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.

Image Courtesy of  Caitlyn_and_Kara

For the letter “D” in the bankruptcy alphabet, I write about the Discharge of Debts.   For most bankruptcy cases, the discharge of debts is the primary reason for filing the bankruptcy.  It is the holy grail of bankruptcy (although not quite as difficult to attain).

What is a Discharge?

Most people think that the discharge is the elimination of debts.  Most attorneys advertise this way and I myself, in order to communicate with my clients, will use similar terminology or phrases.   However, in truth, the bankruptcy discharge does not eliminate debts.   It eliminates the obligation to repay the debt or, to be even more accurate, it legally prevents (enjoins) the creditor from taking any action to collect on the debt.

11 U.S.C. §524 imposes a permanent federal injunction against the collection of any debt that is discharged in bankruptcy.   That’s pretty powerful stuff.

The distinction of a debt still existing, but not being enforceable, is not that significant in most cases, but it has ramifications for the creditor’s taxes, and there are other reasons for the legal nuance.

Not All Debts Are Dischargeable

Of course, not all debts are dischargeable.    Here are a few of the most common debts not dischargeable in bankruptcy.  These are all set forth in section 523 of the Bankruptcy Code:

1. domestic support obligations (all in Chapter 7 and 11; most in Chapter 13)
2. certain taxes (see more on tax dischargeability)
3. debts incurred by fraud
4.  student loans
5. criminal restitution
6. fines owed to a governmental unit.

Some of the above debts are only non-dischargeable if the creditor files an objection to discharge within specific time frames during the bankruptcy case (such as debts incurred by fraud).   Others, such as student loans, are not discharged unless the DEBTOR brings an action determining them TO be discharged.  Others still, such as child support or alimony, are simply not dischargeable at all.    Tricky, huh?  That’s why God invented bankruptcy attorneys.

Ultimately, if you receive a discharge of a debt, you no longer have to worry about repaying that obligation. Discuss with your attorney whether your debts were discharged.

Discharge not Dismissal

And just to get rid of a pet peeve of mine:  a Discharge is NOT the same thing as a dismissal.  People are always confusing these terms.  In bankruptcy, dismissal means dismissal of the bankruptcy case.   If your case is dismissed, you did NOT get a discharge of debts.

This has been the letter “D” of the bankruptcy alphabet.

This article is part of my bankruptcy alphabet series

To see others writing about the letter D:

• D is for Debtor by Jay Fleischman
• D is for Discharge by Cathy Moran
• Cate Eranthe claims D Is For Disclose
• Ryan Caldwell alleges D is for Deconsolidate
• Stuart Ing feels D is for Discharge
• Kim Coleman believes D is for Documents
• Jenna Cho thinks D is for Do’s and Don’ts
• Mitchell Goldstein Debt Relief Agency
• Christine Wilton on Discharges
  Bill Balena on DUIs
• Chris Carr on Domestic Support
• Monica Shepard on Divorce
• Bob Doig on Disclosures
• Daniel Winter on Discharge
• Rachel Lynn Foley on Deeds in lieu of foreclosure
• Bret Nason on Declaring Bankruptcy
• Chris McAvoy on Debtors
• Peter Behrmann on Dos and Dont’s
• Dorota T. examines Domicile
• Birmingham Bankruptcy on Discharge
• Nancy Martin on Discharge

Image Courtesy of Eddi vanW

Once you get to the promised land in a bankruptcy case–the date your discharge is granted–there is frequently confusion among many as to which of their debts were in fact discharged.   The confusion stems from expectations that there is some official specific ruling as to each debt.   That would be nice, but it’s not the way it works.

The Discharge Notice

When the discharge is entered in a bankruptcy case (for purposes of this article, I am referring to Chapter 7 or Chapter 13 cases; Chapter 11 is somewhat different) the only document that is sent out by the court is a 2-page document that generically states that “the debtor is granted a discharge”.  The second page lists, again generically, which types of debts are usually discharged, and which are not, but does not specify which debts in this case are discharged.

Figuring Out Which Debts Are Discharged

The reason it does not state which debts are discharged is that it is simply impossible.  The bankruptcy code provides numerous exceptions to which debts are discharged.   These exceptions are codified in section 523 of the Bankruptcy Code.¹   Some of these exceptions, such as debts incurred through fraud require the creditor to actively object  within a very specific time frame,  and prevail at trial, in order for the debts to not be discharged.  But many others are automatically not discharged if certain (and in many cases very complicated) conditions are met, and those conditions frequently have many exceptions of their own.  A good example of this is tax obligations.   For a quick look at how income tax dischargeability is determined, click here.

A lot of the criteria for determining whether a debt is discharged is subject to argument and can only be decided by a Judge if brought in front of the judge by one of the parties specifically.  Without that, the best the court can do is issue a general discharge that applies to all those debts which do not have a specific exception from discharge in the bankruptcy code.

Ask Your Attorney!

The bottom line is that most debts, such as credit card, medical, repossession and foreclosure deficiencies,  are in fact discharged.   But you need an attorney to really analyze your facts, preferably before you filed your case,  to let you know which debts might not have been discharged (yet another reason to have a bankruptcy attorney for your case–see more).  Ultimately, if there is a dispute, it will need to be decided by a Judge at trial.

¹ To further complicate matters, each bankruptcy chapter (7, 13, 11) incorporates various parts of section 523 differently, so a debt that is discharged in a Chapter 13 case, for example, may not be discharged in a Chapter 7 or 11, etc. )

Image courtesy of  kangotraveler

A while back I wrote an article about the importance of keeping records and receipts, as they are necessary in a bankruptcy case (see http://bklaw.com/bankruptcy-blog/2008/11/receipts-and-documentation/). This requirement was recently revisited by the 9th Circuit Court of Appeals in In re Caneva, 550 F.3d 206 (9th Cir. 2008). In that case, the court held that a debtor filing bankruptcy would be denied his discharge because he failed to maintain or preserve adequate books and records from which the Trustee in bankruptcy (and creditors) could assess the debtor’s financial condition.

This is one of the prerequisites to obtaining a discharge in a Chapter 7 case. 11 U.S.C. 727(a)(3) states that one of the bases for denial of a discharge in a Chapter 7 case is where the debtor “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case.”

The court in Caneva opined that this is particularly true where the debtor is self-employed or operating a business, but it is required in all cases.
Caneva