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Recent Blog Posts
Bankruptcy Can Write Off a Student Loan, IF it Causes Undue Hardship
Writing off student loans is not easy. You must convincingly show that paying the loan causes you undue hardship, a tough condition to prove.
Criminal fines and restitution and child and spousal support are types of debts that bankruptcy essentially never discharges. Income taxes can be discharged but only after meeting certain conditions. We’ve covered these in our last few blog posts. Today we cover student loans.
Student loans are more like income taxes than criminal or support debts in that they CAN get discharged in bankruptcy. Like an income tax, a student loan just needs to meet certain conditions.
But unlike an income tax debt, the conditions for discharge of a student loan are much vaguer. Most of the income tax conditions are clear. These conditions require a precise understanding of the law and a thorough knowledge of the facts of your case. But if you and your bankruptcy lawyer are careful, you should know before you file your bankruptcy whether you can discharge a tax debt.
Exploring Federal and Texas Bankruptcy Exemptions
For some people, filing for bankruptcy can be a scary thing. In the beginning, you may not know what the future has in store for you and you may wonder which of your possessions you are allowed to keep and which possessions you must give up. Exemptions are an important part of the bankruptcy process. In a bankruptcy case, exemptions are the possessions that you get to keep after you have liquidated your luxury assets to help pay back a portion of your debts. Each state has its own guidelines for what property is exempt during a bankruptcy. In 17 states, including the state of Texas, you are able to choose between state exemption guidelines or federal guidelines, but you must choose one or the other. It is important to understand bankruptcy exemptions because they do differ.
Federal Exemptions
The exemptions that are listed here are the exemption amounts for each individual bankruptcy filer. That means if both you and your spouse are filing for bankruptcy, you can double the amounts. Here is a list of the current federal exemption amounts for each individual filer:
Bankruptcy Does Not Write Off Child or Spousal Support Debts
Child support and spousal support debts cannot get written off in bankruptcy. But is your specific divorce debt legally considered support?
We’re in a series of blog posts about special kinds of debt which bankruptcy may not discharge—write off. So far we’ve covered criminal fines and restitution, and income taxes.
Child and spousal support are more like criminal debts than like income taxes. Bankruptcy simply does not discharge a criminal debt, as long as it really is a criminal, not civil, obligation. Bankruptcy does discharge income tax debts that meet certain conditions. Bankruptcy simply does not discharge child and spousal support, IF it fits bankruptcy’s definition of support.
No Discharge of Support
Bankruptcy law is clear that neither Chapter 7 "straight bankruptcy" nor Chapter 13 "adjustment of debts" discharges support debts.
Bankruptcy Writes Off (Some) Income Taxes
Bankruptcy permanently writes off income taxes, as long as the tax meets certain conditions. For some taxes the conditions are easy to meet.
Bankruptcy DOES Write Off Income Taxes
There are certain very special debts that bankruptcy never writes off. Child and spousal support is a good example. See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code.
Income taxes are different. Income taxes CAN be written off, as long as you meet a few conditions. These conditions mostly tie in to timing—when the tax was due and when (and whether) you filed its tax return.
The Two Timing Conditions
In most people meeting these conditions is straightforward. You essentially have to file your tax returns and wait long enough to comply with for the following two conditions:
Criminal Fines and Restitution Not Written Off in Bankruptcy
Bankruptcy does not write off criminal fines or restitution. But it can help by writing off other debts so you can pay crucial expenses.
If you owe criminal fines, penalties, forfeiture, or restitution, bankruptcy does not help you directly with those debts. But bankruptcy can still provide you essential help in paying for essential expenses, including criminal related ones.
The Criminal Fines and Restitution Exception
Neither Chapter 7 "straight bankruptcy" nor Chapter 13 "adjustment of debts" writes off criminal fines, penalties, forfeiture, or restitution.
Under Chapter 7 any "fine, penalty, or forfeiture" owed to "a governmental unit" is excluded from discharge (bankruptcy write-off). Section 523(a)(7) of the U.S. Bankruptcy Code.
(The only exceptions are if the debt is "compensation for actual pecuniary loss" or certain tax penalties. These are narrow exceptions that are beyond what this blog post covers.)
How Will a Bankruptcy Affect My Credit Score?
One of the biggest worries people have when they go to file for bankruptcy is what that will mean for their credit score. There is a lot of confusion surrounding bankruptcies and how they affect your credit. While it is true that they do negatively impact your credit score, it is not nearly as bad as some have let people believe. There is no one answer to how your bankruptcy will affect your credit score. It is a combination of what your credit score was before your bankruptcy and what appears on your credit report. Each situation is different and it is nearly impossible to say how a bankruptcy will affect your credit score.
Effects on Your Credit Score
While there is no simple way to tell how a bankruptcy will affect your credit score, FICO, one of the nation’s leading credit reporting bureaus, has released information on how bankruptcy and other credit mistakes could affect your score. According to FICO, those with higher credit scores before bankruptcy typically lose more points after a bankruptcy, while those with lower credit scores lose fewer points. Despite the difference in the number of points that the score drops, both people with high and low credit scores will have credit scores that end up in the same vicinity.
Scenario: Filing Chapter 13 Now Shortens a Case by Two Years
Here’s a scenario showing how the timing of your Chapter 13 filing can shorten your payment plan from 5 years to only 3.
In our last blog post we explained how your last 6 calendar months of income can determine whether your Chapter 13 payment plan lasts 3 years or instead 5 years. We showed how even relatively small shifts in the money you receive can cause this huge difference.
How this can happen will make more sense after reading through the following scenario.
Our Facts about "Income"
Remember from last time that your "income" includes money from just about all sources, except Social Security. Also, the only money that counts is that which you received during the 6 FULL CALENDAR months before filing. This means that money received DURING the calendar month of filing DOESN’T count. For example, if you file your Chapter 13 case on January 31 you count the income from the previous July 1 through December 31. You don’t count any income received in January.
The Surprising Benefits: Keeping Your Vehicle Lease Under Chapter 7
When financial hardship strikes and bankruptcy becomes necessary, many people assume they will lose everything they currently have, including their leased vehicle. However, Chapter 7 bankruptcy law contains provisions that might surprise you. Assuming you successfully finish the bankruptcy case, you will forever discharge (legally write off) any unsecured debt you would otherwise owe.
In many cases, you can also keep your vehicle lease and continue driving the same car you had before filing. Depending on your circumstances, you can do this by "assuming" the lease in a Chapter 7 case. Understanding these options can make a significant difference in maintaining stability during an already challenging time. An experienced New Braunfels, TX Chapter 7 bankruptcy attorney can help you keep your car lease in Chapter 7.
How Does Chapter 7 Bankruptcy Treat Vehicle Leases?
Chapter 7 bankruptcy, often called liquidation bankruptcy, eliminates most unsecured debts like credit cards and medical bills. When it comes to secured debts and contracts like vehicle leases, the situation becomes more complex. A vehicle lease is essentially a contract whereby you pay monthly payments to use a car for a specified period. Unlike ownership, you do not build equity in the vehicle, but you also have different options when facing bankruptcy.
The Surprising Benefits: Rejecting Your Vehicle Lease under Chapter 7
Getting out of a vehicle lease in a Chapter 7 case requires simply that you formally state that you “reject” it. Then you owe nothing more.
Last week we showed how a vehicle lease can be unexpectedly expensive, and that you can escape through Chapter 7. Today we show you how.
The Option of “Rejecting” the Lease
When you file bankruptcy you get to choose whether or not to keep your leased vehicle. Specifically you choose to either “assume” or “reject” the lease. Assuming the lease means keeping the vehicle and continuing to be legally bound by all the terms of the lease. Rejecting the lease means letting the vehicle go. This allows you to “discharge”—forever write off—all of your financial obligations on the lease. (See Section 365 of the Bankruptcy Code generally about the assumption and rejection of unexpired leases. Warning: it’s very complicated and confusing!)
Which Bankruptcy Option Eliminates All Debt?
One enticing benefit to filing for bankruptcy is the ability to discharge debts, enabling a fresh financial start. The United States bankruptcy code was created to allow honest debtors to free themselves from insurmountable debt; however there are various limitations. Unfortunately, these limitations restrict which debts become eliminated, reduced, or remain the same. Therefore, regardless of whether you file for Chapter 7 or Chapter 13 bankruptcy, some outstanding debts are untouchable.
Which Debts Are Eliminated?
Which debts discharge relies heavily on the type of bankruptcy filed by the consumer. Chapter 13 bankruptcy does not eliminate any debt initially, yet restructures the current sums into an affordable repayment plan. This repayment plan typically lasts three to five years, at the end of which any eligible debts are discharged. When you file for Chapter 7 bankruptcy, any unsecured loans become eliminated immediately. In some instances, unsecured debts make up all of the financial burdens. These debts include:
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