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.
Chapter 7 Bankruptcy (Liquidation)
Chapter 7 bankruptcy, also known as "liquidation," is usually the best way for someone who is overwhelmed by debt to get immediate relief. It is often the quickest, cheapest and easiest way to discharge debt. Typically, the entire process takes about 90 days.
In Chapter 7, you are required to fully disclose your assets and liabilities to the Bankruptcy Court. Your assets, minus certain exemptions, go into the bankruptcy estate, which is then liquidated to pay your debts. The balance of your debts are then discharged. However, many of our clients do not lose any of their assets. By exempting many assets under the applicable laws, we are able to protect our clients' possessions from being seized and sold during the bankruptcy process.
In 2005, the federal bankruptcy laws were amended by Congress, which sought to restrict the class of people eligible to file for Chapter 7 by imposing certain income requirements. Our firm will help you determine whether you are eligible for Chapter 7 bankruptcy or whether you should consider other debt relief options. We can also help you understand the Chapter 7 Means Test, which is a formula through which Chapter 7 eligibility can be determined.
Chapter 7 Means Test
The majority of bankruptcy cases filed in the Bankruptcy Court for the District of Colorado are Chapter 7s. Chapter 7 is the fastest and least expensive method for obtaining relief from debt. In 2005 Congress amended the bankruptcy code to make it more difficult for individuals with primarily consumer debts to file for Chapter 7 bankruptcy. Congress did this by requiring that consumer debtors complete a Chapter 7 Statement of Current Monthly Income and Means-Test Calculation ("Means Test") as part of their bankruptcy filing.
Fortunately, many consumer debtors don't need to worry about "failing" the Means Test, because the only debtors who have to "pass" it are those whose income is above the median household income in the State in which they reside. Currently, the median household income for Colorado households of 1 is $49,549; 2 is $65,631; 3 is $72,259; and 4 is $86,787. An additional $7,500 is allowed for each household member in excess of 4.
Below or Above-Median?
In order to determine whether you are a below or above-median debtor, your Current Monthly Income must be determined by adding up all of the income earned in your household for the preceding six months. Virtually all sources of income, including wages, child support, IRA distributions, gifts, etc. must be added together to determine your Current Monthly Income. If the total amount of income earned in the six months immediately preceding the month in which you file your bankruptcy case, multiplied by two, is greater than the median household income which applies to you, then you are subject to the Means Test.
If you are an "above-median" debtor it does not mean that you cannot file a Chapter 7 bankruptcy. However, you are subject to the Means Test, and if you do not pass it, you will probably have to stay out of bankruptcy or file for Chapter 13, which requires monthly payments. The key for above-median debtors is to pass the Means Test, and to do so an experienced bankruptcy lawyer is indispensable.
The Means Test Itself
The Means Test is a very complex eight page formula in which your income is plugged in, and certain deductions and exclusions are allowed. If there is a positive difference between your gross income and the permitted deductions and exclusions, you fail the Means Test; if there is no such difference you are deemed to not have any "disposable income" to fund a Chapter 13 Plan, and you are allowed to file for Chapter 7. It is not unusual for above median income debtors with competent legal representation to pass the Means Test, and no debtor should file a Chapter 13 bankruptcy unless a Chapter 7 filing has been thoroughly explored and ruled out by your lawyer.
Chapter 13 Bankruptcy (Reorganization)
Generally speaking, Chapter 13 bankruptcy is intended for people who earn a steady paycheck, but who are having a hard time keeping up with a mortgage, car payments or credit card debts.
Chapter 13 bankruptcy imposes order on the chaotic situation that often develops when you default on your debts. Instead of being harassed and sued by your creditors, Chapter 13 allows you to propose a plan in which you pay an amount you can afford, regardless of how much you owe.
Chapter 13 offers other advantages: You do not have to liquidate your assets or pay back all your debt at once. You pay back some or all of your debt over a period of 36 to 60 months. Chapter 13 also allows you to keep important assets such as your home or car, while letting you catch up on your payments if you have fallen behind.
In addition, certain debts can often be eliminated or substantially reduced in Chapter 13 even if the debts are secured by an asset you would like to keep, such as a home or car. For example second mortgages can often be "stripped off" your home and upside down car loans can be "crammed down" in Chapter 13, which often results in very significant reductions in overall indebtedness.
Our bankruptcy practice extends to litigation. We represent both debtors and creditors in a variety of bankruptcy disputes, including:
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