While bankruptcy can be a very compelling financial tool, it certainly is not the option that anyone should lightly undertake. You should carefully analyze your individual financial condition with a bankruptcy attorney to insure that this is your best alternative. Our firm will review your specific situation to assist you in reaching the correct decision at no initial charge.
Urgent Financial Obilgations
Many have found relief from certain financial difficulties by undertaking bankruptcy protection. Are you being continually harassed by creditors? Is your residence being threatened with foreclosure? Are you facing the financial uncertainty of a wage garnishment? Has your automobile been repossessed? If you are facing one of these urgent problems, you should be cognizant that millions have found relief from similar problems by filing for bankruptcy protection.
Bankruptcy can often stop foreclosure proceedings. It can stop the harassment by creditors. Judgments that have resulted in wage garnishments can often be discharged. Medical bills, deficiency judgments on a repossessed automobile and utility back payments can often be handled. A free consultation with our firm can help you decide whether your urgent financial situation can be helped by the filing of a bankruptcy petition.
Chapter 7 vs. Chapter 13
Most consumers file either chapter 7 or chapter 13 bankruptcy. Chapter 7 is commonly referred to as a “liquidation”. The bankruptcy petitioner has a legal obligation to list all assets and all liabilities. In a chapter 7, all assets that are not protected with either a state or federal exemption are turned over to the bankruptcy trustee for sale or liquidation. Accordingly, one of the determining factors in deciding which bankruptcy chapter is appropriate is which assets, if any, are left without the protection of an exemption. If any assets are left without the protection of an exemption, then one may consider the option of filing a chapter 13.
Additionally, one has to pass the Means Test in order to qualify to file for chapter 7. One of the purposes of the Means Test was to eliminate the chapter 7 option to debtors who have too much disposable income. To accomplish this goal, the petitioner’s monthly income is compared to the income of others with the same family size living in your location. If your income exceeds the mean income for your locality, and you have too much disposable income, chapter 7 would not be appropriate, and you should then consider your chapter 13 options.
Chapter 13 is a reorganization of debt. In a chapter 13 proceeding, there is no chance of the debtor losing any property through liquidation even if the debtor’s assets are not protected with an exemption. However, the debtor in a chapter 13 would be obligated to pay back a portion of the obligation owing to certain creditors over a 36-60 month period. The amount of the payment is determined by one’s disposable income calculation. Further, the amount that one has to repay is also dependent upon the type of creditor. Is the debt owed to a secured creditor (i.e. mortgage), a priority creditor (i.e. taxes owed to a governmental unit), or an unsecured creditor (i.e. credit cards)? If you want to retain your home, then generally one would have to pay off all arrears owed to you mortgage company within your chapter 13 plan period. Taxes outstanding within three years of the filing of the tax return would also have to be fully paid in the chapter 13 plan period. There is no similar obligation to pay credit card bills and other unsecured creditors.
While chapter 13 is more complicated, it can be a very important financial tool. If you are behind in your mortgage payment and want to save your home from foreclosure, chapter 13 options might be an appropriate consideration. If you are underwater with your first mortgage (mortgage balance exceeds the value of your residence), and you want to discharge your junior liens (second mortgage), chapter 13 may be a suitable fit. Under certain circumstances, one may even be able to reduce the amount of a car loan to the current value of the vehicle in a chapter 13. For these reasons, it is very important to first determine ones particular needs before deciding which bankruptcy is appropriate.
Stay of Proceeding
Upon the filing of either a chapter 7 or a chapter 13 petition, the bankruptcy court enters an automatic stay of proceedings. The stay of proceeding is a court order that restrains all creditors covered by the order to stop any and all collection attempts. Creditors have to stop all telephone collection calls to the debtor. Any subsequent call would be a violation of the stay of proceeding and the Fair Debt Collection Act and subject the creditor to court sanctions and attorney fees.
Even wage garnishments by judgment creditors would have to stop as long as the stay of proceeding is in effect. In the typical bankruptcy, the stay of proceeding continues until the debt is discharged or until the bankruptcy is dismissed.
Not all debt is created equal. Generally, the classification of the debt determines the ability to discharge the obligation. However, as with most aspects of the law, the previously stated rule does have exceptions. For these reasons, it is necessary to review each specific debt to determine its discharge-ability.
Credit Card Obligations
Credit cards are generally classified as non-priority unsecured debt. In the priority of indebtedness, this type of debt is the lowest and generally the easiest to discharge. However, the party considering a bankruptcy filing should be aware each of the following situations since they may result in the non-discharge of a credit card debt.
1. Any use of a credit card within 90 days of the filing of the bankruptcy petition for non-essential or luxury items may result in the denial of discharge for that expenditure. If the charge is necessary for the support or maintenance of the debtor, then it is generally considered to be a non-luxury item and thereby dischargeable.
2. Cash advances charged to a credit card within 70 days of the bankruptcy filing will generally be non-dischargeable.
Student loans are a creature of Congress. As a result, the treatment of student loans is complicated. Student loans are generally classified as a non-priority unsecured debt. If one would think that they are as dischargeable as a credit card debt since they have the same debt classification, that person would be wrong. The typical student loan is only discharged if the repayment would cause unusual hardship to the debtor. Did Congress define what unusual hardship is? No! Congress left that tasks to the courts. Depending on which court is interpreting that phrase, they generally look for a) an attempt to repay the debt; b) a physical disability, a mental disability, or a unique situation that would hinder in the ability to pay; and c) exhaust all available administrative remedies. While the courts are slowly addressing other situations, do not count on the discharge of a student loan in the typical situation. The discharge of student loans is difficult and requires a separate adversary proceeding.
It has been stated that medical bills cause more bankruptcies than any debt. Fortunately, medical bills are non-priority unsecured debts. For this reason, the indebtedness is generally dischargeable in bankruptcy.
Tax obligations are generally classified as priority debts. Even though so classified, there are limited circumstances when a tax obligation can be discharged in bankruptcy. Tax obligations can be discharged if all of the following conditions have been fulfilled:
1. It has been over three years since the filing of the return that caused the indebtedness;
2. All necessary tax returns have been filed;
3. More than 240 days have expired since IRS has filed any tax assessment concerning the tax obligation; and
4. The outstanding tax obligation was not the result of either fraud or tax evasion.
Even if the tax obligation is discharged, IRS can still collect on the discharged indebtedness if it has filed and perfected a tax lien on the debtor’s property. In such a situation, the taxes would be paid upon sale of the property.