Commonly asked questions about bankruptcy answered below.
This is informational only and is not intended as legal advice.
1. What is bankruptcy?
Bankruptcy is the federal court process that gives you a fresh start financially when your debts exceed your income. Once filed, your creditors cannot continue to collect from you as a result of what is called the “automatic stay.”
2. Should I file for bankruptcy?
If you do not have property that you can sell to pay off your debts, and you do not have enough money to pay your debts after covering basic living expenses, bankruptcy may be a wise choice
3. Does bankruptcy eliminate all of my debts?
While most of your debts can be discharged, some cannot. The most common, non-dischargeable debts are taxes and other debts owed to the government (with certain limited exceptions) and student loans.
4. Can I keep my house and my car?
Yes, in most cases, but you must continue to pay the payments. In some circumstances a car payment or other secured debt can be reduced to fair market value (called a “cram down”) but not in all cases.
5. Can my house payment be reduced?
Generally, no. The only exception is in a Chapter 13 case. If the value of your home is less than the balance of your first mortgage, then it is possible to have the second declared “unsecured” in a Chapter 13. This requires the separate filing of a motion and a payment plan for three to five years. This cannot be done in a Chapter 7, however.
6. Should I try to negotiate down my credit cards before filing for bankruptcy?
Generally not. The IRS considers forgiven debt to be “taxable income.” This means that if you successfully negotiate down your credit card debt, you’ll likely receive a 1099-C form – and in most cases, tax liability is not dischargeable in bankruptcy. As such, in most cases it is better not to settle debt prior to filing bankruptcy.
7. Will I be taxed on the forgiven debt if I short sell my house?
As discussed above, not only is the law is in flux on both the state and federal level, but the analysis also depends on the type of loan you have and your overall financial state. Refer to IRS Publication Home Foreclosure and Debt Cancellation at http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation. Also check the laws of your state for state tax purposes. Additionally, you should be aware of the risks of leaving your home before a foreclosure takes place with regard to lenders. Until the law is clarified, and in some cases, even afterward, it is advisable to consult a lawyer and tax accountant.
8. For tax purposes, should I file bankruptcy before my house forecloses or afterwards?
On the Federal level, the Mortgage Forgiveness Debt Relief Act of 2007 waived the tax implications on debt forgiven due to short sells or foreclosures; however, it expired at the end of 2012. While rumors suggest it has been extended through 2013, they have yet to be substantiated by reputable sources. Check with your state to determine whether forgiven debt has state tax implications.
9. For purposes of my lender, should I stay in my home until it forecloses?
If there are no negative tax consequences, then generally yes, stay until title passes to the lender because the lender has no incentive to take title before it is ready to sell the home. As such, if you leave before foreclosure, the lender will likely leave the property in your name for an extended period of time. The lender doesn’t want the responsibility that comes with title, such as paying property taxes, utilities, homeowner’s dues, and it certainly doesn’t want the legal responsibility for things like mosquito abatement or personal injury occurring on the vacant property.
You, however, will be locked out so that you cannot maintain it properly, and, as the titled owner, will be named in a lawsuit if something should happen, not to mention continuing to be responsible for property taxes and utilities even after filing a bankruptcy. If you file bankruptcy while title is still in your name, you will continue to be responsible for all of those ongoing debts after the filing of your petition up until the lender finally sells the property – which could be years. Additionally, it will increase the time you will be required to wait before you purchase another home.
10. Should I file for bankruptcy before or after I get a divorce?
If possible, it is a good idea to file bankruptcy before divorce if you are qualified to do so. It is better to eliminate the debt rather than divide it between the parties because it becomes complicated when an ex-spouse files afterwards and can result in litigation regarding such things as whether the filing spouse must still pay for debts through a marriage settlement agreement. If divorce is contemplated, it is a good idea for each spouse to consult their own attorney to make sure the bankruptcy is in their interest.
11. Does bankruptcy eliminate all of my debts?
While most of your debts can be discharges, some cannot. The most common, non-dischargeable debts are taxes and other debts owed to the government (with certain limited exceptions) and student loans.
12. Can I discharge a judgment in bankruptcy?
Most of the time, for simple credit card debt judgments, the answer is yes. It is not always the case, however. Specifically, judgments involving fraud are not dischargeable so if it is necessary to file bankruptcy, it is prudent to explore doing so before a judgment is entered against you.
13. What should I do if I'm served with a lawsuit?
The first thing you should do is contact your attorney. In California, you have 30 days to respond to a civil lawsuit, such as a lawsuit to collect a debt from a credit card company. If you do not respond, the action will likely go to judgement. While some judgments can be discharged in bankruptcy, not all can, i.e., judgments involving allegations of fraud. As such, it is important to properly handle lawsuits as soon as you are served with a summons and complaint. Your attorney will know how to best handle the situation and doing so earlier rather than later will prevent needless litigation costs and worry.
14. Is child support dischargeable in bankruptcy?
No. Domestic support obligations are not dischargeable in bankruptcy.
By Cara O'Neill
This website is for information only and is not to be construed as legal advice. Cara O'Neill is an attorney licensed to practice law in the State of California.
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