FAQ

You may find the answers to some of your questions on this page. If not, please feel free to contact us.

 

When I file a bankruptcy petition, can I just schedule the creditors or loans that I want to discharge?

No. You cannot pick and choose any particular creditors. You just file schedule all of your debts, period, and all creditors that are affected by your filing in any way. All your creditors have to be scheduled and given notice of your request for relief under the discharge provisions of the Bankruptcy Code.

 

Are student loans discharged in bankruptcy?

Any loan issued by a government backed lender or a private lender for educational purposes are not dischargeable in any type of bankruptcy, unless it can be shown that excepting such an obligation from discharge would impose an undue hardship on the debtor or his or her dependents. Undue hardship is determined by the bankruptcy judge after you file a bankruptcy petition by means of a lawsuit brought in the bankruptcy proceedings. You would have to show the court that, based on your present and prospective income, you could not possibly pay back the school loan, at least without extreme sacrifice by you and/or your family. Some court decisions have even allowed some portion of the student debt to be discharged with the balance remaining non-dischargeable.

 

I am behind on the mortgage payments on my residence; can I file some type of bankruptcy that would prevent foreclosure?

Yes, if you qualify to file under Chapter 13 and your income is sufficient to fund a Plan that provides for full payment of your mortgage arrearages within a reasonable time (which is three years in the District of Utah). Payments on the arrearages are made through the Chapter 13 plan through the Chapter 13 Trustee’s office. You would also have to make your regular monthly mortgage payments directly to the lender. Such an arrangement may vary if there is a balloon payment due prior to the termination of the Plan (which has a maximum life of 5 years).

 

I am not behind with mortgage payments on my home, but I have substantial equity in it; would it be sold if I file bankruptcy?

The home would only be sold in a Chapter 7 by the trustee where the equity is in an amount greater than the homestead exemption. The maximum amount of the homestead exemption is either $40,000 or $20,000 depending on whether one or both spouses join in the filing, how title to the property is held and the living arrangements of the spouses and any dependents. Even if the equity is greater than the exemption, the trustee might not sell the residence if the amount coming into the estate after payment of the exemption is very small (i.e. a $1,000). Furthermore the trustee could offer to sell the residence back you. In a Chapter 13, the debtor has the power to and may voluntarily sell the home after obtaining court approval.

 

Can my bankruptcy discharge me from income tax liability?

A discharge under a Chapter 13 bankruptcy, following the successful completion of plan payments, will relieve the debtor from all income tax liability and related penalties. However unsecured “priority” income tax must be paid at least 100% under the Chapter 13 plan. Priority income tax includes (but is not limited to) income tax for which a return was due subsequent to three years before the filing of the bankruptcy. Non-priority unsecured income tax would be paid under the plan on a par with other general unsecured debt (such as on credit cards). Unsecured tax penalties may be paid pro rata with credit card debt or even receive nothing under the plan.

A discharge under Chapter 7 would not relieve you from liability for priority income tax and certain non-priority income tax such as for tax years for which a return has not been filed or was filed within 2 years prior to the filing of the bankruptcy. Penalties on these taxes are also non-dischargeable unless imposed for a tax year ending prior to 3 years before the filing of the bankruptcy. The remaining income tax/penalty liability is dischargeable under a Chapter 7 but nonetheless would be collectible (except possibly a penalty portion) to the extent the taxing authority has levied and obtained a secured claim at the time the bankruptcy was filed.

If any income tax and penalty were secured by a valid perfected tax lien, such lien (with certain exceptions) would remain following a Chapter 7 discharge but would be gone following successful completion of plan payments and a discharge under a Chapter 13. In a Chapter 13, such lien would have to be paid in full, with interest, to the extent of the value of the security.

 

What debts are not dischargeable in bankruptcy?

In a Chapter 7 most debts are generally dischargeable. The most common type of debt that is not dischargeable is that incurred by the debtor by certain fraudulent means. For example, where a debtor charges amounts to a credit card prior to bankruptcy and without intent to repay the charges. The lack of intent to pay may be inferred if a debtor files for bankruptcy relief within a short time following the time the charges were incurred. Another example of a debt made non-dischargeable by fraud is a debt incurred by a debtor on a credit card obtained by application that sets forth the debtor’s income in an amount that is much greater than it really is. If the credit card company can prove it would not have issued the card had it known the debtor’s true income, the charges run up on the card would be determined to be non-dischargeable. In these instances where the debt was obtained through fraud, the court may determine the debt to be non-dischargeable if the creditor files a timely complaint with the bankruptcy court and proves the required elements of the fraud.

Other non-dischargeable debts in a Chapter 7 that are dischargeable unless the elements are proven pursuant to a timely complaint are: willful and malicious injury (e.g., when a debtor refuses to give back a leased automobile to the owner after defaulting on the payments and demand for its return, or damages for physical injuries arising from an assault committed by the debtor) and certain types of fiduciary fraud.

The above non-dischargeable debts are always, however, dischargeable in a Chapter 13 (although the Court may dismiss a Chapter 13 for bad faith if the court determines that the debtor is attempting to perpetrate a major fraud).

In addition there are a host of debts that are not dischargeable in a Chapter 7 without the necessity of the creditor filing a complaint. These include alimony and child support, student loans in most instances and injuries resulting from driving under the influence of alcohol or drugs – all of which are likewise not dischargeable in a Chapter 13, and certain income taxes. All income tax however is dischargeable in a Chapter 13 as long as the Chapter 13 plan adequately provides funding for payment.

The above list of non-dischargeable debts and explanation is not exhaustive.

Additional Note:
Discharge has a special meaning in the bankruptcy context. A discharge under bankruptcy relieves the debtor from all personal liability as to dischargeable debts. However a creditor with a security interest on the date of the filing of the bankruptcy (i.e., car loans, home mortgages) securing payment of the loan can still, after the bankruptcy case closes, pursue enforcement of the balance of the debt to the extent only of foreclosing on the security (by privately and/or judicially) in accordance with state law. The creditor cannot pursue you personally for any deficiency between the value of the collateral and the amount of the loan. In a Chapter 13 it should be noted that certain secured debt may be paid to the extent of the value of the security; after discharge following plan completion the secured claim is considered paid in full.

 

How long is the whole bankruptcy process?

If your file a Chapter 7 petition, the time for the discharge to take effect is, at a minimum, 60 days from the time set for the meeting of creditors. This meeting is usually set to take place between 20 and 40 days following the filing of the bankruptcy petition. In Chapter 13, the discharge takes place after the Plan is completed which is no less than three years, but not longer than 5 years from the filing date. In either Chapter 7 or Chapter 13, after a bankruptcy petition is filed and prior to the discharge, the automatic stay remains in effect prevents most continued attempts by creditors to collect debts.

 

What happens to my car lease or loan after I file bankruptcy?

In Chapter 7, an automobile lease will most likely be “rejected” by the debtor in order to discharge any further personal liability for lease payments. However, the leasing company might be able to terminate the lease because of you filed bankruptcy whether or not you were then in default on lease payments. In that case, the leasing company could pick up the car when the bankruptcy closed or sooner under certain instances. If the payments to the leasing company are current, the leasing company might do nothing and you could keep the car as long as you continue to make payments. If you should default on the lease after your bankruptcy closes the leasing company might repossess the car but your liability would (if there is no reaffirmation agreement) be limited to the reasonable rental value subsequent to the filing of the bankruptcy.

In Chapter 13, you could ‘reject’ the lease under the Plan, immediately return the car to the leasing company which would then have a claim for breach of contract to be paid under the plan (but you would also have reasonable rent liability for period of time you held onto car after the bankruptcy was filed). You could also assume the lease under the Plan but you would have to provide for regular lease payments in your monthly budget. Any pre-bankruptcy filing default would then have to be promptly cured.

You can choose between three different treatments for a secured installment car loan in a Chapter 7. First, if you were not in default and the trustee did not wish to sell your auto (which he would not do if there isn’t any equity greater than your $2,500 exemption) you could keep the car and continue making loan payments. The car remains as collateral for the loan, but any personal liability on this loan would be eliminated by your bankruptcy discharge. Second, you may reaffirm the loan and continue making payments, but if you failed at some future point to make payments on the car, the lender would be able to pursue you for any deficiency between the money generated by the lender’s sale of the car and the remaining loan balance.

In Chapter 13, and installment car loan is paid pursuant to the plan: 100% of the secured value of the car (which in most cases is less than the loan balance) and the loan deficiency (the unsecured portion) paid at a lower percentage with the other unsecured creditors.