I have taken the contents of this page from www.findlaw.com but since they were spread across various pages, I have simply placed them right here on one page.
What Is Bankruptcy?
Basic information on Chapter 7 and Chapter 13 bankruptcy.
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidations" or "reorganizations."
Chapter 7 bankruptcy is the liquidation variety -- property is sold (liquidated) to pay off as much of your debt as possible, while leaving you with enough property to make a fresh start. Chapter 13 is the most common type of "reorganization" bankruptcy for consumers -- you repay your debts over three to five years.
Both kinds of bankruptcy have numerous rules -- and exceptions to those rules -- about what kinds of debts are covered, who can file, and what property you can and cannot keep.
Liquidation (Chapter 7)
Liquidation bankruptcy is called Chapter 7, and it can be filed by individuals (a "consumer" Chapter 7 bankruptcy) or businesses (a "business" Chapter 7 bankruptcy). A Chapter 7 bankruptcy typically lasts three to six months.
In a liquidation bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts for which collateral has not been pledged) will be erased. You get to keep any property that is classified as "exempt" under the state or federal laws available to you (such as your clothes, car, and household furnishings). If you don't own much, chances are that all of your property is exempt and you have what is known as a "no asset" case.
If you owe money on a secured debt (for example, a car loan, where the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing your payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Some types of secured debts can be eliminated in Chapter 7 bankruptcy.
What Is Bankruptcy?
Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient, after subtracting certain allowed expenses and monthly payments for certain debts (including child support and debts that secure property), to fund a Chapter 13 repayment plan, you won't be allowed to use Chapter 7. For more on this and other requirements, see Who Can File for Chapter 7 Bankruptcy? For more information on Chapter 7 bankruptcy generally, see An Overview of Chapter 7 Bankruptcy.
Bankruptcy doesn't work on some kinds of debts. Though bankruptcy can eliminate many kinds of debts, such as credit card debt, medical bills, and unsecured loans, there are many types of debts, including child support and spousal support obligations and most tax debts, that cannot be wiped out in bankruptcy. For more information, see What Bankruptcy Can and Cannot Do.
Reorganization (Chapter 13)
Chapter 13 bankruptcy is also known as "wage earner" bankruptcy because, in order to file for Chapter 13, you must have a reliable source of income that you can use to repay some portion of your debt. And to qualify for Chapter 13, your secured debts must be less than $922,975 and your unsecured debts less than $307,675.
When you file for Chapter 13 bankruptcy you propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you'll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you'd filed for Chapter 7.
If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.
What Is Bankruptcy?
For more information on Chapter 13 bankruptcy, see An Overview of Chapter 13 Bankruptcy.
Other Types of Reorganization Bankruptcy
In addition to Chapter 13, there are two other types of reorganization bankruptcy you may have heard of: Chapter 11 and Chapter 12.
Chapter 11 bankruptcy is the type of bankruptcy used by financially struggling businesses -- such as Macy's -- to reorganize their affairs. It is also available to individuals, but because Chapter 11 bankruptcy is expensive and time-consuming, it is typically used only by those who have debts that exceed the Chapter 13 bankruptcy limits or who own substantial nonexempt assets (such as several pieces of real estate). To learn more about this kind of bankruptcy, see A Feast for Lawyers, by Sol Stein (M. Evans & Co., Inc.).
Chapter 12 bankruptcy is almost identical to Chapter 13 bankruptcy. But to be eligible for Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation of a family farm. Chapter 12 has higher debt ceilings to accommodate the large debts that may come with operating a farm, and it offers the debtor more power to eliminate certain types of liens. Only a few hundred people file for Chapter 12 each year, while hundreds of thousands file for Chapter 13. You need a lawyer to file for Chapter 12.
Decide If Bankruptcy Is Right for You
by Attorney Albin Renauer
Is bankruptcy a good idea or not? Here are some things to consider.
1. Learn about it. For individuals, there are two main kinds of bankruptcy:
• Chapter 7 -- a bankruptcy where many, if not all, of your debts are cancelled outright in a short three- to six-month process. (See An Overview of Chapter 7 Bankruptcy.)
• Chapter 13 -- a bankruptcy where you use your income to make payments on your debts over the next three to five years. (See An Overview of Chapter 13 Bankruptcy.)
2. Consider simpler alternatives. Things may not be as bad as you think. You may be "judgment proof" or you may have options you aren't aware of. See Alternatives to Bankruptcy.
3. Make sure you are you eligible. You may be prevented from filing for Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan. (See
Who Can File for Chapter 7 Bankruptcy?) Or you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low. (See Are You Eligible for Chapter 13 Bankruptcy?)
4. Learn which debts won't be cancelled. Some debts, like child support obligations, cannot be wiped out in bankruptcy. Learn more in What Bankruptcy Can and Cannot Do.
5. Consider what will happen to your home. Bankruptcy won't relieve you of your obligation to pay your mortgage, but it might make your mortgage easier to pay by getting rid of other debts. If you have substantial equity in your home, you might lose it if you file for Chapter 7, depending on how generous the exemptions laws are that are available to you. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.
6. Will you lose your car or other property? How much property you get to keep depends whether you've pledged the property as collateral for a debt, and on the "exemption" laws that are available in your state. If you file for Chapter 7, you might lose your car if you have substantial equity that isn't protected by your state's exemption laws.
7. Will your credit cards be paid off? Bankruptcy is good at wiping out most credit card debt and unsecured loans, unless you spent extravagantly or lied on your credit application. See What Bankruptcy Can and Cannot Do for more information.
8. Is your pension, IRA, or 401(k) safe? In most states, you will not lose pensions, retirement accounts, or life insurance in bankruptcy. If you have a pension, a 401(k), an IRA, or life insurance, find out what's protected in your state.
9. Will cosigners be stuck with your debt? If a friend or relative helped you get financing by cosigning a loan agreement, Chapter 13 bankruptcy will protect your cosigner, but Chapter 7 will stick them with any debt you don't pay.
10. Consider your personal life. Bankruptcy can be intrusive -- you have to disclose every last detail of your finances to the court, and other people may find out about your bankruptcy. In a Chapter 7 bankruptcy, you can have property taken away, or, under a Chapter 13 plan, you might spend three to five years having to ask permission to spend your own money .
The Debt Discharge in Bankruptcy FAQ
Q: What is a "discharge in bankruptcy"?
A: A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.
Q: When does the discharge occur?
A: The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the creditors' meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts of an individual with regular income), the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor's discharge in a chapter 7 or 13 case if the debtor fails to complete "an instructional course concerning financial management." The Bankruptcy Code provides limited exceptions to the "financial management" requirement if the U.S. trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.
Q: How does the debtor get a discharge?
A: Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee's attorney, if any. The debtor and the debtor's attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.
Q: Are all of the debtor's debts discharged, or only some?
A: Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. The Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor's drunken driving).
There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12
. A more limited list of exceptions applies to cases under chapter 13. The most common types of nondischargeable debts are
• Certain types of tax claims,
• Debts not set forth by the debtor on the lists and schedules the debtor must file with the court,
• Debts for spousal or child support or alimony,
• Debts for willful and malicious injuries to person or property,
• Debts to governmental units for fines and penalties,
• Debts for most government funded or guaranteed educational loans or benefit overpayments,
• Debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated,
• Debts owed to certain tax-advantaged retirement plans, and
• Debts for certain condominium or cooperative housing fees.
A slightly broader discharge of debts is available to a debtor in a chapter 13 case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. Although a chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., "confirmed") repayment plan, there are some limited circumstances under which the debtor may request the court to grant a "hardship discharge" even though
the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control. The scope of a chapter 13 "hardship discharge" is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available in chapter 12 if the failure to complete plan payments is due to "circumstances for which the debtor should not justly be held accountable."
Q: Does the debtor have the right to a discharge or can creditors object to a discharge?
A: In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor's discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor's discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an "adversary proceeding."
How Bankruptcy Stops Your Creditors: The Automatic Stay
After you file for bankruptcy, the automatic stay offers potent legal protection against bill collectors.
When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Especially if you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, or losing such basic resources as utility services, welfare, unemployment benefits, or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason to file for bankruptcy.
What the Automatic Stay Can Prevent
Here is how the automatic stay affects some common emergencies:
• Utility disconnections. If you're behind on a utility bill and the company is threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. (Also, bankruptcy will probably discharge the past due debts for utility service.) Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in January in New England might be justification enough.
• Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
• Eviction. If you are being evicted from your home, the automatic stay may provide some help -- but the new bankruptcy law makes it easier for landlords to proceed with evictions. If your landlord already has a judgment of possession against you when you file, the automatic stay won't affect these eviction proceedings; the landlord can continue just as if you hadn't filed for bankruptcy. And if the landlord alleges that you've been endangering the property or using controlled substances there, the automatic stay won't do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction -- and the court will probably agree to do so.
How Bankruptcy Stops Your Creditors: The Automatic Stay
• Collection of overpayments of public benefits. If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents this collection. However, if you become ineligible for benefits, the automatic stay doesn't prevent the agency from denying or terminating benefits for that reason.
• Multiple wage garnishments. Filing for bankruptcy stops garnishments dead in their tracks. (And not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy.) Although no more than 25% of your wages may be taken to satisfy court judgments (up to 50% for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened. For some people, any loss of income is devastating; also, some employers get angry at the expense and hassle of facilitating a succession of garnishments and take it out on their employees. Although federal law prohibits you from being fired for one garnishment, an employer can fire you for multiple garnishments.
What the Automatic Stay Cannot Prevent
In a few instances, the automatic stay won't help you.
• Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.
• Support actions. A lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn't stopped by your filing for bankruptcy.
• Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component is not affected by the automatic stay. For example, if you were convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service won't be stopped by your filing for bankruptcy.
• Loans from a pension. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRAs).
• Multiple filings. If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue and proves that the current case was filed in good faith. If a creditor had a motion to lift the stay pending during the previous case, the court will presume that you acted in bad faith, and you'll have to overcome this presumption to get the protection of the stay in your current case.
How Creditors Can Get Around the Automatic Stay
Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove ("lift") the stay, if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can't pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file for bankruptcy, to ask for permission to proceed with the foreclosure -- and that permission is likely to be granted.
What Bankruptcy Can and Cannot Do
Bankruptcy is a powerful tool for debtors, but some kinds of debts can't be touched.
Bankruptcy is good at wiping out credit card debt, but you may have trouble eliminating some other kinds of debts, including child support, alimony, most tax debts, student loans, and secured debts.
What Bankruptcy Can Do
If you are facing serious debt problems, bankruptcy may offer a powerful remedy. Here are some of the things filing for bankruptcy can do:
Wipe out credit card debt and other unsecured debts. Bankruptcy is very good at wiping out credit card debt. Unless you have a special "secured" credit card, your credit card balance is an unsecured debt -- that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. This is precisely the kind of debt that bankruptcy is designed to eliminate. Besides credit card debt, you may have other unsecured debts, and bankruptcy can wipe these out as well.
If you file for Chapter 13 rather than Chapter 7, you may have to pay back some portion of your unsecured debts. However, any unsecured debts that remain once your repayment plan is complete will be discharged.
Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the "harassment"' is simply phone calls and letters, there are simpler ways to stop it. If the harassment is more serious -- if the creditor is about to repossess your car or foreclose your mortgage, bankruptcy can help, at least in the short term, and perhaps longer if you just need a little time to get through a temporary crisis.
Eliminate certain kinds of liens (but not others). A lien is a creditor's right to take some or all of your property. A bankruptcy court's discharge of your debts wipes out your direct obligation to pay your creditors, but if the creditor has a lien on your property, the lien will survive -- unless you invoke certain procedures during your bankruptcy case. If the creditor has taken you to court and slapped a judgment lien on your property, you may be able to remove it.
What Bankruptcy Can't Do
Bankruptcy will not help you hold onto property you haven't paid for or avoid paying child support or alimony, and it will offer only limited help if you are trying to get rid of tax debt or student loan debt. Here's what bankruptcy cannot do for you:
Prevent a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. So, if you have a secured debt (a debt where the creditor has a lien on your property and can repossess it if you don't pay the debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property. But after the repossession, bankruptcy does prevent the creditor from coming after you for additional money if the sale of the collateral did not generate enough cash to pay off the amount you still owed.
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy -- you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, your plan will have to include repayment of these debts in full.
Wipe out student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only on a showing of "extreme hardship" -- a standard that is very tough to meet. You must be able to show not only that you cannot afford to pay your loans now, but also that you have very little likelihood of being able to pay your loans in the future. The court will also consider whether you've made a good faith effort to repay at least some of what you owe, taking advantage of the partial-payment options offered under various laws.
Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is possible in some cases. There are many requirements to be met.
Eliminate other nondischargeable debts. The following debts are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy. If you file for Chapter 7, these debts will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your repayment plan. If they are not repaid in full, the balance will remain at the end of your case.
What Bankruptcy Can and Cannot Do
• debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
• debts for personal injury or death caused by your intoxicated driving
• fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
• recent income tax debts and all other tax debts.
In addition, some types of debts may not be discharged if the creditor convinces the judge that they should survive your bankruptcy. These include debts incurred through fraud, such as lying on a credit application or passing off borrowed property as your own to use as collateral for a loan.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 can't help you with these situations, but Chapter 13 can:
Stop a mortgage foreclosure. Though bankruptcy can delay a foreclosure, a Chapter 7 bankruptcy won't stop it for long. Chapter 13, however, was designed with foreclosure problems in mind. A typical foreclosure scenario is where, because payments have been missed, the lender demands immediate payment of a huge sum of money -- perhaps the entire loan amount -- and there is no way you can come up with it. Filing for Chapter 13 bankruptcy will stop the foreclosure and can force the lender to accept a plan where you make up the missed payments and the loan amount through monthly payments over the next three to five years. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.
Another way bankruptcy can help with mortgage problems is to free you of other debts so you will have more disposable income available to stay current on your mortgage.
Allow you to keep nonexempt property. In Chapter 7, you must give up your valuable nonexempt property so that the trustee can sell it and use the proceeds to pay off your creditors. If you have nonexempt property that you really want to keep, and a steady source of income, Chapter 13 might make more sense. You don't have to give up any property in Chapter 13 because you use your income to fund your repayment plan.
What Bankruptcy Can and Cannot Do
"Cram down" secured debts that are worth more than the property that secures them. You can use Chapter 13 to reduce a debt to the replacement value of the property securing it, then pay off that debt through your plan. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and have the rest of the loan discharged. Under the new bankruptcy law, you can't cram down a car debt you purchased the car during the 30-month period before you filed for bankruptcy. You also can't cram down a secured debt on other personal property you purchased within one year preceding your bankruptcy filing.
Tell the Whole Truth When You File For Bankruptcy
Don't get clever and try to hide property. It will come back to haunt you.
You must sign your bankruptcy papers under penalty of perjury, swearing that everything in them is true. One of the things you're swearing to is that your forms are complete, because the forms ask you to list "all" property, income, and debts. Filing incomplete or inaccurate bankruptcy forms can lead to your case being dismissed -- or worse, if the court thinks you omitted information or made false statements intentionally.
The law is not supposed to punish those who make one or two honest mistakes. If you accidentally leave something off your papers or misstate something on your forms, you can usually correct your papers or explain the mistake to the trustee. But if you leave out so much that it appears that you were careless, the court can find that your actions demonstrate an indifference to the truth and can dismiss your case on that basis.
If you deliberately attempt to hide assets or use a false Social Security number, it will probably come back to haunt you more profoundly than your current debt crisis.
List Every Creditor
Bankruptcy can't help you if you hide information. If you fail to list creditors, the debts you owe them may not be wiped out by your bankruptcy discharge. So, be sure to list every person who claims that you owe them money -- even if you don't think you owe them a cent. In this situation, you can indicate that the debt is "disputed." If the debt is already the subject of a pending lawsuit, the debt can be listed as "contingent" -- that is, it depends on how the lawsuit comes out.
When your bankruptcy is finished, you will no longer owe any debts that have been discharged. If a disputed debt is discharged, the entire dispute will be irrelevant. The creditor will be legally barred from collecting anything more from you regardless of who is right.
Don't Omit Creditors Just Because You Like Them
Some filers consider omitting creditors whom they like -- such as a relative or a friendly local business person -- to avoid having that debt wiped out. This is a bad idea, no matter how honorable your intentions. Bankruptcy doesn't allow you to play favorites. In fact, a central purpose of bankruptcy is to make sure that all of your creditors get their fair share of what you have, and that certain obligations (like child support) are not shortchanged. If the bankruptcy trustee learns that you've omitted creditors from your list, you'll have to add them, and it will raise suspicion about other statements on your forms.
Tell the Whole Truth When You File For Bankruptcy
Include Money You May Have Coming to You
When you list your property on the bankruptcy forms, you must include not only property you have when you file, but also property that you may have coming to you. Here are some examples:
• an inheritance from a recently deceased relative that you have not yet received
• stock options, trust funds, or tax refunds
• pensions, retirement funds, annuities, and life insurance, and
• judgments from lawsuits you've filed or could file, arising from a personal injury or other matter.
All of these are examples of property that you must list on your forms. You may get to keep some or all of this property by claiming it as exempt, but you must list it so that the trustee has a complete picture of all of your finances.
Don't Deliberately Hide Assets or Other Financial Details
If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number to hide your identity as a prior filer, and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud. The punishment for fraud is serious: Jail time is not unusual for those who try to hide property from the court and get caught.
Eliminating Tax Debts in Bankruptcy
Most taxes can't be eliminated in bankruptcy, but some can.
You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. But it's not as simple as it sounds. Most tax debts can't be wiped out in bankruptcy -- you'll continue to owe them at the end of a Chapter 7 case, or you'll have to repay them in full in your Chapter 13 plan.
If you need to discharge tax debts, Chapter 7 will probably be the better option -- but only if you qualify for Chapter 7 (see Who Can File for Chapter 7 Bankruptcy?) and your debts qualify for discharge.
When You Can Discharge a Tax Debt
You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
• The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
• You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.
• The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
• You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
• You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)
The Effect of Federal Tax Liens
If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because prior recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but any lien recorded before you file for bankruptcy remains. In effect, this means you'll have to pay off the lien in order to sell the property.
Alternatives to Bankruptcy
Learn what you can do instead of filing for Chapter 7 or Chapter 13 bankruptcy.
In many situations, filing for bankruptcy is the best remedy for debt problems. In others, however, another course of action makes more sense. This article outlines your main alternatives.
Do Nothing
Surprisingly, the best approach for some people deeply in debt is to take no action at all. If you're living simply, with little income and property, and look forward to a similar life in the future, you may be what's known as "judgment proof." This means that anyone who sues you and obtains a court judgment won't be able to collect from you simply because you don't have anything they can legally take. (As a famous song of the 1970s said, "freedom's just another word for nothing left to lose.")
Except in unusual situations (being a tax protester or willfully failing to pay child support) you can't be thrown in jail for not paying your debts. Nor can a creditor take away such essentials as basic clothing, ordinary household furnishings, personal effects, food, or Social Security, unemployment, or public assistance benefits.
So, if you don't anticipate having a steady income or property a creditor could grab, bankruptcy is probably not necessary. Your creditors probably won't sue you, because it's unlikely they could collect the judgment. Instead, they'll simply write off your debt and treat it as a deductible business loss for income tax purposes. In several years, the debt will become legally uncollectible. And in seven years, the debt will come off your credit record.
Stop Harassment from Creditors
If your main concern is that creditors are harassing you, bankruptcy is not necessarily the best way to stop the abuse. You can hang on to your bankruptcy option but still get creditors off your back by taking advantage of federal and state debt collection laws that protect you from abusive and harassing debt collector conduct. See What to Do If a Bill Collector Crosses the Line for more information.
Negotiate With Your Creditors
If you have some income, or you have assets you're willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Negotiation may buy you some time to get back on your feet, or you and your creditors may agree on a complete settlement of your debts for less than you owe.
Get Outside Help to Design a Repayment Plan
Many people can't do a good job of negotiating with their creditors or with collection agencies. Inside, they feel that the creditors and collectors are right to insist on full payment. Or the creditors and collectors are so hard-nosed or just plain irrational that the process is too unpleasant to stomach.
If you don't want to negotiate on your own, you can seek help from a nonprofit credit or debt counseling agency. These agencies can work with you to help you repay your debts and improve your financial picture. (To find out about agencies in your area, go to the website of the United States Trustee, at http://www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education"; this will lead you to a state-by-state list of agencies that the Trustee has approved to provide the credit counseling that debtors are now required to complete before filing for bankruptcy.)
Debt Counseling vs. Chapter 13 Repayment Plans
Participating in a credit or debt counseling agency's debt management program is a little bit like filing for Chapter 13 bankruptcy. But working with a credit or debt counseling agency has one advantage: No bankruptcy will appear on your credit record.
However, a debt management program also has some disadvantages when compared to Chapter 13 bankruptcy. First, if you miss a payment, Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection and any one creditor can pull the plug on your plan. Also, a debt management program usually requires that your debts be paid in full. In Chapter 13 bankruptcy, you often pay only a small fraction of your unsecured debts.
Consumer advocates have also raised concerns about credit counseling agencies, because these agencies receive most of their funding from creditors. As a result, critics say, these agencies could face a conflict between the interests of their funders and the interests of their clients.
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What Is Bankruptcy?
Basic information on Chapter 7 and Chapter 13 bankruptcy.
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidations" or "reorganizations."
Chapter 7 bankruptcy is the liquidation variety -- property is sold (liquidated) to pay off as much of your debt as possible, while leaving you with enough property to make a fresh start. Chapter 13 is the most common type of "reorganization" bankruptcy for consumers -- you repay your debts over three to five years.
Both kinds of bankruptcy have numerous rules -- and exceptions to those rules -- about what kinds of debts are covered, who can file, and what property you can and cannot keep.
Liquidation (Chapter 7)
Liquidation bankruptcy is called Chapter 7, and it can be filed by individuals (a "consumer" Chapter 7 bankruptcy) or businesses (a "business" Chapter 7 bankruptcy). A Chapter 7 bankruptcy typically lasts three to six months.
In a liquidation bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts for which collateral has not been pledged) will be erased. You get to keep any property that is classified as "exempt" under the state or federal laws available to you (such as your clothes, car, and household furnishings). If you don't own much, chances are that all of your property is exempt and you have what is known as a "no asset" case.
If you owe money on a secured debt (for example, a car loan, where the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing your payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Some types of secured debts can be eliminated in Chapter 7 bankruptcy.
What Is Bankruptcy?
Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient, after subtracting certain allowed expenses and monthly payments for certain debts (including child support and debts that secure property), to fund a Chapter 13 repayment plan, you won't be allowed to use Chapter 7. For more on this and other requirements, see Who Can File for Chapter 7 Bankruptcy? For more information on Chapter 7 bankruptcy generally, see An Overview of Chapter 7 Bankruptcy.
Bankruptcy doesn't work on some kinds of debts. Though bankruptcy can eliminate many kinds of debts, such as credit card debt, medical bills, and unsecured loans, there are many types of debts, including child support and spousal support obligations and most tax debts, that cannot be wiped out in bankruptcy. For more information, see What Bankruptcy Can and Cannot Do.
Reorganization (Chapter 13)
Chapter 13 bankruptcy is also known as "wage earner" bankruptcy because, in order to file for Chapter 13, you must have a reliable source of income that you can use to repay some portion of your debt. And to qualify for Chapter 13, your secured debts must be less than $922,975 and your unsecured debts less than $307,675.
When you file for Chapter 13 bankruptcy you propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you'll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you'd filed for Chapter 7.
If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.
What Is Bankruptcy?
For more information on Chapter 13 bankruptcy, see An Overview of Chapter 13 Bankruptcy.
Other Types of Reorganization Bankruptcy
In addition to Chapter 13, there are two other types of reorganization bankruptcy you may have heard of: Chapter 11 and Chapter 12.
Chapter 11 bankruptcy is the type of bankruptcy used by financially struggling businesses -- such as Macy's -- to reorganize their affairs. It is also available to individuals, but because Chapter 11 bankruptcy is expensive and time-consuming, it is typically used only by those who have debts that exceed the Chapter 13 bankruptcy limits or who own substantial nonexempt assets (such as several pieces of real estate). To learn more about this kind of bankruptcy, see A Feast for Lawyers, by Sol Stein (M. Evans & Co., Inc.).
Chapter 12 bankruptcy is almost identical to Chapter 13 bankruptcy. But to be eligible for Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation of a family farm. Chapter 12 has higher debt ceilings to accommodate the large debts that may come with operating a farm, and it offers the debtor more power to eliminate certain types of liens. Only a few hundred people file for Chapter 12 each year, while hundreds of thousands file for Chapter 13. You need a lawyer to file for Chapter 12.
Decide If Bankruptcy Is Right for You
by Attorney Albin Renauer
Is bankruptcy a good idea or not? Here are some things to consider.
1. Learn about it. For individuals, there are two main kinds of bankruptcy:
• Chapter 7 -- a bankruptcy where many, if not all, of your debts are cancelled outright in a short three- to six-month process. (See An Overview of Chapter 7 Bankruptcy.)
• Chapter 13 -- a bankruptcy where you use your income to make payments on your debts over the next three to five years. (See An Overview of Chapter 13 Bankruptcy.)
2. Consider simpler alternatives. Things may not be as bad as you think. You may be "judgment proof" or you may have options you aren't aware of. See Alternatives to Bankruptcy.
3. Make sure you are you eligible. You may be prevented from filing for Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan. (See
Who Can File for Chapter 7 Bankruptcy?) Or you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low. (See Are You Eligible for Chapter 13 Bankruptcy?)
4. Learn which debts won't be cancelled. Some debts, like child support obligations, cannot be wiped out in bankruptcy. Learn more in What Bankruptcy Can and Cannot Do.
5. Consider what will happen to your home. Bankruptcy won't relieve you of your obligation to pay your mortgage, but it might make your mortgage easier to pay by getting rid of other debts. If you have substantial equity in your home, you might lose it if you file for Chapter 7, depending on how generous the exemptions laws are that are available to you. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.
6. Will you lose your car or other property? How much property you get to keep depends whether you've pledged the property as collateral for a debt, and on the "exemption" laws that are available in your state. If you file for Chapter 7, you might lose your car if you have substantial equity that isn't protected by your state's exemption laws.
7. Will your credit cards be paid off? Bankruptcy is good at wiping out most credit card debt and unsecured loans, unless you spent extravagantly or lied on your credit application. See What Bankruptcy Can and Cannot Do for more information.
8. Is your pension, IRA, or 401(k) safe? In most states, you will not lose pensions, retirement accounts, or life insurance in bankruptcy. If you have a pension, a 401(k), an IRA, or life insurance, find out what's protected in your state.
9. Will cosigners be stuck with your debt? If a friend or relative helped you get financing by cosigning a loan agreement, Chapter 13 bankruptcy will protect your cosigner, but Chapter 7 will stick them with any debt you don't pay.
10. Consider your personal life. Bankruptcy can be intrusive -- you have to disclose every last detail of your finances to the court, and other people may find out about your bankruptcy. In a Chapter 7 bankruptcy, you can have property taken away, or, under a Chapter 13 plan, you might spend three to five years having to ask permission to spend your own money .
The Debt Discharge in Bankruptcy FAQ
Q: What is a "discharge in bankruptcy"?
A: A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.
Q: When does the discharge occur?
A: The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the creditors' meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts of an individual with regular income), the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor's discharge in a chapter 7 or 13 case if the debtor fails to complete "an instructional course concerning financial management." The Bankruptcy Code provides limited exceptions to the "financial management" requirement if the U.S. trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.
Q: How does the debtor get a discharge?
A: Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee's attorney, if any. The debtor and the debtor's attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.
Q: Are all of the debtor's debts discharged, or only some?
A: Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. The Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor's drunken driving).
There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12
. A more limited list of exceptions applies to cases under chapter 13. The most common types of nondischargeable debts are
• Certain types of tax claims,
• Debts not set forth by the debtor on the lists and schedules the debtor must file with the court,
• Debts for spousal or child support or alimony,
• Debts for willful and malicious injuries to person or property,
• Debts to governmental units for fines and penalties,
• Debts for most government funded or guaranteed educational loans or benefit overpayments,
• Debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated,
• Debts owed to certain tax-advantaged retirement plans, and
• Debts for certain condominium or cooperative housing fees.
A slightly broader discharge of debts is available to a debtor in a chapter 13 case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. Although a chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., "confirmed") repayment plan, there are some limited circumstances under which the debtor may request the court to grant a "hardship discharge" even though
the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control. The scope of a chapter 13 "hardship discharge" is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available in chapter 12 if the failure to complete plan payments is due to "circumstances for which the debtor should not justly be held accountable."
Q: Does the debtor have the right to a discharge or can creditors object to a discharge?
A: In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor's discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor's discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an "adversary proceeding."
How Bankruptcy Stops Your Creditors: The Automatic Stay
After you file for bankruptcy, the automatic stay offers potent legal protection against bill collectors.
When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Especially if you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, or losing such basic resources as utility services, welfare, unemployment benefits, or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason to file for bankruptcy.
What the Automatic Stay Can Prevent
Here is how the automatic stay affects some common emergencies:
• Utility disconnections. If you're behind on a utility bill and the company is threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. (Also, bankruptcy will probably discharge the past due debts for utility service.) Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in January in New England might be justification enough.
• Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
• Eviction. If you are being evicted from your home, the automatic stay may provide some help -- but the new bankruptcy law makes it easier for landlords to proceed with evictions. If your landlord already has a judgment of possession against you when you file, the automatic stay won't affect these eviction proceedings; the landlord can continue just as if you hadn't filed for bankruptcy. And if the landlord alleges that you've been endangering the property or using controlled substances there, the automatic stay won't do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction -- and the court will probably agree to do so.
How Bankruptcy Stops Your Creditors: The Automatic Stay
• Collection of overpayments of public benefits. If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents this collection. However, if you become ineligible for benefits, the automatic stay doesn't prevent the agency from denying or terminating benefits for that reason.
• Multiple wage garnishments. Filing for bankruptcy stops garnishments dead in their tracks. (And not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy.) Although no more than 25% of your wages may be taken to satisfy court judgments (up to 50% for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened. For some people, any loss of income is devastating; also, some employers get angry at the expense and hassle of facilitating a succession of garnishments and take it out on their employees. Although federal law prohibits you from being fired for one garnishment, an employer can fire you for multiple garnishments.
What the Automatic Stay Cannot Prevent
In a few instances, the automatic stay won't help you.
• Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.
• Support actions. A lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn't stopped by your filing for bankruptcy.
• Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component is not affected by the automatic stay. For example, if you were convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service won't be stopped by your filing for bankruptcy.
• Loans from a pension. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRAs).
• Multiple filings. If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue and proves that the current case was filed in good faith. If a creditor had a motion to lift the stay pending during the previous case, the court will presume that you acted in bad faith, and you'll have to overcome this presumption to get the protection of the stay in your current case.
How Creditors Can Get Around the Automatic Stay
Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove ("lift") the stay, if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can't pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file for bankruptcy, to ask for permission to proceed with the foreclosure -- and that permission is likely to be granted.
What Bankruptcy Can and Cannot Do
Bankruptcy is a powerful tool for debtors, but some kinds of debts can't be touched.
Bankruptcy is good at wiping out credit card debt, but you may have trouble eliminating some other kinds of debts, including child support, alimony, most tax debts, student loans, and secured debts.
What Bankruptcy Can Do
If you are facing serious debt problems, bankruptcy may offer a powerful remedy. Here are some of the things filing for bankruptcy can do:
Wipe out credit card debt and other unsecured debts. Bankruptcy is very good at wiping out credit card debt. Unless you have a special "secured" credit card, your credit card balance is an unsecured debt -- that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. This is precisely the kind of debt that bankruptcy is designed to eliminate. Besides credit card debt, you may have other unsecured debts, and bankruptcy can wipe these out as well.
If you file for Chapter 13 rather than Chapter 7, you may have to pay back some portion of your unsecured debts. However, any unsecured debts that remain once your repayment plan is complete will be discharged.
Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the "harassment"' is simply phone calls and letters, there are simpler ways to stop it. If the harassment is more serious -- if the creditor is about to repossess your car or foreclose your mortgage, bankruptcy can help, at least in the short term, and perhaps longer if you just need a little time to get through a temporary crisis.
Eliminate certain kinds of liens (but not others). A lien is a creditor's right to take some or all of your property. A bankruptcy court's discharge of your debts wipes out your direct obligation to pay your creditors, but if the creditor has a lien on your property, the lien will survive -- unless you invoke certain procedures during your bankruptcy case. If the creditor has taken you to court and slapped a judgment lien on your property, you may be able to remove it.
What Bankruptcy Can't Do
Bankruptcy will not help you hold onto property you haven't paid for or avoid paying child support or alimony, and it will offer only limited help if you are trying to get rid of tax debt or student loan debt. Here's what bankruptcy cannot do for you:
Prevent a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. So, if you have a secured debt (a debt where the creditor has a lien on your property and can repossess it if you don't pay the debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property. But after the repossession, bankruptcy does prevent the creditor from coming after you for additional money if the sale of the collateral did not generate enough cash to pay off the amount you still owed.
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy -- you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, your plan will have to include repayment of these debts in full.
Wipe out student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only on a showing of "extreme hardship" -- a standard that is very tough to meet. You must be able to show not only that you cannot afford to pay your loans now, but also that you have very little likelihood of being able to pay your loans in the future. The court will also consider whether you've made a good faith effort to repay at least some of what you owe, taking advantage of the partial-payment options offered under various laws.
Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is possible in some cases. There are many requirements to be met.
Eliminate other nondischargeable debts. The following debts are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy. If you file for Chapter 7, these debts will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your repayment plan. If they are not repaid in full, the balance will remain at the end of your case.
What Bankruptcy Can and Cannot Do
• debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
• debts for personal injury or death caused by your intoxicated driving
• fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
• recent income tax debts and all other tax debts.
In addition, some types of debts may not be discharged if the creditor convinces the judge that they should survive your bankruptcy. These include debts incurred through fraud, such as lying on a credit application or passing off borrowed property as your own to use as collateral for a loan.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 can't help you with these situations, but Chapter 13 can:
Stop a mortgage foreclosure. Though bankruptcy can delay a foreclosure, a Chapter 7 bankruptcy won't stop it for long. Chapter 13, however, was designed with foreclosure problems in mind. A typical foreclosure scenario is where, because payments have been missed, the lender demands immediate payment of a huge sum of money -- perhaps the entire loan amount -- and there is no way you can come up with it. Filing for Chapter 13 bankruptcy will stop the foreclosure and can force the lender to accept a plan where you make up the missed payments and the loan amount through monthly payments over the next three to five years. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.
Another way bankruptcy can help with mortgage problems is to free you of other debts so you will have more disposable income available to stay current on your mortgage.
Allow you to keep nonexempt property. In Chapter 7, you must give up your valuable nonexempt property so that the trustee can sell it and use the proceeds to pay off your creditors. If you have nonexempt property that you really want to keep, and a steady source of income, Chapter 13 might make more sense. You don't have to give up any property in Chapter 13 because you use your income to fund your repayment plan.
What Bankruptcy Can and Cannot Do
"Cram down" secured debts that are worth more than the property that secures them. You can use Chapter 13 to reduce a debt to the replacement value of the property securing it, then pay off that debt through your plan. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and have the rest of the loan discharged. Under the new bankruptcy law, you can't cram down a car debt you purchased the car during the 30-month period before you filed for bankruptcy. You also can't cram down a secured debt on other personal property you purchased within one year preceding your bankruptcy filing.
Tell the Whole Truth When You File For Bankruptcy
Don't get clever and try to hide property. It will come back to haunt you.
You must sign your bankruptcy papers under penalty of perjury, swearing that everything in them is true. One of the things you're swearing to is that your forms are complete, because the forms ask you to list "all" property, income, and debts. Filing incomplete or inaccurate bankruptcy forms can lead to your case being dismissed -- or worse, if the court thinks you omitted information or made false statements intentionally.
The law is not supposed to punish those who make one or two honest mistakes. If you accidentally leave something off your papers or misstate something on your forms, you can usually correct your papers or explain the mistake to the trustee. But if you leave out so much that it appears that you were careless, the court can find that your actions demonstrate an indifference to the truth and can dismiss your case on that basis.
If you deliberately attempt to hide assets or use a false Social Security number, it will probably come back to haunt you more profoundly than your current debt crisis.
List Every Creditor
Bankruptcy can't help you if you hide information. If you fail to list creditors, the debts you owe them may not be wiped out by your bankruptcy discharge. So, be sure to list every person who claims that you owe them money -- even if you don't think you owe them a cent. In this situation, you can indicate that the debt is "disputed." If the debt is already the subject of a pending lawsuit, the debt can be listed as "contingent" -- that is, it depends on how the lawsuit comes out.
When your bankruptcy is finished, you will no longer owe any debts that have been discharged. If a disputed debt is discharged, the entire dispute will be irrelevant. The creditor will be legally barred from collecting anything more from you regardless of who is right.
Don't Omit Creditors Just Because You Like Them
Some filers consider omitting creditors whom they like -- such as a relative or a friendly local business person -- to avoid having that debt wiped out. This is a bad idea, no matter how honorable your intentions. Bankruptcy doesn't allow you to play favorites. In fact, a central purpose of bankruptcy is to make sure that all of your creditors get their fair share of what you have, and that certain obligations (like child support) are not shortchanged. If the bankruptcy trustee learns that you've omitted creditors from your list, you'll have to add them, and it will raise suspicion about other statements on your forms.
Tell the Whole Truth When You File For Bankruptcy
Include Money You May Have Coming to You
When you list your property on the bankruptcy forms, you must include not only property you have when you file, but also property that you may have coming to you. Here are some examples:
• an inheritance from a recently deceased relative that you have not yet received
• stock options, trust funds, or tax refunds
• pensions, retirement funds, annuities, and life insurance, and
• judgments from lawsuits you've filed or could file, arising from a personal injury or other matter.
All of these are examples of property that you must list on your forms. You may get to keep some or all of this property by claiming it as exempt, but you must list it so that the trustee has a complete picture of all of your finances.
Don't Deliberately Hide Assets or Other Financial Details
If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number to hide your identity as a prior filer, and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud. The punishment for fraud is serious: Jail time is not unusual for those who try to hide property from the court and get caught.
Eliminating Tax Debts in Bankruptcy
Most taxes can't be eliminated in bankruptcy, but some can.
You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. But it's not as simple as it sounds. Most tax debts can't be wiped out in bankruptcy -- you'll continue to owe them at the end of a Chapter 7 case, or you'll have to repay them in full in your Chapter 13 plan.
If you need to discharge tax debts, Chapter 7 will probably be the better option -- but only if you qualify for Chapter 7 (see Who Can File for Chapter 7 Bankruptcy?) and your debts qualify for discharge.
When You Can Discharge a Tax Debt
You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
• The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
• You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.
• The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
• You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
• You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)
The Effect of Federal Tax Liens
If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because prior recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but any lien recorded before you file for bankruptcy remains. In effect, this means you'll have to pay off the lien in order to sell the property.
Alternatives to Bankruptcy
Learn what you can do instead of filing for Chapter 7 or Chapter 13 bankruptcy.
In many situations, filing for bankruptcy is the best remedy for debt problems. In others, however, another course of action makes more sense. This article outlines your main alternatives.
Do Nothing
Surprisingly, the best approach for some people deeply in debt is to take no action at all. If you're living simply, with little income and property, and look forward to a similar life in the future, you may be what's known as "judgment proof." This means that anyone who sues you and obtains a court judgment won't be able to collect from you simply because you don't have anything they can legally take. (As a famous song of the 1970s said, "freedom's just another word for nothing left to lose.")
Except in unusual situations (being a tax protester or willfully failing to pay child support) you can't be thrown in jail for not paying your debts. Nor can a creditor take away such essentials as basic clothing, ordinary household furnishings, personal effects, food, or Social Security, unemployment, or public assistance benefits.
So, if you don't anticipate having a steady income or property a creditor could grab, bankruptcy is probably not necessary. Your creditors probably won't sue you, because it's unlikely they could collect the judgment. Instead, they'll simply write off your debt and treat it as a deductible business loss for income tax purposes. In several years, the debt will become legally uncollectible. And in seven years, the debt will come off your credit record.
Stop Harassment from Creditors
If your main concern is that creditors are harassing you, bankruptcy is not necessarily the best way to stop the abuse. You can hang on to your bankruptcy option but still get creditors off your back by taking advantage of federal and state debt collection laws that protect you from abusive and harassing debt collector conduct. See What to Do If a Bill Collector Crosses the Line for more information.
Negotiate With Your Creditors
If you have some income, or you have assets you're willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Negotiation may buy you some time to get back on your feet, or you and your creditors may agree on a complete settlement of your debts for less than you owe.
Get Outside Help to Design a Repayment Plan
Many people can't do a good job of negotiating with their creditors or with collection agencies. Inside, they feel that the creditors and collectors are right to insist on full payment. Or the creditors and collectors are so hard-nosed or just plain irrational that the process is too unpleasant to stomach.
If you don't want to negotiate on your own, you can seek help from a nonprofit credit or debt counseling agency. These agencies can work with you to help you repay your debts and improve your financial picture. (To find out about agencies in your area, go to the website of the United States Trustee, at http://www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education"; this will lead you to a state-by-state list of agencies that the Trustee has approved to provide the credit counseling that debtors are now required to complete before filing for bankruptcy.)
Debt Counseling vs. Chapter 13 Repayment Plans
Participating in a credit or debt counseling agency's debt management program is a little bit like filing for Chapter 13 bankruptcy. But working with a credit or debt counseling agency has one advantage: No bankruptcy will appear on your credit record.
However, a debt management program also has some disadvantages when compared to Chapter 13 bankruptcy. First, if you miss a payment, Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection and any one creditor can pull the plug on your plan. Also, a debt management program usually requires that your debts be paid in full. In Chapter 13 bankruptcy, you often pay only a small fraction of your unsecured debts.
Consumer advocates have also raised concerns about credit counseling agencies, because these agencies receive most of their funding from creditors. As a result, critics say, these agencies could face a conflict between the interests of their funders and the interests of their clients.
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