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FAQ - Bankruptcy

Commently asked questions in regards to Bankruptcy

Q: Can I discharge my student loans in bankruptcy? If not, what should I do?

A: Under current law, there is a presumption against the dischargeability of student loans in bankruptcy. You may overcome this presumption and obtain a partial or complete discharge of your student loan obligations if you can establish that not discharging the student loans would cause you or your dependents “undue hardship.” Generally, courts have been fairly strict in applying this standard, which means that most debtors in bankruptcy do not even try to discharge their student loans, which requires the filing of a separate lawsuit, called an Adversary Proceeding, within the main bankruptcy case. However, if you have overwhelming student loan debt and other issues, such as health problems, that make it difficult or impossible for you to work in the field for which you studied, or earn enough money to support yourself, you should ask your lawyer to evaluate the possibility of seeking to discharge your student loans in bankruptcy. If the prospects for discharging your student loans in bankruptcy are unfavorable, and you are otherwise eligible for an income-based repayment option, this may be your best alternative. You can learn more about student loans and income-based repayment options at the National Consumer Law Center (www.nclc.org). You may also find it worthwhile to explore the website of the Consumer Financial Protection Bureau (www.consumerfinance.gov).

Q: Can I renegotiate a mortgage in a Chapter 13 bankruptcy?

A: Under current law the answer is “no”. However, you can make up mortgage arrearages over time and prevent foreclosure as long as you make your Chapter 13 plan payments. In addition, many debtors can “strip-off” junior liens such as second mortgages if the value of their home is equal to or less than the amount of their first mortgage.

Q: Can I discharge unpaid income taxes in bankruptcy?

A: The answer is “yes” under certain circumstances. Generally, if the income tax obligation is more than three years old and you filed the income tax return at least 240 days prior to filing for bankruptcy, the income tax liability is dischargeable. However, income taxes that are less than three years old, and other kinds of taxes, including payroll withholding taxes, are not dischargeable.

Q: I am in financial trouble due to the failure of a small business. Am I still subject to the Chapter 7 Means Test?

A: The answer is “probably not.” The Chapter 7 Means Test applies to debtors whose debts are primarily consumer as opposed to business in nature. Personal guarantees of leases, business lines of credit and even credit cards used for business purposes are business debts. If business debts are larger than consumer debts then the debtor is not required to pass the Chapter 7 Means Test.

Q: I am married, but most of our debts are in my name and not my spouse’s. Are we required to file for bankruptcy together?

A: The answer is “no”. It is frequently advantageous for only one spouse to file in order to preserve the credit rating of the non-filing spouse. However, if you live with your spouse and are subject to the Means Test, your spouse’s income must be included even if you file in your name only.

Q: One of my relatives co-signed on a loan with me. If I file for bankruptcy will it hurt the co-signor’s credit?

A: It should not. The relative will continue to be legally responsible for the repayment of the debt, and if payments are made, his or her credit should not be adversely affected by your filing.

Q: I am behind on my house payments. Is it better to let my house go into foreclosure or should I try to make a “short sale”?

A: If you have another place to go, it is usually in your best interest to try for the short sale. Mortgage companies will often forgive the unpaid balance on your loan in a short sale and some even have “cash for keys” programs which pay you up to $5,000 for cooperating in a short sale rather than letting your house go into foreclosure.

Q: I owe a lot more on my car than it is worth, but I would like to keep it. What will happen to my car in bankruptcy?

A: As a general rule, bankruptcy affects claims but not liens, which means that if you don’t make payments on assets such as cars and homes, the lenders can still receive permission from the bankruptcy judge to take possession of them. However, debtors are also allowed to “redeem” motor vehicles in Chapter 7, and “cram down” car loans in Chapter 13 that are more than 910 days old. This essentially allows the debtor to pay the creditor the value of the collateral while writing off the difference. This can often save you thousands of dollars while allowing you to keep the assets you need and value most.

Q: How will bankruptcy affect my credit?

A: Bankruptcy, over the short term, will hurt your credit. However, many people who are thinking about filing for bankruptcy already have poor credit because they have defaulted on their debts or are about to. Many bankruptcy debtors can re-establish good credit within two to three years after filing bankruptcy especially if they keep making payments on their cars and/or homes and remain employed after filing.