Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

What Debts Were Discharged In My Bankruptcy?

By

banner-1090830_1280_opt

 

After your bankruptcy, one of the hardest questions is figuring out just which debts were discharged.

Eliminating debts was the whole point of filing bankruptcy. You’ve got a court order, but no list.

You and your creditors understandably  expect to find a single document telling them what debts are no longer enforceable and which survive the bankruptcy.

No such luck.

Bankruptcy discharge order

The official form used by most bankruptcy courts merely states that the debtor is granted a discharge. The general information on the second page of the form suggests that you might need an attorney to understand the application of the discharge in a particular case.

That’s because, while the bankruptcy schedules require you to list all of your debts, not all of your debts are dischargeable.

Some debts automatically survive the bankruptcy filing.  Survivors include family support, recent taxes, and criminal restitution.

Debts a creditor can challenge

Other debts may be non dischargeable if the creditor challenges the dischargeability of its debt and wins at trial.

Student loans may be discharged only if the person filing bankruptcy brings an adversary proceeding to establish that repayment creates an undue hardship.

And then, liens generally survive as a charge on the debtor’s property but not a personal liability.

So, it’s complicated.

And the court doesn’t work out all the intricacies before issuing the discharge order.

Who was included in bankruptcy

The basic rule about discharging debts provides that debts are discharged unless there is a statutory exception to discharge listed in the Bankruptcy Code.

The concept of due process (and a provision of the Bankruptcy Code) says creditors get their debt discharged only if they get notice of the bankruptcy.

That’s why saving your bankruptcy papers is so on point.  The schedules and the mailing matrix in your case (and any amendments to them) show who was listed in your case.

Listed creditors are most likely discharged.

Californians get broader discharge

In California, where 9th Circuit decisions are controlling, the Beezley opinion (994 F.2d 1433 1993) tells us that even a creditor who wasn’t listed is discharged in a no asset bankruptcy.

The caveat is that if the creditor has a claim to non dischargeability because of the debtor’s bad acts, the claim survives until the creditor has a chance to challenge the discharge of his debt.

Beezley stands for the proposition that even creditors not listed are discharged in a no asset case.

If everything you owned when you filed bankruptcy was exempt or not worth the trustee’s time to administer, you don’t need to amend your bankruptcy schedules to add creditors that you forgot when you filed.  If there are no assets, they didn’t miss anything financial by being omitted.

Other circuits have similar case law, too.

When creditors call after bankruptcy

In this era of debt buyers and zombie debt, most debtors can expect to get a collection letter on a debt that was discharged in their bankruptcy.

Usually what it takes to make a zombie debt collector go away is a copy of the discharge order and a copy of the schedules showing that the original creditor was listed in the bankruptcy.

A creditor who sold off bad debt can’t give the buyer anything more than the seller had;  in this case, the creditor had an unenforceable debt.

So, save your bankruptcy documents. If giving the collector a copy of the schedules doesn’t make the creditor go away, contact a bankruptcy lawyer.

The bankruptcy court stands ready to sanction creditors who blow off the discharge order.

Enforcing the discharge

Can discharged debt come back

Maximize your bankruptcy discharge

Chapter 13: Know Who Gets Paid First Under Your Plan

By

The financial road isn't always smooth

Reality exists outside of television shows.

And when real-world reality hits some debtors, it’s a trainwreck.

It comes up for me when Chapter 13 clients and I sit down to write the plan for the case.

The plan will set out which classes of creditors get paid over the five year life of the plan.

Too often, my ever-optimistic client wants to keep all of his assets with secured debts AND pay off the must-pay back support or non dishchargeable taxes.

The Problem

Secured debts are things like car loans, home mortgages , and property taxes.

If you don’t pay a secured debt, the creditor has the right to take the asset that is the collateral.

More on secured debts in bankruptcy

In Chapter 13, you get a choice on secured debts:  you can cure any back payments through the Chapter 13 plan or you can surrender the asset.

If you surrender the collateral, you owe neither the back payments nor the payments that come due after you file bankruptcy.

Priority claims in a Chapter 13 must be paid in full over the life of the plan to get the discharge.

The debtor gets no choice.  Priority claims are usually income taxes and family support.

The zinger is that the Chapter 13 trustee generally pays the secured claims first.

Over optimism

So here’s the dilemma.  It’s hard to decide to give up houses and cars.  You’ve usually got some part of yourself invested in the choice.

Even if the car is a gas guzzler or the house burdened with a bad loan or too little value, it’s tempting to assume you can gut it out. Make up the back payments over five years and have something at the end.

When the collateral is a toy, a boat or bike, or a rental home, you spin yourself messages of entitlement or future appreciation.

You commit in your plan to pay both the secured claims and the priority claims within the five year limit of a chapter 13 plan.

You look at your budget and it works, barely.  You can project enough money to do it all within five years.

Hit a bump

But then, mid plan, life intervenes.  Your work hours are reduced.  The car breaks down.  A family member gets sick.

And all of a sudden, there isn’t enough money to make the plan payments that get you everything.

Worse, what you’ve paid into the plan has gone for things you didn’t have to pay for:  the Harley, the underwater rental, the house that’s too expensive.  The trustee’s order of distribution puts the debts that won’t go away behind the options you chose.

Depending on how significant the loss of income or increased expenses, you may be able to recover.

But maybe not.

Plan for the unexpected

When making choices at the beginning of a Chapter 13, don’t assume that everything in your financial life going forward will be uniformly stable or improving.

Where you will be if there is a major negative event in your life?  Have you taken care of the most important debts first?

Or does the overly optimistic plan you propose have you continuing to live on the financial edge?

Image courtesy of Flickr and  bwats2.

When Can I File Bankruptcy Again

By

calendarYou can file bankruptcy tomorrow, so long as you don’t currently have a bankruptcy case pending.

When you can get a discharge in that case is a different story.

The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case.

My friend Gene Melchionne wrote a marvelous piece about the timing of the bankruptcy discharge that conjures up the old high school cheer:  2, 4, 6, 8, who do we appreciate.

The waiting period between cases, if you want a discharge, can be 2 years, 4 years, 6 years or 8 years, depending on what kind of case you filed before and what kind of case you want to file now.

You count those years from the filing of the first case to the filing of the second case.

But, contrary to the usual thinking, the discharge isn’t everything.

Sounds like heresy from a bankruptcy lawyer, doesn’t it,  but let me tell you a couple of stories.

The no discharge Chapter 7

My client had a house with equity, a recent bankruptcy discharge, and a criminal conviction that had him heading to prison, soon.

He faced a future with no income and no way to pay the mortgage.  And at the point he didn’t live in the property, his right to claim a California homestead in the property was in doubt.

But the recent bankruptcy case meant he couldn’t get a discharge in a new Chapter 7 case; and prison wages were not going to support a Chapter 13.

But what we wanted was the automatic stay, the sale of the house, and the homestead paid to the client.

The balance of the equity was beyond saving, on these facts.  We were content to have the balance go to pay toward the restitution judgment.

So, we filed a Chapter 7.  The fact that my client wasn’t eligible for a discharge wasn’t important .  What we needed was a sale managed by the trustee while my client was behind bars and the homestead carved out and paid to the debtor.

No discharge Chapter 13

Much more common than prison-bound debtors are no-discharge Chapter 13 cases.  When they follow hard on a Chapter 7, we sometimes call them Chapter 20 cases:  7 + 13=20.

After BAPCPA’s changes to the bankruptcy code in 2005, the four year rule applies to getting a Chapter 13 discharge after a Chapter 7.  There must be four years between the filing of the 7 and the filing of the 13 in order to get a discharge of your debts in the Chapter 13.

But the discharge isn’t everything.

Pay debts that survived

Often what you need in a Chapter 20 is the automatic stay and time to pay debts that didn’t get discharged in the Chapter 7.  Those debts might be priority taxes, back family support, or even student loans.

It is the payment plan and the predictability that you need, not necessarily the discharge.

Catch up mortgage

Chapter 13 works to give you time and protection to bring a mortgage current.  Because the mortgage is a lien and wasn’t wiped out in the Chapter 7,  failure to get right with the lender will lead to foreclosure.

Liens that survive the discharge

File a Chapter 13, and you’ve got time to get current.

Strip off the worthless lien

While you can’t strip off liens in Chapter 7 unless they impair an exemption, in Chapter 13 you can void an utterly underwater mortgage AND  strip or bifurcate a tax lien.

Two recent 9th Circuit decisions make it clear that it is completion of the Chapter 13 plan, not the discharge, that entitles you to strip a lien, and that the balance on a lien that survived the Chapter 7 doesn’t count for the Chapter 13 debt limits.

When can you file

So, like lots of legal questions, it depends.  It depends on whether you can achieve your goal without getting a discharge.

Image courtesy of Flickr and Hichako.

(

What To Disclose In Bankruptcy Papers

By

gecko-wikimedia-cropped.If the headline drew you in, like the Geico gecko, you can complain you’ve been duped.

In bankruptcy, you disclose everything. Period.

Disclosure is the price of the bankruptcy discharge.

Shortchange the system by leaving out inconvenient facts and you risk both the omitted asset and the discharge.

Understand the difference between discharge and dismissal.

A false oath on the bankruptcy papers or transfers intended to conceal assets from creditors are each grounds on which the discharge of all of your debts can be denied, while the trustee recovers and sells the assets.

It’s nasty and comes at a very high price.

Tell the whole truth

The reason for incomplete bankruptcy schedules is seldom an intention to conceal.  It’s the filer’s failure to take disclosure seriously.

People ready to file bankruptcy don’t want to read the questionnaire that prompts them for various kinds of assets they might have. They don’t commit to thinking about how this question might apply to their situation.

Or they assume because an asset has little market value, it’s excluded from the schedules.

Not so. The schedules don’t ask for your significant assets or things you have with value;  they ask that you list what you own.

You would not believe the number of clients whose completed questionnaires tell me they have no clothes.323171462_9528e70afa_z_opt

Yet I’ve never met with a naked client.  They just perform some sort of mental shortcut when we ask about what they own.

Transparent assets

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:

  • the worker’s compensation claim,
  • the claim against the landlord,
  • the participation in a class action.

All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.

But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts  you get  in bankruptcy.

More

What your signature on your bankruptcy papers says about you

Your court appearance in bankruptcy

Who you need to pay after bankruptcy

Image courtesy of Wikimedia and Frank Wouters.

Woman without clothes:  Gisela Glardino and Flickr

Cut Tax Penalties In Bankruptcy

By

redwood-pixabay_opt

Get in tax trouble and the penalties often grow huge.

What starts as a manageable problem can soon tower over you.

Breathe deep;  there is a solution.

Chapter 13 bankruptcy can cut tax penalties down to size.

All tax penalties discharged in 13

Old or new, large or small, Chapter 13 discharges all unsecured tax penalties.

In contrast, Chapter 7 discharges some tax penalties.

 Discharged are penalties for taxes that are themselves dischargeable.

Also dischargeable in Chapter 7 are penalties where the transaction or event that triggered the tax occurred more than three years before filing, whether or not the tax itself is dischargeable.  523(a)(7)(B).

That’s good, but if you are eligible, Chapter 13 is better.  All penalties are discharged.

Who can file Chapter 13

Chapter 13 is available to individuals (no corporations or LLC’s), with regular income, whose debts total less than the caps for secured and unsecured claims.

You know if you are a real person and whether you have regular income, so the thing that needs analysis is the allocation of your debts between those that are unsecured (the creditor has no lien on your assets) versus the debts for which there is a lien.

To be a secured claim in bankruptcy, that lien has to attach to an asset that has market value greater than any liens senior to it.

Tax liens don’t go to the head of the line just because they are debts owed to the government.  They fall in line behind any other lien holder who perfected their lien before.

Recent taxes must be paid

Chapter 13 plans are written by the person who has filed the bankruptcy case.  The Bankruptcy Code requires, however, that recent income taxes be paid in full through the plan.

Note that it is the TAX and the INTEREST on that tax that have to be paid during the life of the Chapter 13.

Penalties get treated just like personal loans, medical bills, and credit card debt:  what that class of creditors gets in the Chapter 13 is driven by the means test and the best interests of creditors test.   In most Chapter 13 plans, that’s little, or nothing.

Chapter 13 cuts those penalties down to size.

Tax liens whittled down

toothpicks-pixabay_optThe discussion above deals with unsecured taxes and tax penalties.  The rules change when a tax lien is filed.

At its simplest, a Chapter 7 discharge eliminates the IRS’s ability to levy your bank account or garnish your wages for taxes that have been discharged.

However, the Chapter 7 discharge doesn’t alter any tax lien recorded before the bankruptcy, even if the taxes themselves are discharged.

If the tax liability is discharged, any lien in place will not attach to assets you acquire after your bankruptcy is filed.

More about tax liens after bankruptcy

Chapter 13 does alter tax liens.  (See why I’m a fan of 13?)

Chapter 13 treats as a secured claim only that part of a lien that attaches to real value in the taxpayer’s assets.

Put bluntly, if you don’t have any assets, then the lien is worthless and will be voided at the conclusion of your Chapter 13 plan.

Oh, technically,  the tax lien may attach to your household goods, all right.  But those things have very little market value.

Pay the resale value of your pots and pans through the Chapter 13 plan, and the lien is deemed satisfied.

If you can’t cut a deal with the IRS that eliminates the tax penalties as part of an offer in compromise or payment plan, you have bankruptcy options for tax penalties.

More about Chapter 13

Get rid of credit card balances without paying interest

Why Chapter 13 Plans Fail

How Chapter 13 Works

Images courtesy of Pixabay. 

 

Can I Sell Stuff Before I File Bankruptcy

By

insect-in-amberThinking about filing bankruptcy?  Need cash?

Folk wisdom supplies many “rules” about the period leading up to actually filing bankruptcy:

  • Don’t sell anything
  • Don’t pay anyone
  • Don’t make any money

This kind of thinking will have you frozen in time and space like this insect in amber.

Only, this folk “wisdom” is all wrong.

Here’s how to sell assets before filing and without messing up your right to a bankruptcy discharge.

Sell stuff for what it’s worth

Bankruptcy law objects if you dispose of assets for less than they are worth.  It’s not the sale that might be objectionable, it’s the price.

When you transfer an asset for less than its real value, there is less for your creditors.  And  Anglo Saxon law since the Statute of Elizabeth in 1571 has prohibited gifts, bargain sales, or sham transfers that have the effect of reducing your assets.

Transfers where you dispose of an asset for less than its fair market value are called fraudulent transfers.

The transfer can be actually fraudulent, where you intended to hide an asset from creditors.  Or, constructively fraudulent.  Those transfers  can be innocent or even benevolent, as when you make a donation to charity.

But, if you got less in return than you gave up, it may be a fraud on creditors.

Fraudulent transfers in bankruptcy

Bankruptcy law frowns on fraudulent transfers.

The bankruptcy trustee is empowered to recover the assets or money transferred within 2 years of the filing from the recipient  if the transfer was fraudulent.

That strips the benefit of the transfer from the transferee.

In many cases, even when a transfer is fraudulent, it isn’t worth the expense to the bankruptcy trustee to recover it.  The benefit to creditors as a group is just too small or too tenuous to make it worthwhile.

But for the debtor in bankruptcy, significant transfers of assets with intent to hinder, delay or defraud creditors constitute a ground to deny an individual a discharge in bankruptcy. 11 USC 7272(2).

Sell for today’s value

You are absolutely free to dispose of assets before your bankruptcy is filed if you get “reasonably equivalent value” in return.  That’s legalese for getting what it’s worth.

Remember, it’s only worth what a buyer will give you for this particular asset, on this day, in this market.

The stuff may be worth far less now than it was when you bought it.  It may be that the market is glutted or the thing is obsolete, worn, or out of fashion.

If you get about what the market says it’s worth, you’re OK.

If you are selling on the eve of bankruptcy, just make sure that you expose the asset to the market.  That may be Craig’s List;  e Bay; Auto Trader or like marketplaces.  Even a garage sale will do.

Keep a record of the steps you took in your sales campaign.

Disclose the transfer in the bankruptcy schedules and the Statement of Financial Affairs.

And if it genuinely doesn’t have any market value, you’re free to donate it or junk it.

More

What not to do before bankruptcy

Image licensed by Anders L. Damgaard  under Creative Commons license 3.0.

Your Bankruptcy Discharge Doesn’t End Your Case

By

bankruptcy trustee

Isn’t my case over?

I got my discharge.  Why’s the bankruptcy trustee still  hounding me?, my client asks.

People who’ve filed bankruptcy are focused on the discharge as their goal.

With their discharge in hand, they think it’s all over.

They lose sight of the fact that the administration of a bankruptcy estate by the trustee runs on a parallel track to the one that leads the debtor to a discharge.

Different tracks.  Different timelines.

Trustee’s job

The Chapter 7 trustee’s job doesn’t necessarily end at the 341 meeting where the debtor appears and answers questions.

Most Chapter 7 cases end for the trustee with the first meeting of creditors.  There are no assets for the trustee to administer and no unanswered questions.

But the trustee may have responsibilities that remain after the meeting.

The trustee is charged with investigating the debtor’s right to a discharge and with turning any nonexempt assets of the debtor  into cash for benefit of creditors.

How exemptions work

The trustee may need to know about bank balances on the date of filing or transfers that he may be able to recover.

If he has assets to distribute, he needs to review the claims filed by creditors.  If the bankruptcy estate has income, he may need to file a tax return.

There can be lots of work for the trustee in an asset bankruptcy case.

Road to discharge

For the debtor, the track is usually far shorter.

The Bankruptcy Code was structured to let the debtor know very quickly after the filing of the case whether he will get a discharge.

Or rather, it’s set up to let the debtor know whether there’s a dispute about getting a bankruptcy discharge or about the dischargeability of a particular debt.

The notice that goes out to creditors right after a bankruptcy case is filed sets out the deadline for creditors to challenge the discharge or the dischargeability of a particular debt.  That date is usually 60 days after the date of the first meeting of creditors.

Anyone challenging the discharge must file an adversary proceeding with the bankruptcy court in that time.

Absent the filing of an adversary, the court issues the discharge.  The debtor heaves a sigh of relief and thinks it’s all over.

Trustee work continues

The trustee’s work is not ended just because the debtor got a discharge.

If there are assets, he’s still got work to do.  He may need information or other forms of cooperation from the debtor to do his job as trustee.

The debtor’s failure to provide that cooperation can lead to an action to revoke the discharge.  So the debtor still has some skin in that game.

The administration of some bankruptcy estates goes on for years.  It all depends on the nature of the assets the trustee is administering.

No asset cases

The vast majority of bankruptcy cases are no-asset cases.

That’s a shorthand way to say that there are no assets for the trustee to administer and there will be no distribution to creditors.  Even though  Chapter 7 is termed a liquidation proceeding, there may be nothing of value worth liquidating.

In those cases, the trustee may file his no-asset report and close his file long before the debtor gets the discharge.

So the trustee and the debtor proceed down the tracks of a bankruptcy case, in parallel, but not intersecting.

More

The stuff you keep:  exemptions

Choosing between the bankruptcy chapters

Making the most of your bankruptcy discharge

Image courtesy of Flickr and Anna L. Martin.

 

 

 

 

 

 

 

 

 

 

 

 

What’s Included In Bankruptcy?

By

included in bankruptcy

 

Bankruptcy is a snapshot of your situation on the day the bankruptcy case is filed.

Think of your bankruptcy like the Clampett’s Buick,  arriving in Beverly Hills, crating all their stuff.

For bankruptcy purposes, your case includes your financial “stuff”,  debts and  assets.

  • The debts that are included in the case are those existing on the day you file.
  • The assets that are included are the things you owned when you filed bankruptcy.

The bankruptcy filing draws a line between your pre bankrutpcy life and your life after bankruptcy.

With a couple of exceptions, whatever you earn after the date you file bankruptcy is not included in your bankruptcy.

Likewise, if you cause an accident or incur a debt after your case is begun, those debts will not be discharged in your bankruptcy case.  They weren’t in the snapshot of your situation when you filed your case.

The exceptions

The Bankruptcy Code has three exceptions to the rule that the bankruptcy estate is made up of what you owned when you filed.

They are

  • Assets acquired by inheritance, bequest or devise
  • Life insurance proceeds by reason of someone’s death
  • Assets acquired by a marital property settlement or judgment

If you acquire the right to any of these kinds of assets within 6 months of the commencement of the case, they are treated as if you had them when your case began.  The debtor has an obligation to report such acquisitions to the trustee.

Creditors not debt balances

Bankruptcy acts on the debtor/creditor relationship.  That’s why listing all those who have claims against you is so important in getting your bankruptcy schedules right.

It isn’t generally important to list exactly what you owe a creditor in your schedules.  The bankruptcy discharge will wipe out whatever it is you owe on a dischargeable debt.

Remember, you can list and discharge debts where you dispute your liability, so long as you give the creditor notice of your case.

Chapter  13

If your bankruptcy case is a Chapter 13, the rules are a lot less clear.

One part of the law says the rights of creditors to repayment are determined by the property you have at filing; another part of the bankruptcy code says that your earning during the case are property of the estate.

While lawyers can spend lots of time parsing the law, for the debtor in 13, the rule that is clear is that dramatic changes in your income may trigger a change to your plan payments.

Elusive assets

The biggest trouble debtors have in listing their assets in the bankruptcy schedules involves intangible assets, like the right to sue for an accident that has already happened, or a claim in a class action.

Tragic consequences of filing bankruptcy without listing her mother’s house

Even though it’s not known at filing whether you will win such a claim, and if you win, how much you will get, the claim is still an asset you own.  It has to be listed or you may lose it because you didn’t disclose it.

New day

So your fresh start really begins on the day you file your bankruptcy, not when you get the discharge.  Every dollar you now earn is yours.

Image courtesy of prewarbuick.com.

 

How Chapter 13 Cuts Car Loan Down To Size

By

car in bankruptcy

Car lenders who make new car loans with an underwater trade-in will face the music in Chapter 13.

The Supreme Court declined to review a 9th Circuit decision that stripped car loans of their protected specially protected status in bankruptcy; as a result, Californians will continue to benefit from the debtor-friendly decision in Penrod, rising out of a San Francisco bankruptcy case.

The question in Penrod

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value. That left-over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle.

And BAPCPA, the bankruptcy “reform” act of 2005 prohibited reducing a secured claim on a vehicle purchased within 910 days of the bankruptcy.  But did it similarly protect that part of the loan that wasn’t really related to the cost of the vehicle purchased?

Penrod facts

In Penrod, the Redwood City resident had traded in a car worth $6,000 on which she owed $13,000.  The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan.

The 9th Circuit held the negative equity was not purchase money as to the current car.  The appeals court remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

More

How Chapter 13 thwarts repossession

Keeping your car after Chapter 7

10 ways bankruptcy makes you better off

Image  Snackariah under a Creative Commons license

Debts To The Government: Can They Be Wiped Out

By

Uncle Sam public domainIt’s easy to assume that debts owed to the federal government can’t be discharged in bankruptcy.

Easy, but wrong.

Just because the creditor is Uncle Sam doesn’t mean the debt can’t be wiped out in bankruptcy.

In fact, debts to the government range from freely dischargeable to not-in-this-lifetime nondischargeable.

Honesty required for discharge

All of the discussion that follows assumes that your debt to the government is honestly incurred, and is unsecured.

Secured debts, those for which there is a lien, generally survive a bankruptcy discharge.

So tax liens and SBA liens live beyond a Chapter 7 discharge.  More on limits on tax liens after bankruptcy.

Debts dischargeable in bankruptcy

Income taxes for years more than three years before the bankruptcy filing are dischargeable.  You count the three years from the due date of the return.  If there is a tax lien, the lien survives on existing assets, but doesn’t attach to new property.  More on taxes in bankruptcy

Social Security overpayments  can be wiped out in bankruptcy.  After a bankruptcy filing, your current benefits are not subject to reduction on account of a prior overpayment.  More from SSA.

SBA loans are just loans, subject to discharge in bankruptcy.  The complication with SBA loans is that they are often secured.  It’s important to determine what assets, if any, are pledged to support the loan.  A bankruptcy discharge will prevent the SBA from suing you to collect its loan from your wages, savings or other assets;  the collateral you gave the lender when the loan was negotiated survives.

Student loans may be dischargeable

Government guaranteed student loans occupy the middle ground in our range of possibilities.  A student loan guaranteed by a governmental entity can be discharged if the borrower can show a bankruptcy judge that repayment would create an “undue hardship” on the debtor or the debtor’s dependents.  The standard is pretty tough.

Some bankruptcy courts will discharge part of a student loan.  Those courts find that repayment in full is a hardship, but partial repayment is possible without undue hardship.  The 9th circuit which includes California, is one of those circuits allowing partial discharge of student loans.

Government debts that survive bankruptcy

Fines and penalties owed to a government that are imposed to punish, rather than compensate, can’t be discharged in Chapter 7.  There is an exception for tax penalties:  if the tax is dischargeable or the event that triggered the penalty occurred more than three years ago, the penalty can be wiped out.  11 USC 523(a)(7).  In Chapter 13, fines and penalties are dischargeable.

Trust fund payroll taxes are never dischargeable in bankruptcy.  The trust fund portion of payroll taxes is the taxes withheld from the employee’s paycheck for payment to the government.  Officers of corporations who short the government for trust fund taxes can be personally liable for shortfall.

Military scholarships and incentive pay remain collectible despite bankruptcy.  Most of these exceptions make the debt non dischargeable for a period of years, shorter than the usual statute of limitations.  Here’s a more extensive list of governmental exceptions to bankruptcy discharge.

Non dischargeable debts in bankruptcy

Even if a debt is non dischargeable at the end of a bankruptcy case, some of the bankruptcy rules still apply.

Collection of non dischargeable debts is still stayed by the automatic stay.  The stay remains in place til the debtor is otherwise discharged, or until a bankruptcy judge lifts the stay as to that debt.

The statute of limitations still  controls how long a debt is legally enforceable.  The running of time on statute of limitation is suspended while the stay is in place, and sometimes for a specified additional period.  But just because a debt is not dischargeable in bankruptcy, applicable law may still allow it to die of old age.

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

Categories