If you’re facing severe debt problems, filing for bankruptcy can be a powerful remedy. It stops most collection actions, including telephone calls, wage garnishments, and lawsuits (with some exceptions). It also eliminates many types of debt, including credit card balances, medical bills, personal loans, and more. But it doesn’t stop all creditors, and it doesn’t wipe out all obligations. For instance, you’ll still have to pay your student loans (unless you can prove a hardship) and arrearages for child support, alimony, and most tax debts. Bankruptcy allows people struggling with debt to wipe out certain obligations and get a fresh start. The two primary bankruptcy types filed; Chapter 7 and Chapter 13 bankruptcy each offer different benefits and, in some cases, treat debt and property differently, too.
Once you file, the court puts in place an order called the automatic stay. The stay stops most creditor calls, wage garnishments, and lawsuits, but not all. For instance, creditors can still collect support payments, and criminal cases will continue to proceed forward. The automatic stay will stop these actions as long as they’re still pending. Once complete, bankruptcy won’t help.
• Evictions. An eviction that’s still in the litigation process will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord already has an eviction judgment against you, bankruptcy won’t help in the majority of states.
• Foreclosure and repossession. Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. If you can’t bring the account current, you’ll lose the house or car once the stay lifts. By contrast, Chapter 13 has a mechanism that will allow you to catch up on past payments so you can keep the asset. Find out more about bankruptcy’s automatic stay and foreclosure and car repossession and bankruptcy.
• Bankruptcy is very good at wiping out unsecured credit card debt, medical bills, overdue utility payments, personal loans, gym contracts. In fact, it can wipe out most non-priority unsecured debts other than school loans. The debt is unsecured if you didn’t promise to give back the purchased property if you didn’t pay the bill. By contrast, if you have a secured credit card, you’ll have to give the purchased item back. Jewelry, electronics, computers, furniture, and large appliances are often secured debts. You can find out by reading the receipt or credit contract.
• If you can’t afford a payment that you secured with collateral such as a mortgage or car loan, you can wipe out the debt in bankruptcy. But you won’t be able to keep the house, car, computer, or other item securing payment of the loan. When you voluntarily agree to secure debt with property, you must pay what you owe or give the property back.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 and 13 each offer unique solutions to debt problems. The two bankruptcy types work very differently. For instance, how quickly your debt will get wiped out will depend on the chapter you file:
• Chapter 7 bankruptcy. This chapter takes an average of three to four months to complete. Learn more about erasing your debt in Chapter 7 bankruptcy.
• Chapter 13 bankruptcy. If you file for Chapter 13 rather than Chapter 7, you’ll likely have to pay back some portion of your unsecured debts through a three- to five-year repayment plan. However, any unsecured debt balance that remains after completing your repayment plan will be discharged. Find out how to pay off or discharge your debts in Chapter 13 bankruptcy.
Chapter 7 is primarily for low-income filers, and therefore, it won’t help you keep property if you’re behind on payments. But, if you have enough income to pay at least something to creditors, then you’ll be able to take advantage of the additional benefits offered by Chapter 13.
Here are some of the things that Chapter 13 can do.
Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan that will allow you to make up the missed payments over time. To make this plan work, you must demonstrate that you have enough income to pay back payments and remain current on future payments. Allow you to keep property that isn’t protected by a bankruptcy exemption. No one gives up everything own in bankruptcy. You can save (exempt) items you’ll need to work and live using bankruptcy exemptions. A Chapter 7 debtor gives up nonexempt property; the trustee liquidates unprotected property for creditors but not a Chapter 13 filer. While it might seem as though you’d get to keep more assets, it’s not the case. Chapter 13 filers pay the value of any nonexempt property to creditors through the repayment plan.
Cram down secured debts when the property is worth less than the amount owed. Chapter 13 has a procedure that allows you to reduce an obligation to the replacement value of the property securing it. 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 discharge the rest of the loan. However, exceptions exist. For instance, you can’t cram down a car debt if you purchased the car during the 30 months before filing for bankruptcy. Also, filers can’t use the cramdown provision to reduce the mortgage of a residential home.
What Bankruptcy Can’t Do
Prevent a secured creditor from foreclosing or repossessing property you can’t afford. A bankruptcy discharge eliminates debts, but it doesn’t eliminate liens. A lien allows the lender to take property, sell it at auction, and apply the proceeds to a loan balance. The lien stays on the property until the debt gets paid. If you have a secured debt, a debt where the creditor has a lien on your property, bankruptcy can eliminate your obligation to pay the debt. However, it won’t take the lien off the property—the creditor can still recover the collateral. For example, if you file for Chapter 7, you can wipe out a home mortgage. But the lender’s lien will remain on the home. As long as the mortgage remains unpaid, the lender can exercise its lien rights to foreclose on the house once the automatic stay lifts.
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy, so you’ll continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, you’ll have to pay these debts in full through your plan. Eliminate student loans, except in limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you “undue hardship,” which is a very tough standard to meet. You must prove that you can’t afford to pay your loans currently and that there’s very little likelihood you can do so in the future.
Eliminate most tax debts. Eliminating tax debt in bankruptcy isn’t easy, but it’s sometimes possible for older unpaid tax debts. Eliminate other non-dischargeable debts. The following debts aren’t dischargeable under either chapter:
• debts you forget to list in your bankruptcy papers (unless the creditor learns of your bankruptcy case)
• debts for personal injury or death due to intoxicated driving, and
• fines and penalties imposed as a punishment, such as traffic tickets and criminal restitution.
If you file for Chapter 7, these debts will remain when your case is over. In Chapter 13, you’ll pay these debts in full through your repayment plan. Debt related to fraud might get eliminated. A fraud-related debt won’t be discharged if a creditor files a lawsuit called an adversary proceeding and convinces the judge that the obligation should survive your bankruptcy. Such debts might result from lying on a credit application or passing off borrowed property as your own to use as collateral for a loan. If you file for bankruptcy, at the end of your case you will receive a discharge.
A discharge is a court order wiping out most or all of your debts (some types of debts cannot be eliminated in bankruptcy). Sometimes a consumer doesn’t want a particular debt to be wiped out, and is tempted to pay it before filing bankruptcy. Some common situations where a consumer might want to pay off a debt before filing include:
• to ensure that a debt owed to a friend or close family member is not wiped out
• to protect a creditor that the consumer thinks has been “fair”
• to try to hide the bankruptcy filing from a bank, employer, or creditor
• to preserve a relationship with a medical provider, or
• to keep property, such as a car or home.
Many of the reasons that people want to repay debts are based on a misunderstanding of how bankruptcy works. For example, you might not automatically lose your home or car just by filing bankruptcy. And most credit card companies will become aware of your bankruptcy filing, even if you don’t have an outstanding debt with it and don’t list the debt in the bankruptcy.
When you file for bankruptcy, a bankruptcy trustee will be appointed. The trustee’s job is to fairly distribute your assets and property, if any, among your creditors. (You don’t have to give up all of your property during bankruptcy, learn what you can and cannot keep in bankruptcy.) The goal is to ensure that no one creditor has an unfair advantage over another. If you pay a creditor within a short period of time before your bankruptcy, the court may consider that payment to be a preferential transfer. Because you pay that one creditor 100% of the debt owed, and then have fewer assets left to repay other creditors through your bankruptcy, you have preferred that creditor over the others. If that happens, the trustee can try to get the money back through a claw back action. If you have made a preferential transfer to a creditor within the 90 days before you filed for bankruptcy, the trustee can file a clawback suit and try to obtain the funds from the paid creditor. If you repaid a close friend or family member, sometimes referred to as an “insider,” the time period that a court will consider extends to a year before you filed.
In a clawback suit, the trustee brings a lawsuit against the creditor that you paid off in order to get the money back. A clawback suit can cause several problems with your bankruptcy.
• The result can be messy. The trustee may sue family members, employers, medical providers, and anyone else that you paid.
• It will likely delay your discharge since the court won’t enter a discharge until the clawback suit is complete.
• If the court finds that you paid a creditor in order to hide assets, it might deny your entire discharge. This happens most often when a consumer pays off close friends or family members. Not all pre-bankruptcy payments will be considered to be preferential transfers. You can make payments on debts if normally make such payments. The key is to not pay any more than you have been paying towards that debt.
For example, if you regularly pay your physician $100 a month to repay a larger medical debt, you may continue to do so. You can continue to pay your regular car payment, mortgage, child support, or student loans. You can also pay credit card debt that you recently incurred to purchase regular necessities of life, such as gas or food.
If you want to ensure that a creditor gets paid, the best way to do this is after the bankruptcy. There is nothing that prevents you from paying off a creditor, even if its debt has been discharged in the bankruptcy. This is best done when you want to repay friends, family members, employers, or medical providers. However, many financial institutions and credit cards may refuse your payment after a bankruptcy discharge has been entered. Moreover, there’s a stigma against filing for bankruptcy and for good reason. It devastates your credit and cripples your borrowing ability. Even though bankruptcy will fall off your credit report after 7−10 years, most loan applications ask if you’ve ever filed. If you say “no” when the truth is “yes,” you’re guilty of fraud and can be prosecuted. It’s always better to pay off your debts rather than file bankruptcy. A bankruptcy filing could also have an impact on your emotional life or your personal life. People who have filed for bankruptcy report feelings of regret and failure years after filing.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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