Who Qualifies For Bankruptcy?

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One of the more common questions we get when people starting to look in to bankruptcy is who qualifies for it, who can do it, who can’t, and if you can what do you get to keep.

When we start off consultations, essentially that’s the same thing we’re asking of you, is what we need to know to figure those same inquiries out. Pretty good frontline approach is to start analyzing the income. Since the bankruptcy law change back in 2005 that’s become our cornerstone issue is does the household’s income allowed for a bankruptcy to be filed or not. The very short answer is that, it does. You can always file a bankruptcy. It just depends on what chapter you elect to pursue. For most normal Americans that’s gonna be either chapter 7 or chapter 13.

Chapter 7’s are the more common type of bankruptcy. It’s the one you’re gonna hear more about being filed more often. I think in Colorado right now it might even make up about 80% of the bankruptcies being filed. And chapter 7’s are the liquidation type and all that really means is that you don’t restructure debts necessarily over the life of a chapter 7. Rather you are looking to just eliminate or discharge the types of debts that are capable of being discharge. And it is a lot easier to define what isn’t dischargeable than it is to define what’s dischargeable. As a general rule most unsecured debts are dischargeable things like medical debt, credit card debts, lines of credit, the dreaded payday loans that in the last couple of years have begun to dominate the creditor’s schedule on bankruptcy petitions.

Types of debts that you might not be able to get rid of on the chapter 7 might include certain years of tax debt. There’s sort of a popular misconception out there that you can’t get rid of any tax debt in the bankruptcy but that’s just not true we find that’s often the case of sort in the common logic people walk in with initially when they are doing a bankruptcy inquiry. Usually the things you hear around the water cooler related to bankruptcy aren’t necessarily the right things. With taxes usually you have older tax debts, taxes that have been filed on time. You may have the possibility of getting those discharges.

In general, student loans are not dischargeable, however, there are some caveats to that. If you have like a Sally Mae or direct loan that’s pretty clearly a student loan that wouldn’t be dischargeable. But other types of things that often get confused with student loans might be tuition or fees, lots of different types of debts that are associated with education this days that are actually perfectly dischargeable.

Now things like child support or criminal restitution those aren’t dischargeable because of the public interest are not allowing these debts to go away.
When a person files a chapter 7, it’s a fairly quick process. You have your filing date, and probably the most important portion of the filing date is that the court will issue what’s called an Automatic Stay Order and that order makes it illegal for anyone to call you trying to collect, send you bills or harassing a statements in the mail. They also can’t sue you in civil court or garnish wages or bank accounts, so often times that is what compels a person to file is the fear or having already lost money due to a wage or a bank account garnishment. Once the case is filed, the stay orders in place, then if there is a garnishment going on at that time, it has to cease. Or if you are in the middle of being sued, you got the summons and complaints, you know there is a court date coming up, you file a bankruptcy and have a stay order put up into place and then the suit is effectively worthless.

After you file the case and gotten the stay order in your place you’ve got your real quick little we call a 341 hearing sometimes people call it a meeting of creditors though it’s kind of miscoding creditors don’t often show for those anymore. That’s about a month after you file and then there’s a 60-day period between the hearing and when the court can issue the discharge order that relieves your legal responsibility for the dischargeable debts. And about a month or two later you should receive a closing order from the court which lets you know everything is over with.
So general timeline for chapter 7, you’re looking at about 4 or 5 months that can be a little longer just depending on what all comes up during the process but as a good rule of thumb, just count on about a 5 month long process.

Now chapter 13 on the other hand is what you might file if you have a home that’s going into foreclosure and you’ve decided you want to keep the home or if your income is simply too high to file a chapter 7. The income limits are based on the household size so for most people it’s going to vary a little bit from household to another. Also, you do or don’t count certain types of income towards the means test like social security or social security disabilities are pretty good example of income that wouldn’t count against you in qualifying for a chapter 7 through the courts in income qualification test. But if your income does end up over your household’s size limit to file a chapter 7, you can always file a chapter 13.
Where the 13’s differ from chapter 7 is that a 7 seeks to discharge the types of secured debts that are allowed to be discharged. A chapter 13 allows the debtor to pay back a portion of the debt based on their ability to pay that debt as opposed to the amount on the balances that you had right before you file a bankruptcy.

Certain types of debt in 13 do need to be paid back in full so as we mentioned earlier if you had a home that was going into arrears and you want to save that home as long as you’d file bankruptcy before the date of the foreclosure sale then you could use the stay order that went into place the day the bankruptcy was filed to stop the foreclosure sale and then use your chapter 13 bankruptcy to stretch out the arrears on the home over the life of the chapter 13 bankruptcy which can last anywhere from 3 years to 5 years (36 to 60 months).

Outside of bankruptcy the only other alternative would be either to try to negotiate something with the bank; loan modifications are fairly popular these days. The results do vary extensively from one case to another. Some folks have good experiences with those and the one’s we see a lot of times haven’t had a very great experience with those. Or if you weren’t using a program like that outside the bankruptcy really your other option would be to just write them a large cheque for everything that had gone into arrears at that point which for most people is not a practical possibility. And so that’s why we have things like chapter 13 bankruptcy where you can take the amount of those arrears and pay them back yes, but pay them back over a 36 to 60 month period where that amount can become feasible or something that the household can do to retain their home and what equity they’ve built up in there over the years.

Another thing you can do in 13s that you cannot do in 7s is you could structure tax debt through it.

Now there are two types well really three types we consider depends on how you looking at it but tax debt can either be secured, it can be unsecured, and it can be priority or its non-priority. And when you are formulating a 13 plan for someone who has a tax debt it’s fairly critical that you are able to distinguish the differences between those. If you can find that you tax debt is on the unsecured non-priority variety which generally means there is not a tax lien in place on any property when they go down county recorder’s office and record a general tax lien that makes it unsecured and if the taxes are older and there’s a few different dates you have to look at it and determine what date they’re gauging the taxes by. But as a very broad general rule if the taxes were more than three years old from the date that they were filed, the date of the last possible filing or the date of an IRS assessment then those taxes are going to lose their priority status and they really become no more impactive in the bankruptcy than say a credit card debt or a medical debt might be. So in cases like that we’ve had clients over the years who have used the chapter 13 to discharge what portion of the debts were allowed to be discharge by the code and then to restructure the remaining tax debt over a three to five year plan that they can pay as opposed to maybe what the IRS or the Colorado Department of Revenue might be asking for all in one giant sum which may not be doable at all.

If you have questions on this and you want to do a research on your own you might go to our website, there’s a pretty large section in there now. We’ve been writing articles that brief for almost 6 years. Just as clients have asked things we’ve thought ‘that’s a good question’and we’ve got that from a few folks we’ve decided to draft essays or articles on those particular issues and then list them in the thing called the bankruptcy resource center on our webpage which you can get to morsebankruptcy.com or if you have questions during the week that you’d like to talk to one of our attorneys about or myself, feel free to give us a call at 303-300-6684.

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  1. Who Qualifies For Bankruptcy?
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