Understanding Bankruptcy 9/12/2019

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Question: Question: In a Chapter 13 bankruptcy, can I pay one debt over others?

Everyone with debts has at least one bill they’d like to pay, even if they can’t pay them all. So, if you are already filing Chapter 13 bankruptcy and repaying some debt, why not treat some better than others?
Sometimes that is allowed and sometimes not. It’s a complicated issue because, at the heart of the Chapter 13 plan, there is a pool of money – the payments you make – which has to be divided among creditors. If one is paid more, others get less typically. So, favoring one means discriminating against others.

The law requires some discrimination. For example, if you aren’t paying everyone in full, then you typically have to provide for special “priority” claims to be paid in full. These are things the government has a special interest in – paying the trustee, child support, recent taxes and so on.
In other cases, like your home and car, the law often allows payment of these “secured” debts in preferential ways over your other debt because you need those assets to keep going (and putting the money into the pot each month!).

But what if the debt is one you can’t wipe out at the end of the typical case, like student loans? Can you pay those in full and “short change” the other debts you can wipe out? Sadly, there are only limited ways to do that because it gives you a “head start” not a “fresh start” at the end of your case, according to some.

In October 2012, a couple argued they should be able to pay non-priority taxes they could not wipe out in full not because it would help them out…but because the tax authorities had done nothing wrong and deserved to be paid. The 8th Circuit bankruptcy appellate panel did not buy that argument either. See, In re Copeland, #12-064 (8th.BAP 11/12/12).

Thus, arguing that your sister’s loan to you deserves special treatment because she’s been good to you probably won’t fly either. If paying the debt with special treatment is necessary to keep your case afloat or otherwise earning income, then it might be better received by the court. Some judges have allowed restitution and some business-related debts to be paid preferentially, recognizing that going to jail or having to close your business down is counterproductive to getting anyone paid.

Next Week’s Topic: What Happens when I file a bankruptcy?

Michael A. Cibik, Esquire

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