Filing a Chapter 7 bankruptcy case can be a great benefit for someone that is in the midst of unmanageable burdensome debt. However, it will also influence your financial and individual life for several years after filing. That’s why it is essential to understand what Chapter 7 bankruptcy can and cannot accomplish for you. A Chapter 7 bankruptcy case will generally discharge most or all of the debts that most people filing a case need to get rid of. This includes unsecured debts, secured debts, law suit judgments, lease obligations, and other varieties of debts that are causing them stress, grief and other problems. Below is a discussion of the kinds of debts that are generally discharged in a Chapter 7 bankruptcy case. See 11 U.S. Code § 727 – Discharge.
Most Unsecured Debts
Most unsecured debts, such as balances due on a credit cards, personal loans, personal guarantees for business loans, bills for services, back rent, certain tax debts, and medical bills and are subject to being discharged under Chapter 7. Also obligations under leases and contracts can usually be discharged. While there is exception to the discharge of debts where the service, money, or property, was fraudulent incurred, this is rare occurrence in the vast majority of Chapter 7 bankruptcy case. One example is where false information must have been presented in writing to a lender to get a loan approved, and the deception must have been material, showing that the lender would not have approved the loan had they known the truth. For example, if a borrower significantly exaggerated their income on a credit application, the exaggeration could be material if it was a requirement to obtain the credit. However, for a debt to be ruled as “non-dischargeable” the creditor has a limited amount of time to bring what is known as an adversary proceeding in the bankruptcy case, and the creditors still has to prove the alleged fraud to the court. As mentioned earlier, this is not a common occurrence the vast majority of Chapter 7 bankruptcy cases.
Secured Debts in the Event that you Simply Surrender the Property
Any secured debt is also discharged you return anything securing the duty to the finance company / lender / bank. In the event that you do not want to keep and continue making payments the secured property, it will usually be to your benefit to let the creditor take it back. To do this, state on the Statement of Intentions form (which is a part of the bankruptcy petition) that you wish to surrender the property and make it available for the creditor to pickup. You do not have to deliver the property to the creditor. However, you should cooperate with the lender and make it easy for them to repossess the property. Sometimes a bank will not attempt to repossess secured property if it is not worth very much. This would usually be furniture and appliances.
Secured Debts if the Collector Did Not Properly Take a Stake in the Property
In rare instances, you may have the opportunity to keep property secured by a debt if the leaser neglected to properly record a a security interest in the property. For example, say a car dealership forgot to properly record a lien on your vehicle and the vehicle’s value is in the limits of exemptions for motorized vehicles, you might be able to keep the car with no payments being required.
Certain Tax Debts
Taxes (state and federal) on income are generally eligible to be discharged if:
- The the tax return(s) was filed more than 2 years before the bankruptcy case was filed.
- No form of tax evasion or fraud has been committed.
- Tax liability was determined more than 240 days before the case was filed;
- The taxes were first due at minimum of 3 years before the request for bankruptcy was filed; and
- The debtor actually filed the tax return and it was not a substitute tax return filed by the IRS
However, because the rules for discharging income tax debts are quite complicated, it is best to discuss tax return debts with your bankruptcy attorney in conjunction with an experienced Certified Public Accountant (CPA). Many people do not truly understand all the details of the taxes they owe that are necessary to make a determination of their dischargability in a Chapter 7 (or Chapter 13) bankruptcy case. In addition, the rules for discharging tax debts differ slightly between a Chapter 7 and a Chapter 13 bankruptcy case. So if income taxes are a significant part of your case, you will need to make sure they are analyzed separately and in conjunction with your overall bankruptcy case.
Monetary judgments are very often dischargeable, with one or two of exceptions: Fraud Claims and Judgments in wrongful death or personal injury lawsuits resulting from motor vehicle, vessel or aircraft accidents while you were intoxicated.
However, Be Careful with Debts Incurred Near to the Time Before Your Bankruptcy Filing
Sometimes, a debt that would normally be discharged in a Chapter 7 bankruptcy case will not be if it was incurred very close prior to the date of the bankruptcy filing. The general rule is that debts incurred within ninety (90) days preceding the filing of a bankruptcy case that were for the purchase of extravagance merchandise or administrations owed to a single creditor in overabundance of $650 are considered to be non-dischargeable. This is also true for cash loans that are greater than or equal to $925 if created within seventy (70) days of your bankruptcy request. See 11 U.S. Code § 523 – Exceptions to discharge.
Here the obligations are believed to have been made with the intent to file bankruptcy soon after and that you had no intent to reimburse the borrowed credit. It is possible to try to show that that was not the case by filing a motion with court. Obviously, creating the movement and going to a hearing is costly and time consuming. If planning on borrowing credit it is recommend waiting on documenting your insolvency appeal until any such buys or loans are outside the 70 or 90 day time frame. A debt collector / creditor might be inclined to claim that those recently incurred debt are not subject to allotted time frame. Should they decide to try and have the debt ruled as non-dischargeable, the creditor will have to file an adversarry proceeding with the court and show that due to your excessive borrowing and spending, and you had no intention of repaying the debt. Fortunately for honest debtors seeking relief from debts, this is not a common occurrence the vast majority of Chapter 7 bankruptcy cases.
Fortunately for most people filing a Chapter 7 bankruptcy case, these objections to the bankruptcy discharge are not usually filed unless the debts incurred are very significant. However, it is best to disclose all recent credit usage with your bankruptcy attorney so he or she can best advise you whether you should wait to file a case or not.
Obtaining Assistance with Your Bankruptcy Case
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