to next month to fix a variety of issues.
By no means am I criticizing the other two attorneys.  Both are fine attorneys and I have respect for them.  If I didn’t, I wouldn’t have agreed to cover their cases.  Nor was today some sort of anomaly.  Some Chapter 13 cases get recommended for confirmation.  Other cases have to be held up for a month or two to straighten out issues that crop up – issues that are not always within an attorney’s control.
But I have always taken pride in the fact that a large number of my Chapter 13 cases get recommended for confirmation at the first hearing.  The same is not true of most other attorneys, based on my observation.  And today’s scores of 3/3 and 4/4 demonstrated – albeit by a small sample size – my track record versus the track records of other attorneys.
Oftentimes, clients will complain that I demand too much information and paperwork, and they think that I’m being too nit-picky.  I am.  And what happened today is a good illustration of why.  I prefer to do my homework before a case is filed.  I prefer to grill and examine my own clients until I am satisfied and confident that a case is ready to go.  I would rather do it that way and get a speedy confirmation which makes everyone happy, as opposed to watching a case blow-up after it has been filed, when certain revelations may be beyond my ability to exert much control over.