Your Debt Is Mostly Tax Debt
Not all debts are created equal. Certain debts, even in bankruptcy, are not discharged or eliminated through the bankruptcy process. Most taxes fall into this category. Certain taxes like payroll taxes a business owner owes will never go away. The typical income tax will not be eliminated in your bankruptcy unless it meets certain criteria. Specifically, it must be at least three years old and must not have been assessed to you at anytime in the last 240 days. If the majority of your debt is taxes and relatively recent, bankruptcy is likely not going to be a good option because you will not obtain the benefit of discharging those debts. However, if your debt is income tax, and it is at least three years old, you should meet with a bankruptcy attorney to see if it can be eliminated through bankruptcy filing.
If You Anticipate Having New Debts Soon
It’s a good idea to hold off on filing for bankruptcy if you foresee other significant expenses in the near future. As a general rule, Chapter 7 bankruptcy only erases debts you have as of your filing date. Debts that come along later will be yours to deal with, sometimes for years to come. For example, if you will be having knee replacement surgery in the next year and you will have to pay some or all of the expenses, those expenses will be wiped out if you wait to file for Chapter 7 bankruptcy until after your surgery.
Alternatives To Chapter 7 Bankruptcy
Alternatives to bankruptcy may be able to help you get the fresh start you need. The one that’s right for you will depend on your financial situation and the types of debts you owe. Let’s go over each option.
Debt Settlement:You can negotiate with your creditors. If you’ve fallen behind on payments or are about to, you can contact your creditor to discuss the issue. You may be able to work out an affordable payment plan or negotiate a debt settlement for less than the full amount owed. This is especially true with credit card debt. Typically, a settlement needs to be paid in a lump sum.
Repayment Plan: Entering into a debt management plan with an agency is another option. Unlike in debt settlement, a debt management plan involves paying back your debt over time on more doable terms than you have now. Typically only unsecured debts can be included in a debt management plan.
Debt Consolidation: Taking out a debt consolidation loan to pay off your debts is another debt relief option. You would then have only one monthly payment to make to the new creditor. These loans often offer lower interest rates than what you’re already paying.
Another option is selling your valuable property to pay back creditors. But be careful. The money you get for your property may not be enough to pay off or settle all of your debts. You may end up having to file for bankruptcy anyway.
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The Bankruptcy Filing Process
There are a number of legally required steps involved in filing for bankruptcy. Failing to complete them can result in the dismissal of your case.
Before filing for bankruptcy, individuals are required to complete a credit counseling session and obtain a certificate to file with their bankruptcy petition. The counselor should review your personal situation, offer advice on budgeting and debt management, and discuss alternatives to bankruptcy. You can find the names of government-approved credit counseling agencies in your area by calling the federal bankruptcy court closest to you or by visiting its website.
Filing for bankruptcy involves submitting a bankruptcy petition and financial statements showing your income, debts, and assets. You will also be required to submit a means test form, which determines whether your income is low enough for you to qualify for Chapter 7. If it isnt, you will have to file for Chapter 13 bankruptcy instead. You will also need to pay a filing fee, though it is sometimes waived if you can prove you cant afford it.
You can obtain the forms you need from the bankruptcy court. If you engage the services of a bankruptcy lawyer, which is usually a good idea, they should also be able to provide them.
Assuming the court decides in your favor, your debts will be discharged, in the case of Chapter 7. In Chapter 13, a repayment plan will be approved. Having debt discharged means that the creditor can no longer attempt to collect it from you.
You Will Be Discharged From Bankruptcy
A discharge releases you from the legal obligation to repay the debts you had as of the date you filed for bankruptcy, except for specific types of debts that are excluded by law. These include alimony and child support payments, student loans , court-ordered fines or penalties, and debts arising from fraud.
The timing of your discharge depends on a number of factors, including whether this is your first bankruptcy, and whether you are required to make surplus income payments.
Timing of your discharge from bankruptcy
If this is your first bankruptcy and you are not required to make surplus income payments , you will be eligible for an automatic discharge from bankruptcy in nine months. If your surplus income is higher, your bankruptcy will be extended to 21 months and you will be required to make payments from your surplus income.
Your discharge from bankruptcy will happen automatically if
- the discharge is not opposed by the LIT, a creditor or the Office of the Superintendent of Bankruptcy;
- you have attended the mandatory financial counselling sessions; and
- this is your first or second bankruptcy.
To ensure that a greater percentage of debts is repaid to creditors, the following standards set out when an automatic discharge will occur.
|Surplus income is greater than $200 per month||36 months after filing|
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Saving Your Credit Score Is Only One Reason
An end to collection hell:;Nosals study found that once people fell seriously behind on their debt with at least one account 120 days overdue, for example their financial troubles tended to get worse. Balances in collections and the percentage of people with court judgments grew.
By contrast, people who file for bankruptcy benefit from its automatic stay, which halts almost all collection efforts, including lawsuits and wage garnishment. If the underlying debt is erased, the lawsuits and garnishment end.
Freedom from certain debts:;Chapter 7 bankruptcy wipes out many kinds of debt, including:
Civil judgments .
Some older tax debts.
Some debts, including child support and recent tax debt, cant be erased in bankruptcy. Student loan debt can be, but its very rare. But;if your most troublesome debt cant be discharged, erasing other debts could give you the room you need to repay what remains.
Better access to credit:;It can be difficult to get credit right after a bankruptcy. But Nosals study shows people who have completed bankruptcy are more likely to be granted new credit lines within 18 months than are people who fell 120 days or more overdue at the same time but;didnt file.
Your credit limits after bankruptcy are likely to be low, however, and your access to credit like your credit scores wont recover completely until a Chapter 7 bankruptcy drops off your credit reports after 10 years.
Bankruptcy: Knowing When And Why You Should File
Many people view bankruptcy as a permanent state of existence from which theres no turning back. In reality, legislators included bankruptcy in legal codes to provide consumers like you with a tool to transition to better circumstances. As with any tool, however, its important to understand when and how to pursue bankruptcy if you want to reap the greatest benefits.
At the Law Office of Rebecca L. Evans, we are always working to help people deal with the complexities of filing for personal bankruptcy. Since 1982, weve been doing everything in our power to help individuals in Northern Virginia make informed decisions about whether bankruptcy is right for them.
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Timing A Bankruptcy Filing Wisely Can Have A Significant Impact On Your Future
By Stephen Elias, Attorney
COVID-19 Updates: Retirement Accounts; Stimulus Funds; Online Filings
If you’re worried that you make too much to qualify for bankruptcy, CARES Act provisions ensure that receiving stimulus funds won’t affect your ability to obtain a discharge.
Also, rest assured that you can file safely. Many bankruptcy lawyers will consult with you virtually, and bankruptcy filers now appear at the 341 meeting of creditors by video or telephonically. Check the U.S. Trustee’s 341 meeting status webpage or go to your court’s website for details.
In some situations, it makes sense to hold off on filing for Chapter 7 or Chapter 13 bankruptcy. Sometimes, filing bankruptcy too early can mean losing property you would have otherwise been able to keep, or having to file for Chapter 13 instead of Chapter 7. Other times, you may be able to deal with debt in other ways, and avoid bankruptcy altogether. Read on to learn more about several situations when it might be beneficial to delay bankruptcy.
Eligibility To File A Chapter 7 Bankruptcy Case
In order to be eligible for a Chapter 7 case, you must receive credit counseling from an approved agency within 180 days prior to filing. When you file, you are required to provide the court with a certificate from the agency describing the services you received along with a copy of any debt repayment plan you and the agency may have developed. After you file, you will also have to complete an instructional course concerning personal financial management in order receive a discharge. Classes are run by independent agencies and require additional costs. A list of accredited credit counselors can be found at the United States Trustee’s website, .
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Collection Accounts Can Be Removed From Your Credit Report
Im sure youve heard of credit repair; everyone has. But what is credit repair? Its not what you may think; no attorneys are treating to sue collection agencies or using some genius loophole in the system. All credit repair is, is disputing;negative accounts on your credit report with the Credit Bureaus.
The Credit Bureau has 30 days to contact the creditor and verify the accuracy of the account. If they cannot validate the item, it must be removed from your credit report entirely. Paying off collections doesnt help your credit score at all. But, having a collection removed from your report will have a positive impact on your score.
The #1 Reason People File Bankruptcy: Unpaid Medical Bills
According to Snopes.com, the number one reason people file for bankruptcy is because of medical bills. Approximately 643,000 Americans filed bankruptcy because of medical debt each year.
If you have tens of thousands of dollars in unpaid medical debt that you could never pay off, it makes sense to file bankruptcy. Most people would say yes, but there is another option that is way better and cheaper!
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Debt That Can’t Be Forgiven
While bankruptcy can eliminate a lot of debt, it can’t wipe the slate completely clean if you have certain types of unforgivable debt. Types of debt that bankruptcy can’t eliminate include:
- Most student loan debt .
- Court-ordered alimony.
- A federal tax lien for taxes owed to the U.S. government.
- Government fines or penalties.
If You Need Bankruptcy Protection Make It Count
There’s a limit on how often you can apply for bankruptcy, which is why Tadross recommends his clients think very carefully about it before going that route. The danger of jumping into a bankruptcy head-first right now is that you may end up incurring more debt over the next few months. If that happens, and you’ve already filed, then you won’t have a lot of options to wipe out your new debt.
If you file a Chapter 7 bankruptcy and receive a discharge of your debt, you can’t file again for eight years. If you file for Chapter 13, you’ll need to wait six years before you can file for a Chapter 7 bankruptcy. If you want to re-file for Chapter 13 bankruptcy again, the waiting period is two years.;
It’s important to consider the timing. Will you see any benefit now? For example, if you’re about to lose your home or your car is going to be repossessed, then filing for a Chapter 13 and stopping the immediate foreclosure may help. Several states and cities have halted foreclosures and those with federally-backed mortgages are protected for now, but many homeowners who aren’t covered by these measures.
If you just lost your job or were furloughed because of the coronavirus, but expect to be rehired once business resumes, then it may be best to wait, says John Rao, an attorney and bankruptcy expert with the National Consumer Law Center.;
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Bankruptcy Is Not The End Of Your Financial Life
If you can no longer afford to pay your bills and you haven’t been able to negotiate better terms with your lender, then it may be time to consider bankruptcy. Don’t beat yourself up over it too much, Rao says.;
Filing for bankruptcy is often seen as this admission that “I’m a failure,” but that’s not usually the case, he says. And while it’s a step most people don’t want to take, bankruptcy can provide a lot of relief if done right.;
“It really does provide that fresh start,” Tadross says, adding that once your Chapter 7 bankruptcy is approved, or you receive a discharge in your Chapter 13 case, you’re completely debt-free.
Chapter 13 bankruptcies can stay on your credit report for three years, while Chapter 7 cases disappear after 10 years. But that won’t prevent you from getting approved for credit.;
Quite the opposite, Tadross says, adding he usually advises clients that they will likely receive dozen pre-approved credit card offers within a week of completing their bankruptcy. Why? Because creditors know you’re debt-free and that you’re not going to be able to file for another bankruptcy for several years.;
Debt can feel like an albatross around your neck, Tadross says, but you shouldn’t feel humiliated that you’re taking steps to rectify it through bankruptcy. “You’re just making arrangements to catch up on what you owe it’s not the end of the world,” he adds.
Your Lender Wants To Repossess Your Car
Bankruptcy’s automatic stay also puts an immediate stop to any efforts by your lender to repossess your car. In Chapter 13, you can catch up by including back payments in your plan. In both chapters, you might be able to get your car back if the lender repossessed it recently. Talk to a local bankruptcy lawyer. If you’d like to learn more, read Can the Lender Repossess My Car During Chapter 7 Bankruptcy and Car Repossession and Bankruptcy.
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When Bankruptcy Is The Best Option
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Bankruptcy isnt the end of the world. It may even be good for you.
Bankruptcy stops collection calls, lawsuits and wage garnishments. It erases debt. And despite what youve heard, bankruptcy may help your credit scores.
But thats not the whole story.;Most people struggle so long with their debt that their credit is already battered by the time they file for bankruptcy. And once they do, their scores typically rise, not fall. If the debt is erased which is known in bankruptcy court as a discharge scores go up even more.
Within a year, youre way better off, says Jaromir Nosal, assistant professor of economics at Boston College, who co-authored a study for the Federal Reserve Bank of New York about the effects of bankruptcy. Its a pretty rapid rate of recovery.
When And Reasons Why To File For Bankruptcy
However, declaring bankruptcy can also be expensive and time-consuming and have a huge impact on your credit score. This, in turn, can have far-ranging effects on other aspects of your life, such as buying a new car or home or even applying for jobs. Also, waiting to declare bankruptcy until youre completely broke can actually work against you.
If youre contemplating declaring bankruptcy, heres what you need to know.
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