Common Bankruptcy Questions & Answers

by Natasha Meruelo, Esq.

What is Bankruptcy? 

Bankruptcy is a legal process in which you ask the Bankruptcy Court to grant you relief from your debts. In order to obtain a discharge of your debts, you need to honest and truthful about what assets you own or may have owned but no longer own, what debts you owe, your income and expenses and what your past financial dealings have been like. There are several types of Bankruptcy. The most common types are Chapter 7, 11 and 13. Most consumers typically consider Chapter 7 or Chapter 13 Bankruptcy. But, occasionally, individuals may find it advantageous to file for Chapter 11 Bankruptcy.

What is Chapter 7?

Chapter 7 Bankruptcy is known as a “liquidation”. What this means is that in return for a discharge of your personal liability for debts such as credit cards, car loans, personal loans, retail accounts, lines of credit and mortgage loans, you give up all non exempt assets. In New York State, you have a choice of exemptions that you can apply to your assets. One of the most recent changes to New York exemption laws, for example, allows homeowners to exempt up to $150,000 ($300,000 for married couples who are both owners) of equity in their home. In many cases, an individual filing for Chapter 7 is able to keep all of the property that is important to them and able to gain a fresh start without paying any money to their creditors. If you are considering filing for Chapter 7 Bankruptcy, it is very important to speak with a qualified attorney who can assist you with exemption planning. Remember, only a lawyer can counsel you on how Bankruptcy exemptions apply to your property.

What is Chapter 13?

Chapter 13 Bankruptcy is a “reorganization” of your debts. In Chapter 13 Bankruptcy, you propose a plan on how to deal with your debts.The plan must conform to the requirements of the Bankruptcy code, which addresses 1) how certain debts are classified and paid back, 2) how much you must commit to a Chapter 13 plan, 3) what debts are not dischargeable and 4) many other aspects of your Chapter 13 case. A chapter 13 plan can last between 3-5 years. There is also a limit on the amount of debt a person can have in a Chapter 13 plan. If you exceed this debt limit, you are not eligible to file for Chapter 13 Bankruptcy.

The main difference between Chapter 7 and Chapter 13 is that in Chapter 13, you are making monthly payments towards your debt. Often, these monthly payments will be much less than the amount you would normally pay just towards credit card minimums each month. The difference is that in a Chapter 13 case, your payments actually mean something and your debt is being resolved. 

However, just because you are making monthly payments does not mean you are necessarily paying back 100% of your debt in a Chapter 13 plan. In fact, in many cases individuals pay a very small percentage of their debt back. However, there may be many circumstances in which it is in your favor to pay certain debt back in full and Chapter 13 is a way to accomplish this at a much lower cost than outside the Bankruptcy process.

I thought Chapter 11 was just for businesses. Why would I consider this option?

Chapter 11 is the only kind of Bankruptcy where a business may obtain a discharge. However, individuals may also take advantage of Chapter 11 Bankruptcy. This may be particularly useful if you wish to reorganize your debts and create a payment plan but your debts exceed the debt limits in a Chapter 13 or where you cannot propose a feasible plan to pay your debts in 5 years and need a longer repayment period.

A Chapter 11 plan is more costly than a Chapter 13 but the benefits offered by Chapter 11 Bankruptcy may significantly outweigh the costs of a Chapter 7 liquidation or not having any Bankruptcy protection at all. 

What is the difference between debt consolidation and Bankruptcy?

Often, debt consolidation companies only make your debt problems worse. Many of these companies may not have your best interests at heart. Frequently, clients have come to me after paying these companies hundreds of dollars with the same or more debt than they had when they first began that process. When you begin paying one of these companies and stop paying your bills, some creditors decide to take matters into their own hands and may file a lawsuit against you in your local court. If you are able to settle your debts, you may find yourself dealing with 1099-c tax liability for any amount of money in excess of $600.00 that was “forgiven” as a result of the settlement.  Imagine thinking you resolved one of your debts but are now smacked with an IRS tax bill that comes straight out of your refund, or worse, that is a bill you now owe to the IRS!

On the other hand, debts discharged in bankruptcy are not taxable income. While it is true that filing for bankruptcy is not great for your credit, neither is “debt consolidation”. This is because if you stop paying your bills, creditors can report to credit reporting agencies that you have done so or that you are delinquent. If a creditor agrees to accept less than what you owe them, they can also report this. All of these things can negatively affect your credit. Imagine if you could have filed for Chapter 7 bankruptcy and not paid all this money and instead focused on taking care of your family!

Debt consolidation often just delays the inevitable and costs you much more money than paying for a Bankruptcy which gives you real and immediate protection from your creditors.

Why would I file Chapter 13 over Chapter 7?

There are many advantages to filing for Chapter 13 that you may not be aware of. Here are a few examples:

1. Chapter 13 Bankruptcy can stop the foreclosure process and help you evaluate what options you have to stay in your home including reinstating your mortgage by resuming your monthly payments while paying back your arrears over 36-60 months interest free.
2. Chapter 13 Bankruptcy can allow you to strip a second mortgage which is completely unsecured due to a decrease in the value of your home.
3. Chapter 13 Bankruptcy can allow you to manage your tax debts and pay them back, often times interest free and also penalty free over time. 
4. Chapter 13 Bankruptcy can help you lower your monthly car payments by spreading the total balance due over 60 months or by allowing you to “cram down” a loan to the actual value of your car.
5. Chapter 13 Bankruptcy can help you stretch payment of your child support arrears over 36-60 months which may dramatically reduce the amount of the garnishment you are experiencing each pay period.
6. Chapter 13 Bankruptcy can help you develop a realistic repayment plan that prioritizes your most important debts and helps you regain control of your financial life.
7. Chapter 13 Bankruptcy provides for an automatic stay of collection against any “co-signors” of consumer debts, which means the person who helped you get a loan won’t suffer just because you filed for bankruptcy.

How long will my Chapter 13 case last?

A Chapter 13 case will last between 3-5 years. The length of your plan is determined by your income and how it compares to the median income of a household of your size in your state. If you are below the median income, you are entitled to file a 36 month plan. However, if you need more time to pay your debts, you may ask the court to allow you to have up to 60 months. If you are above the median income, your plan will be 60 months long.

When do I make my first payment in my Chapter 13 case?

You will begin making payments right away. The first payment is due 30 days after the filing of your Chapter 13 case.

I’ve heard different kind of debts will be treated differently in a Chapter 13 case. Is this true?

Yes. In Chapter 13 Bankruptcy, certain debts are given priority over others. Generally speaking, Chapter 13 organizes debts into the following categories: 1) administrative debts (e.g. attorneys fees, trustee fees), 2) secured debts (e.g. mortgage arrears, car payment arrears, secured tax debts), 3) unsecured priority debts (e.g. taxes, domestic support obligations) and 4) unsecured debts (e.g. credit cards, retail cards, personal loans). Administrative, secured and unsecured priority debts must be paid in full in any Chapter 13 case. They also get paid in that order. Unsecured creditors are paid last. Your Bankruptcy attorney can help you understand this further and explain to you what debts you may have, if any, that must be repaid in full.

What happens if I am no longer able to afford my Chapter 13 payments?

Often times, unexpected events occur which may prevent you from making your proposed Chapter 13 plan payments. There are several options that may be available to you if you are no longer able to afford your Chapter 13 payments. You may be able to modify plan to lower your monthly payment, convert your case to a Chapter 7 case, ask the court for a hardship discharge or dismiss your case.

I am married, does my spouse have to file Bankruptcy with me?

No, just because you are married does not mean you and your spouse have to file for Bankruptcy together. However, if you are both liable for the same debts, your filing and subsequent discharge will not insulate your spouse for joint debts and he or she will remain liable. So, it may be in both of your interests to consider filing together.

Can I keep my house or my car out of my Bankruptcy?

No, you cannot pick and choose what assets you include or don’t include in your Bankruptcy. Some assets are not part of your Bankruptcy estate by law. However, the rest of your assets and any debts associated with these must be disclosed. Believe it or not, your Bankruptcy may help you keep your home or your car. So, don’t be scared about “including” your home or car.  You should speak to a qualified attorney about your concerns and to make sure you understand the effect filing for Bankruptcy would have on your particular assets. Remember, every case is different.

Will I have to appear before a judge? How often do I have to go to court?

When you file for Chapter 7 Bankruptcy, you typically have one court date about 30 days after your case is filed. This is what is known as your meeting of creditors. Creditors rarely show up and the person you appear before is not a judge. This meeting is where you will meet the Trustee, who is an attorney that represents the interests of your creditors. If all goes well at your meeting of creditors, you will likely never have to go to court again. An exception to this, however, is if you decide to sign a reaffirmation agreement with respect to a particular debt such as a car loan. If the Court determines there may be a possibility that reaffirming this debt could be a hardship to you or your family, you will be required to appear before your Bankruptcy Judge who will ask you some questions to make sure you can afford this debt.

When you file for Chapter 13 Bankruptcy, you will typically go to two court dates. The first is the meeting of creditors described above. The second is your confirmation hearing where you will appear before a judge. At the confirmation hearing, you will find out if the Court will approve your Chapter 13 plan and your attorney will also discuss any other items that need to be addressed in order for your case to be confirmed. Once your plan is approved and confirmed, you will likely not have to show up in court again unless a problem comes up. In our district, you do not need to appear at any additional hearings unless specifically ordered by the court or unless you fall behind on your payments.

How long does it take to receive a discharge?

In a Chapter 7 case, assuming no objections to your discharge are made, you may obtain a discharge 60 days after the initial date of the meeting of creditors. 

In a Chapter 13 case, assuming you are eligible for a discharge, you may obtain a discharge after you have successfully completed your confirmed plan, which can take 3 or 5 years.

However, these answers could be different if you filed a prior Bankruptcy case. This is because there are rules on how often you may file a Chapter 7 case or Chapter 13 case, which will affect your ability to get a discharge. If you have filed a Bankruptcy case before and are contemplating filing for Bankruptcy again, make sure to tell your Bankruptcy attorney of your prior filing!

I am a small business owner and guaranteed many of my business’s debts. Will my Bankruptcy filing and discharge also discharge my business’s liability for these debts?

No. If you own your business as anything other than a sole proprietorship, you and your business are separate entities. Therefore, you filing for Bankruptcy does not relieve your business of its liability for business debts. However, your business may not be liable for debts and a review the documents you signed for loans or other debts can help determine if the business is really liable for these debts. It is worth investing in hiring an attorney to review these documents to determine who is truly liable for your debts. This can be an important part of your Bankruptcy planning. If your business is liable for these debts and you wish for your business to be granted a discharge, you should consider discussing filing a Chapter 11 Bankruptcy for the business with a Bankruptcy attorney. 

How long does a Bankruptcy filing stay on my credit report?

Credit Reporting Agencies report potentially negative information, such as missed payments and most public record items on a personal credit report for seven years. This includes Chapter 13 bankruptcies. However, an exception to this is that they may report Chapters 7, 11 and 12 bankruptcies for 10 years. 

How long will it take for me to re-build my credit after filing for Bankruptcy?

Even though a Bankruptcy will stay on your credit report for 7-10 years, it won't necessarily affect your credit score the entire time. Many people start rebuilding their credit within 1-2 years after Bankruptcy discharge. You have also options such as applying for a “secured” credit card which can help you start re-building credit right away.

Can I wipe out student loans?

Student loan debt is extremely difficult to wipe out in Bankruptcy. This is because the standards for discharging student loan debt through a “harship discharge” are particularly difficult to meet for most individuals. This process is both complex and expensive and requires a separate proceeding from your Bankruptcy filing. 

Is it true you can wipe out taxes in Bankruptcy?

Yes, some income taxes are dischargeable in Bankruptcy. It is a common misunderstanding that Bankruptcy cannot eliminate any tax liability. But, the longer you wait to deal with tax debts, the more difficult it may become to help you.

Whether or not income taxes are dischargeable depends on when they became due, when they were assessed as well as a variety of other factors. However, income taxes which are dischargeable are not automatically discharged as a result of you receiving a discharge. A separate proceeding to determine they are dischargeable is required. 

Unfortunately, Bankruptcy cannot eliminate liability for taxes such as estate and gift taxes, sales tax or fuel taxes. Special rules also apply to trust fund taxes, which are taxes related to social security and medicare. Furthermore, if your tax debts have become “secured” by the IRS or state taxing authority filing a tax lien, this may further complicate your case and affect the dischargeability of the tax debt.

If it turns out your tax debt is not dischargeable, you can still explore if Bankruptcy would be a good way to take control of your tax debts. For example, a Chapter 13 plan may provide you with a way to repay your debts in full, at a fixed payment each month and interest free. Worrying about the IRS or state levying your bank accounts can become a worry of the past!

If you are concerned about income tax debts, you should speak with a qualified Bankruptcy attorney to determine if Bankruptcy can help you discharge these debts.

Can I wipe out child support or arrears?

Domestic support obligations, such as child support, cannot be discharged in Bankruptcy. However, you may be able to lower the amount of your monthly child support garnishment by filing for Chapter 13. This is because you are allowed to repay your child support arrears over 3-5 years in Chapter 13, which may significantly reduce the amount of funds that are garnished from your paycheck.

I only owe a small amount of debt? Can I still file Bankruptcy?

Yes. There is no minimum debt requirement to be eligible to file for Bankruptcy. Although the amount of debt you owe may seem small compared to others, the decision to file Bankruptcy is somewhat personal. If debt is affecting your life negatively and you or your loved ones are suffering from the obligation to repay debt, Bankruptcy may be appropriate for you even if your debt is not very high.

Questions or interested in a consultation about your case? Email Natasha Meruelo, Esq. at meruelolaw@gmail.com or call me at (914) 517-7565. The first consultation is always free of charge.

Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White Plains, NY 10601.

*Natasha Meruelo, Esq., designated as a Federal Debt Relief Agent by an Act of Congress and the President of the United States, proudly assists consumers seeking relief under the US Bankruptcy Code.   Prior results do not guarantee a similar outcome.

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Understanding the "Unknown"- What Happens When You File For Chapter 7 Bankruptcy?

by Natasha Meruelo, Esq.

Ok, so you've decided you need to file for bankruptcy and you're hoping this decision is going to lead to you becoming debt free and able to breathe easy again. The effect of a discharge certainly sounds good. However, what happens in between beginning the process and getting to the final result of obtaining a discharge is a gray area for many people who come to see me. So, I'm going to devote this post to explaining the Chapter 7 bankruptcy process further and perhaps this will also answer some of your questions.

At my office, after a client retains me and provides me with certain documents, they must take a credit counseling course. In the mean time, I prepare a client's case and request the client come into the office to review and sign their petition and schedules before it is filed (this is a simplified version of the process which usually involves a lot more analysis and review before a case is filed). It is important to emphasize that bankruptcy relief does not begin until a case is filed. Furthermore, your case cannot be filed until you complete the credit counseling course so don't delay! 

Once your case is filed, you are entitled to protection of the "Automatic Stay". This protection basically means that creditors are not permitted to collect pre-filing debts from you by calling you or communicating with you, garnishment of your paycheck stops and freezes on your bank account are lifted, and lawsuits come to a halt. Creditors may petition the court to continue certain lawsuits, such as foreclosure actions, however they must obtain permission to lift the Automatic Stay before they can continue a lawsuit.

So, the most immediate effect you will notice when your case is filed is that phone calls and harassing creditors should stop contacting you. Get ready for those "1-800" phone calls to stop.

A lot of behind the scenes work also begins at this point. The most typical example is that your attorney will communicate with the Trustee's office and provide him or her with certain documents such as a copy of your signed petition, pay stubs, tax returns, appraisals of assets and other documents that Trustee may specifically request. Your attorney may also engage in communications with certain creditors regarding your filing.

The next step in the process that you will experience is what is known as the Meeting of Creditors or "341a Hearing". This is a hearing you must attend and typically occurs about a month after your case is filed. At this hearing, you meet the Trustee who is assigned to your case and that Trustee may ask you a wide range of questions regarding your assets, income, expenses, financial history and how your difficulties arose. What happens at your hearing depends on the complexity of your case, whether you have assets that could be distributed for the benefit of your creditors and whether the Trustee has any additional questions or requests additional information. If your hearing is "closed", you are one step closer to obtaining your discharge.

After your hearing is over, you should make sure you take the second required course, known as the Financial Management course. You cannot obtain your discharge without taking this class. There are many other events that could happen between the 341a Hearing and obtaining your discharge. For example, creditors technically have until 60 days from the date of your hearing to object to your discharge or the dischargeability of any particular debt. The Notice of Meeting of Creditors that you receive in the mail will state what date the is last day for anyone to object. 

Other events may also need to happen prior to discharge. A common example is where a debtor wishes to reaffirm a particular debt, such as a car loan. This must be done within a certain window of time since an individual cannot reaffirm a discharged debt. So, although the Trustee may have "closed" your hearing or ended further inquiry into your case, this does not mean all the work in your case is done. It is very important you discuss what additional requests or supplemental services you may want your attorney to provide you with ahead of time so that important deadlines do not pass you by. In our court, for example, if you wish to participate in the Loss Mitigation Program, you must request this before your case closes. The same goes for stripping a judgment lien. It must be done before your case is closed or you may find yourself in a difficult predicament later when the only way to try to strip a lien is to go through the expense and time of re-opening your case (which is at the court's discretion). 

Typically, a person is eligible to receive a discharge 60 days after their 341a hearing and many courts will close a case the same day or within a few days of entry of the discharge. Once your case is closed by the Court, your case is officially over.

Questions or interested in a consultation about your case? Email Natasha Meruelo, Esq. at meruelolaw@gmail.com or call me at (914) 517-7565. The first consultation is always free of charge.

Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White Plains, NY 10601.

*Natasha Meruelo, Esq., designated as a Federal Debt Relief Agent by an Act of Congress and the President of the United States, proudly assists consumers seeking relief under the US Bankruptcy Code.   Prior results do not guarantee a similar outcome.

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Judgments- How They Affect You And How Bankruptcy Can Help

by Natasha Meruelo, Esq.

Many individuals come into my office concerned about the fact that they have received a notice from their Sheriff's office or a law firm that a judgment has been entered against them. Often times, this is the first time they have really been made aware of a lawsuit that has been filed against them. Unfortunately, by the time a judgment is issued, the lawsuit has reached its conclusion and the issuance of a judgment means that the creditor has won their case against you, for now.

The most immediate effect of a judgment is that it serves as a basis for a creditor to recover money from you and in the very near future. The most common way a judgment is enforced is through an income execution order sent to your employer. This is known as "wage garnishment". In New York State, 10% of your gross salary can be garnished by your average judgment creditor. The second most common way a judgment is enforced is through restraining your bank account for the amount of the judgment (and often for a higher amount, if permitted by NY law). There are rules for how much money can be taken from your account, what funds cannot be taken and how much you may be able to withdraw from your account once the restraint occurs, however, this doesn't change the fact that a restraint can cause you a lot of stress and financial hardship when it occurs.

A secondary effect, which is not often immediately felt by an individual, is how a judgment can affect your real property. The simple explanation is that if a judgment is recorded in the county where you own real property, such as your home, it attaches as a "judgment lien" to your real property. What this means is that you could be prevented from selling your home or re-financing your mortgage, unless you are able to satisfy this additional lien now recorded against the property. Think of it as a second or third mini mortgage against your home...although you are not making monthly payments, when it's time to sell, there has to be enough money available to pay it off. Often times, this satisfaction will be achieved by paying a creditor less than what you owe them in exchange for them issuing you a satisfaction of this debt. However, this can result in 1099 income to you- known as 1099-c income or "cancellation of debt income", which may be taxable to you.

Believe it or not, bankruptcy may be able to help you in this situation. First of all, if filing for bankruptcy is an appropriate option for you, filing your case will put an end to any wage garnishment or bank account restraints. And, if you obtain a discharge, that debt can never be collected upon again against you personally or any other property you may acquire. Furthermore, debt discharged through bankruptcy does not result in 1099 income. That's the immediate effect of a bankruptcy discharge, your personal liability for the debt and collection efforts go away.

However, if you own real property, the lien against your property that was already in place when you filed does not go away unless you take additional actions, if they are available to you in your case, to remove or strip a "judgment lien". This is because absent a court order to the contrary, a lien will survive a bankruptcy discharge. A creditor may not be able to collect against you personally, but if you do not remove the lien, they can collect against the property you owned at the time of your filing. But there is hope because due to the relief available to you under the bankruptcy code, you may be able to strip a judgment lien from your property. In order to know whether this remedy is available to you, you should speak with a qualified bankruptcy attorney who can evaluate your case properly. 

Questions or interested in a consultation about your case? Email Natasha Meruelo, Esq. at meruelolaw@gmail.com or call me at (914) 517-7565. The first consultation is always free of charge.

Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White Plains, NY 10601.

My Bank Account Has Been Frozen- What Does This Mean?

by Natasha Meruelo, Esq.

The most common reason individuals in New York experience a restraint on their bank account is because a creditor has obtained a judgment against them and is enforcing it against their bank account.

What does this mean in plain English? It means that you have been sued and lost and as a result the court entered a judgment against you for the amount claimed to be due to the creditor. Now, that creditor may be trying to collect on this money judgment by serving legal papers on your bank requiring it to restrain or "freeze" your bank account. This allows the creditor to take money directly from your account.

In New York State, a creditor cannot take all your money and also cannot take certain kinds of "exempt" funds. So, what can you do? One option is to contact a bankruptcy attorney and discuss whether your situation is appropriate for bankruptcy. Once you file bankruptcy, any restraints on your account can be lifted and if you are within a certain range of time, you may even be able to recover any money that has been removed from your account.

Of course, the best course of action is not to wait until things have gone this far. In fact, you should act as soon as possible after becoming aware of a lawsuit filed against you so you can evaluate your options before too much time passes or before what may be your last remaining resources are depleted. You will need funds to pay your bankruptcy attorney and if you are without any resources whatsoever, you may not be able to obtain relief.

Questions or interested in a consultation about your case? Email Natasha Meruelo, Esq. at meruelolaw@gmail.com or call me at (914) 517-7565. The first consultation is always free of charge.

Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White Plains, NY 10601.

Can I File Bankruptcy If I Filed Before?

by Natasha Meruelo, Esq.

It is possible to file for bankruptcy more than once. Often times, although a person may never plan to file more than once, a person is faced with circumstances where they want to consider filing for bankruptcy again. If you are unsure of whether you qualify for a second bankruptcy discharge, consider the following information.

I Would Like to Discharge My Debts But I Filed For Bankruptcy Before- What Are My Options?

1. If you filed for Chapter 7 before and you want to get another Chapter 7 Discharge, you must wait more than 8 years from the filing date of your previous Chapter 7 case.

2. If you filed for Chapter 7 before and you want to get a Chapter 13 Discharge, you must wait more than 4 years from the filing date of your previous Chapter 7 case.

3. If you filed for Chapter 13 before and you want to get a Chapter 7 Discharge, you must wait more than 6 years from the filing date of your previous Chapter 13 case. 

4. If you filed for Chapter 13 before and you want to get another Chapter 13 Discharge, you must wait more than 2 years from the filing date of your previous Chapter 13 case.

Qualifying For A Discharge May Not Be The Most Important Reason To File For Bankruptcy

Believe it or not, it may not be essential to your case that you qualify for a discharge. There are some circumstances where a bankruptcy can be very helpful and assist you in accomplishing your goals even if you do not get another discharge. The most common example would be filing a Chapter 13 case even though you are not eligible for another discharge yet. 

Let's say that one year after you receive a Chapter 7 discharge and get rid of all your credit card debt, you fall behind on your mortgage payments because you lose your job. Luckily, you are able to become re-employed but in the interim fell 9 months behind on your mortgage. As a result, the bank is now refusing to accept your payments unless you come up with all of the money you supposedly owe to bring the loan up to date. Well, even if you are not eligible for a discharge, you can use the structured repayment aspect of a Chapter 13 bankruptcy to pay back your arrears over 36-60 months and reinstate your mortgage. In this scenario, as long as there are no problems with the plan you propose which violate the Bankruptcy Code, fail to pay back what you owe or otherwise make your plan "unconfirmable", the bank can no longer refuse to accept your regular monthly payments. All that matters here is that you have a vehicle to get current and pay your debts, not that you have an ability to receive a discharge.

Filing for bankruptcy for a second time can be confusing and you should speak with a qualified bankruptcy attorney to understand your options. 

Questions or interested in a consultation about your case? Email Natasha Meruelo, Esq. at meruelolaw@gmail.com or call me at (914) 517-7565.

Why Should I Consider a Chapter 13 Bankruptcy?

by Natasha Meruelo, Esq.

A lot of persons who come into my office feel overwhelmed by their debt and cannot imagine trying to do the type of bankruptcy, known as Chapter 13, where they have to make a monthly payment to their creditors. The question that always comes up is, why would I want to file for Chapter 13 over Chapter 7?

Strip That Second Mortgage

Believe it or not, there are often many benefits to filing for Chapter 13 bankruptcy over Chapter 7. The most common reason these days is that you can strip your second mortgage in a Chapter 13 case whereas you cannot presently do so in a Chapter 7 case. When bankruptcy attorneys talk about "stripping", we are referring to a process where you prove that your second mortgage or line of credit is completely unsecured and as a result the court grants your request to remove that mortgage lien from your property upon successful completion of all of your Chapter 13 payments. Unfortunately, this process cannot also be used to strip a part of your first mortgage.

Pay Back Taxes Interest Free

But, did you know you can also use the Chapter 13 payment plan to pay off certain debts in full, such as income taxes, interest free? For those individuals that are currently on IRS installment plans and where a substantial part of your payment may be going to interest and penalties, this could make a big difference and also cost you a lot less money overall. 

When you file Chapter 13 bankruptcy, the taxes you owe are determined as of your filing date and do not continue to grow (assuming they are not secured by property). So, if you owe $2,000 including interest as of your filing date, this is what you pay back at 0% interest. Furthermore, only taxes that are considered "priority debts" have to be paid back in full. For these priority debts, in addition to the great interest rate, penalties do not have to be paid back in full (they become unsecured debts like credit cards) and no further interest or penalties accrue on the total amount. 

So, if you are making a payment anyway to the IRS or state taxing authority each month, consider how much further that payment could go in your Chapter 13 payment plan. If you aren't dealing with income tax problems because you don't know how to, then consider utilizing the Chapter 13 process before this debt grows more than it has to be or a tax lien or warrant is field against you. You may also find out from speaking with a qualified bankruptcy attorney, that some of your income tax debts are dischargeable and can be paid back for less than 100% in a Chapter 13 case. 

Get Back on Track With Your Mortgage and Avoid Foreclosure

Chapter 13 also provides individuals with a way to reinstate their mortgage loan and get back on track with their normal payments. For a lot of homeowners who have fallen behind on their mortgage payments, they may be facing what is known as an "acceleration" of their loan, where the bank demands all of the loan be paid to avoid a foreclosure. This is basically impossible for most persons facing this problem. But, what if you could take that amount you are behind on and pay it off over 60 months and resume making your normal payments at the same time? This is possible in a Chapter 13 bankruptcy. So, if you owe $20,000 to your mortgage company and cant come up with the whole amount now, think about whether you could come up with $333.33 each month to deal with this. It may be better to pay your mortgage company back that money each month than continuing to make that car payment or credit card minimum payments each month. 

What Happens to My Other Debt Payments When I File Chapter 13?

The general rule of thumb is, if you want to keep it, you're going to have to keep on paying for it. So, car payments, HOA dues or maintenance, mortgage payments, utility bills, and every day living expenses are things you are going to have pay for each month. You also must keep on top of any child support or domestic support payments you have been court ordered to pay.

What you're not going to be paying for each month is credit card minimum payments, income tax installment plans, personal line of credit payments and a second mortgage payment (if your attorney determines you can strip this mortgage). All of the "disposable income" you used to commit each month to these bills is now going to be going to the Chapter 13 plan and will be broken down and distributed to the right creditors by the Trustee.

Overall, a Chapter 13 bankruptcy can be a great way to organize your debt and take control over your life. While it is true that you are repaying your debts, some of these debts are debts that you actually want to repay anyway but couldn't figure out how to do so before. Don't brush aside Chapter 13 just because it means you have to come up with money each month. It may be the best money you ever spent!

Questions or interested in a consultation about your case? Email me at meruelolaw@gmail.com or call me at (914) 517-7565.

Stripping A Second Mortgage Doesn't Mean You Don't Pay For Part of that Second Mortgage

by Natasha Meruelo, Esq. 

One of the great advantages of a Chapter 13 for homeowners who have lost equity in their homes is that a Chapter 13 bankruptcy permits homeowners to strip the second mortgage off their home where that second mortgage or lien is completely unsecured. In many Chapter 13 Plans, the second mortgage creditor is ultimately paid a small percentage of what it is owed for that debt. The most common reason for this is because the plan payment proposed is not enough to cover the full amount of what is owed and the creditor is paid from a pool of funds it has to share with other unsecured creditors such as credit cards. In these cases, the debtor does pay back some of that second mortgage but this amount is substantially less than what that debtor would have paid over time if he or she made all the payments required by the original agreement.

However, this is not always the case, especially where bankruptcy debtors may have a substantial amount of disposable income each month. This is the scenario that played out in In re Renz (Bankr. Court EDNY August 1, 2012). Much of the focus of this case was on whether or not the Debtors should be permitted to withdraw a claim they filed on behalf of a mortgage creditor whose lien they stripped and subsequently pay this creditor nothing in an amended plan. The Court concluded the Debtors could not proceed in this manner. But, the Court also brought up the point that these debtors had enough disposable income to pay this particular debt back in full. So, even though the debtors were successful in stripping the second mortgage lien, the Court would not permit their plan to be confirmed unless the disposable income they calculated they had each month was committed to the plan. In this case, the Court's ruling meant that if the debtors wanted their case to be confirmed, the second mortgage creditor would have get paid back some, if not all, of their "claimed" debt. At least it would be interest free.


Questions or interested in a consultation about your case? Email me at meruelolaw@gmail.com or call me at (914) 517-7565.

Taxes Owed As a Result of Late or Unfiled Returns May Be Non Dischargeable

by Natasha Meruelo, Esq.

Did you know that your income taxes for prior tax years could be dischargeable? Many clients are relieved to learn that this is possible and often times the IRS or state taxing authority will be willing to concede dischargeability of certain tax debt in your case. However, whether or not your taxes are dischargeable could also depend on whether you filed your taxes too late or failed to file them at all. If you are considering filing for bankruptcy and are concerned about tax debt in addition to other debts, you should make every effort to determine whether any of your taxes were filed late and without an extension and also whether or not the IRS or your state taxing authority filed a tax return for you for a particular year before you filed your return. If you are aware of these circumstances, make sure you inform your bankruptcy attorney because it could make a significant difference in his or her analysis of the dischargeablity of your tax debt. 


A recent case, Shinn v, IRS (In re Shinn), has highlighted the problems faced by debtors who have filed their tax returns late and who wish to have their tax liabilities determined to be dischargeable. In this case, the debtor filed his tax returns for tax years 2001 and 2002 in 2006, several years after the IRS had already made its own determination of the debtor's tax liabilities for 2001 and 2002. It is important to note that this debtor had not asked for any extensions for these tax years and simply did not file tax returns.
The court determined that untimely filed Form 1040s could not be considered a return for dischargeability purposes and no exception applied. Accordingly, the debtor was not entitled to a discharge of his tax debt for 2001 and 2002, which at the time exceeded $45,000.00.


If you are faced with tax liabilities and are seeking advice from bankruptcy counsel, make sure you come to your first meeting with that attorney with as much information as possible regarding the timing of your tax assessments in addition to the amount of taxes you owe. I always encourage potential clients to make our first meeting as productive as possible because the clearer the facts, the better analysis I can give a person regarding his or her case and how I may be able to help them.


Questions or interested in a consultation about your case? Email me at meruelolaw@gmail.com or call me at (914) 517-7565.

Inherited IRAs- Are They Safe From Creditors?

by Natasha Meruelo, Esq.

In the last few years, the issue of whether creditors can reach retirement funds inherited by individuals who are in bankruptcy proceedings or contemplating bankruptcy, has become a hot topic. In many courts around the country, this has been labeled a "question of first impression", meaning, it is the first time this question has come before such courts.

It seems that many courts are now concluding that these assets are exempt. Of course, each case is different and depends on the circumstances surrounding the inherited retirement funds, however, this trend is positive news for debtors.

In one of the most recent decisions on the subject, Chilton v. Moser (In re Chilton), the Fifth Circuit found on appeal that an inherited IRA with $170,000 was exempt due to the fact that it was rendered exempt from taxation under a specific IRC provision following its transfer from the deceased to the debtors and the fact that this provision was specifically named in Section 522(d)(12), the federal exemption for certain retirement funds. 

Similarly, in a Ninth Circuit United States Bankruptcy Appellate Panel case, Mullen v. Hamlin (In re Hamlin), the court considered whether a debtor could claim an exemption under Section 522(b)(3)(C) in an IRA the debtor inherited from her grandmother, and concluded that a debtor can exempt funds in an IRA inherited from a non-spouse. It should be noted that not all courts agree with the analysis in Chilton and Hamlin, however, these cases are positive news for persons considering bankruptcy.

If you are contemplating filing for bankruptcy and are concerned about an inherited IRA or other retirement funds you have received from a deceased individual, it would serve you well to speak with a qualified bankruptcy attorney about your case.

Questions or interested in a consultation about your case? Email me at meruelolaw@gmail.com or call me at (914) 517-7565.

Non-Attorney Bankruptcy Petition Preparers- Why Take The Risk?

By Natasha Meruelo, Esq.

Have you ever considered hiring a bankruptcy "petition preparer" instead of a bankruptcy attorney? Bankruptcy petition preparation services abound, however, there is a vast difference between hiring an attorney and using one of these services and the difference could jeopardize your chances of getting a discharge of your debts.

Bankruptcy is not a matter that should be taken lightly and it is also not a matter of filling out a few forms. First and foremost, just because you have debt and are struggling to pay your bills, does not mean that bankruptcy is appropriate for you. Actions you may have taken in your financial life or assets you may have may present significant issues that would make a bankruptcy filing inappropriate in your situation or really merit the careful and thought out counsel of a bankruptcy attorney. There is no way you can get the kind of knowledge and information you need from a bankruptcy petition preparer that will allow you to feel confident about the direction of your case that you can get from working with an attorney. Furthermore, a petition preparer will not be by your side as you go through the bankruptcy process, unlike your attorney, who represents you until your case closes.

While bankruptcy relief is available to thousands of individuals, your case may require special planning and analysis that a bankruptcy petition preparer is unlikely to be able to provide. In fact, bankruptcy petition preparers cannot provide you with the same level of service and counseling that bankruptcy attorneys can because of the exact fact that the are not attorneys and cannot give you legal advice. This means that they cannot tell you what types of property you can keep versus what assets you could be putting in jeopardy by filing for bankruptcy, or how to protect property by applying the correct exemptions. All of this constitutes legal advice, which a petition preparer is neither qualified nor permitted to do. All a petition preparer can do is literally fill out a form for you. So, ask yourself: why should you pay for a service that you could do by yourself when you could instead speak with an attorney who can advise you as to what issues may be present in your bankruptcy case, what type of bankruptcy is best for your situation and who will also be a source of guidance throughout your case?

Some things are just not worth the risk. This is a lesson all too often learned by individuals whose cases are dismissed or worse, who end up losing assets as a result of incorrect advice from a petition preparer or simply a poorly prepared set of papers. That was the unfortunate lesson learned by the Debtors in In Re Kuch,  2012 Bankr. LEXIS 1025 (Bankr. D. Colo. March 12, 2012). Although the bankruptcy petition preparer in this case was ultimately sanctioned by the court, the debtors had to go through the harrowing experience of having their case dismissed and presumably having to start over in their quest for bankruptcy relief.

Questions or interested in a consultation about your case? Email me at meruelolaw@gmail.com or call me at (914) 517-7565.