What debts are not dischargeable in bankruptcy?

The most common types of non-dischargeable debts are student loans, government fines and fees and some taxes, spousal and child support.  There are other categories such as debts incurred due to fraud but these are much less common.

Student loans– These debts are almost always not dischargeable.  Whether they are government backed student loans or loans from a private agency they are not dischargeable.  The 2005 BAPCA law saw to that.  Loans issued “for any educational purpose” are now all non-dischargeable in bankruptcy and student loans will pass through the bankruptcy unaffected and you will have to pay them.

There is a hardship discharge for student loans in bankruptcy but it is very hard to get.  To get a hardship discharge of student loans your attorney would have to bring an adversary proceeding in bankruptcy court.  This amounts to a mini-trial where all the facts of the hardship would have to be proven.

It is expensive and time-consuming to bring such a s case and there is no assurance that you will win.  In fact it is apparently very hard to win one of these trials at all.  There are stories of judges looking at a disabled debtor and telling them that they though they cannot work any more in their field, they could teach and earn money to pay the student loan back that way.

Government fines, fees, penalties, and some taxes– If you get a traffic fine or criminal fine levied by a court or other government agency then those fines are not dischargeable in bankruptcy.  That is easy but taxes are more difficult.  The main rule for taxes is the 3 year rule that states that 3-year-old income taxes are dischargeable in bankruptcy.

So in 2012 (after April 15th)  income taxes for 2008 would be dischargeable.  This is because these taxes were due in april of 2009.  Both state and federal  income taxes are dischargeable in bankruptcy if the meet this 3 year rule.  There are other rules too but this is the main one that applies to most people.

Other types of taxes are not dischargeable so consult with an attorney for advice on your tax situation.

Spousal and child support– Forget about discharging these.  You will have to pay your ex-spouse or your children after you get a support obligation levied against you.

Fraud– Debts where fraud is proven will not be dischargeable.  If you get sued and the plaintiff alleges fraud then you want to fight these cases because bankruptcy will not save you from having to pay.  The normal credit card suit usually will not contain a fraud allegation but credit card companies can allege fraud in a bankruptcy.  This usually occurs if you have very large recent charges on your cards for cash advances or luxury items.

If you have such charges then tell your attorney so he can wait some time to file or advise you on the possible consequences if you do file right away.

The good news is that if your debt does not fall into one of the non-dischargeable categories then it is probably dischargeable in a bankruptcy!

For more info. check out my websites at:   www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office to speak toe for free about any bankruptcy or debt related issue  at (619) 702-5015.  Call now for free credit report and analysis!  I am a San Diego bankruptcy lawyer.  For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

Double dip recession deflation and depression in California? A good time to file bankruptcy.

                                                                          THE UNEMPLOYMENT RATE IS STAYING HIGH

The unemployment rate is still 12.3% in California and the economy lost 27,000 jobs in June according to the California Employment Development Department.  The LA Times reported that even though the economy lost jobs, the unemployment rate slightly declined.

Even so unemployment is still high and there does not seem to be any economic recovery coming soon for poor California.  In fact there seems to be a lot of talk about a double dip recession.  With no recovery on the horizon and high unemployment, it does appear as if the economy could slip into another recession.

                                                                                                  DEMAND IS FALLING

If unemployment benefits don’t get extended then there will be even less money in the system.  With less money to spend demand for goods falls and so do the prices for those goods. These falling prices brought on by falling demand are a sign of the beginning of a possible deflationary spiral.  This apparently is a hot topic now on Wall street.

Again as reported in the LA Times, the consumer price index showed that prices for everything except food and energy was up .9% for the year but this was the smallest increase in 44 years.  If demand continues to fall with increased unemployment and no extension of unemployment benefits then companies would have to do some serious price cutting to boost their sales.  This price cutting is deflationary.

                                                                                         RECESSION OR  DEPRESSION?

What does that mean to the consumer?  Well it’s good if you have not lost your job but you just have to pay less for what you buy.  You can now save a lot of money by buying the things you need at the new lower prices.   This situation can be good for the consumer but it can trigger a deflationary spiral as consumers sit on the sidelines and don’t buy anything because they believe that if they wait and things will get even cheaper.

Deflationary spirals and depressions often go together.  One leads to another as less and less buying leads to more unemployment, lower prices, a downward spiral, and general economic decline.  Apparently in the great depression prices declined 27% from 1929 to 1933.

 But what about the debtor?  If you are in debt then your burden gets even worse.  You will be paying back money borrowed previously when money was more available than it is now.  Now that it is scarce, it is much harder to pay back and the interest rates you are paying on credit card debt and other unsecured debt can be astronomical.

                                                                                 BANKRUPTCY MAY BE A NECESSITY

Therefore a deflationary period is a good time to get rid of debt in a bankruptcy.  You will need those scarce dollars to pay your bills and buy what you need to survive.  Spending your money on past debt is not a good idea in a deflationary spiral/double-dip recession/depression period.  In fact it may be a necessity for you to lose that debt to survive these difficult economic times.

Don’t think now that you have the luxury of being able to pay that debt back as you may have had in better times.  You may need to seriously consider bankruptcy for your own survival.  Why kid yourself that you can pay back these debts?  You will surely need your money for your basic needs and those of your family. 

You may lose your job and join the 12% unemployed so if you have any extra money available or if you even have a decent income coming in now don’t give it to the credit card companies or other unsecured creditors.  In California there is a very generous exemption program that allows most people to keep most assets and you can certainly keep your job in a bankruptcy.

Contact a bankruptcy attorney and file a bankruptcy today before you foolishly pay all your money to these creditors that you could discharge in bankruptcy.   The financial life you save may be your own!

Former Padre Steve Finley bankrupts his restaurant business then he changes his mind- Good idea?

Hold the peanuts, cracker jacks and hot dogs.  Steve Finley the former San Diego Padre had declared bankruptcy on Jan. 5th 2010 for his “Flight” restaurant in Del Mar.  It became another victim of this down economy.  The restaurant was owned by BRG Restaurant LLC which is the entity that filed for chapter 7 bankruptcy (and not Steve personally).  The bankruptcy was then later dismissed on April 23,2010.

According to the docket report of the filing there were a number of required statements missing in the original filing that were added later.  According to an interview Steve did for SignOnSanDiego he filed hastily originally because of an auction that was scheduled to sell the restaurant equipment.  Bankruptcy is a good technique to stop these types of actions.

The question I have though is whether it’s a good idea to allow a bankruptcy case to be dismissed.  Steve was most probably advised that if he allowed this case to be dismissed and then he re-filed the case within a year of filing the original case then he stands to lose his automatic stay.  The automatic stay is wha prevents creditors from attempting to collect debts while you are in bankruptcy.  Therefore if Steve files again within a year he will only benefit from the stay for 30 days.  After that period the creditors could presumably again attempt to collect his debts.

Don’t allow your case to be dismissed because you need the automatic stay and it’s usually smart to complete your bankruptcy once you start it for that reason.  Steve said in the article that he was going to re-file if a new investor he was bringing in did not work out.  Just remember that the 2005 bankruptcy reform law included this provision to cancel the automatic stay for those, like Steve, who file and then dismiss and then re-file.

Think carefully before you allow your bankruptcy to be dismissed.  You may not like the no stay provisions of the 2005 law.

I am a bankruptcy attorney practicing bankruptcy law in San Diego.  Please visit mt websites at www.farquharlaw.com or www.freshstartsandiego.com.

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

Don’t do what Michael Vick did in his bankruptcy (don’t give money away to your relatives and friends before you file).

Michael Vick filed for chapter 11 bankruptcy in July 2008.  But the problem appears to be that prior to his filing of bankruptcy Mr. Vick allegedly gave $2 million to family and friends.  The Trustee in his case is seeking reimbursement from his mother, his fiancée, his brother, and other friends and relatives.  Therefore the people who received the money will be asked to return it to the trustee for distribution to his creditors.

Mr. Vick had 20 million dollars in debt when he filed chapter 11.  Apparently he can keep $300,000 of his 5 million in salary with the rest going to his creditors.  There are no fraud allegations in this case associated with the improper transfers but the Trustee is demanding return of the $2 million.

The problem for Mr. Vick is if his friends and relatives have spent and or invested and lost the money (that they have allegedly received) then how will they then return it to the Trustee?  The Trustee will probably take payments but what if Mr. Vick’s friends and relatives have little or no money to make the payments?  Mr. Vick now has an income of only $300,000 a year to pay for himself so he probably can’t help all of them return the money.

In a chapter 7  bankruptcy the law that allows the Trustee to demand this is the preference law contained in section 547 of the bankruptcy code. ( Mr. Vick filed a chapter 11 bankruptcy which is different and far more complicated than the simpler chapter 7 that most people file). This section 547  basically states that if you make a payment within 90 days to a non-insider while you are insolvent then the recipient of the money could be asked to return it to the trustee for distribution to the creditors.

If you make a payment to an “insider” then the trustee can look back one year for such transfers and demand the money back.  An insider is a close friend or family member.  These are exactly the people who Mr. Vick transferred this $2 million dollars to.   The transfer is essentially considered a “fraudulent conveyance”.

My bankruptcy clients in a chapter 7 often mention that they need to pay a relative or friend back for some loan that this person had given them before they file for bankruptcy.  I have to warn them as I do here that this is not a good idea and that the trustee in their case can ask for the return of the money to the estate just like they asked Michael Vick.  In my cases the amounts they want to transfer are a lot less but it is not allowed nonetheless.

Always inform your attorney of these transfers and if you have not paid the money back yet then don’t do it.  You can pay these friends and relatives back after the bankruptcy.  You can pay them out of exempted funds that you are legally allowed to keep in the bankruptcy or you may pay them over a period of time out of your post-petition regular income.  There is no prohibition against paying these people back after bankruptcy but it must be done correctly or your friends and relatives could be asked to pay the money back to the trustee like Michael Vick’s were.

What Do I DO If A Creditor Sues Me For A Debt- Can I Include This In The Bankruptcy?

Yes, certainly you can include a debt in the bankruptcy even if the creditor sues you as long as the debt is dischargeable.  (Check back for a later blog to see which debts are dischargeable).  If you are served with a lawsuit by a creditor then you have 30 days to answer that suit.  You can answer with a bankruptcy filing but if you are not ready to file within 30 days then you can answer the suit to set it for trial.  Trial will be some months away and you can still file before the trial.

Once you get a lawsuit though remember the clock is ticking so don’t delay.  Call a bankruptcy attorney right away so he is notified and can advise you.  If you fail to file the bankruptcy or answer the Summons and Complaint within the 30 days then you will eventually be defaulted by the attorney for the creditor.

A default means that now the creditor will enter a default judgment against you and they can file a lien against your credit, they can lien your house, they can garnish your wages, and they can attach your bank accounts.  You don’t want any of these things as they are all bad.  The creditor can pursue all of these tactics once he gets this judgment.  Act quickly and don’t allow him to get your money or your assets.

Many of my clients have been called into their bosses office one day to be told there is a wage garnishment being deducted from their paycheck that they must now pay.  Others have discovered the money in their bank accounts seized.  Sometimes liens are put on their houses which are very hard to remove.  Don’t let this happen to you!  Call me or another bankruptcy attorney immediately upon receiving a lawsuit for an unpaid bill.

Don’t confuse the Summons and Complaint with a letter form a lawyer threatening to sue though.  One is clearly marked as a court document giving you 30 days to answer.  Please call if you have any confusion.

If you file the bankruptcy then the bankruptcy stay comes over all of your creditors blocking them from collecting debts from you in any way.  Bankruptcy law is federal law and it preempts or overrides state law so the court in which you were sued would have to dismiss the suit.  The creditor and his lawyer will be notified in the bankruptcy schedules so they will not be able to pursue a judgment against you.

So bankruptcy is your answer and your way out if you are served with a lawsuit by a creditor to whom you owe a dischargeable debt.

Should I Re-negotiate and Settle These Debts Or File Bankruptcy?

For most of my clients it makes more sense to file bankruptcy and discharge their debts instead of trying to settle them and pay them back. 

As a general rule, depending upon your income, I tell people that if they have more than $10,000 in unsecured dischargeable debts and they are otherwise eligible then they should probably file bankruptcy.  If you have less than $10,000 in debt and a decent income then we would explore the possibility of settlement.  But if your income is already being used elsewhere and you are strapped for cash then we would probably reconsider bankruptcy.

If you have now or have  received a large sum of money recently then it also makes sense to settle your debts.   This sometimes happens to my clients.  A relative may die and the inherit money or they could win a lottery or the may just have a large amount of money sitting around.  (This does not include retirement funds which I will deal with in a later blog).  If you have this pool of money which exceeds the allowable wildcard exemption and you would risk losing it in a bankruptcy then you want to consider settling the debts.  This money sometimes comes expectantly during the bankruptcy but before filing.  That is okay and we just shift gears and we begin contact the creditors to settle the debts.

If your income is too large for a chapter 7 and you don’t want to be locked into a chapter 13 then you can also settle your debts.  You can settle the debts for a fraction of what you owe especially if a bankruptcy attorney calls and warns them that you may file bankruptcy.  How small or large that fraction is hard to say as the companies are all different but in my experience the will settle for substantially less than the full balance if you can pay them in a lump sum.  If you want payments then you might consider the chapter 13.

If your income fits within the limits of the means test, and you do not have too much cash or other non-exempt assets then you should probably file the bankruptcy.  You can then discharge your debts in 90 days without paying them and use the money you save to pay for yourself, your family, your retirement or just about anything instead of these large banks who don’t need your money nearly as bad as you do.

Most of the people who contact me fall into this last group and they decide go ahead and  file bankruptcy and not settle their debts.

Chapter 7 or Chapter 13- Which Bankruptcy Chapter Do I Need?

Clients are often confused about chapter 7 and chapter 13  bankruptcies.  (There is also a chapter 12 for farmers and chapter 11 for businesses).   A chapter 7 is the one where you get a discharge of your debts 90 days after you file.  The 7 has a very short timeline and clients like it because of the simplicity and speed at which it is processed.  The debtor (the person who files bankruptcy) attends the 341 hearing (meeting of creditors) 30 days after he or she files bankruptcy.  The creditors rarely show up at the 341 hearing so it’s just you, the attorney, and the Trustee who are in attendance.  The bankruptcy discharge is then usually granted another 60 days later.

The debtor must list all of their assets and debts in their bankruptcy schedules when they file.  The debtor must list their secured creditors separately from the unsecured creditors and the debtor must list whether they intend to keep their secured assets or surrender them.  The debtor must also list their income, expenses, all of their personal property, a statement of financial affairs, and do the means test.  There are also a few other schedules that must be completed but these are the main ones.  (Check my previous blog for an explanation of the means test).  When the schedules are completed then this information is filed with the Bankruptcy Court.

The 7 is most popular but there is also a chapter 13 where you pay back all or part of your debts over a period of 3 to 5 years.  This chapter is useful when you make too much money for a Chapter 7, or if you need to protect assets from trustee, or if you need to make up back mortgage payments and pay them out over the next 3 to 5 years.

Also you can strip off a second mortgage in a chapter 13 if it is totally unsecured.  A totally unsecured second mortgage is one where the value of the house is less than the value of the first mortgage leaving the second with no equity to attach to.  Stripping it off means that you get rid of it, you don’t pay it, and it goes away.

“Cramdown” is also useful in a 13 where you reduce the value of the loan on an asset in the bankruptcy to the value of the asset.  So if you have a car worth $10,000 but the loan value (the amount you owe) is $20,000, you would only have to pay back the $10,000 (over 3 to 5 years) to keep the car in the bankruptcy as the loan would be “crammed down” to $10,000.  The remaining $10,000 on the loan would go away and the finance company would never be able to collect it from you.  You must continue your payments for the full 3 to 5 years to get your discharge at the end of the chapter 13.  This is hard for many people and they sometimes drop out of these plans and then their debt returns.

So a 7 with the possibility of getting rid of all your credit card, medical, personal loan debt in 90 days is still the most popular form of bankruptcy by far and most people choose this one.  13s are rarer but available and advisable under the right circumstances.