If you are considering filing for bankruptcy, you should know that not all debts are treated equally. For example, certain debts cannot be met or forgiven and must be repaid in full. However, other debts can be fully repaid immediately or after a few years, depending on whether you file a chapter 7 or chapter 13 bankruptcy.
Some debts can also be changed so that you can pay the payments and retain the ownership to which the debt is linked, such as a car or a home. How your debt will be treated during a bankruptcy indicates what you can gain by filing a bankruptcy.
Although most debts can be included in a bankruptcy application, there are several that are not actually discharged. These are called ‘priority debts’ because they have priority over other debts. When you file a Chapter 7 bankruptcy, priority debts will be the first to receive the proceeds from the sale of your assets, and these debts cannot be paid even if you have no assets to pay them. When filing a Chapter 13 bankruptcy, there must be provisions in the payment plan to be able to pay it in full.
Priority debts include:
- Mortgages, car loans or other secured debts . “Secured debt” means that the loan is covered by an asset, such as a car or a house, that can be taken back if you do not make your payments. In most Chapter 13 bankruptcies, these loans are restructured to include missed payments and fines in the payment plan. In Chapter 7 Bankruptcy, you may be able to keep the loan and the underlying asset if you can make up for the missed payments and continue making periodic payments after your bankruptcy has been completed.
- Fines, fines or costs owed to a government unit . For example, tax fines, fines for overdue speeding offenses and registration costs for vehicles are not settled in bankruptcy.
- Most student loans that are guaranteed or financed by the government . Student loans that are issued directly by the government or an institution affiliated with the government, such as Sallie Mae, cannot be fired unless you can demonstrate that repaying them would cause “unnecessary hardship”. However, this is an extremely difficult standard that you must meet. That said, most providers have hardships that lower your payments or extend the term of your loan. Moreover, since many “private” student loans have some sort of government guarantee, most student loans cannot be fired.
- Take advantage of overpaid amounts . For example, if you have received unemployment benefits but received too much money, you may have to pay the excess. However, if you cannot pay, it becomes a debt that cannot be fired.
- Loans from a 401K plan or another fiscally attractive pension plan . Bankruptcy court does not discharge debts that you owe yourself. Since this is exactly what a loan with retirement plan is, it will not be forgiven if you apply for chapter 7. It should become part of your repayment plan when you submit chapter 13.
- Debts related to “intentional and malicious injury to persons or property.” If a court has ordered you to pay compensation for intentional injury to a person or their property – including damage sustained while driving under the influence – filing a bankruptcy will not clarify or reduce debt. However, if you submit Chapter 13, you may be able to restructure this debt, but you still cannot eliminate it.
- Alimony, marriage or debts for child benefits . These debts cannot be included at all in a Chapter 7 bankruptcy. However, they can be included in a Chapter 13 bankruptcy, provided they form part of the payment plan with a provision that arrears are paid in full and current payments are continued.
- Taxes that you owe to a local, state, or federal government . Current tax liabilities, past debts from previous years and any reimbursements or fines, plus other types of taxes, such as payroll taxes, are considered priority debts and most cannot be forgiven in a bankruptcy. If you cannot pay a current or recent tax assessment, you must deal with the IRS separately, outside of the bankruptcy court, because they offer hardships and even forgive debts in extreme circumstances. That said, jareSmikeange income tax can sometimes be waived through bankruptcy. This is discussed further below.
When can you lose your tax liability?
To cancel the tax debt, all of the following conditions must be met.
- The debt must only be income tax and must not include any costs, fines or other taxes, such as wage tax or sales tax.
- You have not filed a fraudulent tax return or intentionally paid tax (fraud with tax evasion).
- The tax liability is at least three years old. If you have more current income tax, you can usually work out a payment plan or offer, in a compromise with the IRS, directly. But you cannot include recent income tax in bankruptcy.
- You submitted the tax return that the income tax has generated on time and at least two years ago. You cannot wait a few years to submit your tax return and then submit several years at once to declare bankruptcy and prevent you from paying a large tax bill.
- You must owe these taxes for at least 240 days prior to filing your bankruptcy application.
Keep in mind that the IRS can place liens on your property for unpaid tax debts that cannot be canceled in bankruptcy, even if the tax debt itself met these requirements and was forgiven. In other words, if your bankruptcy ends, the right of retention will remain in place.
Upside Down Home and Auto Loans
You will be considered upside down if you have a car, a house or other property that is worth less than what you owe. This would be the case if you bought a car for $ 10,000, but the car is currently worth $ 7,000 and you still owe $ 8,000 (ie car link upside down).
In a Chapter 13 bankruptcy, however, you can qualify for a so-called ‘cram-down’ change, whereby the loan is lowered so that the balance and the current value of the asset match. This results in a smaller monthly payment or a shorter loan period.
In this example, the balance of the loan would be reduced to $ 7,000, or the current value of the car. However, there are limitations to which you can use a cram-down change. For example, you cannot use it on a car loan if you purchased the car within 30 months of your bankruptcy application or on loans for other personal property that were purchased within 12 months of your bankruptcy application.
If creditors can recoup more than a seizure or foreclosure through this change, they will accept it sooner. That said, you can only perform a cram-down change if you file a Chapter 13 instead of a Chapter 7 bankruptcy.
Confirm the debt again in a Chapter 7 Bankruptcy
Since Chapter 7 bankruptcy requires you to sell your assets to pay off your debts, you may want to keep certain debts to link the asset to it. For example, if you can pay missed mortgage payments and continue with monthly payments once your other debts have been paid, you may be able to “confirm” your mortgage again.
Re-confirming a debt means that, with the lender’s consent, the debt will be canceled during the bankruptcy and will not be released. In exchange for continuing to make payments as agreed, you are able to retain ownership of the item – your home in this example.
Some lenders are very willing to do this because it is likely that you will be in a better position to make payments once your other debts have been paid. As an aside, if your home is approaching or is already in foreclosure, filing for bankruptcy will temporarily stop the process through an “automatic stay”.
It is also common to reconfirm a car loan, as this benefits both the debtor and the lender. The debtor may keep his car and the lender avoids taking the seizure and selling the car for what is probably less money than the loan is worth.
Although there are many types of debts that will ultimately not be included in your bankruptcy, it is advisable to include all of your debts when you first file a file, even if you want to continue paying. In this way you can determine exactly with the receiver what debts you can and cannot collect. Because bankruptcies are often different in different states, it is best to follow a course with credit advice before you apply to determine how your debts are handled and what the best way is to take action.