Answers To Frequently Asked Questions
What Is Involved In Filing A Bankruptcy Case?
Arriving at the decision to file bankruptcy is not an easy process. No one sets out with the intent of filing bankruptcy, but there are times when filing bankruptcy is the best option for resolving a debt problem. For many people, filing a Chapter 7 or Chapter 13 bankruptcy case may be the first time they are involved in a court case. On top of being worried and stressed about the financial situation, they are nervous about going to court.
It can help ease nerves and make the process of filing for bankruptcy relief a little easier if you understand the basic steps involved in filing a bankruptcy case.
What Happens To My Credit Score When I File Bankruptcy?
A common concern that many people have when considering filing for bankruptcy relief is how filing a bankruptcy will impact their credit score. You may have heard that filing a bankruptcy case ruins your credit rating forever. While your credit score may be lower for a while, it is not permanent decrease in your credit score. In many cases, filing a bankruptcy case improves your credit score within a year or two after filing.
Can Filing Bankruptcy Help Improve My Credit Score?
Filing bankruptcy helps improve the “amounts owed” portion of your credit score by discharging unsecured debt. The balances on the discharged accounts become zero which helps improve this portion of the credit score. In addition, creditors cannot continue to report late payments on debts that are discharged thereby helping to improve the payment history portion of the credit score. Month after month, the payment history improves without additional late payments being reported by creditors.
By not filing bankruptcy, you prolong the time it takes to improve your credit score. If you don’t pay your debts, creditors continue to report late payments and other negative information. Even if you begin paying the debt, the negative information remains on your credit report for years. When you stop creditors from reporting negative information, the steps you take to improve your credit score going forward count more than they would if they had to battle the continued reports of negative information.
What Is A Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy case is also referred to as a “liquidation” bankruptcy. However, don’t let this frighten you away from obtaining more information about how filing Chapter 7 can help you resolve your debt problem. For many individuals, filing bankruptcy under Chapter 7 gives them the fresh start they need to overcome a financial crisis, without having to liquidate any personal assets!
Why Do People File Chapter 7 Bankruptcy?
Chapter 7 is available to individuals and businesses seeking relief from debt. While some people may need to file bankruptcy because they abused credit, most individuals file bankruptcy because they experienced a financial crisis.
The United States Supreme Court explained the reason for bankruptcy over 80 years ago. The justices made it very clear that bankruptcy was not intended to be a punishment or a terrible thing. Congress intended bankruptcy to be a way to help those who cannot afford to pay their debts for any reason.
Regardless of why you need to file bankruptcy, you will be treated the same under the law. Even if you made a few poor financial decisions and got into debt over your head, you will not be judged, and you will have the same rights as a person who files Chapter 7 because she had a heart attack and cannot pay the medical expenses.
Can I Discharge Income Tax Debt In A Chapter 7 Bankruptcy Case?
Income tax debt is one of the reasons many people file for bankruptcy relief. However, most income tax debt is non-dischargeable meaning you cannot get rid of the debt by filing a bankruptcy case. However, in some cases, income tax debt is dischargeable in a bankruptcy case, even in a Chapter 7 bankruptcy case.
Discharging income tax debt in bankruptcy is a complicated undertaking. The rules governing a discharge of tax debt can be confusing. Before you attempt to get rid of your tax debt by filing bankruptcy, consult with an experienced attorney who understands the Bankruptcy Code, bankruptcy rules, and case law.
What Is A Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy case is referred to as a reorganization bankruptcy or a wage-earner plan. Some debtors can pay some or all their debts if their creditors would work with the debtors to accept a reasonable plan to reorganize their debts. Unfortunately, creditors are more interested in getting their money than helping individuals. Therefore, the Bankruptcy Code includes a chapter of bankruptcy that allows debts to propose a reasonable plan to reorganize debts.
Once approved by the court, creditors must accept the terms of the plan. The plan prevents creditors from taking certain actions to collect debts during the bankruptcy case. While creditors may object to certain terms in the plan, a creditor cannot simply choose to “opt out” of a Chapter 13 plan.
What Is Included in A Chapter 13 Plan?
You include all your debt in your Chapter 13 plan. You cannot choose to leave out specific debts just like creditors cannot choose to opt out of your plan. However, debts are handled in different ways.
Secured Debt: A secured creditor holds a debt that is secured by collateral, such as a mortgage, car, or other assets. Secured creditors must be paid through the plan or outside of the plan. Failure to pay the debt may result in the court modifying the bankruptcy stay to allow the creditor to proceed with a foreclosure or repossession.
However, some secured debts may not be paid in full. In some cases, motions may be filed to “value” the lien at the fair market value of the collateral. For example, the loan on a vehicle may be reduced to the market value of the vehicle. With very limited exceptions, a motion to value is not allowed for liens secured by real property.
Unsecured Debt: The debt owed to an unsecured creditor is not secured by collateral. Examples of unsecured debt include medical bills and credit card debt. Unsecured creditors are paid a percentage of their debt through the Chapter 13 plan. In most cases, unsecured creditors receive pennies on the dollar. Upon completion of the plan and receipt of a bankruptcy discharge, the debtor isn’t required to pay the remaining balance owed to an unsecured creditor. The debt is discharged, and the unsecured creditor is barred from taking any action to collect the amount from the debtors.
Some unsecured debt is non-dischargeable. For example, most student loans are non-dischargeable in bankruptcy. What this means for the debtor is that he or she will continue to owe the student loan after the bankruptcy case is closed if the student loan is not paid in full through the bankruptcy plan.
Unsecured Priority Debt: Some types of unsecured debt are treated differently in a Chapter 13 case. These debts must be paid in full through the Chapter 13 plan because they are non-dischargeable. Examples of unsecured priority debt include most taxes, child support, alimony, and restitution. Provisions must be made in the Chapter 13 plan to pay unsecured priority debt in full before the plan is completed. If not, the debtor continues to owe these debts after the bankruptcy case is closed.
Can Chapter 13 Stop Foreclosures and Repossessions?
Yes, filing a Chapter 13 bankruptcy case stops foreclosures and repossessions. Once a bankruptcy case is filed, the provisions in the automatic stay prevent creditors from taking any action, including repossessing or foreclosing on an asset, without prior court approval.
A Chapter 13 case can potentially save a home and a car, even if the creditor is on the verge of seizing the asset. However, the Chapter 13 plan must make provisions for the past due payments to be paid through the plan. In the case of a mortgage, the debtor must also resume making regular mortgage payments directly to the lender outside of the plan. If the debtor fails to make the payments to the mortgage company or becomes behind on plan payments, the lender may be allowed to continue the foreclosure.
Will The IRS Agree To A Payment Plan For The Taxes I Owe?
If you cannot pay the taxes you owe to the Internal Revenue Service, the IRS might initiate a levy action or file a Federal Tax Lien. To avoid the collection process by the IRS, you can request a payment plan for the taxes you owe. A payment plan allows you to pay your taxes over an extended period. By arranging for monthly payments, you can avoid the negative aspects of an IRS collection action.
Remember, applying for an installment agreement does not extend the time you have to file your tax returns. You are still expected to file your tax return and pay the taxes you owe by the due date. Therefore, if you plan to request an installment plan, you need to make sure that you file your tax return on time and file your application for an installment agreement promptly.
What Are My Options For Repaying IRS Tax Debt?
For many people, tax time is a windfall because they receive a refund of taxes they paid throughout the year. However, for others, tax time does not hold any reason to rejoice because they owe money to the Internal Revenue Service. The good news, if there is any good news when you owe taxes, is that you have several options for paying your taxes other than paying the bill when you file your tax return. Keep in mind that you must file your tax return by the due date or face penalties. Even if you owe taxes, file your tax return on time. You can choose an option for paying the taxes you owe to the IRS, but only if you file your tax return first.
Request a Short Extension of Time to Pay
The IRS may grant you a short extension of time to pay your taxes. Extensions typically range from 60 to 120 days. During the extension, interest and penalties will continue to accrue on the amount of taxes you owe. If you believe you can pay your taxes with a short extension, this option may be your best option because you face less in penalties, interest, and fees if you qualify for and pay your taxes with a short extension compared to requesting an installment plan.
Just make sure to file your tax return on time. In most cases, you cannot qualify for an extension of time to pay if your tax return was filed after the due date.
Requesting an IRS Installment Agreement
The IRS offers installment agreements to help taxpayers pay their tax debt and avoid collection efforts, liens, and levies. Short-term installment agreements are 120 days or less while long-term installment agreements may last for several years.
Saxton Law, PLLC is here to answer any questions you may have about bankruptcy, IRS agreements and debt relief. If you are experiencing stress from mounting debt, seek relief by calling 601-255-0813 to schedule a free initial consultation with Randall R. Saxton.