5 Things Bankruptcy Cannot Do For You
Bankruptcy is an incredible tool for rescuing your financial life from the crushing weight of title waves of debt, interest, and late fees. If you are behind on credit card bills, utilities, medical bills, and other unsecured debts, bankruptcy can help you turn everything around and, with time, rebuild your credit. But, bankruptcy is not a cure-all for financial problems. It won’t turn you, overnight, from someone behind on bills to a debt-free existence with a house, car, and the American dream realized.
Bankruptcy is just a tool and a step in the right direction financially, but here are some things that it just cannot do:
5. Pay Off Your House or Car
Bankruptcy eliminates debt, right? And there are plenty of articles on the Internet talking about how equity in your home is protected during a chapter 7 bankruptcy filing, right?
Bankruptcy will eliminate your obligation to pay the debt owed on your house. But that doesn’t mean you keep the house. If your equity in the house falls below the exemption amount in your state for a personal residence, you may be able to keep your home even in a chapter 7 filing, where the rest of your excess assets are sold off to pay your debt. But, the amount you owe is still secured by a lien on the title to the house. So, even though legally you do not have to pay back what you owe on the mortgage, the lender still has the ability to seize your house and sell it to pay what you owe thanks to that lien.
In other words, if you want to keep the house, you’re still going to have to pay for it, even if bankruptcy “eliminated” the debt.
Cars are like houses – the debt is secured by a lien on the property. As such, you won’t be able to escape the money owed on the car if you want to keep the car.
4. Help you escape past-due alimony, child support, or tax debt
There are a few categories of debt that are considered non-dischargeable: alimony, child support, and tax debt are three of the most common. Lawmakers decided that public policy considerations wade against making these dischargeable in the same way that consumer debt is dischargeable, so if you file bankruptcy successfully, while some of your other debt may be eliminated, these three categories will follow you even after your case is closed.
3. Eliminate your student loan debt (probably)
Yes, it is a myth that student loans cannot be discharged in bankruptcy. We’ve covered that, and we will keep shouting that from the rooftops until everyone in America knows that it is a myth.
That doesn’t mean that it is simple though. In order to discharge your student loan debt, you’ll have to file a lawsuit after bankruptcy and prove that student loan debt is an undue burden and that you have no reasonable hope of repaying it. Examples of successful cases are rare, and include disabled individuals and people who took out the equivalent of a home mortgage for a degree that pays like a barista.
Think about it: if it was as simple as filing bankruptcy, how many law students would rush to the courts to file and illuminate their debt? And would the federal government really make it easy for you to eliminate debt that they have extended? They are happy for you to stiff the credit card companies, but to walk out on your student loans? Blasphemy.
2. Allow you to keep everything.
There are pretty much two types of filings for most individuals: Chapter 7 and 13. In a Chapter 7 bankruptcy, you are only allowed to keep specific exempt assets. Goodbye second car and vacation home, for example. (In fact, in some states, you can’t even keep a single home or car.)
In a Chapter 13 bankruptcy, you must agree to a repayment plan that allows you to keep all of those non-exempt assets that you’d have to give up in a Chapter 7. But your repayment amount in a Chapter 13 filing for unsecured debt – those pesky credit cards and past-due medical bills, as examples – is set at your disposable income or the value of your non-exempt assets (whichever is higher). So, if you hold onto all of those assets, you may end up having to pay back so much debt that it proves to be not worth filing at all – or it proves to be beyond your income, which means the court won’t allow you to proceed.
In short, you might be able to keep everything in a Chapter 13 filing, but if you do, you may regret it.
1. File twice in a short time
Here’s an important thing to remember about bankruptcy: the court can’t fix what it doesn’t know about. Whether you do it yourself or seek the help of an experienced attorney, you’ll still need to make sure you include everything in your filing. If you don’t, the court won’t discharge the debt, and you’ll still be obligated to repay it after your case is closed.
And there is no second filing, at least for a few years.
Rather than risk that mistake and having to carry debt past your bankruptcy, consider enlisting the help of an experienced attorney that can minimize your chances of making mistakes. They will help you pull your credit report and find things you may have forgotten about, as well as classify your assets properly so that you can keep as much of your property as possible. If you still need the help of an attorney, our network of bankruptcy attorneys would be happy to chat – set up a consultation today.