Chapter 13 bankruptcy and a lawsuit settlement. Unlike Chapter 7 bankruptcy, if you file Chapter 13 bankruptcy the trustee does not take your assets to sell them to generate payments for your creditors. Instead, you will be allowed to create a 3 of 5 year debt repayment plan to repay your creditors all or a portion of the unsecured debts you owe. May 26, · The Extraordinary Tools of Bankruptcy: Avoid Paying Your Ex-Spouse Most of Your Property Settlement Debts Wasson and Thornhill May 26, Bankruptcy and Divorce Chapter 13’s “super discharge” means that you can write off a portion . For more information on IRS taxes and a chapter 7 bankruptcy, see IRM Is bankruptcy the best option for IRS tax settlement? If you are only trying to reduce your tax debt, bankruptcy may not be the most effective solution. Bankruptcy only discharges select tax debts, and you cannot include any tax debt that is less than three years old.
Related videosCan I Discharge My Water Bill In Bankruptcy?
The judgment lien would remain on your property if you go through bankruptcy. If you were to sell your home at a later date, the lien would be paid out of the proceeds of the sale of the house. If this is the case, the settlement can be discharged through bankruptcy under the right circumstances.
Some settlement agreements will contain language that will protect the plaintiff in case the defendant files bankruptcy. Some examples of this would be requiring a guarantor for the defendant or having a third party make the payments to the plaintiff on behalf of the defendant. If the settlement agreement requires a guarantor then the defendant would be discharged of the debt through bankruptcy, but the plaintiff would still be paid by the guarantor.
If the third party is contracted to make the payments, the plaintiff would have protection from the bankruptcy trustee attempting to recover the settlement payments. However, some settlements or court ordered payments are not dischargeable. The bankruptcy code takes public policy considerations and prevents certain debts from being discharged.
Obligations like alimony and child support will not be discharged through bankruptcy. For example, if you have a settlement to pay due to a drunk driving accident, it is very unlikely to be discharged. But, the plaintiff will have to file suit again in bankruptcy to preserve the settlement and prevent discharge.
In this situation, if the settlement agreement contains an admission of fault by the defendant then the settlement is nearly guaranteed to survive bankruptcy.
If it does not, the issue of fault will need to be determined by the bankruptcy court. Other examples of non-dischargeable settlement obligations would be those involving repayment for property obtained by false pretenses, such as fraud or embezzlement. Should a debtor in possession fail to comply with the reporting requirements of the U. In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.
The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U. For purposes of this publication, references to U. Creditors' committees can play a major role in chapter 11 cases. The committee is appointed by the U. Among other things, the committee: consults with the debtor in possession on administration of the case; investigates the debtor's conduct and operation of the business; and participates in formulating a plan.
A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties. A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession. In some smaller cases the U. The Bankruptcy Code addresses this issue by treating a "small business case" somewhat differently than a regular bankruptcy case.
A small business case is defined as a case with a "small business debtor. Determination of whether a debtor is a "small business debtor" requires application of a two-part test. Second, the debtor's case must be one in which the U. In a small business case, the debtor in possession must, among other things, attach the most recently prepared balance sheet, statement of operations, cash-flow statement and most recently filed tax return to the petition or provide a statement under oath explaining the absence of such documents and must attend court and the U.
The small business debtor must make ongoing filings with the court concerning its profitability and projected cash receipts and disbursements, and must report whether it is in compliance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure and whether it has paid its taxes and filed its tax returns. In contrast to other chapter 11 debtors, the small business debtor is subject to additional oversight by the U.
Early in the case, the small business debtor must attend an "initial interview" with the U. Because certain filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case normally proceeds more quickly than other chapter 11 cases.
For example, only the debtor may file a plan during the first days of a small business case. This "exclusivity period" may be extended by the court, but only to days, and only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time.
When the case is not a small business case, however, the court may extend the exclusivity period "for cause" up to 18 months. Single asset real estate debtors are subject to special provisions of the Bankruptcy Code. The term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.
The Bankruptcy Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay which are not available to creditors in ordinary bankruptcy cases. On request of a creditor with a claim secured by the single asset real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor unless the debtor files a feasible plan of reorganization or begins making interest payments to the creditor within 90 days from the date of the filing of the case, or within 30 days of the court's determination that the case is a single asset real estate case.
The interest payments must be equal to the non-default contract interest rate on the value of the creditor's interest in the real estate. Although the appointment of a case trustee is a rarity in a chapter 11 case, a party in interest or the U.
The court, on motion by a party in interest or the U. Moreover, the U. The trustee is appointed by the U. Alternatively, a trustee in a case may be elected if a party in interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee. In that instance, the U.
The case trustee is responsible for management of the property of the estate, operation of the debtor's business, and, if appropriate, the filing of a plan of reorganization. Section of the Bankruptcy Code requires the trustee to file a plan "as soon as practicable" or, alternatively, to file a report explaining why a plan will not be filed or to recommend that the case be converted to another chapter or dismissed.
Upon the request of a party in interest or the U. The appointment of an examiner in a chapter 11 case is rare. The role of an examiner is generally more limited than that of a trustee. The examiner is authorized to perform the investigatory functions of the trustee and is required to file a statement of any investigation conducted. If ordered to do so by the court, however, an examiner may carry out any other duties of a trustee that the court orders the debtor in possession not to perform.
Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor's schedules to determine whether some of the claims are improperly categorized. Sometimes, the examiner may be directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action should be taken.
The examiner may not subsequently serve as a trustee in the case. The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.
As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.
The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U. The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.
Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the automatic stay. For example, when the debtor has no equity in the property and the property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt.
The Bankruptcy Code permits applications for fees to be made by certain professionals during the case. Thus, a trustee, a debtor's attorney, or any professional person appointed by the court may apply to the court at intervals of days for interim compensation and reimbursement payments. In very large cases with extensive legal work, the court may permit more frequent applications.
Although professional fees may be paid if authorized by the court, the debtor cannot make payments to professional creditors on prepetition obligations, i. The ordinary expenses of the ongoing business, however, continue to be paid.
The debtor unless a "small business debtor" has a day period during which it has an exclusive right to file a plan.
This exclusivity period may be extended or reduced by the court. But in no event may the exclusivity period, including all extensions, be longer than 18 months. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. A chapter 11 case may continue for many years unless the court, the U. The creditors' right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.
The debtor in possession or the trustee, as the case may be, has what are called "avoiding" powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition.
By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or "disgorgement" of the payments or property, which then are available to pay all creditors. Generally, and subject to various defenses, the power to avoid transfers is effective against transfers made by the debtor within 90 days before filing the petition. But transfers to "insiders" i.
In addition, under 11 U. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors. Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11 case, other issues may arise that must be addressed by the debtor in possession. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise.
If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court. A debtor in possession may not use "cash collateral" without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected.
Section defines "cash collateral" as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor's security interest.
When "cash collateral" is used spent , the secured creditors are entitled to receive additional protection under section of the Bankruptcy Code. The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession's use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession.
A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide "adequate protection" to the creditor. Adequate protection may be required to protect the value of the creditor's interest in the property being used by the debtor in possession. This is especially important when there is a decrease in value of the property.
The debtor may make periodic or lump sum cash payments, or provide an additional or replacement lien that will result in the creditor's property interest being adequately protected.
When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a court-approved "superpriority" over other unsecured creditors or a lien on property of the estate.
Before confirmation of a plan, several activities may take place in a chapter 11 case. Continued operation of the debtor's business may lead to the filing of a number of contested motions. The most common are those seeking relief from the automatic stay, the use of cash collateral, or to obtain credit. But, if Mila files a Chapter 13 case, that debt can be discharged. Even though support and some other divorce-related debts cannot be discharged in a Chapter 7 case, they can often be managed in a Chapter 13 case.
Chapter 13 is a repayment plan under the protection of the bankruptcy court. For instance, domestic support obligations have a high priority, but most other unsecured debts , like credit cards and medical bills, are assigned a lower priority. For a Chapter 13 plan to be approved by the court, it has to pay off certain high priority debts between three and five years. Those priority debts include non-dischargeable support and property division obligations.
Priority debts do not include obligations that arise out of hold harmless agreements or any cash payments in lieu of assets.
Those two are treated like credit cards and medical bills. Even though a child support claim is not dischargeable, you can take up to five years to pay it off in a Chapter 13 while under the protection of the bankruptcy court. The child support creditor can take no action on that debt as long as you make your payments and keep up your current domestic support obligations according to your plan.
To the extent they have anything left over, the low priority creditors will share that in proportion to what they're owed. Let's go back to Mila and Roger for an example. When she gets a new job, she decides to file a Chapter 13 case. It makes no difference because, under the bankruptcy code, Mila has put forth her best effort and prioritized child support payments. The rest of her debt will be discharged. Bankruptcy Filing Decisions. By Carron Armstrong.
To be excepted from discharge, money owed to a spouse has to meet three requirements:. The debt must be in the nature of alimony, maintenance, or support.
The debt must be owed to a former spouse.