Changes to Chapter 13 Plans due to COVD-19 in the CARES Act: You may be able to modify your existing chapter 13 plan to reduce your monthly plan payments and/or extend your chapter 13 plan to a total plan length of up to 7 years.

On March 25, 2020, Senate passed sweeping federal relief legislation called the “CARES Act” in response to the coronavirus crisis. The CARES Act includes an amendment to chapter 13 the Bankruptcy Code that may provide benefit to households that have been financially impacted by this pandemic. This legislation applies to both new cases that are not yet filed as well as chapter 13 cases that have already been filed.

If you are currently in chapter 13 and are experiencing a material financial hardship due to the coronavirus pandemic, the amendment explicitly permits individuals and families to propose chapter 13 plan modifications that either reduce their monthly plan payment and/or extend their chapter 13 plan to a total duration of up to 7 years.

Modify the Chapter 13 Plan to Reduce your Monthly Payment: If you have suffered, or soon will suffer, a material financial hardship due to the pandemic, you may wish to consult your attorney about modifying your chapter 13 plan to reduce the monthly payment until such time that your income recovers. This option may benefit persons and households who have suffered a loss of employment, reduction or loss of income due to layoffs, reduced hours or otherwise have financial hardship caused by the need to take care of children or family members.

Extend the Chapter 13 Plan to Seven Years: Specifically, the CARES Act allows chapter 13 debtors to propose a modified chapter 13 plan that extends the duration of their chapter 13 plan to a total of no more than seven years, as opposed to typical five years in most chapter 13 cases. For existing chapter 13 cases, extending a plan to up to seven years requires a showing you are experiencing or have experienced a “material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic”.   In some cases, a 7-year chapter 13 plan means that mortgage arrears, priority taxes and other priority and secured debts may be repaid over a 7 years with lower monthly plan payments as opposed to higher monthly plan payments over 5 years, particularly if your household income has been impacted by the pandemic.

Examples of persons who may be benefitted by filing a modified chapter 13 plan under the CARES Act:

  • You or another primary income earner in your household have reduced or lost income due to layoffs caused by the pandemic.
  • You or another primary income earner in your household have had to reduce your hours due to illness or need to take care of children or family members as a consequences of the pandemic including school closures.
  • Your current chapter 13 plan was filed primarily to repay taxes, mortgage and/or auto loan arrears, taxes and other priority debts. The new amendment provides the option to extend your plan for up to 2 years beyond the original plan length (for a total new plan length of no more than 7 years) to allow more time to pay these important debts. 

This new legislation will apply for those who were laid off from work or otherwise suffered a loss of income due to the pandemic, or for whom their household is financially impacted due to the virus. Please contact my office if you believe the pandemic has caused a loss of income, or soon will cause you to lose income and therefore jeopardize your ability to continue your chapter 13 plan payments as currently proposed.

This new legislation is unlikely to benefit current or prospective chapter 13 cases for persons who are not impacted by the pandemic, for those whose income is not impacted and are currently in chapter 13 plans where the general unsecured creditors receive a significant repayment on debt, for those whose income is not impacted and who do not otherwise have mortgage or auto loan arrears, taxes or other priority debts to be repaid in the plan. If in doubt as to whether the CARES Act may benefit your chapter 13 case, you should contact your chapter 13 attorney.

NOTE: The bankruptcy provisions of the CARES Act listed above sunset within a year of the legislation being enacted.

Contact Lynn Wartchow for a consultation on how the CARES Act may benefit your chapter 13 case.

Can I still file bankruptcy during COVID-19? What is different about bankruptcy during this National Emergency?

For now, the Minnesota bankruptcy court is still accepting new consumer and business bankruptcy filings for all chapters of bankruptcy, continuing the availability for critical bankruptcy relief for persons otherwise in the process of foreclosure, wage garnishment, debt collection and other unknowns. The court systems are essential functions of our country, core to constitutional functions and access to justice. For this reason, it’s unlikely that bankruptcy filings will be suspended or cut off during the national emergency. However given that attorneys are also dealing with the same additional pressures of taking care of their own families and after working with more limited resources than normal, you may expect longer response times.

Yes, you can still file chapter 7 and chapter 13 bankruptcy during the COVID-19 outbreak, but the process will be different.

If you have not yet consulted and retained a bankruptcy attorney, the first hurdle you face may be consulting and establishing the necessary information for your attorney to file your bankruptcy case. If you have a computer or device with camera function, most attorneys are switching to video or telephone conferences instead of in-person consultations. Wartchow Law offices utilizes the application Zoom for video conferencing and document review, and Zoom does not require that clients create an account or login, although a download of the software may be needed. Next you will need to provide your attorney with a significant amount of information and documentation, posing another potential problem for those that do not have access to a scanner or fax machine from home.

Signatures also pose an issue for which the Minnesota bankruptcy court has already addressed by temporarily suspending the requirement for original “wet” signatures on bankruptcy documents, and instead allowing attorneys to collect their clients’ authorized e-signatures. This allows debtors to sign and file their bankruptcy documents while reducing the need for physical contact between attorneys and clients.

Also for now, the Minnesota bankruptcy court and panel trustees have suspended in-person court hearings for lift stay motions, chapter 13 plan confirmations, and Meetings of Creditors—all of which typically take place in person at the courthouse or other designated official location. While the process is still in flux for how to hold these required appearances without compromising public health, it is expected that judges and trustees will soon hold Meetings of Creditors and other required hearings telephonically and/or by video conference. For pending bankruptcy cases that have already been filed, this means that Meetings of Creditors that have not yet been held are currently being suspended and indefinitely continued, for now at least. However the suspension and continuance of hearings does not mean that the protection of the automatic stay or other bankruptcy relief is not available. Creditors may also still file motions for lift stay and adversary proceedings, and bankruptcy trustees are still working to administer bankruptcy estates during this national emergency.

In sum, you can still file bankruptcy and the need to file may be greater than ever. Potential debtors are encouraged to check with their state authorities to see if other forms of non-bankruptcy relief may be available to them, including lessening of restrictions and wait periods on unemployment benefits, availability of emergency funds, restrictions on eviction, foreclosure and other debt collection, as well as check with their creditors to see what forbearance options may be available to them regarding mortgage, auto loan and credit card payments.

Every bankruptcy court is separately administered and what one bankruptcy court or bankruptcy trustee is doing during COVID-19 may not be the case for all bankruptcy courts or trustees. It’s always best to check with a local bankruptcy attorney or bankruptcy court website for your district to see what the latest is as the courts, trustees, bankruptcy attorneys and other practitioners change the way that bankruptcy cases are administered.

Located in Edina, Lynn Wartchow represents all chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota.

The 2019 Chapter 13 Debt Limits effective April 1, 2019

*Applies to case filed in 2019, 2020, 2021 and through April 2022.

Effective April 1, 2019, the debt limits for filing chapter 13 bankruptcy as prescribed by section 109(e) of the Bankruptcy Code have been upward adjusted as follows:   

Unsecured debt limit:            $419,275

Secured debt limit:                $1,257,850

These limits adjust annually and the next chapter 13 debt limit adjustment is set to occur on April 1, 2022.

The secured debt limit of $1,257,850 includes the total of all debt that is secured by personal and real property owned by the debtor including mortgages secured by real estate (i.e., residential homestead mortgages as well as mortgages on rental or commercial properties, if any) and other collateralized debts such as vehicle loans, equipment loans, etc. The secured limit may also include tax liens.

The unsecured debt limit of $419,275 includes the total of all amounts owed on unsecured lines of credit, credit cards, medial debts and other consumer debts, some taxes owed and even disputed debts in most cases. This unsecured debt limit is calculated per person in the event that a married couple files a joint chapter 13 bankruptcy case.

Any individual that is either employed or self-employed in business is eligible for chapter 13 bankruptcy relief provided the individual’s unsecured debts are within these limits of $419,275 unsecured / $1,257,850 secured.

Individuals who exceed the chapter 13 debt limits still have the option to file under chapter 7 so long as their income qualifies under the means test, or otherwise may file an individual Chapter 11 proceeding, particularly for individuals with income-producing assets such as rental properties, valuable business interests and other property holdings that would be liquidated in chapter 7.

If you exceed the 2019 chapter 13 debt limits, read more about alternatively filing under chapter 11 at What is Individual Chapter 11 Bankruptcy and Why Would I file an Individual Chapter 11?

Attorney Lynn Wartchow advises clients on which form of bankruptcy they qualify for and whether Chapter 7 or Chapter 13 fits their needs best.  Contact for a free consultation and more information on all your options available in bankruptcy.

The Rise in Bankruptcy Filings for Older Individuals and Seniors

Since 2007, bankruptcy filings have doubled for those aged 55 and over. Despite being at a time in life where their children are out of the home and finances should be relatively stable, these older filers now make up about 20% of all people currently filing for bankruptcy relief. Compare that to the smallest group of bankruptcy filers, i.e. those aged 25 and less which account for less than 2% of all bankruptcy filers.

So why is it that older individuals and seniors make up such a disproportionate percentage of bankruptcy filings?

Seniors typically have lower, fixed incomes consisting of social security and possibly pension or other limited retirement income that is barely enough to meet basic living expenses without any wiggle room in the budget for savings for unexpected costs.  In the case of a couple where one spouse may still work full time, often one income is not sufficient to meet bills even with social security and a pension payment. This limited income makes it difficult if not impossible for seniors to get ahead of debt when unexpected temporary expenses and medical emergencies hit.

A quick—but perhaps ill advised—fix many seniors opt for is to refinance their home, pulling money out to pay off credit cards and medical bills and get a head of bills in the short term. But for those on a fixed income, this is a terrible idea on many fronts. First, it converts unsecured debts (which you can go bankrupt on) into secured debt (which you cannot bankrupt). Second, pulling money out of your home to pays creditors adds to the balance owed which in turn increases the monthly mortgage/home equity line payment. A higher home payment does not solve any problem when you are already struggling to make ends meet. Plus a refinance adds charges of several thousand dollars to your mortgage balance in addition to the money pulled out from the home.

Your better option is to explore the bankruptcy alternative. As a senior with limited income, your financial priority should be to protect cash flow by minimizing debt service so that you can afford for the long term to pay the necessary home mortgage and other monthly expenses. Your social security and pension payments may only incur marginal or nominal annual increases and retirement assets may one day be depleted. Best to see if you can discharge credit cards and other unsecured debts in bankruptcy, thereby preserving your future income and also your estate.

Inherited IRA’s May Be Exempt in Bankruptcy, Depending on from Whom the IRA was Inherited

One of the greatest areas of controversy regarding the exemption for individual retirement accounts (IRAs) is the inherited IRA. If a would-be bankruptcy debtor has inherited an IRA from a relative, as often happens between spouses and parents and children, can he or she exempt that IRA as if it were an IRA that they had funded? Or are inherited IRAs treated as most other inherited assets, subject to nominal, if any, exemption in bankruptcy? Whether a bankruptcy debtor may exempt an inherited IRA as one’s own IRA depends on whom they inherited the account from and what they did with the IRA upon inheritance.

Most IRAs are exempt when one files bankruptcy, meaning the retirement account is protected against creditor claims when a bankruptcy is filed. Stated otherwise, the debtor may file bankruptcy, receive a discharge of debts and keep their IRA account intact. This exemption for IRAs includes employer-sponsored IRAs, such as simplified employee pension plans (SEPs) and simple IRAs, as well as IRAs rolled over from 401(k), 403(b), or 457 (government) plans. While the exemption is currently limited at $1,171,650, the IRA exemption nevertheless applies whether the debtor elects the federal or Minnesota state exemption scheme. However a debtor should not to assume that all IRAs within the dollar limits are always exempt in bankruptcy, particularly if that IRA account was set up by someone other than themselves. In other words if the IRA is a result of a transfer, that IRA account may not be exempt in bankruptcy.

The availability of the exemption for an inherited IRA lies in from whom the IRA was inherited.  In 2014, the U.S. Supreme Court issued a decision in Clark v Rameker holding that inherited IRAs generally may not be exempted via the IRA exemptions provided under the Bankruptcy Code or state statute. However the case carved out an exception for IRAs inherited by a spouse. In essence, Clark v Rameker holds that while inherited IRAs are not exempt, there is a singular exemption for an IRA is inherited by one’s spouse (i.e., the bankruptcy debtor is the surviving spouse) provided the surviving spouse treats that IRA as if it is their own IRA by rolling it over directly into their own IRA. The rollover is critical to claiming the exemption, since by rolling over the IRA into one’s own account, the surviving spouse demarcates the IRA as one’s own IRA (i.e., not as an inherited IRA) under both the Internal Revenue Code and the Bankruptcy Code.

The opinion of Clark v Rameker, outlines the facts for creating the exception to the rule otherwise that inherited IRA’s cannot be exempted as one’s own IRA:

The third type of account relevant here is an inherited IRA. An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. See §§ 408(d)(3)(C)(ii), 408A(a). If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRA (subject to the rules discussed below). See Internal Revenue Service, Publication 590: Individual Retirement Arrangements (IRAs), p. 18 (Jan. 5, 2014). When anyone other than the owner’s spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account. Clark v. Rameker, 134 S. Ct. 2242, 2245, 189 L. Ed. 2d 157 (2014)

This reasoning in Clark v. Rameker aligns with the singular exception created in the Internal Revenue Code, which treats an IRA as “inherited” only when the individual acquired such account by reason of the death of another individual, and such individual was not the surviving spouse of such other individual. See 26 U.S.C. § 408(d)(3)(C)(ii). See also Internal Revenue Service, Publication 590: Individual Retirement Arrangements (IRAs), p. 18 (Jan. 5, 2014)(“If you inherit a traditional IRA from your spouse… you can… [t]reat it as your own by rolling it over into your IRA.”  This IRC reference was the exclusive basis for reasoning used by the Supreme Court in deciding against the debtor’s claimed exemption in Clark v Rameker, since the debtor in that case was not the surviving spouse of the IRA’s owner and therefore could not exempt the IRA no matter what she did.

Pros and Cons of Small Business Chapter 7 Bankruptcy

It happens to many small businesses: Operations and sales start slumping. While key creditors may offer forbearance agreements or even short-term extensions of credit, it’s just not enough. Perhaps the business grew too quickly for the principals to manage operational demands under an increased debt load. Maybe business never recovered from the pandemic. Perhaps the business model wrongly assumes receivables will be timely paid to keep the cash flowing as needed for debt service. Or the taxing authority has come knocking for unpaid withholding or sales taxes. Or a lawsuit naming the business as defendant has forced the principals to confront the business’s future viability considering the high costs of litigation defense, the possibility of a significant monetary judgment or repossession of critical equipment.

There are many precursors to business insolvency, with some factors beyond the control of even the most assiduous of small business owners. It’s always a difficult decision for an owner who has invested their time and personal savings into a business to wind-down operations and mitigate the consequences of unpaid debts.

Unfortunately, the closing of a small business often means the owner should file a personal bankruptcy proceeding to discharge their personal guarantees. But should the business also file a chapter 7 bankruptcy? The answer may be surprising.

Pros of Small Business Chapter 7 Bankruptcy:

  • Preserve cash flow and company assets for the payment of trust fund taxes and other priority debts. This is particularly true in the case where the company is being pursued in litigation, state court and other actions that may result, or have already resulted, in a monetary judgment against the company. Bankruptcy stays litigation and collection on the judgment so that current cash assets and future proceeds from the chapter 7 liquidation may be applied to the payment of payroll and other trust fund taxes ahead of general unsecured creditor claims. This may also be beneficial to the company principals who can be personally assessed for those taxes.
  • Orderly liquidation of business assets. A trustee is assigned to liquidate the remaining assets of the business and use the net proceeds after the trustee takes their cut to pay down the liabilities in order of priority. This process is especially useful if the business’s principals are unable to liquidate the business assets and there is significant inventory to be dealt with.
  • A trustee takes over all existing operations. A trustee will immediately be assigned to manage and control the remaining operations of the business, taking the burden off the business principals and owners to terminate employees and leases, surrender collateral to secured creditors, manage bank accounts, etc. This can also be viewed as a negative consequence by some small business owners (see below).

Cons of Small Business Chapter 7 Bankruptcy:

  • A trustee takes over all aspects of the business. A trustee will take over management and control of the business and the principals will be sidelined to simply watch and see what happens. This can be beneficial if the business is still operational and the principals no longer wish to manage the business through its winding-down, or can be viewed as a negative if the principals still have an interest in operating the business for some longer period of time and do not wish to see the business ‘go dark’ under the management of a bankruptcy trustee.
  • No discharge of debts. Unlike a personal chapter 7 bankruptcy, there is no discharge of debts at the end of a business chapter 7 proceeding. At the end of chapter 7, the business will simply be defunct, dead in the water and typically still owing liabilities.
  • Assets will be liquidated. Since a trustee will be liquidating the business assets, those assets are likely to be sold as quickly and cheaply as possible. This could mean a loss of equity in the assets. A fire sale by the trustee may also mean that personally guaranteed debts may not be minimized if assets are sold for less than the owner could potentially sell for herself/himself to pay down the debts.
  • Attorney and filing fees for chapter 7 can run into the thousands of dollars.
  • Personal exposure and risk to the business principals/owners. There is always a chance that a business chapter 7 filing will result in exposure to avoidance actions brought by the trustee against the owners and/or principals of the business. One common example is when the trustee sues a principal to recover for the benefit of the business creditors any distributions or draws taken by that principal in the one year prior to filing. For this reason, it is imperative that the business hire an experienced business bankruptcy attorney who can evaluate the risk and exposure faced by the principals/owners if the business files chapter 7 and their possible defenses. Note that if a principal is sued by the trustee, the principal must hire separate counsel since the business bankruptcy attorney cannot represent both the business and its principals.

There are other, non-bankruptcy issues surrounding the winding down of failed business enterprise which may require the services of a business attorney. Even if chapter 7 does not make sense for the business—as often it does not make sense especially for smaller businesses—the small business owner may still wish to be advised on how to resolve personally guaranteed debts, personally assessed taxes unpaid by the business, as well as how to navigate and avoid potential issues of alter ego should the owner wish to form a new business entity that is free and clear of any of the failed business’s debts.

For the small business owner that contacts my firm for assistance, I suggest the following steps:

  • The business owner should evaluate what business debts are personally guaranteed and/or may be personally assessed. Personally owed debts may include business credit cards, leases and personally guaranteed SBA loans as well as unpaid business taxes. The answer to this may lead the owner to seek out personal bankruptcy representation.
  • Should the owners attempt to wind down the business themselves, with or without the assistance of an attorney, or does chapter 7 bankruptcy offer any significant benefits in spite of the fact that there is no discharge of debts.
  • Have an attorney evaluate the exposure and risk to the business owner, either in the event that a business bankruptcy is filed or under certain circumstances, for example the owner took possession and control of business assets and funds to the detriment of its creditors.

Qualifying for a Mortgage After (or During) Bankruptcy: What does it take and how long will I wait?

It should come as no surprise that qualifying for a new mortgage or refinance with a bankruptcy in your credit history is likely to complicate the process. But while a bankruptcy will stay on your credit report for a full ten years after your case is complete—which means up to fifteen years total for individuals who file chapter 13—bankruptcy takes its biggest bite on creditworthiness in the first two to three years after the case is first filed.

The good news is that bankruptcy does not automatically disqualify a borrower from obtaining a new mortgage or refinance, and the most available product after bankruptcy usually will be a FHA mortgage (as opposed to a conventional mortgage). The bad news is that eligibility for a mortgage will take time, usually two years or more with reestablished good credit.

As a general rule of thumb, a debtor can qualify for a FHA mortgage or refinance either during or after bankruptcy under the following guidelines:

Chapter 7 or Chapter 11 Bankruptcy: At least 2 years have elapsed since the date of discharge of debts and the borrower has a credit score at least a 640. In most chapter 7 cases, the discharge of debts is entered three months after the case is initially filed.

Chapter 13 Bankruptcy: At least 1 year has elapsed since the filing chapter 13 bankruptcy and the borrower has a credit score at least 640, plus the borrower can provide lender with a verified perfect payment history of their chapter 13 plan. Some lenders may also require the chapter 13 trustee’s approval of the loan.

Note: For conventional mortgage products and rural housing, the typical waiting period may be extended to three years or more and often with higher credit score requirements.

If you filed a chapter 7 or chapter 13 bankruptcy, or you are still in an active chapter 13 plan, work now to increase your odds to qualify for a mortgage product by doing the following:

  • Reestablish a good credit score now. The better the credit score, the lower the interest rate will be. While it won’t happen quickly, you do not have to wait until bankruptcy is complete to work on improving a credit score. Pay your mortgage, student loans, vehicle leases and auto loans on time each month so that you get the benefit of the positive credit reporting. If your student loan is in default, get it back on track with an Income Based Repayment program. Don’t let new debts and bills fall into collection. Check your credit report annually for errors that negatively impact your score. And consider a secured credit card or even a traditional credit card with a low limit—use it sparingly, keep the balance below 10% of the available credit limit or, better yet, pay it off in full each month. If your bankruptcy case is already complete, have the state court docket updated to show any pre-bankruptcy judgments were discharged in your bankruptcy case.
  • If you are in an active chapter 13 plan, ensure your monthly chapter 13 plan payment is made on time each month. For debtors with cash flow problems, this may mean that you set up your monthly plan payments to be automatically deducted from your wages or otherwise have your plan payment made via ACH deduction from a bank account.
  • Be prepared and be patient. At a minimum, most borrowers will have to wait at least two years from when a bankruptcy was filed before they will qualify for a FHA mortgage.

As an alternative for homeowners looking to refinance an existing mortgage who do not meet the underwriting requirements for a traditional refinance, the Making Home Affordable program administered through the federal government may offer a better solution. Obtaining a HAMP or HARP mortgage modification essentially provides the benefit of a cost-free refinance with market interest rates however without the strict credit score/financial history requirements or mandatory post-bankruptcy waiting periods. These programs will not exist indefinitely and as of the date of this post, Congress has approved the Making Home Affordable program only through the end of 2016. To identify the various programs and requirements for a mortgage modification, see the official HUD website on Making Home Affordable.

DISCLOSURE: This information is intended as a general guideline only and is not meant to be a definitive response on any individual qualification for a mortgage or refinance. Mortgage underwriting standards change frequently and only a banking institution or loan officer can determine eligibility for mortgage products.

While Bankruptcy Are Filings Down, Debts Are Still Up—Get Practical Bankruptcy Advice Sooner Rather than Later

According to the National Association of Consumer Bankruptcy Attorneys, the number of people filing for bankruptcy in 2011 has dropped as much as 30% in some states from 2010 to 2011. It speculates that the reason for the decline in bankruptcy filings may be due to the costs associated with filing bankruptcy, rather than an indication that people’s debts are becoming more manageable. In Minnesota, the court filing fee for Chapter 7 is $299 and the attorney fees in a typical Chapter 7 case can average $2,000 or more for a simple case. While bankruptcy attorneys should be especially busy in a downturned economy, their clients are scrambling to make mortgage payments and keep up with routine living expenses on less and less income, thus leaving little funds available for the expense of actually getting long term debt relief in bankruptcy.

However, the irony that bankruptcy is expensive shouldn’t prevent people from understanding the ramifications of debt and getting educated on their bankruptcy and non-bankruptcy options. Most bankruptcy attorneys offer free, no commitment consultations where they will review your circumstances and give you guidance and advice on how much bankruptcy will cost and how long it will take. The last thing most people want is to find themselves in the midst of a foreclosure, lawsuit or facing a wage garnishment and not having known there were options available to them to avoid that sticky situation, including filing for bankruptcy and sometimes options that don’t even involve bankruptcy. It never hurts to educate yourself especially if the only cost is a couple hours of your time.

Debts don’t go away fast, as we all know. Bankruptcy is your constitutional right to  relief from struggling under debt. Find out what bankruptcy can do for you and then decide if it makes sense.

Wartchow Law Office represents consumer and business bankruptcy clients in Chapter 7, Chapter 13 and Chapter 11 business reorganizations.