When you’re overwhelmed by bills you can’t pay, bankruptcy can give you a fresh start by eliminating most debt (Chapter 7) or condensing it into an affordable repayment plan (Chapter 13). Once you receive your discharge, you’re free to start over.
Before you file, it is important to examine what types of debt you owe, as some obligations are not dischargeable in a Chapter 7 bankruptcy. Others could theoretically be discharged, but only if exceptional circumstances apply. Similarly, some collection actions may be allowed to continue after the automatic stay lifts. To provide you with realistic expectations of what bankruptcy can do for you, below is an overview of five outcomes that bankruptcy cannot achieve.
1. Prevent Lenders from Seizing Collateral for Secured Debt
Secured debt is secured or backed by collateral, such as a mortgage or auto loan. If you default, the lender can seize the asset, sell it, and use the proceeds to cover the debt. If you file for Chapter 7, you are protected from your obligation to pay a secured debt, but the lender can still seize the asset unless you reaffirm the debt with them.
2. Eliminate Child and Spousal Support Arrears
Under U.S. Bankruptcy Code, domestic obligations like child and spousal support are nondischargeable. If you’re in arrears, you can include them in a Chapter 13 repayment plan, allowing you to catch up while you continue to make regular payments. If you file for Chapter 7, eliminating dischargeable debt can leave you with the extra income needed to become current with your court-ordered obligations.
3. Discharge Debt Incurred Through Fraud
Debts incurred and accumulated through fraud will not be discharged when you file for bankruptcy. For example, if you maxed out your credit cards on nonessential items prior to filing, your creditors can object to your discharge by filing an adversary proceeding.
4. Eliminate Student Loans (In Most Cases)
Federal and private student loans can only be discharged in a Chapter 7 filing in exceptional circumstances. You have to be able to demonstrate that paying them would cause you undue hardship, which is not an easy standard to meet. In Oklahoma, the principal test for hardship is the Brunner Test, which uses three factors to determine whether you should be allowed to discharge some or all of your loan balance.
- Taking your current income and expenses into account, you would not be able to repay your loans AND maintain a minimal standard of living for yourself and your family.
- Your financial circumstances are unlikely to improve for most of the repayment period.
- You did your best to repay the loans.
5. Eliminate Most Tax Debt
Tax debt is similar to student loans in that it isn’t easy to discharge, but not impossible either. Only income tax debt that is at least three years old may be discharged. Additionally:
- You must not have committed fraud or tried to evade paying taxes.
- You must have filed a return for the tax debt at least two years before the date of your bankruptcy petition. If your return was late, the tax you owe cannot generally be discharged.
- You must have passed the 240-day rule, meaning that the debt was assessed by the IRS at least 240 days before you filed your petition (or has yet to be assessed).
Contact an Oklahoma Bankruptcy Attorney
If the bulk of your debt falls into one or more of the categories above, you might be better off addressing them in a Chapter 13 repayment plan. Consulting with a bankruptcy attorney will help you make the right decision for your individual debt scenario.
At the Law Offices of B. David Sisson, we will help you eliminate or restructure your debt so that you can put your current financial turmoil behind you and get a fresh start. If some of your debts present special challenges, Attorney Sisson will advise you on the best way to address them, so that they don’t remain a cloud over your financial future. To schedule a consultation today, please contact us.