Sunday, November 30, 2008

Bad Boy and Other Unavoidable Debts

There are certain debts and obligations that can not be discharged in a Chapter 7 bankruptcy:

Criminal fines and debts -- All court fees and court-ordered judgments related to any criminal activity cannot be discharged. Traffic fines and parking tickets too.

Judgments or debts incurred as a result of personal injury or death to others caused by intentional conduct (e.g., fraud, criminal activity) or reckless conduct (drunk driving).

Student Loans. Although there is a general policy not to discharge student loan debt; in some very rare circumstances, older student loans (seven years of repayments) can be discharged, but only if a severe hardship condition exists.

Taxes -- Federal, state and municipal taxes that became due within the last three years;

Fraudulent debts -- Any debt that the court finds was obtained fraudulently or illegally will not be discharged. For example, if you ran up debt on a credit card shortly before filing bankruptcy (within 60 to 90 days of filing), the court will refuse to discharge that debt. In addition, if you lied on a loan application to obtain funds -- that related debt will not be forgiven in bankruptcy;

Dischargeable debt you incurred to pay off non-dischargeable debt -- For example, you cannot take a cash advance on a credit card to pay off last year's taxes, just so you can write it off in bankruptcy;

Alimony and child support payments (court-ordered) are not dischargeable; divorce and property settlements are not dischargeable unless the other party agrees to it.

The Chapter 13 Alternative for Non Dischargeable Debts

If Chapter 7 bankruptcy doesn't work for you for any of the reasons listed above, or if you fail to qualify for Chapter 7, you might get help in a Chapter 13 bankruptcy. To qualify for Chapter 13 bankruptcy, you must have regular or reasonably predictable income that allows you to catch up on your accrued debts over a 3-5 year period while making your regular monthly payments. However your current debts cannot exceed limits set forth in the Bankruptcy Code ($336,900 unsecured debt, $1,010,650 secured).

Priority debt -- you have a significant amount of priority debt (taxes, wages owed to employees and any social security benefits, pensions, etc.) that would not be dischargeable under a Chapter 7 bankruptcy. Spousal and child support are also priority debts. Marital property settlement("equalization") is not. Priority debts are amortized and repaid under Chapter 13, without accruing interest. If the payments that are required under a Chapter 13 plan are insufficient to fully repay priority debts over the plan period, the balance is not discharged and remains owing thereafter.

Valuable property -- you don't want to turn certain property over to the bankruptcy trustee for auction. For example, a diamond ring that is a family heirloom and which exceeds the value of your allowable exemption.

Secured debt -- you are behind on your mortgage or car payment, but would like to keep these assets. Chapter 13 bankruptcy allows you to keep this property and catch up on arrearages.

Dishonest activity -- you might avoid paying a significant portion of debt incurred from fraud or malicious and criminal activity in a Chapter 13 bankruptcy.

Although Chapter 13 requires debtors to pay back their creditors over a 3-5 year plan, in reality, unsecured creditors are not paid back in full. This is due to the fact that a Chapter 13 debtor is given a budget to live on (see the Means Test)and the rest of his or her earnings is "disposable income" that funds the Chapter 13 plan, with priority claims and secured claims paid first and the balance, or what is left, if any, going to the unsecured creditors. A discharge of unpaid balances does not occur unless and until the Chapter 13 plan is fully performed (paid in full).

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