Debt has become part of our current economic and financial system; it is perfectly normal for individuals to have manageable amounts of debt that are used to build credit while being paid off incrementally. However, what happens when that doubt becomes too great to manage? Your entire life can become overwhelmed and it gets progressively more difficult to pay off the debts in question if your income is not great enough. At some point in time, the interest becomes so high that you are unable to even make a dent in any of the premiums that you are facing. If you are a debtor in San Diego who owes too much to creditors and is considering filing for bankruptcy, it is in your best interest to hire a law firm like San Diego Bankruptcy Attorney to help stabilize your life and finances.
The Benefits of Declaring Bankruptcy
Title 11 of the United States Code codifies bankruptcy in this country. This federal statute, also known as the Bankruptcy Code, has been on the books since 1787 and any resident of the United States, including those who live in San Diego, are subject to its governance. The Bankruptcy Code is a means by which individuals and/or companies who are beleaguered by towering debt can attain some measure of relief and get a fresh start.
Declaring bankruptcy results in a thorough analysis of your income and expenses, as well as a comprehensive inventory of your assets, to determine when and how you can repay your creditors. It is a formal legal agreement with the bankruptcy court and individuals most commonly declare either Chapter 7 or Chapter 13 Bankruptcy. It is necessary to seek out professional legal help to help you determine which type of bankruptcy you are eligible for as each has its relative advantages and disadvantages.
The overall benefits to declaring bankruptcy are various. For one, doing so automatically triggers what is known as an automatic stay. This compels creditors to immediately cease any and all actions to recover the debt that you owe them, including suing you, contacting you, and/or repossessing your possessions that were used as collateral for certain types of loans. Collateral is something of objective value that is used as a security to guarantee the repayment of a loan (most frequently real estate and/or cars). This automatic stay gives stressed debtors some time to collect themselves and begin rebuilding their finances.
Because collateral is used in certain types of loans, if you default on those types of payments than your property can be seized and sold in order to pay off your debts. Certain bankruptcy exemptions for certain kinds of debt discharge you of any obligation to pay off said debts. Some debts, however, cannot be discharged, no matter how the bankruptcy proceedings go.
Not losing your property means that once you get out of the financial chaos, you will have some assets with which to rebuild your life. A bankruptcy filing will remain on your record for seven (7) to ten (10) years, however. For many people, this is an acceptable trade-off to help them ease their financial obligations. Furthermore, depending on the type of debt and the circumstances of the loan, you may either be allowed to fully discharge the debt or make payments on it over an extended period of time without crippling interest rates.
Pre-Filing Debts versus Post-Filing Debts
There are various timing requirements to discharge certain debts. This means that it is legally relevant when the debt was incurred. A pre-filing debt is a financial obligation that was incurred before the day that you, the debtor, filed for bankruptcy. Its existence predates any and all bankruptcy proceedings. Depending on the type of bankruptcy filing (usually Chapter 7), the bankruptcy court may release you from having to pay pre-filing debts that are eligible for discharge.
On the other hand, a post-filing debt is a financial obligation that was incurred following the bankruptcy filing. This is generally meant to be avoided, however, because during a bankruptcy filing the debtor should not have access to lines of credit with which they may incur substantial debt. Furthermore, all post-filing debt remains the responsibility of the debtor, regardless of the outcome of the bankruptcy case and the specifics of the bankruptcy agreement.
In other words, there are certain types of debt that can be discharged. Amongst these forms of debt, any that are incurred before the bankruptcy filing may be wiped away (depending on your particular situation) while any that are incurred after the bankruptcy filing will remain your responsibility, independent of any outcome from your bankruptcy filing.
Priority Debts versus Non-Priority Debts
The types of debts that cannot be discharged are known as priority debts. The process of discharging is legally defined as the release of the debtor from personal liability and the prevention of the creditor from continuing to try and gather payment on said debts. The various types of priority debt include:
- Debts that are backed by collateral (secured debts) such as car loans, mortgages, and/or personal loans.
- Any fees, fines, and/or penalties owed to a government body and/or agency such as speeding tickets, tax penalties, and/or Department of Motor Vehicles (DMV) registration fees.
- Any overpayment of benefits such as unemployment benefits, Social Security, and/or disability.
- Any loans secured from a 401k plan and/or any tax-advantaged retirement plan. These are essentially debts that you owe to yourself and will not be discharged.
- Student loans. Although these loans are not secured debts (there is no collateral needed for a student loan because students do not yet have the income to possess collateral), they function more like government-sponsored loans and as such fall under the same category as fees owed to the state.
- Any fines and/or damages owed for a lawsuit or court proceeding due to “willful and malicious injuries to person or property”. If you are responsible for injuring or even killing another person, especially in wrongful death cases and/or driving under the influence, any debts that you incurred due to damages that you must pay will not be discharged.
- Any taxes to local, state, and/or federal agencies. These include taxes for Los Angeles County, the State of California (The Franchise Tax Board – FTB), and/or the federal government (Internal Revenue Service – IRS). This includes tax liability, payroll taxes, and any penalties you may owe.
In these scenarios, the debts incurred must eventually be paid off. The only question is how and when depending on whether you file for Chapter 7 or Chapter 13 bankruptcy. A bankruptcy attorney will be able to provide you with guidance and insight, as well as analyze your finances, to best advise you on how to proceed.
Chapter 7 and Chapter 13 bankruptcies result in substantially different outcomes when it comes to how priority debts are paid off. Chapter 7 bankruptcy is essentially a process of liquidation, meaning that various assets that you own are liquidated, or turned in to cash (in other words, they are sold and/or auctioned off), and then used by the courts to pay your priority debts. For some debtors who wish to retain pieces of property or assets, such as a mortgage and/or car title, will not benefit from a Chapter 7 filing.
Debtors with higher incomes, and therefore a greater ability to pay off their debts, will generally have to file a Chapter 13. This process will result in a repayment plan that is focused on paying priority debt first and foremost. Chapter 13 is most accurately described as a restructuring of your debt to allow for it to be paid incrementally over time without the tremendous burden of ever-increasing penalties and/or late fees. Most other types of debt, including non-priority debts, may be paid in part, although the court will likely absolve you of most of these obligations.
Non-priority debts are the kinds of debt that can be discharged. They include credit card bills, personal loans that are unsecured, any bills in the possession of collection agencies, business debts, medical insurance bills, and/or utility bills. This is where the debtor will get the greatest level of relief during their bankruptcy proceedings. Studies show that approximately 60% of Americans are in danger of bankruptcy due to medical bills alone.
Under Chapter 7 bankruptcy, non-priority debts are generally discharged from top to bottom. This can give you a clean slate and a chance to rebuild your finances and rehabilitate your credit score. However, Chapter 7 may result in some amount of liquidation of your assets. If you wish to keep your mortgage or car title, for example, you may be better off filing Chapter 13. Under this plan, a portion of your non-priority debts gets paid under a repayment plan that is structured to fit your particular needs and income.
Unsecured Debt versus Secured Debt
All non-priority debts are, by their very definition, unsecured debts. This is when a debt is incurred without having to offer some form of collateral as a pledge to pay off the debt in the future. It is important to note that the collateral in question must be objectively valuable. This means that it has to have some measure of widely-recognized cash value on an open marketplace. Possessions that you consider priceless, like a piece of art that is not from a famous artist, do not have any objective value and therefore cannot be put up as collateral.
A secured debt is a loan that is given on a contingent piece of collateral. In other words, you offer up some objectively valuable asset as collateral and are extended a line of credit in return. Most individuals who have average incomes will have only one (1) or two (2) pieces of collateral that fit these criteria: a house and, at most, two (2) cars.
If someone is wealthier, they may own additional real estate, including commercial spaces or vacation homes, as well as investment portfolios that can be used to get secured loans. Examples of secured debt using these pieces of collateral include mortgages, car loans, home equity loans, tax liens on properties, and/or liens on judgments in civil lawsuits.
Furthermore, one of the telltale signs that a person is nearing financial ruin (and eventual bankruptcy) is that they will become so desperate that they use a home equity loan (a secured debt) to pay off the credit card or medical bills (unsecured debt). They are jeopardizing their most valuable asset to pay off a debt that can be better managed, or even discharged, in a proper bankruptcy hearing.
What is an Upside Down Loan?
In some cases, due to fluctuations in the market and the objective values of assets, a person may owe more on their loan than what the asset is worth. This frequently happens as a result of a real estate crash. Consider that you secure a mortgage for a home worth, say, $250,000 but the crash has reduced its objective value to $150,000. If you owe more than that lower value, for example, $200,000, then you have what is called an upside down loan.
This is a very specific kind of debt that is both frustrating and potentially crippling to a person’s finances. Paying this loan is basically like throwing your money away as you are not paying for what the objective value of the asset is.
However, if you file for Chapter 13 bankruptcy, then you may qualify for a cram-down modification. Remember that Chapter 13 bankruptcy allows for you to keep assets and is a form of bankruptcy that largely restructures debt. In a cram-down modification, the loan is reduced to match the objective value of the asset. This modification can only be used on a car loan that was purchased no more than thirty (30) months and a personal property loan purchased no more than twelve (12) months before the day of your bankruptcy petition.
Can You Discharge Any Tax Debt?
Tax debts are very serious, and the IRS can go to great lengths to get what you owe them. They can impose wage garnishments, meaning that they take money directly from your paycheck. They can also place a lien on your property. A lien is a legally-recognized right to take and/or keep possession of someone’s property as a means of ensuring that said person pays them some amount of debt that is owed.
It is also possible to have certain kinds of tax debt discharged if the following conditions are met:
- It can be a debt from income taxes only and not any fees, penalties, payroll tax, and/or sales tax.
- You are not guilty of the charge of tax evasion fraud, meaning that you did not file a fraudulent return or do anything illegal to avoid paying your taxes. Conviction of tax evasion fraud may result in a 20-year prison sentence, a $250,000, or both.
- The income tax debt must be at least three (3) years old. If the income tax debt is more recent than three (3) years old, the IRS will usually allow you to develop a payment plan or some financial compromise that is independent of your bankruptcy filing.
- You cannot file multiple years at once when declaring bankruptcy as a way to avoid having to pay a large tax bill. In other words, the tax return that resulted in the income tax bill was filed on time and at least two (2) years before the bankruptcy filing.
- These income taxes were owed for at least two hundred-forty (240) days before you filed your bankruptcy filing.
If the preceding conditions are met, then you can file for Chapter 7 bankruptcy to have all these income tax debts absolved in as little as three (3) months. If you are a resident of San Diego and owe any taxes to the county and/or state, then those debts are considered the priority and cannot be discharged.
If you make too much money to qualify for Chapter 7 and have to file via Chapter 13, then you will be able to restructure your income tax debts under a repayment plan that will be signed off on by the bankruptcy court judge. Chapter 13 repayment plans mean that you are still responsible for all priority debts, including secured and tax debts, but can do so at a rate that is within your income range. Chapter 13 bankruptcies require a high degree of collaboration with the bankruptcy court judge in order to properly assess what and when you can pay.
Furthermore, any tax debts owed under a Chapter 13 plan will be at the same percentage points as your other priority debts. A 5% payment plan for credit debt means that you will have a 5% payment plan for tax debt.
There are various challenges and opportunities that are part of the bankruptcy process. As such, it is absolutely vital that you retain experienced legal representation to help you decide what kind of bankruptcy you wish to file for and which non-priority debts you can have discharged. Residents of San Diego, call 619-488-6168 to get a free consultation at San Diego Bankruptcy Attorney.