If you are struggling with overwhelming debt, you have options that are designed to help you get a fresh start and improve your long term financial picture. It is important, however, to know exactly what bankruptcy can and cannot do for you. Here we explore some of the basic concepts as to what bankruptcy can and cannot do.
What Bankruptcy Can Do For You:
- Discharge or Wipe Out Credit Card and Other Unsecured Debt
Bankruptcy wipes out all general unsecured debt and gives the individual a fresh start. Unsecured debt is the type that does not have collateral to back up the loan. Some examples of unsecured debts are credit cards, medical bills and personal loans.
- Bankruptcy Stops Creditor Collection Activities and Lawsuits
Any calls or creditor harassment is stopped by the bankruptcy. The automatic stay under 11 U.S.C. Section 362 is a powerful tool that stops all activities of creditors, ranging from just phone calls to lawsuits, levies and garnishments. The stay is triggered upon the filing of any bankruptcy case. In a Chapter 13 bankruptcy, the automatic stay acts to stop a foreclosureand will give you the opportunity to catch up on any amounts you have fallen behind on the mortgage.
- Eliminate Certain Kinds of Liens
In a chapter 7, chapter 13 or chapter 11, you have the power to void or strip off certain liens. For example, if there is a judgment lien that is interfering with your exemption, in a Chapter 7 bankruptcy you will be entitled to strip off that judgment lien. Another example is in a Chapter 13 when a second mortgage is completely underwater with no equity to support that lien; the mortgage can be stripped off or crammed down and made unsecured.
- Wipe Out Certain Types of Tax Debts
If the IRS debt is for income taxes only, you have not committed fraud or willful tax evasion, the IRS debt is three years old from the date it is due, you had filed a tax return for that particular year at least two years before the bankruptcy filing and the IRS assessed the income tax debt at least 240 days before you filed the bankruptcy petition, that tax debt can be wiped out in a bankruptcy.
- Restructure Outstanding Secured Debt and Tax Debt that Cannot Be Discharged
In order to save a house in foreclosure or a car that is behind on payments, you can file a Chapter 13 bankruptcy and restructure the arrears (amount you have fallen behind) over 60 months. Similarly, if you owe nondischargeable tax debt, you can take that outstanding debt in a Chapter 13 and pay it over five years or 60 months.
- You Can Reject Unexpired Leases and Executory Contracts
If you are in the midst of a business or consumer type lease or ongoing contract, you can reject that lease or contract. This is a particularly beneficial strategy in a Chapter 11 bankruptcy case when a business needs to get out of certain commercial leases that are not beneficial to the business and save those leases that are beneficial.
- Allows you to Keep Exempt Property
Many believe you lose all property if you file bankruptcy. This is simply not true in that in most people keep their properties as long as the property is within their exemptions. See our page on the Federal Exemption schedules. For example if you own a home that only has $20,000 in equity, you will be able to keep the home, i.e., the house is worth $100,000 and you have a $80,000 mortgage. The Federal Exemption scheme would allow you to exempt the home and you would keep it while wiping out other unsecured debt.
What Bankruptcy Cannot Do For You:
Here are some general things that bankruptcy cannot do for you:
- Prevent a secured creditor from repossessing property.
While a bankruptcy may eliminate debts, it does not eliminate the secured lien that backs up the debt. If a debt secured by collateral is not paid, the creditor can file a motion with the bankruptcy court to vacate or get permission to get around the automatic stay and precede with its repossession efforts. Eventually, the creditor will be able to get at the property that backs up the debt, such as a car or real estate, if something is not done to pay or potentially restructure the debt and deal with the creditor.
- Wipe out child support and alimony obligations.
Child support and alimony obligations are not wiped out or discharged in bankruptcy. You will continue to be liable for these debts just as if you did not file bankruptcy at all. The best you can do is take these debts and restructure them over a 60 month reorganization plan in a Chapter 13 Bankruptcy.
- Discharge student loans.
Student loans are next to impossible to wipe out in a bankruptcy. They can be wiped out if you can show that paying back the loan would be an "undue hardship." The courts have taken a stringent view of this standard and you basically have to be completely incapacitated with next to no likelihood of being able to pay your loans in the future.
- Wipe out some tax debts.
Some tax debts can be wiped out as discussed above. However, the requirements are strict in order to wipe out tax debt. Some tax debt such as trust fund taxes, sales tax, income tax less than three years old, cannot be wiped out.
- Eliminate debts arising from misconduct.
Bankruptcy will not wipe out debts caused by personal injury or death caused by your intoxicated driving or debts arising from personal injuries caused by intentional conduct, such as an assault. For example, if someone was hurt as the result of your drinking and driving and has a claim for personal injury against you, this debt obligation cannot be wiped out.
- Wipe Out Penalties or Fines.
Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, will not be wiped out by the bankruptcy.
- Wipe out Debts Where a Creditor Is Successful on Complaint Objecting to Your Discharge.
Some types of debts may not be discharged if the creditor convinces the bankruptcy court that the debts should survive the bankruptcy because the debt arose from a fraud committed by the debtor.
Contact a NJ Bankruptcy Lawyer
There are many other more detailed explanations of what bankruptcy can and cannot do for you. Please do not hesitate to contact a New Jersey personal bankruptcy attorney to discuss what bankruptcy can and cannot do in more detail.