Chapter 13 Wage Deduction

The Chapter 13 bankruptcy trustee encourages debtors to make monthly plan payments using a wage deduction order. At the debtor’s request, the bankruptcy court will send an order to the employer to withhold money from the employee’s paycheck and send it to the trustee. Cases using wage deduction have fewer instances of default.

Many debtors don’t use wage deduction because they want to avoid informing their employer about the bankruptcy case. But does this make sense?

Bad credit can get you fired. Failure to manage your personal finances could lead to your termination, especially if you work for a bank and other financial institution, a retail store, or a business where you handle cash on a routine basis. Collection calls at work can get you fired. Mistakes and time off work can get you fired.

On the other hand, the federal bankruptcy laws prohibit government and private employers from firing you on the basis of your bankruptcy filing. By informing your employer that you have filed bankruptcy, you have put the employer on notice that you are dealing with your financial problems in a responsible and legal manner. In order to terminate you during your bankruptcy case, your employer must find a reason unrelated to your bankruptcy and personal finances. Consequently, most employers do not want to risk violating the federal law.

Finally, which is worse: to inform your employer of your bankruptcy through a wage deduction order, or for your employer to discover your financial problems through some other channel? Most employers (and people) respect honestly and forthrightness. Some employers conduct periodic credit checks on their employees, so your bankruptcy will be eventually discovered. This is especially the case with government work involving national security or the Federal Deposit Insurance Corporation.

Of course, every situation is different and you should discuss your situation with an experienced bankruptcy attorney. Your attorney can help you decide if a wage deduction order is right for you.
 

What If I Owe My Bank Money?

Filing bankruptcy does not stop your finances. You still need money for gas, food, to pay the rent, etc. But what if you have money in your checking or savings account at a bank where you owe money? This can be a problem once you file your bankruptcy case.

What the Bank Can Do
If you have a debt at a bank where you have money deposited, the bank has a right of setoff. That means it can take money from your checking or savings account to pay a debt, like an overdraft or a defaulted loan. When you file bankruptcy, the bank’s right to setoff survives, but is temporarily prevented by the automatic stay. Before the bank can perform the setoff it must ask permission from the bankruptcy court.

You would think that the bankruptcy automatic stay would stop the bank from taking collection action against you, but that is wrong. The 1995 US Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 US 16 (1995) says that a bank can freeze your account and withhold your funds so that it has time to make a request for setoff from the bankruptcy court. Once your account is frozen for setoff purposes, the money is likely gone for good.

How Long Do You Have?
When you file bankruptcy the clerk of the court sends a notice to the bank regarding your bankruptcy case. It usually takes a few days for the bank to receive notice. However, some larger banks compare the list of recent bankruptcy filings against their accounts. If an account holder has filed bankruptcy, some banks will freeze the account immediately, whether you owe it money or not (Wells Fargo Bank often does this).

What You Can Do
The answer is simple. If you owe money to your bank, switch banks. Keep the old bank account open, but only keep a small balance. Remember to change any direct deposit to the new bank account and cancel any monthly direct debits. Your old bank cannot setoff money that is deposited in another bank, and cannot freeze that account.

Filing bankruptcy is complicated. Thankfully there are experienced attorneys that can identify your debt issues and are able to use the federal and state laws to protect your interests. If you need help with your finances, speak with an experienced bankruptcy attorney and discuss your situation. The federal bankruptcy code can help you discharge debt, restructure your finances, and get a fresh start.

Should I Tell My Creditors That I'm Filing Bankruptcy?

Creditor harassment is a common reason people visit bankruptcy attorneys. Collection calls can be a source of frustration and embarrassment. So once you have decided to file bankruptcy, should you tell your creditors?

The answer to this question depends on a number of things. First, have you hired an attorney? Once you retain bankruptcy counsel, you can inform your creditors, “Don’t talk to me; call my attorney!” The Fair Debt Collections Practices Act (FDCPA) prohibits third party collectors (collection agencies, attorneys, etc.) from speaking with you once they know you are represented by an attorney concerning the debt. Hiring a bankruptcy attorney can provide immediate relief and peace of mind to many who have been harassed by creditors. Ignoring the FDCPA and continuing to harass you can cause serious trouble for the collector.

The second issue is, “Can telling the creditor that you are filing harm you?” Hiring an attorney and intending to file bankruptcy are not the same as actually filing your bankruptcy case. Until you file you are not under federal bankruptcy protection, and a secured creditor may try to repossess property. For instance, if you are several payments behind on your car loan, the lender may decide to quickly repossess your vehicle to avoid complication and delay by the bankruptcy. You may get your vehicle back after you file a Chapter 13 case, but it may take a few days or longer. You will not get your vehicle returned if you file Chapter 7. Once you file your bankruptcy case, the creditor may not repossess property without the bankruptcy court’s permission.

Finally, creditors hear “I’m filing bankruptcy” every day. Are you able to file your case quickly, or will it take awhile? An original creditor (i.e. the one who loaned you money or extended credit) is not subject to the FDCPA. If you do not follow through quickly with your threat to file bankruptcy, the creditor may soon renew and increase its efforts.

Your bankruptcy attorney is in the best position to instruct you whether to tell your creditors that you intend to file bankruptcy. For many, the answer is “Yes,” but there are special circumstances when it is best to avoid disclosing a pending bankruptcy action. Consult with your attorney and get the advice you need.
 

What is an Adversary Complaint?

Federal laws protect an individual from creditor harassment during a bankruptcy case. Sometimes disputes arise during the case and a creditor, the trustee, or the bankruptcy debtor needs the issue tried by a court. In these cases the matter can be heard as an adversary proceeding before the bankruptcy judge.
An adversary proceeding is a separate court case, but is heard by the bankruptcy court when it has jurisdiction over the matter. The jurisdiction of bankruptcy court judges is limited to core proceedings or matters “related to” the bankruptcy. Matters that are not directly related to the bankruptcy case are outside the court’s jurisdiction. For instance, many family law matters, like modifying child support or granting a divorce, cannot be heard as adversary proceedings. Common disputes that are adversary proceedings are:
• Cases involving the return of money or property;
• A case to determine the validity, priority or extent of a lien;
• An objection to discharge or an action to revoke discharge;
• The attempt to revoke an order of confirmation of a Chapter 13 bankruptcy plan;
• A case to decide whether a debt is eligible for discharge; or
• A request for an injunction.
Not all disputed matters related to the bankruptcy case are filed as adversary proceedings. The bankruptcy rules distinguish adversary proceedings from “contested matters.” A note to the Federal Rules of Bankruptcy Procedure states, “Whenever there is an actual dispute, other than an adversary proceeding, before the bankruptcy court, the litigation to resolve that dispute is a contested matter.” An objection to a proof of claim is an example of a contested matter that is not an adversary proceeding.
To commence an adversary proceeding, a party must file an adversary complaint with the bankruptcy court. In cases alleging fraud or debts caused by willful and malicious injury, the bankruptcy law requires that the complaint must be filed within 60 days after the first Meeting of Creditors. The court will issue a summons and schedule a trial date. The trial is held with testimony and exhibits offered as evidence.
An adversary proceeding does not postpone the debtor’s discharge. However, discharge of the debt at issue is delayed until the adversary proceeding is resolved.
If you need to restructure your debts in bankruptcy, but also need a court to decide a matter concerning one of your debts, an adversary proceeding in bankruptcy may be beneficial. Adversary proceedings are conducted quickly and efficiently, so the matter will be fairly tried by a federal judge without a lengthy delay. Speak with an experienced bankruptcy attorney about your financial situation and learn how an adversary proceeding can help.
 

Will I Lose My Anticipated Income Tax Refund In Chapter 13 Bankruptcy?

Chapter 13 is a repayment bankruptcy. You pay your creditors whatever you can afford over three to five years (three years for lower income earners, five years for higher wage earners). You are required to commit your disposable income to the repayment plan during the repayment period. You are also required to pay as much to unsecured creditors as they would receive in a Chapter 7 liquidation bankruptcy.

An expected income tax refund is property of the bankruptcy estate. Many debtors are able to protect all or a portion of their income tax refunds by applying legal exemptions to the expected refund. After applying all of your available exemptions, the remaining unprotected amount is often little or nothing.

If you cannot protect your tax refund with exemptions, you are required to pay the non-exempt amount in your monthly plan payments. This is because your unsecured creditors would get this money if you filed a Chapter 7 bankruptcy.

Even if you have a non-exempt tax refund, your bankruptcy attorney may be able to save your refund under certain circumstances. One trick to apply the non-exempt portion of your expected income tax refund to next year’s taxes. The IRS will keep your tax overpayment and use it for taxes you may owe in the future. The Tenth Circuit case of Weinman v. Graves, 609 F.3d 1153 (10th Cir. 2010) holds that the bankruptcy trustee cannot force the IRS to turnover a tax refund that is held to pay future taxes. The election to apply the refund to your future tax liability is irrevocable under section 6513(d) of the Internal Revenue Code. Consequently, your interest in the refund when you file bankruptcy is limited to what is left after the IRS applies the money to next year’s tax liability.

This trick is common in Chapter 7 cases, but can be used in Chapter 13 cases as well to avoid increasing your monthly plan payment. Working closely with your bankruptcy attorney and a skilled CPA will maximize the amount of money you get to keep. If you are expecting a large income tax refund, but need to file Chapter 13, speak with an experienced bankruptcy attorney and discuss your options. Your attorney can explain how the federal laws can protect your assets and discharge your debts.

Stopping a Tax Offset for a Defaulted Federal Student Loan

Stopping a Tax Offset for a Defaulted Federal Student Loan

Federal student loans are guaranteed by the US government and administered by the Department of Education. When a borrower defaults on the loan, the Department of Education may refer the loan to the Department of the Treasury for collection. The Treasury issues your tax refund check, which can be offset to pay your defaulted student loans. The Treasury will offset your entire refund, even if it includes money owed to your non-obligated spouse or an earned income tax credit.

So what can you do to stop this nightmare?

First, the Department of Education is required to send you notice of the offset. You are entitled to a hearing and an opportunity to present evidence when challenging the debt. If you make a timely request for a hearing, the collection process must stop. So it is in your best interest to review the loan documentation and request a hearing if there are mistakes. During that time you should also contact the Department of Education, negotiate a repayment schedule, and request that all garnishments and seizures cease.

Second, you should check with the Internal Revenue Service and see whether your tax refund will be offset. The number to the IRS Offset Hotline is 800-304-3107.

Third, if you filed a joint income tax return, your spouse may be eligible to reclaim his or her portion of your joint refund. Your spouse must file an "injured spouse" claim form (IRS Form 8379) with the Internal Revenue Service. Questions regarding the amount your spouse will receive can be answered by the IRS by calling 800-829-1040.

Fourth, you may be able to stop the collection process if you can show evidence of financial hardship. You must contact the Department of Education and submit documentation to support your claim. The Department of Education will consider your claim and may agree to modify the withholding action.

Finally, bankruptcy may stop an offset of your income tax refund. The bankruptcy laws on this matter are complex and require the attention of an experienced attorney. In general, the bankruptcy code allows a creditor to offset money owed to the debtor against a pre-bankruptcy debt. The offset must involve the same parties to the credit and the debt. If the creditor wants to perform an offset during the bankruptcy (for instance, during a Chapter 13 bankruptcy), it must first ask the bankruptcy court for relief from the automatic stay.

If you have defaulted on your student loans, you may be able to stop an IRS offset of your income tax refund. It is important to discuss the specifics of your situation with an experienced bankruptcy attorney. Your attorney can recommend the best course of action to protect your assets and income.