You may find the answers to some of your questions on this page. If not, please feel free to contact the Law Office of Marji Hanson.
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 file a schedule of 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?
A loan issued either by a government-backed lender or a private lender for educational purposes is not dischargeable in any type of bankruptcy, unless it can be shown that excluding 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 repayment plan that provides for full payment of your mortgage arrearage over the course of your three to five year plan. Payments on the pre-filing 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. Your payment arrangement will 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 for bankruptcy?
The home would only be sold in a Chapter 7 by the trustee if the equity amount is greater than the homestead exemption. The maximum amount of the homestead exemption is either $42,000 or $84,000, 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. $1,000). Furthermore, the trustee could offer to sell the residence back to you. In a Chapter 13, the debtor has the power 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 most income tax liability and penalties related to timely filed tax returns. However, 100% of unsecured “priority” income tax must be paid. Priority income tax includes (but is not limited to) income tax for which a return was due within three years before the filing of the bankruptcy. Non-priority, unsecured income tax would be paid under the plan on 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 be omitted from the plan.
A discharge under Chapter 7 would not relieve you from liability for priority income tax or for 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 (with the possible exception of a portion of the penalties) 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 Chapter 7 and Chapter 13, most consumer debts are generally dischargeable. The most common exceptions include debts intentionally not listed in the bankruptcy petition, student loans (unless undue hardship can be proven at trial), taxes, fines or penalties for violating the law, alimony and child support, and debts incurred 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 shortly after charges were incurred. Another example of a debt made non-dischargeable by fraud is a credit card debt on a card that was obtained by claiming false income on the application. If the credit card company can prove it would not have issued the card had it known the debtor’s true income, the charges 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 potential non-dischargeable debts in both Chapter 13 and Chapter 7 include: 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 like embezzlement. A creditor may also ask the court to determine that divorce and other property settlements be excluded from the discharge order.
The above list of non-dischargeable debts and explanation is not exhaustive.
Discharge has a special meaning in the bankruptcy context: it relieves the debtor from all personal liability for specific debts. However, a creditor with a security interest (i.e., car loans or home mortgages, where the car or home secures the loan) on the date of the filing of the bankruptcy 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 does the whole bankruptcy process take?
If you 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 3 years, but not longer than 5 years, from the filing date. In both Chapter 7 and Chapter 13, after a bankruptcy petition is filed and prior to the discharge, the automatic stay remains in effect and prevents most continued attempts by creditors to collect debts.
What happens to my car lease or loan after I file bankruptcy?
In Chapter 7 or Chapter 13, you can turn in the car, “reject” the lease, and the balance owed becomes a general unsecured claim in the bankruptcy case. Rejection of the lease ends your personal liability for lease payments and any termination deficiencies. In either Chapter 7 or Chapter 13, you are permitted to assume personal property leases. In Chapter 7, you would need to cure any past-due lease payments before you would be allowed to assume the lease agreement and retain the car. In Chapter 13, your lease payment would ordinarily be paid separately from your Chapter 13 plan payment. You can 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 also have to be promptly cured before your plan could be confirmed by the court.
You can choose between two different treatments for a secured installment car loan in a Chapter 7. First, surrender of the car back to the lender and discharge of the entire car loan balance. Second, 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 $3,000 exemption), you could reaffirm the balance of the debt, keep the car, and continue making payments. If you reaffirm a car loan, the car remains as collateral for the loan, you do not receive a discharge of your personal liability on the loan, and if you fail 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, an 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) is paid at a lower percentage with the other unsecured debts.