I often file either chapter 7s or chapter 13s for individuals that own houses. Most of the time, the individual who files wants to keep their house. And most of the time it is easy for the debtor to keep their house in the bankruptcy. The key issue is the amount of equity in the house: the difference between what the current fair market value of the house minus the amount of money owed on the mortgage(s).
The two main bankruptcies for individuals are chapter 7 and chapter 13. In general, if an individual is looking to obtain a fresh start and obtain debt relief by filing a bankruptcy, chapter 7 is preferable to a chapter 13. The threshold matter for determining whether someone qualifies for a chapter 7 versus a chapter 13 is what kind of debt that the debtor has.
In some circumstances a chapter 13 bankruptcy is a better strategy for dealing with past due taxes. Indeed, as my last blog post explained, a Chapter 7 case can be a powerful tool in dealing with past due taxes. A chapter 7 stops, at least briefly, any pending IRS or Oregon Department of Revenue (ODR) paycheck or bank account garnishment, and most other collection actions. And, most importantly, a Chapter 7 case can either: 1) discharge (legally write off forever) certain, usually older, income tax debts; or 2) discharge enough of your non-tax debts so that—after your Chapter 7 case is completed— you can afford to enter into a reasonable monthly payment plan with the IRS and/or the ODR on the taxes that can’t be discharged; or 3) a combination of the above two—discharge some of your tax debt, along with some or all of your other debts, so that you can afford to enter into a monthly payment plan with the IRS and/or ODR on the taxes that can’t be discharged.
A Chapter 7 bankruptcy can be a very powerful strategy for dealing with past due income taxes. A Chapter 7 can stop a tax garnishment, discharge older tax debt, and allow you to pay off newer taxes. A Chapter 7 will stop the IRS, the Oregon Department of Revenue (ODR), and/or any other state or local tax entity from garnishing your bank accounts and paychecks. The filing will stop a threatened tax lien from being recorded against your home and will stop threatening letters and phone calls for at least 90 days after the filing, and, in some cases, forever.
Income tax debts CAN be “discharged” (permanently written off) if they meet certain conditions. These conditions may be quite easy to meet. To write off income taxes under either Chapter 7 or Chapter 13 takes meeting four conditions. Two of these conditions are very seldom a problem. That means that most likely you can discharge a tax debt if you meet the other two conditions. And you will likely meet these other two conditions sooner or later. It’s mostly a matter of time.
Student loans are a huge issue for many people. Unfortunately, under current law it is almost impossible to discharge student loans in a bankruptcy case. The general rule is that student loans are not dischargeable unless you can prove an “undue hardship.” Often courts will require that the debtor is essentially mentally and/or physically disabled and unable to earn an income before they will allow a discharge of student loans in a bankruptcy. But if a debtor is disabled, most student loan lenders have an internal procedure (non-bankruptcy) for obtaining a discharge of the student loans.
I often get the question of whether or not there is a certain amount of debt that somebody needs to have before they can file a bankruptcy. The answer is that there is no minimum amount of debt that is required to file a bankruptcy.
This morning I received a voice mail message from a former chapter 7 client. She received her discharge in August 2012. In her voicemail, she stated that a collection agency was calling her to collect on a credit card that was part of the bankruptcy. I immediately called the collection agency and explained to them that they are violating federal law by trying to collect on a debt that was discharged in a bankruptcy.
The bankruptcy statutes are designed to give honest debtors a fresh start. They are not designed to allow individuals to discharge debts that they never intended on paying in the first place. Most debtors are honest people that have come on some challenges (loss of job, medical condition, etc.).
Are Creditors Right When They Say You Can’t Write Off Their Debt in Bankruptcy? Most debts ARE written off in bankruptcy. Most creditors or collectors who try to persuade you to pay a debt on the threat that it can’t be written off in bankruptcy are likely either ignorant or dishonest. Adam M. Weiner Bankruptcy Layer, Attorney, Write off DebtThis blog is not about secured debts—those with collateral like a mortgage or vehicle loan. It’s not about the relatively short list of special debts which are not written off regardless whether the creditor complains or not—child and spousal support, most student loans, many taxes. Instead this is about regular debts that would be written off unless the creditor objected.
