Bankruptcy as an Option for Dealing With Debts

If you are crushed under an insurmountable amount of debt, it can get your heart-rate up. Resolving economical issues is best executed through an extensive approach. One viable option that you might consider employing is bankruptcy. Although you could also opt to consolidate debt, bankruptcy provides you with the opportunity for a fresh economical future, also known as a “fresh start”. Based on the kind of bankruptcy you file, your debts get reduced or eliminated, or you obtain extra time to pay them off.

Personal Bankruptcy–Not All Debts Are Dischargeable

However, when you declare personal bankruptcy, not all debts are dischargeable. Liabilities that you cannot reduce or liquidate via Chapter 13 or Chapter 7 bankruptcy include child maintenance, court fines, alimony, and debts incurred as a result of drunk driving.  Liabilities such as back taxes and student loans normally do not qualify for bankruptcy debt relief but these debts may be dischargeable under certain circumstances.

The following are a few important things that you need to know:

Certain back taxes

If certain requirements are met, some taxes are dischargeable in bankruptcy. For details on these requirements, click here.

General loans and credit cards

You can discharge general loans as well as credit card bills in your bankruptcy filing. However, if you have used any fraudulent means to obtain loans, the creditor may successfully object to the discharge of that debt.

Federal student loans

There is new movement afoot in Congress to make it easier to discharge student loans in bankruptcy, but as of this time it is very difficult. The only way currently is if the debtor can prove “undue hardship” as that term is defined by case law. There are other non-bankruptcy means of dealing with student loans under certain circumstances.  To see more about these visit http://www.bklaw.com/chapter7/student_loans.html

Secured loans

Loans that are obtained with collateral such as a home or an automobile are dischargeable, but the lien remains against the property on which it is secured. Under certain circumstances liens can be removed or reduced. Discuss with your attorney what options might be available in your situation.

You may also discharge past due cable and utility bills, tuition, rent, and medical debts in bankruptcy. However, if you fail to pay your rent after bankruptcy you may be lawfully evicted by your landlord. Moreover, you may be required to pay an extra deposit to your utility companies if you do not stay current with your obligations, even after bankruptcy.

Need More Information?

For more information on which debts are dischargeable in bankruptcy,  please visit http://www.bklaw.com/discharge.html

Author’s Bio: Martha Jackson loves to write financial articles and she is a contributory writer associated with the Debt Consolidation Care Community and has written several articles on debt consolidation, debt settlement and get out of debt for various financial websites. She holds her expertise in the Debt industry and has made significant contribution through her various articles.

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Anyone who has defaulted on a credit card or other debt has had to deal with harassing phone calls from debt collectors.   Despite laws preventing it, these collectors will use intimidation, negative sales tactics and outright lies to get you to cough up money to them.  Once you realize what is real and what isn’t, and what your rights are, it makes the process far less scary.

Here are a couple of realities taken from a recent Readers Digest article by Michelle Crouch:

1.  Debt collectors get paid bonuses when they reach certain goals

2.  They have pre-authorization to settle for sometimes as little as 15-20% of the total debt

3.  Statutes of limitations may legally prevent them from suing you to collect on your debt, in which case you aren’t going to want to pay them anything.

4.  There are legal ways of getting them to stop contacting you–as simple as writing a letter.   The Fair Debt Collection Practices Act (FDCPA) provides hundreds of pages of rights to debtors

It is important to not let fear take control of your decision making processes.   Learn your options, analyze the costs and benefits, and then make your decision.   In order to do this, you need information.  You can gain information from many sources, including attorneys.   Bankruptcy is one option to consider, but certainly not the only one.  Consulting with an attorney is often a very illuminating experience.   You may be pleasantly surprised at what you will learn.

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This is not a means test

The means test in bankruptcy is not a test like you take in school based on your memory.   The means test is a budget analysis created by Congress to supposedly determine whether one has the ability (i.e. the means) to repay all or a portion of their debts, which determines whether one  is ineligible to file for bankruptcy relief under Chapter 7, as opposed to  Chapter 11 or Chapter 13.

I say “ineligible” as opposed to “eligible” because in most court districts,  even if you “pass” the means test it does not automatically mean you qualify to file a Chapter 7 case.   There are other eligibility factors that come into play even if the presumption of abuse does not arise on the means test.  This will be discussed more below.

The Means Test Only Applies to Consumer Debt Cases

The means test only applies if one’s debts are primarily (i.e. more than 50%) consumer debts.   Consumer debts include secured mortgage debt obligations on a personal residence, as well as most credit card-type debts. The means-test also only applies if the total income received in the 6 calendar months prior to filing the bankruptcy case (explained more fully below) is above the median income for your state, given your household size. See the means test flow chart created by Judge Maureen Tighe of the United States Bankruptcy Court, Central District of California, as presented in the informative blog of the Moran Law Group.

So, What is the Means Test Exactly?

The analysis for the means test is extremely complex and requires an experienced bankruptcy attorney to properly calculate.  The basic definition can be seen here.

The more detailed and technical answer is:   The means test takes all income received (and this means ANY income, regardless of whether it’s taxable income, so that includes gifts, withdrawals from a 401k, and almost any other type of income EXCEPT social security income) in the 6 calendar months prior to filing the bankruptcy case–including that of your spouse, if any (see why this gets included)– and subtracting out certain allowed expenses.  These “allowed expenses” are mostly IRS-based allowances for living expenses, food, clothing, shelter, etc. and have little connection with reality.  There are specific allowances for secured debt payments, such as mortgages and car payments, but almost every aspect of the means test has been, is being, or will be challenged in the courts, because it is frequently nonsensical, internally inconsistent, and confusing.

It is not as simple as determining that your income is below or above the median income for your area and household size (and determining your household size is another hotly contested issue).  You need a qualified bankruptcy attorney familiar with the court decisions in your area, to properly evaluate your eligibility for bankruptcy.  (For example, self-employment income is not analyzed exactly the same way as wage-earner income from a job)

Passing the Means Test is Just the First Step

Which brings me back to the point of eligibility.   Passing the means test is just the first step. It is possible to pass the means test but still be showing–for example–a surplus in your current monthly income and expenses.   For example, let’s say you were unemployed for the 6 months prior to filing your bankruptcy case, but you just landed a new job that pays you $100,000 per year. In that instance, you would likely pass the means test and show you are eligible to possibly file a Chapter 7 case. However, you would most certainly draw an objection (via a Motion to Dismiss your case) from the US Trustee’s Office as having too much income.

Please Don’t Try This At Home!

The means test and assessing eligibility to file bankruptcy is a field of land mines and evolving interpretations of law.  As they say on television ad disclaimers, “We are trained professionals. Don’t try this at home”

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stack of bills

A question I have been repeatedly asked over the years from my potential bankruptcy clients is: How much debt do they need before they can declare bankruptcy? I have found that this question has different intent and meaning to different people. For example, some people think that there actually is a minimum amount of debt required before one is eligible to file a bankruptcy case. That question is very easy to answer: Some amount more than zero.

I think the real question most intend to ask is whether filing bankruptcy is prudent given the amount, and type, of debts they have. This can only be answered after a comprehensive analysis of a client’s complete financial situation.

For example, certain bankruptcies–such as a Chapter 13– can be filed when the only debt one has is secured debt, such as a mortgage, in order to allow time to catch up on payments.

For a Chapter 7 liquidation case, I have filed cases for debtors who have had as little as $5,000 of total unsecured debt to those with over $5,000,000. In the case of the young man who had $5,000 of debt, which is admittedly an unusual amount on which to file a bankruptcy case, the situation was such that it was in his best overall interest–after analyzing his entire situation–to file a bankruptcy case. He was relatively uneducated, had a part-time minimum wage job, and no credit to speak of (the debt was a judgment from a traffic accident). Filing bankruptcy enabled him to get rid of the debt, which he was going to have a very difficult time paying off, and it also enable him to clear off his credit record, obtain a fresh start, and commence rebuilding (or actually in his case, BUILDING) his credit. Several years later, he has several credit cards (on which he is current with payments), a wife, a house, a dog and enough income to survive.

I use that story–unusual though it may be–to point out that sometimes bankruptcy really is the best solution, regardless of how much debt there is. Now obviously if the man in that story had income of $75,000 a year, it would have been a ludicrous decision to file bankruptcy, but it is important to seek the advice of a qualified bankruptcy attorney and see if it is in your best interest to take advantage of the bankruptcy laws which are here to provide assistance in such situations.

Another frequent question I get from potential clients is whether debts that they are making payments on as part of a “debt consolidation” program are dischargeable in a bankruptcy case. In fact, I’ve had numerous people think that those aren’t even debts anymore, once they are in a repayment program, or that magically the 15 debts they consolidated are now just one debt. Let me provide some simple, concise answers or explanations to these questions/comments.

1. Yes, debts that have been consolidated or are in a repayment program are dischargeable in bankruptcy, assuming that there are no independent grounds for objecting to the discharge. (see more on dischargeable debts)

2. When you enter into a debt consolidation program, you still owe the debts until they are paid in full (which presumably includes the fees to the consolidation agency). Thus, if you file a bankruptcy case, you must list any and all such debts. (See our recent related blog on picking and choosing which debts to include in bankruptcy.

3. Just because you have consolidated your multiple debts down into one payment does NOT mean that you don’t owe each of the individual creditors, unless they were paid off by a single consolidation loan that was taken out. What this usually means is that you are paying a company to make the payments to each of the creditors, while you make one single payment to the consolidation company, but you still owe each of the creditors until they are paid off.

Whether you can discharge (bankrupt) specific debts and keep others is a question that over the years I get asked repeatedly. Actually, strangely enough, clients don’t ask it as a question. They state it as if it were completely possible. “I want to get rid of my large debts and keep the small ones”. After nearly twenty years of listening to this, I believe a lot of it stems from some very basic confusion of bankruptcy discharges and the general requirements and obligations of being a debtor in bankruptcy.

First: There are numerous requirements to filing a bankruptcy case. One of them is that you must LIST ALL of your debts and ALL of your assets in your bankruptcy schedules.

Second: When you receive a discharge, you are discharged from any and all debts that are made dischargeable by the Bankruptcy Code (unless a creditor or other party successfully objects to the discharge).

Third: You can voluntarily repay any debt you want after the bankruptcy case is completed (in a Chapter 7 case, this is about 4 months after the case is filed, in Chapter 13, it’s 36-60+ months). See more on how the process works for each bankruptcy chapter.

Fourth: In a Chapter 7 case, you may, with the consent of the creditor and approval by the bankruptcy court, enter into a reaffirmation agreement. What this does is take the debt out of the bankruptcy and obligate you to the terms of the agreement (whatever they may be) despite the discharge you ultimately receive in the bankruptcy case. Reaffirmation agreements must be signed, executed, and filed with the court prior to the entry of discharge in your case.

The critical question to ask when trying to determine (or ask your attorney) whether you can discharge certain debts is: WHY do you want to do that (whatever “that” is)? In my experience, most debtors perceive that if they keep certain creditors off the bankruptcy, that they will magically be able to continue to have credit with them. Nothing could be further from the truth. In fact, with respect to credit card debt in particular, you have a much better chance of negotiating for a reaffirmation agreement with them (if that is your goal) to keep some credit on the card after your discharge is granted. Personally, I advise my clients strongly against doing that (because getting a new credit card after bankruptcy is about as difficult as finding mud after a rainstorm).

There is much more to say on this topic, such as how secured debts are handled in bankruptcy. If you have questions, you should schedule a consult with a bankruptcy attorney.

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