Television personality and part-time comedian John Oliver recently did an important segment on bankruptcy law. The April 18, 2021 show covered the many often misguided reasons people avoid filing bankruptcy. It points out why bankruptcy should be used when necessary.
The show admirably highlighted the benefits of bankruptcy, including getting a fresh start from your debts. It also stated clearly that the social stigma associated with filing bankruptcy is “completely misguided.”
Unfortunately, the show also makes many technically correct, but incomplete and misleading statements which cast even more confusion on filing bankruptcy and what it can and cannot accomplish.
This will address some of the more important statements in Oliver’s episode.
Certain Tax Debts Can Be Discharged In Bankruptcy
Oliver correctly points out that not all debts can be discharged in bankruptcy. Among these he states are “…most taxes”.
While true, this could lead viewers to believe that taxes can never be discharged, which is not true.
Certain taxes, such as income taxes, are dischargeable if they meet these requirements:
- are over 3 years old from the date the returns are last due to be filed;
- they were assessed more than 240 days prior to the bankruptcy case filing;
- the returns were filed more than 2 years prior to filing the case;
- they are not the product of a fraudulent “willful evasion” to pay.
California sales taxes can be discharged as well if they meet the above requirements.
Chapter 13 Bankruptcy Can Be Very Beneficial
The majority of the bankruptcy segment dealt with Chapter 13 bankruptcy. Oliver states that many are misdirected into Chapter 13 cases instead of Chapter 7. This may be true, but that does not mean Chapter 13 is not a good solution for many. There were several problems with Oliver’s statements in this regard:
You Will Not Necessarily Lose Your Vehicle Or Home In A Chapter 7 Case
Oliver reports that many people file Chapter 13 because they might lose their home or vehicles in a Chapter 7 case. This is just not true. You are allowed to keep assets in Chapter 7 if their values are less than the amount of exemptions allowed in the state which applies in the case.
The homestead exemption in California, for homes purchased more than 1215 days prior to the bankruptcy filing, is up to $600,000 (depending on the median sales prices for the county). So if you have more than $600,000 of equity in your home, then yea, you may need to look into a Chapter 13. But you do not automatically lose your home in Chapter 7.
Same deal with vehicles. In California, you have between $3,325 and approximately $35,000 of exemptions available for equity in vehicles, depending on what other assets you have that need to be exempted. This is usually not an issue in a Chapter 7, especially if your attorney knows what they are doing.
The vast majority of Chapter 7 cases are “no asset” cases where no assets are sold by the Trustee.
Not True: “If You Miss A Payment In Chapter 13, You’re Out”
This is just flat out incorrect. In Chapter 13, you have the ability to seek to suspend payments, or modify your plan to lower them, depending on what is causing you to miss the payment.
Every case is different, and there are limits on how many payments you can suspend or lower.
You must pay out at least as much as your creditors would get in a Chapter 7 case. So, the value of your assets and amount of exemptions in part determines the minimum amount which must be paid in a Chapter 13. Your actual budget also factors in to this (and the budget can change over time).
Not true: People Generally File Chapter 13 Only To Finance Attorney’s Fees
This is also very misleading. Oliver refers to a bankruptcy study done by Professors Bob Lawless and Jean Braucher, under the name of the “Consumer Bankruptcy Project.” This study found that African Americans filed a disproportionate percentage of Chapter 13 cases vs. other races. The reasons for this allegedly relate to abject racism and economic inability to pay necessary attorneys fees prior to filing the case (which would be necessary for a Chapter 7 filing). This may be true in some cases. But there are many reasons a Chapter 13 case would be filed instead of Chapter 7 which have nothing to do with race or ability to pay attorney’s fees.
Chapter 13 Allows Reorganization And Discharge Of Debts When Debtor Is Not Eligible For Chapter 7
For one thing, there are income limits for qualifying for Chapter 7. Debtors are required to “pass” a Means Test and can also not have too much actual disposable income in their current budget in order to qualify. Thus, if you have too much disposable income to do a Chapter 7, you might opt to do a payment plan based on your budget for 36 to 60 months in a Chapter 13. This can enable you to pay off your debts for far less than you would need to pay outside of bankruptcy.
Chapter 13 Allows You To Keep All Assets
Another reason to file Chapter 13 is to protect non-exempt assets from being sold by a Trustee in Chapter 7. Chapter 13 allows the debtor to keep all assets as long as the amount paid out during the payment plan is the same as creditors would receive in the Chapter 7 case (if the assets were sold).
Chapter 13 Allows Removal Of Some Junior Mortgage Liens
Another reason to file Chapter 13 is to remove (strip) junior mortgage liens on real estate, in cases where the value of the property is less than the amount owed to senior liens (i.e. first mortgage).
For Those With High Income, Chapter 13 Allows Payment of Debts At Zero Percent Interest
Even for those debtors who have enough disposable income to pay all of their debt over time, Chapter 13 can be a big money saver because the interest accrual on the debts stops the day the bankruptcy case is filed.
So while Chapter 13 can be used to pay attorneys fees over time when the debtor cannot afford them in a Chapter 7 case, that is not the main reason to file Chapter 13 (and in my office, it is almost never the reason).
In summary, Oliver’s episode was a big step forward in destroying the myth that bankruptcy is something to be avoided and the social stigma associated with it is completely misguided.
But to attain a fuller understanding of all that bankruptcy can do, what its risks and benefits are, and whether it is right for you, you should schedule a consultation appointment with an experienced bankruptcy attorney in your area.
Image attribution: “2013 Bankruptcy Brochure Jan – May” by Alachua County is licensed under CC BY 2.0