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Debts Not Listed in Your Bankruptcy Documents
If one of your creditors is not included in your "schedules" you risk continuing to owe that debt after your bankruptcy is finished.
Legal Obligation to List All Creditors
Overall you are required by law to list all your debts and their creditors on your bankruptcy schedules. You can’t do a partial bankruptcy, listing most of your debts but hiding one or two that you don’t want to be affected. You must include every debt on which you are legally obligated.
Debts Not Included May Not Be “Discharged”—Legally Written Off
If you do not include a debt in your formal bankruptcy documents when you file your case you risk not discharging that debt at the time all your other debts are discharged. See Section 523(a)(3) of the Bankruptcy Code.
In a Chapter 7 “straight bankruptcy” case the discharge happens quite quickly—usually about 3 to 4 months after your case is filed. In a Chapter 13 “adjustment of debts” the discharge almost always doesn’t happen until you finish the payment plan, which is usually 3 to 5 years after your case is filed.
How to Discharge a Student Loan in Bankruptcy
Writing off a student loan in bankruptcy requires showing “undue hardship.” What is that?
Student Loans CAN Sometimes Be Discharged
You may have heard that student loans can never be “discharged”—written off in bankruptcy. Untrue.
Some other kinds of debts can’t ever be discharged, such as child and spousal support. But student loans are more like income taxes. Both can be discharged under certain conditions. (See our blog post of last Friday about discharging income taxes.)
However, income taxes are usually easier to discharge than student loans. Most of the time you just have to file your tax return and wait a certain amount of time. The requirements for discharging a tax debt are quite clear. They are much less clear and more rigorous with student loans.
“Undue Hardship”
The Bankruptcy Code says that a student loan is not discharged unless making you pay it “would impose an undue hardship on [you or your] dependents.” See Section 523(a)(8).
Unpaid Child or Spousal Support Never Discharged in Bankruptcy
You can’t legally write off child support or spousal support.
Our last blog post was about the conditions under which bankruptcy can discharge—write off—all income tax debts that meet certain conditions. Those conditions are mostly met by the passage of time. In contrast, unpaid child and spousal support is simply not discharged through bankruptcy. Not now. Not ever.
Support is Not Discharged, IF It’s Really Support
There IS one possibility, although admittedly this doesn’t often come into play. The Section of the Bankruptcy Code that defines support refers to a debt “in the nature of” child or spousal support. (See Section 101(14A).)
This “in the nature of” language means that an obligation could be called support in a divorce decree or court order, and yet NOT actually be “in the nature of” support. The bankruptcy court is not bound by what your divorce court labeled as support. The bankruptcy court looks beyond the language used in your separation or divorce documents to the kind of debt it actually is under the specific facts of your divorce.
Income Taxes Discharged and Not Discharged in Bankruptcy
Bankruptcy DOES discharge--permanently write off--certain income taxes. It's mostly just a matter of time.
Taxes Can Be Discharged (Legally Written Off)
Some special kinds of debts can never be discharged through bankruptcy. Examples are child and spousal support, and criminal fines and restitution. A bankruptcy filing does not write off these kinds of debts.
Income taxes are not like these. Almost all income taxes can be discharged, once a few conditions have been met.
Once the tax you owe meets those conditions, it is discharged exactly like any other debt. The IRS and your state taxing authority are no different than your credit card creditor. Once a tax debt is discharged, they can never chase you for that debt again.
The Two Main Conditions to Discharge Income Taxes
For most people the conditions are not complicated. They require filing your tax returns and waiting out a certain amount of time.
Criminal Debts Not Discharged in Bankruptcy
Bankruptcy can’t discharge—permanently write off—criminal debts, but it can still help in indirect but potentially game-changing ways.
If filing a bankruptcy case does not discharge criminal debts, how could it possibly help?
In a number of practical ways, bankruptcy enables you to focus on your criminal defense and to deal with any potential fallout. If you’ve been charged with a significant crime you need to make that your highest priority, financially and emotionally. Here’s how filing bankruptcy can help you do that.
1) Discharge Your Other Debts
If you’ve been charged with a serious crime, you have to figure out how to pay for a good criminal attorney and for the other costs of your defense. Considering what’s at stake, you need to consider not paying all or most of your creditors. It may make sense to sell some of your assets and/or even get early access to any retirement funds.
Either in addition to or instead of these tactics, often the fastest way to reduce your debts and quickly improve your cash flow is by filing a Chapter 7 "straight bankruptcy." Then you can immediately stop paying the debts you intend to discharge. The discharge itself usually happens within only about 4 months after your case is filed, freeing you of your debts.
Bankruptcy in the U.S. Constitution and Statutes
Bankruptcy is federal law. The U.S. Constitution has said so from the beginning. Find the Bankruptcy Code in Title 11 of the U.S. Code.
If you’re considering bankruptcy and are trying to read up on it, this may help make sense of it.
The U.S. Constitution
The Constitution gave Congress the power "to establish... uniform laws on the subject of bankruptcies throughout the United States." (Article 1, Section 8, Clause 4.) This particular power is near the top of a long list of legislative powers the Constitution granted to Congress.
Why Bankruptcy is in the Constitution
Bankruptcy may seem like a minor issue in the grand scheme of setting up a new nation. But making bankruptcy a federal responsibility instead of a state one actually went to the heart of what the Constitutional Convention of 1787 was trying to address.
What is Considered "Income" for the Chapter 7 "Means Test"
“Income” is not what you think it is—it’s much broader than usual and fixates on the 6 full calendar months before your bankruptcy filing.
Our last blog post a couple days ago was about an upcoming cost of living adjustment of median family income amounts. This adjustment is going in effect for bankruptcy cases filed on and after April 1, 2016. (See Section 101(39A) of the Bankruptcy Code.) These median family income amounts are important because they can determine whether you can pass the “means test” and qualify for a Chapter 7 “straight bankruptcy” instead of a Chapter 13 “adjustment of debts.”
That’s important because a consumer Chapter 7 case usually take only 3 or 4 months to finish. It usually does not require you to pay anything to most of your creditors. In contrast a Chapter 13 case usually takes 3 to 5 years, and requires you to pay all you can afford to your creditors throughout that period of time.
A Chapter 7 "Means Test" Calculation Adjustment
As of April 1, 2016 you can have a little more "disposable income" and still pass the "means test" to qualify for Chapter 7 bankruptcy.
Means Test
The “means test” determines whether you have enough income after your expenses (that is, enough “disposable income”) to repay your creditors a certain amount. If you don’t have enough disposable income, then you qualify for Chapter 7“straight bankruptcy.” Otherwise you must instead deal with your debts through a Chapter 13 “adjustment of debts” case.
Chapter 7 allows you to discharge (legally write off) all eligible debts in a process taking 4 months or so. In contrast Chapter 13 requires you to pay debts as much as you can afford to in a payment plan lasting usually 3 to 5 years. Chapter 13 may give you some significant advantages over Chapter 7. But in many other situations being able to discharge debts in a matter of a few months makes Chapter 7 the much preferred option.
The Maximum IRA Exemption
Most pensions and other retirement funds are "exempt"—completely protected when you file bankruptcy. But there’s an exemption cap for IRAs.
Property Exemptions
When you file a Chapter 7 "straight bankruptcy" case usually you are able to keep everything you own because of property "exemptions." These are usually categories and amounts of assets that people are allowed to keep, and their creditors and the bankruptcy trustee are not allowed to take. For example, there are homestead exemptions for your home, vehicle exemptions for your vehicle(s), and usually many other categories.
The intent behind exemptions is that you can’t really get a fresh financial start if you have to give everything to your creditors. So the exemptions protect a basic set of assets. Depending on where you live and what assets you own, you have a right to exemptions through your state’s laws and possibly also through federal laws.
As long as the exemption categories and amounts cover everything you own, you can keep everything in a Chapter 7 bankruptcy. To the extent you own something that isn’t covered, you may have to surrender it to your creditors.
A Fresh Start against Your Co-Signer
Through bankruptcy, you may be able to and want to pay a co-signed debt. If not, you need protection from that debt and from your co-signer.
A friend or relative may have helped you earlier by co-signing a debt for you. But now you find yourself needing relief from all or most of your debts through either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.”
So what happens to your co-signed debt? And what happens to whatever responsibility you may feel towards your co-signer?
In the last two blog posts we explained how either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” may help you be able to pay the co-signed debt. These two kinds of bankruptcy provide a certain amount of indirect or direct protection for your co-signer.
But what if—even with the help of bankruptcy—you simply can’t afford to pay the co-signed debt now or at any time in the foreseeable future? You may no longer want to pay your co-signer because your relationship has soured. Your co-signer may be the one who received the benefit of the debt and should pay it back. Or you may still want pay it eventually but have no idea when. In all these situations you need legal protection against your co-signer.
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