What you want to know is this—can you file bankruptcy on student loans? The answer is yes, it’s possible to discharge student loan debt in bankruptcy, but it’s never been likely for most people. The process is complicated and costly, and bankruptcy judges only grant student loan debt relief in extreme situations, leaving a small percentage of people to benefit.
However, changes to the student loan discharge process have improved the odds that those who qualify for student loan debt relief will receive it. In this article, you'll learn what's required to discharge student loan debt and alternatives if your student loans are ineligible.
A bankruptcy filing allows people overwhelmed by debt to get a fresh start. The bankruptcy “discharge” erases credit card balances, medical debt, phone and utility bills, unpaid rent, personal loans, and more.
But not all debts can be discharged. For instance, support obligations and many tax debts are examples of “nondischargeable debt.” Student loans are also nondischargeable in most instances, and you remain responsible for the balance after bankruptcy.
However, you can erase student loan debts if you successfully prove that paying them back would be an “undue burden.” Below, we explain the process and what is required to meet the undue burden standard.
Meeting the undue burden standard has always been challenging. And although many have hoped Congress would ease student loan discharge laws, they remain as strict as ever.
However, some improvements have been made. The Department of Justice now oversees the student loan discharge proceedings to help maintain a transparent process and ensure those who qualify receive the appropriate relief.
Although challenging, getting rid of student loan debt is still possible. However, you’ll likely want to exhaust all options before turning to bankruptcy. Below, we cover bankruptcy and nonbankruptcy alternatives, with the simplest and most effective options listed first.
The most common federal programs provide repayment options to reduce monthly payments. You’re likely familiar with these, but if not, you’ll find details in How to Get Out of Student Loan Debt.
The most helpful federal program offers student loan debt relief to people with total and permanent disabilities. People apply directly with Federal Student Aid, using a more straightforward and less expensive process than bankruptcy that can eliminate the following loan types:
You’ll qualify after providing disability documentation from the U.S. Department of Veterans Affairs (VA), the Social Security Administration (SSA), or an authorized medical professional. You’ll find more about applying for total and permanent disability student loan forgiveness on the Federal Student Aid website.
Learn about student loan deferments for cancer patients.
Before filing for bankruptcy, you’ll want to know if you can establish the undue hardship factors necessary to erase your student loans. You must prove each of the following factors.
Present Ability to Pay. If you have enough money to pay your student loans, you won't clear this factor. So how do you pass it? You must show your expenses meet or exceed your income. The allowed calculation figures are on the student loan attestation form or you can ask your bankruptcy lawyer for more information.
Future Ability to Pay. Will your financial situation improve enough to allow you to repay your loan in the future? If so, you won’t meet this hurdle. Factors proving a future inability to pay include not holding a degree, being of retirement age, having a disability, chronic injury, or protracted unemployment history, and having an extended repayment status. If none of the factors apply in your case, other facts will be considered to determine your future ability to pay.
Good Faith Efforts. The good faith element assesses whether you’ve reasonably attempted to earn money and pay the student loan. Contacting the lender about payment plans is a good-faith factor. Previous nonpayment won’t automatically disqualify you, nor will failing to enroll in an income-dependent plan when you can provide a valid explanation.
The Justice Department analyzes these factors in a litigation report provided to the bankruptcy judge assigned to the student loan discharge lawsuit. You're entitled to a copy, so you or your lawyer should request the report. Your state might have a slightly modified standard leading to the same result; however, traditionally, the standards have varied little between states. Your lawyer will advise you of any significant differences.
If you can satisfy the undue hardship factors, filing for bankruptcy might offer student loan debt relief. To start the process, you must file two separate matters—the bankruptcy chapter that best meets your needs and a separate bankruptcy trial or “adversary proceeding” requesting the student loan discharge.
If your income is low enough for a student loan discharge, you’ll likely qualify for Chapter 7 bankruptcy (take the Chapter 7 means test to find out). Most people prefer Chapter 7 because it’s usually over in four to six months, and filers don’t repay creditors.
But Chapter 7 doesn’t solve all financial problems. Consider filing for Chapter 13 if you’re facing one of the following common situations (others exist):
In Chapter 13, filers repay creditors a portion of what they owe through a three- to five-year Chapter 13 plan. Learn whether it's better to file for Chapter 7 or Chapter 13.
You’ll start the bankruptcy process by filing the mandatory bankruptcy forms. You’ll file a separate complaint to begin the student loan adversary proceeding, and each matter will receive a different case number.
When you file the adversary proceeding, you’ll also provide financial and student loan information on a student loan attestation form. The Justice Department and the Department of Education apply the undue burden factors described above and prepare a student loan discharge litigation report for the bankruptcy judge. You're entitled to a copy of the report, so be sure to request it.
After your loan provider gets served with a copy of the complaint, the discovery phase begins, and each side can request information from the other. At trial before a bankruptcy judge, you put on evidence proving your case, and the loan provider presents a defense.
The bankruptcy judge will consider the evidence and the Justice Department’s opinion when deciding the case outcome.
If you don’t qualify for a student loan bankruptcy discharge, you might have another option. It is possible to use bankruptcy to manage your student loan debt instead of eliminating it. For instance, you could file for Chapter 13 and receive temporary relief from high payments because you’ll likely be able to pay a reduced amount during your Chapter 13 plan.
However, you'll be on the hook for whatever amount is left after your repayment period ends. Another significant downside is that the time spent in Chapter 13 could erase all credit for the time paid into an income-dependent plan.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. Also, don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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Updated March 26, 2024
]]>One of the most popular questions people ask bankruptcy lawyers is, “Does bankruptcy clear tax debt?” Unfortunately, the answer isn’t straightforward. Your ability to eliminate tax debt in bankruptcy depends on many factors, including the tax type, age, whether you filed your taxes on time, and whether the taxing agency has a lien on your property.
In this article, you'll learn about options for eliminating tax debt, including how to determine whether you can discharge it in Chapters 7 and 13.
More often than not, you’ll remain responsible for paying your taxes. But it's not always the case because sometimes, bankruptcy does clear tax debt.
So, how do you know whether you can use bankruptcy to get out from under a hefty tax bill? You’ll want to analyze the factors you must meet to “discharge” or eliminate tax debt in bankruptcy. Then, decide which chapter will best meet your needs.
The only type of taxes you can erase in bankruptcy are qualifying federal income taxes. In other words, you won’t be able to discharge property taxes owed on real estate, employee trust taxes withheld by a business, or other tax debt.
Bankruptcy filers must consider many factors when determining whether they can discharge tax debt. The most significant is age because bankruptcy doesn’t erase taxes less than three years old.
You can use the “Dischargeable Tax Checklist” below to learn more about discharge requirements. But remember, it doesn't address your particular factual situation. It's best to get an evaluation from a bankruptcy lawyer or contact the Internal Revenue Service (IRS) to verify tax debt discharge eligibility.
The conditions you must meet before eliminating federal income in bankruptcy include the following:
Even if you meet all the requirements in the Dischargeable Tax Checklist, you might still run into a problem if the IRS placed a lien on your property or you paid your taxes with a credit card.
If the IRS has already put a lien on your property, you're likely out of luck. The lien will remain if the IRS records a tax lien on your property before bankruptcy.
In this situation, all bankruptcy will do is wipe out your obligation to pay the qualifying tax and prevent the IRS from going after your bank account or wages. You’ll have to pay off the tax lien before selling and transferring the property’s title to a new owner.
If you paid off nondischargeable tax debt using a credit card, the credit card balance could be a nondischargeable debt in Chapter 7. However, this isn’t automatic. The credit card company must challenge the dischargeability by filing and winning a bankruptcy lawsuit or "adversary proceeding."
Unlike Chapter 7, in Chapter 13, you can discharge a credit card balance incurred due to paying off a nondischargeable tax debt.
Filing for bankruptcy can help you resolve dischargeable and nondischargeable tax debt. But each chapter has pros and cons, depending on your situation. Here are key facts to consider when deciding between Chapters 7 and 13.
The most significant benefits of Chapter 7 are that you erase dischargeable debts in about four months without repaying creditors. You’ll remain responsible for nondischargeable taxes after your Chapter 7 case ends.
One of the problems people encounter with Chapter 7 is failing to qualify because they earn too much. You’ll need to take and pass the Chapter 7 means test to determine your eligibility for a Chapter 7 debt discharge. Also, sometimes people can’t keep everything they own. You'll lose property you can’t protect or "exempt" with a bankruptcy exemption.
However, people with tax debt in Chapter 7 often benefit somewhat from a property sale because the trustee pays sales proceeds toward priority debts first. Because taxes are a priority debt, a property sale could lower the amount owed on nondischargeable tax debt after bankruptcy.
Example. Celine owes $35,000 in dischargeable credit card debt and $15,000 in nondischargeable tax debt when she files for Chapter 7. She can protect everything she owns with bankruptcy exemptions, except for a tropical timeshare in a community regularly visited by TikTok influencers. The Chapter 7 trustee sells the timeshare and pays $10,000 toward her nondischargeable tax debt. After bankruptcy, Celine remains responsible for paying $5,000 of tax debt.
Filers pay into a Chapter 13 plan for three to five years, and all come out of Chapter 13 free of tax debt. But all tax debt isn't discharged in Chapter 13. You’ll likely pay less than you owe on dischargeable taxes, but you must pay nondischargeable taxes in full.
It's common for people to file for Chapter 13 even when qualifying for Chapter 7 because Chapter 13 offers benefits not available in Chapter 7, such as the ability to keep all property. The lengthy repayment plan gives you time to catch up on missed mortgages and car payments, allowing you to save a home from foreclosure or a car from repossession. You can also use the repayment plan to pay to keep nonexempt property you'd lose in Chapter 7.
However, Chapter 13 is expensive. Not only will nondischargeable tax debt continue to incur interest, but you must also pay the trustee’s fee, which can be up to 10%. It’s also common to earn too much to qualify for Chapter 7 but not enough to support a Chapter 13 plan.
Example. Charlie wanted to file for Chapter 7, but after she and her bankruptcy lawyer discovered she earned too much to qualify, they began exploring Chapter 13. Unfortunately, the conversation was short. Because Charlie owed $60,000 in nondischargeable taxes, she would need to pay $1,000 monthly for 60 months, plus interest and the trustee’s fee. Because Charlie didn’t have enough disposable income to pay the required monthly payment, she didn't qualify for Chapter 13.
Example. Hannah qualified for Chapter 7 but was $6,000 behind on her mortgage payment and didn’t want to lose her home. She also owed $15,000 in miscellaneous dischargeable debt and $5,000 in nondischargeable tax debt. Hannah would need enough income to repay $11,000 plus interest and trustee fees through her plan. She’ll likely pay very little, if anything, on the $15,000 dischargeable debt, which the bankruptcy court will erase when she completes her plan.
Filing for bankruptcy won’t impact your future tax filing responsibilities. However, tax filings can affect how much you’ll pay in Chapter 13 or lose in Chapter 7.
If the IRS owes you a tax refund when you file for Chapter 7, you must be able to protect it with a bankruptcy exemption even if you haven’t yet filed the return. If you can’t exempt it, the trustee will seize it for the benefit of creditors.
In this situation, many people delay bankruptcy until after receiving the return and spending it on necessities such as living expenses. If you choose this approach, keep records of your expenditures.
Example. Phillip filed for Chapter 7 bankruptcy in December 2023. When he attended the 341 meeting of creditors in January 2024, he hadn’t yet filed taxes for 2023. At the meeting, the trustee's questions included asking whether he anticipated a tax return. He answered that he didn’t know. The trustee continued the meeting to allow for further investigation. During that time, Phillip discovered he was owed a refund of $2,500. Because his state didn’t offer an exemption to protect it, he lost the refund to the trustee.
Chapter 13 filers must complete tax returns promptly each year. The Chapter 13 trustee will likely inspect the return, and creditors could also request a copy.
If your return shows you're making more money than expected, the trustee could file a motion asking the court to increase your monthly payment. Why? Because your creditors are entitled to your discretionary income for the duration of your plan, and typically, a salary increase will increase discretionary income.
The trustee might also be entitled to a Chapter 13 filer's tax return if it is unusually large. A hefty tax return is another salary increase indicator, but might also signal that a filer's expenses are lower than disclosed in the initial filing. In either case, the trustee might investigate the filer's ability to pay more to creditors.
Example. John received a promotion a few years after filing for Chapter 13 bankruptcy. He called his bankruptcy lawyer because he didn’t want to give the additional funds to creditors. John's plan was to increase his withholdings so his monthly bank deposits appeared unchanged. His lawyer advised against it, explaining that intentionally hiding funds from creditors could be considered fraudulent and that a significant tax return could prompt a thorough evaluation of his finances.
Learn more about when a trustee might suspect fraud.
You must turn over tax returns when filing for Chapters 7 and 13. However, the requirements differ depending on the Chapter filed. It’s more important to be current on tax filings before filing for Chapter 13 because the Chapter 13 trustee has a greater need for accurate tax information.
Unlike Chapter 7 filers, Chapter 13 filers must pay certain taxes in the Chapter 13 plan. Here are the details.
When you file for Chapter 7, the trustee will ask for your most recently filed tax return. It doesn’t necessarily have to be the tax return for the last tax year, so you can file for Chapter 7 even if your tax return filings aren’t current.
If you are exempt from filing taxes, you can expect the trustee to ask for a written explanation.
You must be current on tax returns when filing for Chapter 13 because you must provide returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors. The bankruptcy court will dismiss your case if you don’t give the trustee the required returns.
Using Chapter 13 bankruptcy to pay tax debt over time is possible. However, you’ll pay interest on nondischargeable tax debt and the Chapter 13 trustee fee, which can be costly. So, before using the bankruptcy route, you’ll want to research IRS payment plan options.
You can also explore companies offering to negotiate tax debt. But, research such companies carefully. Not all deliver on their promises. You’ll likely fare better working with an experienced lawyer specializing in tax and bankruptcy cases.
When meeting with a bankruptcy attorney about taxes, be prepared to tell the lawyer the tax type, its age, whether the taxing agency has filed a lien and more. The lawyer will use the information to assess whether bankruptcy will erase your tax debt, what happens to federal liens, and how you might manage tax debt using Chapter 13.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>In this article, you'll learn how Chapter 7 bankruptcy clears debt, which debts Chapter 7 will discharge, why your filing date determines what bankruptcy covers, which debts and liens Chapter 7 bankruptcy won’t clear, and how to stop collection calls after bankruptcy.
Once you understand more about discharging debts in bankruptcy, you'll likely find that using Chapter 7 to eliminate debts you’re struggling to pay is just what you need to get a fresh financial start.
A bankruptcy discharge is an order issued by the bankruptcy court that breaks the contract between the bankruptcy filer and a creditor. Without the contract, the filer isn’t legally required to pay the discharged debt, and the creditor can’t take collection actions.
However, the debt won’t disappear entirely. The bankruptcy filer’s credit report will show the debt “discharged in bankruptcy” for up to ten years, although the notation’s impact on the debtor’s credit score will lessen over time.
Most Chapter 7 filers receive a discharge order about four months after filing the bankruptcy petition.
Chapter 7 filers discharge all of the following debts (a Chapter 13 discharge erases a few more):
You can use our list to get a general feel for whether you’re a potential Chapter 7 candidate, but it’s best to review your particular debts with a bankruptcy lawyer. Why? Because you might have dischargeable debts that don't appear above.
As much as we'd like to, we can't create a list that includes all dischargeable debts because bankruptcy law doesn’t tell us the debts you can discharge. Instead, the law tells us the debts you can’t erase in bankruptcy, which we cover in “Chapter 7 Bankruptcy Doesn’t Clear All Debts” below.
Note about fraud and utility deposits. Any debt-related misconduct or fraud can turn a dischargeable obligation into a nondischargeable debt. Also, a utility provider can’t refuse to provide service because of a bankruptcy filing but can charge a reasonable deposit to ensure future payment.
Find out about utility shut-offs and Chapter 7 bankruptcy.
Your Chapter 7 bankruptcy will discharge debts you had before filing but not after. Not even debts you incurred after filing but before you received your discharge. Here's how it works.
In short, the bankruptcy court discharges debts that existed before the Chapter 7 filing date. You’ll have to pay for anything you get on credit after filing your petition, even bills you incur before receiving a discharge.
Example. Jessica fell behind on her electric bill, listed the balance in her Chapter 7 bankruptcy schedules, and continued to use her electric service. After receiving her Chapter 7 discharge, the energy company deleted the charges predating her bankruptcy filing and billed her for the electricity she used after her bankruptcy filing date.
The discharge order won’t list the debts you wiped out in Chapter 7. Instead, it will list the debts that bankruptcy law says all filers remain responsible for paying. You’ll stay on the hook for the following:
You'll find a more detailed list of nondischargeable debts in What Is a Bankruptcy Discharge? If you’d like more information about classifying debts in bankruptcy, consider reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.
Bankruptcy automatically clears you of the responsibility to pay a mortgage, car loan, or secured debt. Bankruptcy doesn’t remove a lien giving the creditor the right to take property if you don’t pay.
For instance, you’ll lose your car if you don’t continue paying your car payment informally or sign a reaffirmation agreement. The lender can use its lien rights to repossess it during the Chapter 7 case after asking the court to lift the “automatic stay” order preventing collection efforts, or wait until the Chapter 7 case ends.
You can stop most creditor calls cold by providing your bankruptcy case number and filing date. Start by finding a filed bankruptcy document or notice. You should have one handy because you get copies of all mailings, even if a bankruptcy lawyer represents you. The filing date will be next to the case number at the top.
Why will this work? The creditor can use the information to verify your bankruptcy, and if the calls don’t stop, the creditor will be subject to sanctions. Find out more about what happens if a creditor tries to collect a debt during your bankruptcy.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>Secured debts are created with liens. Liens can be voluntary or involuntary. Home mortgages and car loans are examples of secured debts that you incur voluntarily. Real property tax liens, by contrast, are involuntary liens.
Usually, you voluntarily agree to give a creditor a security interest in your property. For instance, as a condition for making a home loan, a lender typically requires you to sign a mortgage (or, in some states, a deed of trust). A mortgage or deed of trust is an agreement that grants a lender a security interest, or lien, against real property. The lien allows for a foreclosure auction if the homeowner falls behind on the monthly payment.
You can also grant a lender a lien against personal property, which is anything you own or have an interest in that isn't real estate (real property). Personal property includes vehicles, equipment, furniture, tools, inventory, shares of stock, other types of investment interests, and even cash.
Typically, you grant a lien against personal property through a security agreement. Before extending a new car loan, for example, a lender will require you to sign a security agreement granting a lien against the vehicle you are buying. It's the voluntarily lien that allows the lender to repossess your car if you don't pay as agreed.
Involuntary liens are security interests imposed against your property by a state or federal statute or court order. No agreement is involved. Involuntary liens include:
One of the steps that a secured creditor must take to protect its right to collect is to perfect its lien. "Perfection" is a legal term that refers to the action required to give other creditors and interested parties notice of a lien or security interest. The action to perfect a lien depends on the property type and applicable state law. For example:
In most states, the lender perfects its lien by recording (filing) mortgages and deeds of trusts in the county where the property is located.
Lenders usually can perfect liens against cars, motorcycles, and trucks by a filing with the state motor vehicle department and a notation on the certificate of title.
Security interests in most tangible personal property—like equipment, furniture, tools, goods, and materials—are perfected by filing financing statements. A financing statement is a document that identifies the borrower, lender, and collateral for a secured debt.
Unlike security agreements, financing statements don't have to be signed to be effective. A creditor can file a financing statement as long as you have signed the security agreement for the collateral that it is supposed to cover. In most states, financing statements are filed with the secretary of state.
Perfecting a lien is a critical step for any creditor. Sometimes, borrowers grant liens against the same property, like your home, to multiple creditors. Take, for example, a home equity line of credit, which is usually junior to the mortgage you took out to buy your house. A junior lien, like a home equity line of credit, can, in effect, move up in priority if the holder of the first mortgage fails to perfect its interest.
In bankruptcy, the consequences of a lender's failure to perfect a lien can be even more serious. If you file bankruptcy, the court has the power to set aside a lien that has not been properly perfected. A lien that is set aside is treated as if it never existed in the first place—meaning that the lender becomes an unsecured creditor. (To learn what happens to unsecured debt in Chapter 7 and 13 bankruptcy, see What Happens to Liens in a Chapter 7 Bankruptcy and Your Debts in Chapter 13 Bankruptcy.)
One of the big differences between an unsecured debt and a secured debt is how the creditor can enforce its rights if you fail to make payments. For most unsecured debts, creditors must first sue you in court before they can take any of your property. However, A secured creditor can move to enforce rights if you default on your loan obligations and have not filed bankruptcy. Remedies to enforce secured debts include:
Secured creditors may not trespass on private property or breach the peace, but they usually don't have to go to court before repossessing cars or other motor vehicles.
A lender may enforce a home loan by foreclosing its mortgage or deed of trust. In some states, foreclosure doesn't require any court action and may be completed within a matter of a few months. In other states, where court approval is needed, foreclosure typically takes much longer.
A secured creditor has the additional option of filing a court action to obtain a judgment against you. Depending on applicable state law, a creditor may seek a judgment for the entire obligation that you owe or the balance left after deducting the value of any collateral that it recovers.
If you’re struggling financially and want to learn about different ways to manage your debts, like negotiating settlements or filing bankruptcy, consider talking to a debt settlement lawyer or bankruptcy lawyer.
]]>An "unsecured debt" is an obligation or debt that doesn't have specific property, like your house or car, serving as collateral for payment of the debt. If you fail to pay unsecured debt, the creditor can't take any of your property without first suing you and getting a court judgment, subject to a few exceptions.
A "secured debt," on the other hand, has a piece of property serving as collateral for the debt. If you fail to make payments, the creditor can take the property.
Common types of unsecured debts include:
Most debts are unsecured. The primary exceptions are home and auto loans, which are almost always secured.
Advances on lines of credit can be unsecured claims. Some lines of credit are unsecured, backed only by your promise to repay advances taken against them. Obligations on home equity lines of credit, on the other hand, are typically secured claims (secured by your home).
If you fail make payment on an unsecured debt, the creditor can contact you to try to obtain payment, report the delinquent debt to a credit reporting agency, or file a lawsuit against you. Generally, a nongovernmental, unsecured creditor can't seize your assets without a court judgment.
To get a judgment, a creditor must file a complaint in state or federal court and serve you with a copy, which is the start of the lawsuit. You have the right to file an answer to the complaint and contest the lawsuit before a judgment can be entered.
Once a creditor obtains a court judgment against you, it can proceed with collection remedies. Collection remedies and procedures are governed primarily by state law. A judgment creditor may, among other things:
The percentage of your wages that can be garnished varies from state to state. State and federal law also exempt some real and personal property from collection. Creditors can't garnish or collect from assets to the extent exemptions cover them. Exemptions available to you might protect your home equity, household furniture, pension plans, and other items of property from your creditors' collection efforts.
If you default on a federal student loan, the Department of Education can garnish up to 15% of your disposable income without a court judgment. State and federal tax authorities may also undertake collection remedies without going to court.
If you’re struggling financially and want to learn about different ways to manage your debts, like negotiating settlements or filing bankruptcy, consider talking to a debt settlement or bankruptcy lawyer.
]]>In this article, you’ll learn the following:
We explain what you must know to avoid problems when erasing credit cards in bankruptcy to help you prevent a credit card creditor from filing a legal action against you.
The straight answer is that you could face a fraud charge if you aren’t careful. Credit card fraud occurs when you purchase something on credit, knowing you have no intention to repay the debt or don’t have the money to repay it.
Here’s what you should know to avoid running into a credit card fraud problem before bankruptcy:
Keep reading for more information.
When you make a credit card purchase, you promise to repay the debt later. Buying an item on credit, knowing you can’t or won’t pay, is fraud. We explain several types of fraud at the end of the article, but in each case, the underlying concept is the same. However, an exception exists that will allow you to use your credit cards before bankruptcy in certain circumstances.
The easiest way to prevent fraud is to stop using credit cards after visiting a bankruptcy lawyer or deciding to file for bankruptcy. Doing either suggests you can't or don’t intend to pay your bills.
However, you can use your credit card before filing for bankruptcy if you have no other way to buy something essential or “goods or services reasonably necessary for the maintenance and support of you and your family.”
For instance, if the weather forecasts a deep freeze, you could purchase heating oil for you and your family. A warm jacket and boots for a school-age child and a repair on the car used for work would also be allowed.
No. By definition, luxury purchases aren't essential for your well-being. If your creditor sues you in bankruptcy and wins, you won't be able to discharge the debt in bankruptcy. You’d remain responsible for the charges.
It can be. Suppose you charge luxury purchases totaling $800 or more within 90 days of filing for bankruptcy. In that case, the creditor wouldn’t need to prove you intended to commit fraud, the bankruptcy court would presume it. You’d have to prove you intended to pay the bill or the purchase was reasonably necessary to avoid a fraud charge.
Creditors receive the same advantage when a bankruptcy filer takes cash advances totaling $1,100 within 70 days of bankruptcy. (The amounts apply to cases filed between April 1, 2022, and March 31, 2025.)
Any goods or services not reasonably necessary for the maintenance and support of you and your family would be a luxury purchase. For instance, fur coats, jewelry, home decor, golf clubs, and salon services would likely be considered luxury purchases under bankruptcy law.
Example 1. 45 days before filing for Chapter 7, Xavier bought a $5,000 engagement ring on his credit card, and the credit card company sued for nondischargeability. The bankruptcy court determined the engagement ring was a luxury item purchased within 90 days of filing for bankruptcy and presumed fraud. Because Xavier couldn’t prove the purchase was necessary or that he intended to repay the debt, the bankruptcy court declared the debt nondischargeable. Xavier remained obligated for the credit card charge.
Example 2. One day, Jasmin’s car breaks down. Because she has a meager income, she can’t afford to pay $900 to replace the transmission. However, she needs the car to go to work, so she uses her credit card to pay for the repair. A court would likely find that this was a reasonably necessary expense and allow the discharge of the credit card debt.
The credit card company brings the fraud to the bankruptcy court’s attention by filing an “adversary proceeding.” An adversary proceeding asks the court to hold a trial to determine whether fraud occurred.
It depends. If the bankruptcy court finds a debt fraudulent, the court will declare it “nondischargeable.” You’d have to pay it after your case ended.
However, the bankruptcy court can’t make a debt nondischargeable if the creditor doesn’t file an adversary proceeding. The bankruptcy court would erase the credit card charges with other dischargeable debts.
Learn about other types of debts that are not dischargeable in bankruptcy.
A bankruptcy creditor can sue under a fraud theory for various reasons, including if you charge goods or services without intending to pay the bill. The charges don’t need to be for luxury goods and services, and they can occur at any particular time (other than those imposed by the statute of limitations). However, the creditor would need to prove you intended to commit fraud.
By contrast, a creditor who can rely on “presumptive fraud” isn’t required to prove intent. Engaging in a particular act is enough to imply or presume fraud. For instance, the bankruptcy court will presume fraud if a debtor uses a credit card to make luxury purchases of $800 or more within 90 days of the bankruptcy filing. The presumption gives a creditor an advantage because proof of intent isn’t needed.
Because the burden of proof is eased in a presumptive fraud matter, most cases settle out of court with the debtor agreeing to pay some or all charges. Learn about the consequences of bankruptcy fraud.
Did you know Nolo has made the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 23, 2022
]]>Read on to learn more about how bankruptcy impacts the obligation of your cosigners and guarantors to pay your debts and what you can do to protect them.
Lenders who doubt your ability to repay a loan will often require someone with higher income, more assets, or better credit to be responsible with you. For instance, a bank might ask that you supply a guarantor for your loan for any of the following reasons:
A guarantor might be required in other situations, as well. For instance, landlords ask first-time renters or those with past credit issues to have someone guarantee the obligation. The same applies when leasing a vehicle, equipment, and furniture.
Your bankruptcy discharge eliminates your responsibility to pay your debts, not the liability of the cosigners and guarantors to pay the debt. Whether a creditor can collect from the cosigner during bankruptcy depends on whether you file Chapter 7 or 13.
If you file for Chapter 7 bankruptcy, your cosigner won’t receive any protection from creditors. They’ll still be on the hook during and after bankruptcy.
All collection activities against you must stop because of the bankruptcy’s automatic stay. However, the automatic stay doesn’t extend to your cosigners, and your debt discharge won't impact a cosigner’s payment responsibilities. Your creditors will be free to pursue the cosigner or guarantee of your debt.
A Chapter 13 bankruptcy offers more protection to your cosigners and guarantors. Plus, you get more time to pay off the cosigned or guaranteed debt through your three- to five-year Chapter 13 repayment plan.
When you file a Chapter 13, the automatic stay protects cosigners and guarantors from creditors collecting on consumer (nonbusiness) debts—called the Chapter 13 codebtor stay. Your creditors can still ask the court to lift the automatic stay under the following circumstances:
Also, the codebtor stay will end if the court dismisses your case or converts the case from Chapter 13 to Chapter 7 bankruptcy.
However, you can take steps to protect your cosigners and guarantors from collection efforts by creditors when you file for Chapter 7. Here are your options.
Before receiving a discharge in Chapter 7, you can choose to reaffirm secured debts such as car loans, mortgages, and other certain other credit accounts (jewelry, computer, and furniture accounts are often secured by the purchased product, meaning that you must return it if you fail to pay as agreed).
When you reaffirm a debt, you give up the benefit of your discharge and make yourself personally liable for the obligation again. As a result, reaffirming debts isn’t usually advised unless you need a particular item or want to help protect cosigners and guarantors from creditors.
To learn more, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.
After a Chapter 7 discharge, you are no longer obligated to pay back any discharged debts. However, this does not preclude you from voluntarily paying off your debts after the bankruptcy.
If you want to protect your cosigners and guarantors, you can continue paying the debt until it’s paid. In many cases, such as with an automobile, the lender will allow you to continue making the monthly payment. You can read more about keeping cars in Chapter 7 bankruptcy.
Warning about guarantors. It would be highly unusual for a typical bankruptcy filer to have a guarantor on an auto loan or some other secured purchase. However, a lender might not be willing to informally accept monthly payments if a guarantor were in place and had sufficient assets to pay the debt in full.
Important tip. You probably won’t want to pay off the debt before filing for bankruptcy. Bankruptcy rules prevent you from favoring one creditor over another, and the bankruptcy trustee could unwind the transaction. Learn about preferential transfers in bankruptcy.
Bankruptcy affects the credit of the person who files for bankruptcy, regardless of the cosigner status. The bankruptcy filing won't impact the nonfiling cosigner’s credit directly. Here's how it works.
You file for bankruptcy. If you file for bankruptcy, your debt responsibility will be eliminated—assuming the debt can be discharged—and your credit score will likely decrease. Nonfiling cosigners remain responsible for the debt. A nonfiling cosigner’s credit won’t be affected unless the cosigner doesn’t pay the debt.
Your cosigner files for bankruptcy. Suppose your cosigner files for bankruptcy. In that case, the bankruptcy will wipe out the cosigner’s responsibility to pay and impact the cosigner’s credit. You’ll remain responsible for the debt. Your credit won’t decrease unless you stop paying as required.
Learn about bankruptcy and your credit.
Did you know Nolo has made the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>If you don’t want to keep property serving as collateral for a secured debt when you file for bankruptcy, you can “surrender” it by giving it back to the lender. The bankruptcy case will wipe out your responsibility to pay for the secured debt. If you want to keep the loan in place—and keep the property—you'll need to continue paying the loan. One way to do so is by completing a reaffirmation agreement with the lender.
In Chapter 7 bankruptcy, you must decide how to deal with your secured debts and the property that secures those debts.
You’ll find more about options such as reaffirming the debt or redeeming the property in Secured Debt & Property in Chapter 7 Bankruptcy.
When you surrender property in Chapter 7 bankruptcy, you return it to the creditor, and it’s the simplest method of dealing with secured debt and property in Chapter 7. The bankruptcy discharge wipes out your personal liability for the secured loan. The property lien will no longer exist because the lender will have recovered the property.
If you decide to surrender an item of property in your Chapter 7 bankruptcy case, you will inform the court of your decision in your bankruptcy papers. You’ll do so by completing the Statement of Intention for Individuals Filing Under Chapter 7 form.
You don’t have to physically return the property to the creditor—the creditor must collect it. If the creditor doesn’t retrieve the property and the trustee doesn’t claim it, you keep it. The likelihood of this happening is higher when the property isn’t worth much.
Surrendering property can be a good option if:
Find out more about surrendering a car in Chapter 7 bankruptcy.
The most obvious disadvantage to surrendering property is you lose the property. Surrendering might not be an option if you need your car to go to work or attend important doctor’s appointments.
A less obvious disadvantage to surrendering property is that some courts won’t count your loan payments on property you intend to surrender for purposes of the means test. Because secured payments reduce your available disposable income for qualification purposes, you might have difficulty qualifying for Chapter 7 bankruptcy.
Learn more about the bankruptcy means test.
Bankruptcy works by severing contracts with your creditors. Because your obligation to pay a debt stems from a valid contract, a creditor can’t collect the debt without it. However, in some cases, you’ll want to continue paying a lender to keep the financed property.
For instance, suppose you’re making payments on a vehicle. If you have another form of transportation, losing the car you’re buying on credit might not be an issue. But if you need the car to get to work or to take your children to school, then losing it might not be an option.
To get around this problem, you can enter into a new contract—a reaffirmation agreement—with the holder of your auto loan. If both sides agree to the old contract terms or newly created conditions, the bank will draft a reaffirmation agreement and forward it to you for your signature. After you sign, it will be filed with the bankruptcy court.
However, taking additional steps to make the contract binding is necessary. Specifically, you must demonstrate that you can afford the monthly car payment. If represented, your lawyer can attest that the payment will not pose an undue hardship for you (and your family) by signing the reaffirmation form and filing it with the court. Otherwise, the judge will determine at a hearing.
Once the reaffirmation agreement is approved, you’ll be legally liable to pay the debt balance. As long as you remain current on your payment, you can retain the property without fear that the lender will repossess it.
Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy.
Did you know Nolo has made the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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]]>When taking out a secured loan, you agree the purchased property will be collateral, creating a voluntary "lien." The lien lets the creditor recover the property if you don't pay—even if you file for Chapter 7 bankruptcy. Filers don't always lose secured property in Chapter 7, but keeping it will depend on the following:
We explain both Chapter 7 secured property approaches below and briefly cover options available in Chapter 13. However, keep in mind this article addresses voluntary liens only. You can learn about voluntary and involuntary liens in What Happens to Liens in Chapter 7 Bankruptcy?
If you’re making payments on an expensive property—such as a home, car, diamond ring, computer, or couch—you’ve likely agreed that the property will serve as collateral and the lender can sell the collateral if you don’t pay as promised. For instance, the lender might repossess a car or foreclose on a home if you fall behind on the payment.
Whether the lender must go to court before selling the property will depend on your state's laws. Also, some states will give the lender a “deficiency” judgment for the remaining balance if the sale brings less than the amount owed.
You can eliminate your responsibility to pay a mortgage, car payment, or another secured debt in Chapter 7 bankruptcy. However, filing for bankruptcy doesn’t take away a lender’s lien rights to reclaim the property. Why? Because a secured debt has two parts:
In some situations, you can ask the bankruptcy court to remove the lien as part of your bankruptcy case. For instance, the bankruptcy court might remove an involuntary property lien placed by a state court after trial if the lien interferes with a bankruptcy exemption.
If you have a debt secured by property and you file for Chapter 7 bankruptcy, here are your options, assuming you meet all requirements:
Find out more about keeping secured property in Chapter 7, including how to keep your house or protect a car.
If you’re wondering what it means to protect equity with a bankruptcy exemption or want more details about redeeming property in Chapter 7, keep reading.
If you’re behind on a secured debt payment, like a mortgage or car payment, filing for Chapter 7 bankruptcy won’t help you keep the property. Why? Because Chapter 7 doesn’t have a mechanism to catch up on payment arrearages.
If you can’t make arrangements to bring your payments current, you’ll likely lose the property after your case ends. You could lose your asset even sooner if the court lifts the automatic stay to allow for foreclosure or repossession.
Because there’s no way to force a lender to work with you in Chapter 7, if you want to keep secured property, ensure you’re current on payments and can protect all property equity before filing.
You can protect some property when you file for bankruptcy, but the amount you can keep will depend on your state’s bankruptcy exemptions. If you owe more on a secured loan than the property securing the debt is worth, you don’t have equity and can skip this step. However, suppose you can’t protect all of a property’s equity. In that case, the Chapter 7 bankruptcy trustee assigned to the case would sell it for your creditors’ benefit.
Here’s how it works.
Example. You owe $3,000 on a car worth $6,000, leaving you with $3,000 in equity. Your state’s vehicle exemption will let you protect $1,000. In this case, the trustee would sell the car and pay your secured creditor the $3,000 you owe. You'd receive the $1,000 exemption amount. The remaining $2,000 would go to unsecured creditors, minus any costs of sale and the trustee’s commission.
Yes. If you’re behind and want to keep the property, Chapter 13 bankruptcy is probably the better choice. In Chapter 13, you can make up missed payments over time using the Chapter 13 repayment plan. However, keep in mind that you'll need to be able to afford the regular monthly payment and meet other Chapter 13 payment plan requirements, too.
When you redeem property in Chapter 7 bankruptcy, you can satisfy the loan by paying the value of the property in one lump sum payment. If you and the creditor disagree about how much the property’s worth, the court will decide at a “valuation” hearing. The judge will extinguish your obligation to the creditor after you pay the agreed-upon lump sum amount.
If you're wondering how bankruptcy exemptions come into play here, the simple answer is they don't. Filers redeem property in Chapter 7 bankruptcy only when property equity doesn't exist because one of the requirements is that you owe more than the property is worth.
You can redeem property in Chapter 7 bankruptcy only if you meet all of the following conditions:
A Chapter 7 property redemption is often a good option if your debt balance exceeds the property's value. Why? Because if you redeem the property in bankruptcy, the creditor must accept the item’s value as payment in full, even if you owe significantly more.
The main drawback to redemption is most debtors can't afford to pay the property's value in a single payment. Some companies specialize in lending to people seeking to redeem property, so a loan might be an option. Or you might be able to get the money from a friend or relative.
Chapter 13 offers ways to reduce the amount owed on secured property, but bankruptcy practitioners refer to these procedures by different names. You'll use a "cramdown" to reduce what you owe on personal property, like your car. You can even use a Chapter 13 cramdown on investment real estate.
A “lien strip” is used to pay significantly less on a wholly unsecured mortgage on your residence. You'll find more information about reducing your residential home mortgage in Chapter 13 in Keep Your House in Chapter 13 Bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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]]>In Chapter 13 bankruptcy, priority debts get paid in full through the Chapter 13 repayment plan (the categories are the same).
Most Chapter 7 bankruptcies are “no asset” cases, and the debtor doesn’t have anything that the Chapter 7 bankruptcy trustee can sell for the benefit of creditors. But that isn’t always the case. The trustee will review creditor claims and disperse the funds when money is available.
The trustee will pay two types of debts: priority unsecured debts and nonpriority unsecured debt. All priority debts must be paid in full before nonpriority unsecured debts can be paid, like medical bills, credit card balances, and personal loans.
For more information, read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.
No one wants to lose property in Chapter 7 bankruptcy. But when it happens, the sting isn’t quite so nasty if you have priority debts.
Why? Because most priority debts can’t be “discharged” or erased in bankruptcy. You'll have to pay priority debt balances after the Chapter 7 case ends. But, because the trustee pays priority debts first, if you lose property, the sales proceeds will be applied to your priority debt first, leaving you less to pay after your bankruptcy case ends.
For example, suppose the trustee sells your RV for $15,000 and uses the money to pay toward your $20,000 recent income tax bill, which is a priority, nondischargeable debt. After your bankruptcy case, you’d owe $5,000 instead of $20,000 on your tax debt.
Find out more about keeping property in Chapter 7 bankruptcy and nondischargeable debts.
Priority debts that might come up in consumer bankruptcies include the following (amounts valid from April 1, 2022, through March 31, 2025):
To learn how other debts are treated in Chapter 7, see Your Debt in Chapter 7 Bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated: October 23, 2022
]]>A bankruptcy discharge wipes out all credit card debt at the end of the case. It doesn’t matter if the debt is $1,000 or $100,000. Your responsibility to pay the outstanding balance will be gone (although you might have to return jewelry, electronics, or furniture if you agreed the purchase would secure payment of the debt).
However, a significant exception exists. If you rack up credit card debt with fraudulent intent, you should assume the bankruptcy court won’t discharge it in bankruptcy. Charging on your credit card with no intention of paying the debt, especially when planning to file for bankruptcy, is almost always considered fraud.
You’d be wise to avoid running up credit card balances before filing if you’d like your bankruptcy case to go smoothly. Charging purchases shortly before a bankruptcy case is one of the red flags your creditors and the bankruptcy trustee appointed to your case will be looking for. It's one of the more common inappropriate acts people tend to engage in before filing.
If you run up credit card balances before bankruptcy, the credit card company can file a lawsuit asking the bankruptcy court to declare the debt “nondischargeable.” If the credit card company wins, you’ll remain responsible for paying your credit card bill after your case ends.
Learn about “adversary proceeding” lawsuits in bankruptcy.
Bankruptcy laws make it easy for creditors to force you to reimburse them for luxury charges and cash advances made before bankruptcy. Even when you run up credit card balances without intending to defraud the creditor, for example, if you truly intended to pay for the ski boots when you bought them, you might still get in trouble.
Here are the rules:
But an exception exists. You can charge purchases for necessary goods and services. When you use a credit card to buy something you or your family needs, the credit purchase still qualifies for a bankruptcy discharge.
You need certain things to maintain employment and a household. These things fall into the “necessary” goods and services category. By contrast, you don’t need luxury goods and services to work and live. Here are a few examples of both.
Necessary goods and services. Charges for heat during the winter and gasoline to get to work should be dischargeable because they’re necessary items. Also, the court would likely consider unbranded athletic shoes for a child’s physical education class an essential expense.
Luxury goods and services. The court would likely consider an expensive pair of branded athletic shoes or designer heels an unnecessary luxury purchase. Luxury services would include charges for manicures and nonmedical relaxation massages.
Read more about luxury purchases made just before bankruptcy.
If your purchases fall into the luxury category or you took out cash advances shortly before filing, expect the creditor to take action. Many will appear at the 341 meeting of creditors, the one appearance all bankruptcy filers must attend, and ask you to repay the debt voluntarily.
If you don’t agree to reimburse the creditor for the credit card charges, the creditor will file an adversary proceeding in bankruptcy court.
If a credit card company wants the bankruptcy court to declare your recent charges nondischargeable so you can’t wipe them out, it must take action. The credit card company must file a lawsuit in bankruptcy court and object to your discharge in what’s known as an “adversary proceeding.”
The credit card company can win the adversary proceeding in one of two ways depending on when you made the purchase. Remember, the 90-day presumptive period refers to the 90 days immediately before the bankruptcy filing.
The bankruptcy court will discharge the credit card charges if the credit card company doesn’t file an adversary proceeding. Learn more about adversary proceedings and fraud consequences in bankruptcy.
You can expect the bankruptcy court to look at whether you were broke when you made the purchase and if you intended to repay it. The court will also consider whether you consulted with a bankruptcy lawyer and if you did, when the meeting occurred.
Why would it matter that you’d spoken with a lawyer?
It’s a clear sign that you knew you couldn’t pay. Also, the court would likely assume the lawyer explained the 90-day presumptive fraud rule. So it would be a good idea to steer clear of using your charge cards for anything other than necessities after meeting with a bankruptcy lawyer.
Even if the creditor presents evidence of fraud or gets to rely on the presumptive fraud rule, you won’t automatically lose the case. You can prove that you didn’t attempt to defraud the creditor.
A typical defense would include presenting evidence that you could pay the charge, that you intended to repay it, and that you didn’t intend to file bankruptcy. Typically, you’d want to present as much evidence as possible.
Keep in mind that trying to “work the system" is never a good idea. Because the bankruptcy court will have seen every type of manipulation possible, the best way to avoid a problem is by following the rules.
Learn more about timing a bankruptcy filing.
Most credit card companies will carefully review all your purchases and other card activity before the bankruptcy filing, so if you have charges you’re concerned about, it’s a good idea to talk to a bankruptcy lawyer. An attorney can help you decide whether to go forward and pay the charges if the creditor raises the issue or avoid bankruptcy altogether.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated September 29, 2022
]]>Most debtors don’t have any problem sailing through the Chapter 7 process. That said, getting a Chapter 7 discharge isn’t a sure bet. Here are two barriers to debt discharge.
For a few of the 19 categories of debt, the creditor must successfully challenge the discharge of the debt during the bankruptcy case. If a creditor doesn't raise an objection, or if it does and the court disagrees, the debt will be discharged.
In Chapter 7 cases, the debtor doesn’t have an absolute right to a discharge. To receive a discharge, debtors must fulfill the requirements of bankruptcy law. (11 U.S.C. § 727.)
If the debtor fails to follow the rules or doesn’t provide mandatory information, a creditor, the bankruptcy trustee, or the U.S. trustee can object to the entire Chapter 7 discharge. For instance, the court can deny a Chapter 7 discharge if you:
If successful, the debtor will remain responsible for all obligations.
Some types of debts are deemed nondischargeable without the need for a hearing if they fall within one of a list of prescribed categories. Unless the debtor can demonstrate extraordinary circumstances, the following debts are automatically nondischargeable:
While all of these debts are nondischargeable in Chapter 7, some can be eliminated in Chapter 13. Find out which debts are dischargeable in Chapter 13 but not Chapter 7.
Some debts aren’t automatically excepted from discharge. Creditors must ask the court to determine if they are dischargeable or not. If the creditor doesn't raise the dischargeability issue or the creditor raises the issue, but the court doesn't agree, these debts will be discharged.
If you're considering bankruptcy as an option for dealing with debt, you'll want to learn more about how it works, what it can and cannot do, and who is eligible.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 23, 2022
]]>If you're interested in using Chapter 7 to eliminate a heavy credit card burden, you'll want to understand the following:
You'll also learn how to qualify for a Chapter 7 credit card discharge and whether credit card balances get paid in Chapter 7.
However, keep in mind that while Chapter 7 offers many benefits, it might not be the best bankruptcy chapter for you. Before moving forward, it's worth learning when Chapter 13 works better than Chapter 7.
When money is tight, turning to credit cards to buy things you need is natural. But when finances don’t improve and credit card balances increase, it can become challenging to make the monthly payments.
Chapter 7 can provide relief by eliminating many different credit card obligations, including balances on major credit cards, department store credit lines, gas cards, and more.
Even though filers commonly use Chapter 7 to erase credit card balances, you can’t always wipe your hands cleanly of the debt. Here are a few things you might have to do:
If you don’t have any of these situations, skip ahead.
In most cases, you won’t need to return the property you bought on your credit card because most credit card obligations are “unsecured” debts. When you applied for the account, you didn’t agree to give back the property if you couldn’t pay.
However, that might not be the case if you charged an expensive item. For instance, you could have a “secured debt” if you bought a piece of jewelry, a TV, or a kitchen appliance. A creditor with a secured debt can repossess the property if you don’t pay what you owe, even when you file for Chapter 7 bankruptcy.
The most common culprits? If the credit card company requires you to keep a balance in a savings account, the credit card likely is secured. Other possible secured credit purchases include charges made on jewelry, furniture, appliance, computer, electronics, and mattress accounts. Check the receipt or the credit contract for verification.
What can you do if you want to keep the property? If you want to keep a secured item but owe more than it's worth, you might be in luck because Chapter 7 has a solution. You can file a motion asking the court to let you “redeem” the property by paying its actual value instead of the full amount owed. Learn more about redeeming secured property in Chapter 7 bankruptcy.
Dealing with secured personal property in bankruptcy can be tricky, so consider consulting with a bankruptcy lawyer.
Credit card charges don't always go away in bankruptcy. If the Chapter 7 trustee or a creditor objects to the discharge, you might have to pay back particular charges or an entire credit account. Here we explain situations to watch for, and the process the trustee or a creditor must use when objecting to a discharge.
Certain types of credit purchases made before filing for bankruptcy are automatically “presumed” fraudulent, and you could have to repay the charges.
Luxury goods and services. If you use a credit card to buy more than $800 worth of luxury goods or services within 90 days of filing for bankruptcy, the debt would be presumed nondischargeable. Reasonable amounts of food, clothing, and gasoline wouldn’t fall within this rule, nor would your usual rent or utility bills.
Cash advances. Cash advances are more straightforward than purchases of luxury goods and services. Suppose you use a credit card to take over $1,100 in cash advances within 70 days of filing bankruptcy. In that case, the bankruptcy court would presume the debt is fraudulent, regardless of how you used the money. (Both figures are valid as of April 2022 and will change in April 2025.)
The luxury and cash advance presumption isn’t absolute. You’d have an opportunity to prove you reasonably believed you could repay the charge and intended to do so. However, satisfying the standard isn't necessarily easy.
Not everyone is honest when applying for credit. Some people inflate income or falsify asset documents to increase approval odds. Others use credit with no intention of paying the charge.
If this sounds familiar, it might be best to stay away from bankruptcy. Misrepresenting your finances when applying for credit and using credit with no intention of paying is considered fraud.
A bankruptcy court that finds you committed fraud could hold you responsible for paying the account and impose other serious fraud consequences, such as dismissing your case or referring the matter to the FBI for investigation.
Another strategy you’ll want to avoid is turning a “nondischargeable debt” that won't go away in bankruptcy into a debt you can “discharge” or erase in bankruptcy.
For instance, suppose you learn you can eliminate your credit card debt in Chapter 7, but not your tax debt. It might seem like a good idea to pay off the tax debt with the credit card and wipe out the credit card balance in the Chapter 7 case, right?
Not necessarily. Tax debt paid with a credit card survives Chapter 7 if the credit card company objects to the discharge. But here's a strange twist of bankruptcy law. You can wipe out tax debt paid with a credit card in Chapter 13.
It's possible to discharge credit card debt even when one of the problems described above exists. If the credit card company doesn't notice the issue, doesn't think it's financially worth pursuing, or, simply put, does nothing, the debt will get erased.
A credit card company that wants the bankruptcy court to find a debt nondischargeable must file an “adversary proceeding” lawsuit with the bankruptcy court. If the creditor doesn't file a case, the charges will get discharged along with other obligations.
If you're served with a nondischargeability complaint, you must file a timely answer to dispute the creditor's claim. The bankruptcy court will hold a hearing before deciding whether to discharge the debt.
In Chapter 7 bankruptcy, the deadline for filing complaints challenging the dischargeability of a credit card debt is set by the court. You'll find the date in the 341 meeting of creditors notice sent by the court.
Yes, there's still more to know about erasing credit card debt in Chapter 7. Here are a few questions you might not have thought to ask.
No, you must list all debts you owe. Even if you forget to list a zero balance account you hadn’t used in a long time, the creditor would discover the bankruptcy on your credit report and close the account.
However, sometimes smaller creditors let a bankruptcy filer keep an account open, although it’s rare. For instance, debtors have successfully kept open small pet medical accounts that they routinely pay off. As with all debts, you’d remain responsible for all charges made after bankruptcy. Talk with your local bankruptcy attorney about the practices in your area.
Learn more about keeping a credit card in Chapter 7 bankruptcy.
No. The bankruptcy filer’s debt is the only debt erased. For instance, suppose you and your mother open a credit card account together and are both responsible for the bill. You're cosigners. A Chapter 7 discharge will erase your responsibility to pay the credit card balance, but your mother will remain obligated to pay the bill.
Chapter 13 works a bit differently. Creditors can’t collect from cosigners during the Chapter 13 bankruptcy, and you can fully protect your cosigner by paying the total debt in your Chapter 13 plan.
After your bankruptcy case, you’ll probably be surprised by how easy it is to get credit. Many people are considered reasonable credit risks shortly after bankruptcy and begin receiving credit offers soon after their bankruptcy case closes. Here’s why:
Get off to a good start and learn about rebuilding credit after filing bankruptcy.
Chapter 7 bankruptcy filers must take and pass the Chapter 7 “means test” before wiping out credit card balances and other debt. If you can afford to pay some or all of your credit card debt, you might not qualify to file a Chapter 7 bankruptcy case.
The means test works by comparing your income to your household expenses. If you have money left over, called “disposable income,” and fail the means test, your best option might be to file a Chapter 13 case instead.
You can pass the means test in one of two ways.
If your family’s income is less than the “median” or the average income a family of the same size earns in your state, you’ll qualify automatically. If your family’s income is higher than the median, the means test will calculate whether you have income left over to pay creditors after considering reasonable living expenses.
If you fail the means test because you have disposable income you can use to pay creditors, you might still qualify for a Chapter 7 case in a few unusual instances. For instance, you might qualify if most of your debt is business debt, you’re an active military member, or you have other particular circumstances such as higher medical or utility costs than the average family.
If you don’t pass the means test, you might qualify for debt relief under Chapter 13. Chapter 13 solves various financial problems Chapter 7 can't and lets you pay important debts first.
For instance, when creating a budget, you’d set aside enough income to cover reasonable living expenses and use any remaining amount for your Chapter 13 payment.
The plan would pay overdue mortgage or car loan payments. Catching up on these amounts would let you keep the house or retain the car. You’d also pay off debt you couldn’t eliminate in bankruptcy, such as overdue tax debt and domestic support arrearages. The benefit here? You pay these amounts over time without fear of wage garnishment, bank levy, or property seizure.
You’d only pay credit card balances if any income remained. And even then, credit card accounts would share the remaining funds with other nonpriority unsecured debts, like unpaid rent and medical, utility, and cellphone bills. Most filers don’t pay much toward these low-priority bills, which is why you sometimes hear the phrase “pay pennies on the dollar in Chapter 13 bankruptcy.”
Find out more about how Chapter 13 bankruptcy helps people who don’t qualify for a Chapter 7 discharge.
Usually not. Most Chapter 7 bankruptcies don’t pay anything to creditors because there’s no money to distribute. Many Chapter 7 filers can protect everything they own with bankruptcy exemptions, leaving no property for the Chapter 7 trustee appointed to the case to seize and sell for the benefit of the creditors. These cases are called "no-asset cases."
In Chapter 7 “asset cases,” which are somewhat rare, money is available for creditors. The trustee disperses money to creditors using a priority debt ranking system. Important debts, like back child and spousal support and recent tax debt, get paid first.
Less important nonpriority unsecured claims, like credit card debts, fall to the bottom of the list. So it's unusual for a credit card company to receive payment in Chapter 7, but that’s not to say it doesn’t happen.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
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Can I Keep a Credit Card in My Chapter 7 Bankruptcy? Can I Run Up My Credit Card Balances Before I File Bankruptcy? |
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Preparing for Bankruptcy: What to Do With Bank Accounts, Automatic Payments, and Utility Deposits Your Retirement Plan in Bankruptcy How Bankruptcy Exemptions Protect Your Property |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>The reaffirmation process lets you remain responsible for a debt, such as a car payment, and keep the car or other “collateral” property securing the debt. You and the lender enter into a new contract—usually on the same terms—and submit it to the bankruptcy court.
Before entering into a reaffirmation agreement, it helps if you’re current on the loan payments, but some lenders will negotiate new terms with you. However, a lender isn’t required to do so, so it’s best to be current before filing for Chapter 7.
Also, you must meet another requirement. You must be able to protect all of the equity in the property with a bankruptcy exemption. If you can’t exempt all of the property’s equity, the trustee will sell the asset and use the proceeds to pay your unsecured creditors.
When you reaffirm a debt, you agree that you will still owe it after your bankruptcy case ends. Both the creditor’s lien on the collateral (which gives the creditor the right to take the property if you fail to pay as agreed) and your liability to pay the debt will survive bankruptcy intact.
In most cases, it will be as if you never filed for bankruptcy for that debt.
Reaffirmation provides a sure way to keep collateral as long as you abide by the terms of the reaffirmation agreement and keep up your payments. If you stay current on the payment, the lender won’t be able to take back the property.
Reaffirmation also provides an opportunity to negotiate new terms to reduce your payments, your interest rate, or the total amount you will have to pay over time. However, the lender doesn't have to agree to new terms and most reaffirmation agreements are on the original contract terms.
Because reaffirmation leaves you personally liable for the debt, you can’t walk away from the debt after bankruptcy. You’ll still be legally bound to pay the deficiency balance even if the property is damaged or destroyed. And because you have to wait eight years before filing another Chapter 7 bankruptcy case, you’ll be stuck with that debt for a long time.
For instance, if you reaffirm your car note and then default on your payments after bankruptcy, the creditor can (and probably will) repossess the car, auction it off, and bill you for the difference between what you owe and what the trustee received at auction.
Example 1. Suppose you owe $25,000 on your car before filing for Chapter 7 bankruptcy. You most likely will continue to owe $25,000 on your car after you file for bankruptcy (unless you negotiate a lower amount in your reaffirmation agreement). If you can’t keep up your payments and the car is repossessed, you’ll owe the difference between the $25,000 reaffirmation amount and the amount the lender sells the car for at auction, or “deficiency balance,” which will be considerably less than you owe, in most cases). Nearly all states permit a creditor to sue for a deficiency balance. However, about half of the states don’t allow deficiency balances on repossessed personal property if the original purchase price was less than a few thousand dollars.
Example 2. Tasha owes $1,500 on a computer worth $900 and reaffirms the debt for the full $1,500. Two months after bankruptcy, she spills a soft drink ruining the computer. Because she reaffirmed the obligation, she still must pay the creditor the remaining balance.
The first step is ensuring the Chapter 7 bankruptcy trustee won’t sell your property. If you can’t protect all of the equity with a bankruptcy exemption, the trustee will sell it, pay the lender, give you the exemption amount, and use the remaining proceeds to pay unsecured creditors.
However, if you can protect all of the property equity, you can use a reaffirmation agreement and continue paying on “secured” property that’s encumbered by a lien. You and the creditor must agree to any change in terms.
Also, you or the lender must file the agreement in court as part of the bankruptcy case. The bankruptcy court must review the agreement in a reaffirmation hearing if an attorney does not represent you. If you have a lawyer, the lawyer must sign the agreement and attest that you can afford the payment and that it won’t cause undue financial hardship.
At the hearing, the judge will consider how the reaffirmation might affect your post-bankruptcy budget and whether you can afford the payments. The judge can reject the agreement if it isn't in your best interest or would create an undue hardship for you or your family.
Reaffirmation agreement rejections occur when it appears that you can't afford the payments after paying your basic living expenses or if you owe much more on the debt than the property is worth. The bankruptcy judge will make this determination after reviewing the income and expense forms filed with the bankruptcy petition in your case.
Sometimes a lender will let you keep a car or other property without filing a reaffirmation agreement as long as you continue making your payment. This is a good way to go because if the lender repossesses the property because you can't make your payments, or you let the car go back to the lender after an accident, you won't be responsible for paying anything further.
That won't be the case if you enter into a reaffirmation agreement. Because reaffirming a debt comes with the disadvantage of leaving you in debt after your bankruptcy case ends, you should consider it only if:
Reaffirmation might be the only practical way to keep some property types, such as automobiles or your home. Also, reaffirmation can be a sensible way to keep property that is worth significantly more than what you owe on it.
If you decide to reaffirm a debt, it’s usually worth asking the creditor to accept less than you owe as full payment. For most people, it’s not a good idea to reaffirm a debt for more than what it would cost you to replace the property.
Learn more in Your Home in Chapter 7 Bankruptcy and Your Car in Chapter 7 Bankruptcy.
If you need the collateral, you’ll want to be current on your payments before filing for bankruptcy to stay on the creditor’s good side. If you fall behind, the creditor can demand that you bring your account current before agreeing to a reaffirmation contract.
It’s common to wonder how secured and unsecured debts differ. The answer is simpler than you might think.
When applying for a credit account or taking out a loan, the lender might ask you to put up collateral (valuable property) that it can sell if you fail to pay your bill—especially when borrowing a large sum of money. The collateral assures or guarantees the lender that it will get paid if you stop making your payment as agreed.
Securing a loan with collateral creates a “lien” on the property, a type of ownership interest that remains until the borrower pays off the debt. The lien interest gives a creditor the right to repossess your vehicle if you fail to make your payment. Likewise, if you fall behind on your mortgage, the lien will allow the lender to foreclose on your home.
A bank or creditor who owns a collateralized debt has what is called a “secured debt.” If the bank seeks reimbursement in a bankruptcy case, it will file a “secured claim.” If the bankruptcy trustee sells the property, the trustee must pay the secured lender first before distributing funds to unsecured creditors.
However, not all creditors require a borrower to provide security when making a loan or providing a credit service. An “unsecured” creditor doesn’t have a lien interest in collateral, so it can’t sell the borrower’s property to pay off the debt without doing more.
Credit cards, medical bills, and personal loans, such as payday loans are all examples of unsecured debt. An unsecured creditor can gain a security interest by winning a debt collection lawsuit and recording the money judgment with the local recorder’s office or the appropriate state agency.
If you want to keep your car, home, or other property in Chapter 7, a reaffirmation agreement might be the way to go. But it might not be in your best interests. A local bankruptcy lawyer can explain your options and help you make the right decision for you.
Learn more about why you should hire a bankruptcy lawyer and options if you can't afford a bankruptcy lawyer.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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How to File for Bankruptcy in Your State Preparing for Bankruptcy: What to Do With Bank Accounts, Automatic Payments, and Utility Accounts |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>(To learn more about what happens to your debts in Chapter 7 bankruptcy, including which debts are discharged and which are not, see our Chapter 7 Bankruptcy area.)
You will be able to get rid of your tax debts in Chapter 7 bankruptcy if you meet the following requirements:
You cannot get rid of most non-income-related tax debts. The following debts won't be discharged in Chapter 7 bankruptcy:
To learn about your other options for dealing with tax debt, check out the Back Taxes & Tax Debt section of our site.
]]>This article will focus on federal tax liens. Similar principles apply to state tax liens. Laws vary from state to state, however, on specific issues such as how state tax liens are created and what property they cover.
A lien is a security interest, or claim, against specific property. A home mortgage, for example, is a lien against a residence. If you don't pay the debt, the creditor can sell the property that is subject to the lien to get reimbursed.
A federal tax lien is like a mortgage, except that it secures your obligation to the IRS instead of a lender. A tax lien can be imposed if you fail to pay taxes on a timely basis. However, just because you owe taxes does not mean that you are subject to a tax lien.
How state tax liens are imposed. Laws vary between states as to what is required to impose a state tax lien.
How federal tax liens are imposed. The IRS file a notice in order to get a federal tax lien against your property. The notice must be filed in the county where you live or where the property is located. Once the IRS files its notice, it has a lien against all property -- real or personal -- that you own. The lien attaches to all property that you own from and after the date that the IRS files its lien. Federal tax liens continue in effect for up to 10 years after the IRS assesses the taxes that you owe.
What happens to tax liens when you file for bankruptcy depends on whether or not the tax lien was in place before you filed for bankruptcy.
Filing Chapter 7 triggers a statutory protection known as the automatic stay. The automatic stay bars creditors, including the IRS, from taking action to collect most types of debt except through the bankruptcy process.
Among other things, the automatic stay bars the IRS from filing a tax lien postbankruptcy. This means that the IRS cannot impose a tax lien during your Chapter 7 case unless it previously filed a notice.
A tax lien filed before your bankruptcy, however, continues in effect. The bankruptcy court cannot set aside a tax lien as long as it was filed properly before your Chapter 7 case.
Tax liens may be paid, in whole or part, through the bankruptcy process. A bankruptcy trustee is appointed after you file Chapter 7 to administer and liquidate assets in your bankruptcy estate to raise money to pay your debts. In some Chapter 7 cases, debtors have assets that the trustee can sell to pay creditors, including the IRS. The IRS is entitled to any money raised through the sale of assets covered by a federal tax lien except to the extent there are prior mortgages or security interests.
Example. Say your house is worth $350,000 and is subject to a $100,000 mortgage and a $75,000 federal tax lien. Let’s assume that you are entitled to a homestead exemption of $100,000. If the bankruptcy trustee sells your home, the trustee would pay $100,000 to your mortgage lender and $75,000 to the IRS. The trustee would also pay you $100,000 for your homestead exemption. The balance of $75,000 would go to pay costs of sale and other creditors in your bankruptcy case.
Unfortunately, tax liens usually are not paid in Chapter 7 cases. Most Chapter 7 cases are “no asset” cases. In a no asset case, creditors receive nothing because there is no property that the trustee can sell for the benefit of the bankruptcy estate after taking into account secured claims (like mortgages and tax liens) and exemptions. Ordinarily, trustees will not attempt to sell property if all of the proceeds would have to be paid to secured creditors or the debtor.
Example. Let’s take the example of a house worth $200,000, with a $150,000 mortgage, a $25,000 federal tax lien, and a $100,000 homestead exemption. In most cases, the trustee would not try to sell the house, because there would be no proceeds available to pay other creditors after taking into account the mortgage, tax lien, and homestead exemption.
In this situation, the tax lien would still remain on your property after your Chapter 7 case is over. In order to get rid of the lien, you could sell the property and pay the IRS from the proceeds. Or, you could attempt to work out a payment plan with the IRS to pay the balance due and have the tax lien released. Simply filing Chapter 7, however, would not make the lien disappear.
Tax liens also attach to personal property, such as cars and household furniture. In most Chapter 7 cases, trustees do not try to sell personal property, because it is either worth too little, encumbered by liens (like auto loans), or subject to exemptions. You have to continue to deal with tax liens that cover personal property you are able to retain after a Chapter 7 filing.
Generally, your options to deal with a federal tax lien that remains in effect after bankruptcy are as follows:
Taking no action can make sense when the value of property subject to a tax lien is relatively nominal and your personal liability for the tax obligation was discharged through your Chapter 7 filing. (Learn more about when tax debts can be discharged in bankruptcy.)
]]>Read on to learn about secured property and debts in Chapter 7 bankruptcy, why you might want to redeem property, restrictions on property you can redeem, and the advantages and disadvantages of redemption.
When you make a large credit purchase, such as for a car, jewelry, computer, or furniture, the lender usually requires you to put up the purchased property as collateral. This type of debt is known as a secured debt because if you fail to pay, the lender can take back the property, sell it at auction, and use the proceeds to pay down the loan.
In Chapter 7 bankruptcy, when you fill out the official bankruptcy forms, you must tell the court and your creditor what you intend to do with the property securing a debt. For instance, your options include:
If you aren’t current on your payments, you’ll probably lose the property because Chapter 7 bankruptcy doesn’t provide a way to catch up on arrearages. So unless the lender agrees to negotiate a new agreement (perhaps through a reaffirmation agreement), the lender will be free to pick up the property after your case ends—or sooner if the lender successfully lifts the automatic stay—the order that prevents collection activity.
If you surrender the property, you won’t need to worry about paying any portion of the debt. It will get wiped out in your bankruptcy case.
When you redeem property in Chapter 7 bankruptcy, you buy it back from the creditor in one lump sum for the value of the property. If you and the creditor don’t agree on what the value of the property should be, the court will hold a “valuation” hearing and decide the question for you.
If you choose to redeem property and the court approves the redemption, once you pay the creditor the lump sum amount, you own it free and clear.
You can redeem property in Chapter 7 bankruptcy only if you meet all of the following conditions:
Redemption is often a good option if your debt balance is substantially greater than the value of the property. If you redeem the property, the creditor must accept the item’s value as payment in full, even if you owe much more on the debt.
The main drawback to redemption is coming up with the money. It must be in one lump sum payment. Some companies specialize in lending to people seeking to redeem property; so a loan may be one way to get some cash fast. Or you might be able to get the money from a friend or relative.
]]>Student loans aren’t automatically discharged in Chapter 7 or Chapter 13 bankruptcy—and wiping them out isn’t easy. To discharge either federal or private student loans, you must bring a separate action within your bankruptcy case (called an adversary proceeding) and demonstrate to the court that repaying your student loans would cause you undue hardship.
Courts have come up with various standards that borrowers must meet to prove undue hardship. You can learn about those standards in Student Loan Debt in Bankruptcy.
This hardship test, however, applies only to educational loans. While that definition tends to include almost all loans you take out to pay for school, it usually does not cover debts you owe directly to an educational institution for tuition, room, board, and the like. But, keep in mind that this is only when such debts aren’t structured as a loan or extension of credit.
Some bankruptcy courts have ruled that the hardship test does apply if the school essentially provided you with a loan to pay the tuition. If you still owe tuition in the form of a loan, then you’ll likely have to meet the undue hardship test to discharge the tuition debt.
An adversary proceeding is essentially a lawsuit. It starts with the filing of an adversary complaint and moves into the discovery phase wherein both sides can gather information from each other. Then, if the case doesn’t settle, the matter gets decided at a trial before a bankruptcy judge.
The judge will consider the evidence presented by both sides. As part of the evidence, an expert will usually testify about your current and future ability to work and employment prospects (or the lack thereof).
Of course, it would be difficult for most bankruptcy filers to complete this process without help. If you’re considering asking the bankruptcy court to discharge your student debt by way of an adversary proceeding, you might want to start by consulting with a bankruptcy litigation lawyer.
]]>By contrast, if you want out of the monthly payments, you can surrender your timeshare and let it go back to the lender, but you’ll likely remain responsible for maintenance fees until the bank forecloses and transfers title out of your name. In this article, you’ll learn more about what happens to timeshares in bankruptcy and how to spot common problems so that you can avoid them before you file.
What Will Happen to a Timeshare in Bankruptcy?
When you purchase a timeshare, you share ownership of a piece of property with several other people. Most people pay a timeshare mortgage and monthly or annual maintenance fees to cover the costs of keeping up the property (similar to HOA dues). (Learn more about how timeshares work.)
Bankruptcy law considers a timeshare real estate and treats it in much the same way as your house. Here’s how you’ll list it when you fill out your bankruptcy forms:
If you still own the timeshare. If you are still in possession of the timeshare when you file for bankruptcy, you’ll list it with your other property on official bankruptcy form Schedule A/B: Property. Because the lender can foreclose on the timeshare if you default on the loan, the timeshare secures the timeshare mortgage, and you’ll list the debt on Schedule D: Creditors Who Hold Claims Secured By Property. You’ll also indicate whether you intend to keep it or surrender it back to the bank.
If the lender foreclosed on the timeshare. In this situation, you won’t list it on Schedule A/B (because you no longer possess it) and any remaining timeshare-related debt will be listed on official form Schedule E/F: Creditors Who Have Unsecured Claims.
Filing for Bankruptcy After Foreclosure
If the bank forecloses on your timeshare before you file for bankruptcy, you can discharge (get rid of) all of the remaining timeshare-related debt in either a Chapter 7 or Chapter 13 bankruptcy. The debt you can discharge includes a deficiency balance (the difference between the foreclosure proceeds and the amount you owe) and unpaid maintenance fees.
Filing for Bankruptcy When You Still Own the Timeshare
Filing for bankruptcy before the lender forecloses can be more complicated than if the foreclosure has already taken place, but you’ll have more options. Your choices will depend on whether you want to keep or surrender the timeshare, the type of bankruptcy you file, the amount of equity in the timeshare, and the exemption laws of your state (the laws that tell you what property you can keep in bankruptcy).
Keeping the Timeshare in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, if the value of the timeshare is equal to or less than the amount that you owe (there is no equity), selling it won’t financially benefit your creditors. You can keep it as long as you can continue making the payments.
If there is equity, however, the bankruptcy trustee—the person responsible for overseeing your case—will want to sell it for the benefit of your creditors. You’ll be able to keep it only if one of the following applies:
Your state’s exemption law (the law that lists the property you can keep) allows you to protect your timeshare equity. Because a timeshare is a luxury, it’s unlikely that your state will have a specific exemption that covers a timeshare. Instead, you’ll likely need to live in a state with a “wildcard exemption” that allows you to exempt a certain amount of property of your choosing.
You borrow money to purchase the equity from the trustee. The trustee will often let you buy the property at a discount as long as you prove that you borrowed the funds from a friend or relative.
The trustee can’t sell the timeshare and abandons it.
If you can’t protect the timeshare in one of these ways, the trustee will sell it and distribute the proceeds to your creditors.
Keeping the Timeshare in Chapter 13 Bankruptcy
One of the benefits of Chapter 13 bankruptcy is that you’re allowed to keep all of your property. The trick, however, is demonstrating that you have enough income to pay the monthly mortgage payment and maintenance fees in addition to your required monthly repayment plan payment. If you can’t cover everything, you’ll need to surrender the timeshare or let something else go. (Learn about how Chapter 13 repayment plans work.)
Surrendering the Timeshare in Chapter 7 and Chapter 13 Bankruptcy
You can surrender the timeshare in both Chapter 7 and Chapter 13 bankruptcy. If you do so, your bankruptcy discharge will eliminate your liability for:
the remaining timeshare mortgage balance, and
any unpaid maintenance fees assessed before your filing date.
In most states, you’ll continue to be responsible for the maintenance fees that accrue after you file bankruptcy and until the foreclosure takes place. Bankruptcy wipes out only the bills you incur before your bankruptcy filing date, not afterward. As well, you’ll remain the legal owner of the timeshare until the lender forecloses on the property and transfers the title out of your name.
To avoid paying for ongoing maintenance fees, it might be a good idea to file for bankruptcy after the foreclosure. However, you’ll want to talk with an accountant before you use this strategy to ensure that you won’t incur a tax liability. (Learn about the consequences of a timeshare foreclosure.)
It’s important to note that any remaining balance won’t be wiped out in a Chapter 13 discharge until after you complete your three- to five-year repayment plan.
Surrendering a Timeshare With Equity
If you surrender a timeshare with equity, the Chapter 7 trustee will sell it and distribute the funds to your creditors. If you have “priority” debts that you’ll still have to pay after bankruptcy, such as child support or spousal support debt and unpaid income taxes, this can be a great thing because the trustee must pay your priority debts before nonpriority debts, such as credit card balances and medical bills. Therefore, if you have a priority debt, giving up the equity in your timeshare might not sting as much.
If you file for Chapter 13 bankruptcy, however, the trustee will not sell the property for you. So if you have equity in the timeshare, you’ll want to make arrangements to sell it yourself and use the funds in your repayment plan.
Consulting With a Bankruptcy Lawyer
For help determining how to handle a timeshare when filing for bankruptcy, consider meeting with a knowledgeable bankruptcy attorney.
]]>Here are some circumstances in which you might consider repaying a debt that was discharged.
Perhaps someone cosigned or guaranteed a loan or credit account for you, for example, a car loan, store credit card, or a personal loan. Even though you no longer have to pay the debt, your cosigner is still liable for the debt (unless the cosigner also filed for bankruptcy). There's one exception: If your cosigner is your spouse and you live in a community property state, your spouse may be protected by your discharge. (Learn more about what happens to cosigned loans in bankruptcy.)
If you incurred the debt and the creditor is seeking payment from your cosigner, you might feel like you should pay it. Once your bankruptcy case is over, you are free to pay the cosigned debt.
If you borrowed money from a relative, the bankruptcy laws treat it as any other debt. Your relative cannot pressure you to repay the debt -- that would be a violation of bankruptcy laws. But if you feel obligated to pay up, you can do so.
Medical debt is unsecured debt that is almost always discharged in a bankruptcy case. If your debt to a medical provider was discharged, the medical provider cannot violate the discharge by forcing you to pay the debt after the bankruptcy case. But the provider can refuse to provide further services to you.
Many people who file bankruptcy feel particularly regretful about discharging a medical debt, especially to doctors or hospitals with whom they intend to continue a relationship. If this is your situation, you can voluntarily repay the debt.
If your employer provides you with a credit card to use for employment-related expenses like travel or purchasing supplies, you may have to list the card in your bankruptcy and depending on the type of card, your liability to your employer for charges might be discharged.
Many employees feel obligated to repay their employers for unreimbursed charges, especially if those charges were for personal expenses, and not business expenses.
Keep in mind that most creditors expect to close accounts and charge off balances when they receive notice of your bankruptcy filing. If you want to continue paying on an account that you had before you filed, the creditor may treat your account differently than before you filed. For instance, some creditors will do the following:
Read on to learn when the bankruptcy trustee might abandon your property, how the trustee abandons property, and what that means for you or your creditors.
After the initial bankruptcy filing, all of the debtor's nonexempt property becomes part of the bankruptcy estate. However, not all property becomes part of the bankruptcy estate. The property that is excluded is called exempt property and the debtor is allowed to keep this property. Examples of exempt property include your homestead (often up to a certain dollar amount), ordinary household goods, pensions and retirement accounts, your vehicle (up to a certain value), clothes, and public benefits such as social security and unemployment. What kinds of properties are exempt and up to what value they are exempt varies from state to state.
(To learn more about bankruptcy exemptions and what property is protected, check out Nolo's section on Bankruptcy Exemptions and Your Property.)
The bankruptcy trustee oversees and administers the estate, and determines which nonexempt property can be liquidated in order to pay back creditors.
If the bankruptcy trustee determines that liquidating particular property in the estate won’t yield much for creditors, the trustee may choose to abandon the property. The trustee may also do this if the property would be hard to sell.
This might happen if, after deducting the costs of sale, the trustee's commission, any amount due a creditor with a lien against the property, and any exemption owed to you, there is nothing or little left to distribute to creditors.
Example. Sara owns a car that has a replacement value of $6,000. She owes $1,500 to her car loan lender and her state allows her to exempt $3,000 in car equity. If the trustee were to sell the car at auction, the trustee would incur costs of about $2,000 in order to pick up, store, and auction off the car, and would collect a $500 commission on the sale. After deducting $1,500 (which goes to the lender), $3,000 (the trustee pays this to Sara), $2,000 (costs of sale), and $500 (the trustee's commission) from the $6,000 sale price, nothing would be left for Sara’s creditors. The trustee would likely abandon the car.
If the trustee abandons the property you keep the property even though it is nonexempt. The trustee may also abandon the property to the lien holder if the lien is greater than the value of the property. For example, if you have stopped making payments on your home and you have a mortgage for $100,000 but the fair market value of the property is $75,000, then the trustee will most likely abandon the property and the lender can proceed with the foreclosure if you are behind on your payments.
In most cases, the trustee will file a Notice of Abandonment to notify the creditors of the intent not to liquidate the property of the bankruptcy estate to meet their debt obligations. By filing this notice, the trustee is formally giving control of the property back to the debtor and any other creditor that may have an interest in the property. Filing this notice is also helpful because it lets all the creditors know where they stand and what to expect from the bankruptcy.
Sometimes the trustee will abandon property without going through the process of filing a Notice of Abandonment. If this happens, section 554(c) of the Bankruptcy Code provides that if the trustee does not affirmatively abandon property, and it is not otherwise affirmatively administered, the property will be deemed abandoned.
Learn more about Your Property & Debts in Chapter 7 Bankruptcy.
]]>Many parents take out PLUS loans to help finance their children’s education. (PLUS loans are also available for graduate students to take out on their own.) Parents can take out a PLUS loan for an undergraduate student who is a dependent and who is in school at least half time. With a PLUS loan, the parent is the usually the sole obligor on the loan. This means that the student doesn’t owe the debt, only the parent does.
Student loans can be wiped out in bankruptcy only if you can demonstrate to the court that to repay them would cause undue hardship to you and your dependents. The undue hardship test is not an easy one to meet.
What constitutes undue hardship varies from court to court, although most courts follow the Brunner test, which requires the bankruptcy debtor to meet all of the following three criteria in order to discharge a student loan:
To learn more about the Brunner test, other factors courts consider, and the changing landscape of student loan discharges, visit our Student Loans in Bankruptcy topic area.
Unfortunately for parents, the same dischargeability standard for a student loan taken out by a student applies to parents who take out PLUS loans. The fact that the parent has not benefited in any way from the education does not matter. This means that if you have a PLUS loan and you file for bankruptcy, you must demonstrate to the judge that repaying the loan would cause undue hardship to you.
The undue hardship test is not a complete barrier. Courts have found that PLUS loan borrowers met the standard and discharged their loans. In fact, an older PLUS loan borrower may be in a better position than a young student to meet some of the Brunner factors. For example, an older PLUS loan borrower, who perhaps is retired, may have an easier time demonstrating that her financial hardship will last for a significant portion of the loan period (as opposed to a younger recent graduate who has a whole career ahead of her). In the same vein, older PLUS loan borrowers may be more likely to be disabled or physically impaired, limiting their job prospects and future earning capacity.
In most cases, if you want to discharge a PLUS loan in bankruptcy, you should bring a separate action within the bankruptcy case, called a complaint to determine dischargeability. In the complaint you ask the judge to rule that your PLUS loan is dischargeable. The proceeding is like a mini-lawsuit – you can do discovery and present witnesses and/or evidence in court at the hearing on the matter. Student loan creditors usually oppose these types of complaints, so most bankruptcy filers will need an attorney to help.
]]>Although most unsecured debts are discharged (wiped out) in bankruptcy, student loans are different. If you want to discharge a student loan in bankruptcy, you must bring a separate action within your bankruptcy case (called a complaint to determine dischargeability) and demonstrate to the court that repaying your student loan would cause undue hardship for you and your dependents.
What constitutes undue hardship varies from court to court, although most courts follow the Brunner test, which requires the bankruptcy debtor to meet all of the following three criteria in order to discharge a student loan:
To learn more about the Brunner test, other factors courts consider, and the changing landscape of student loan discharges, visit our Student Loans in Bankruptcy topic area.
What if you didn’t actually take out the loan to provide for your education, but instead merely cosigned a student loan with someone else, perhaps a child, spouse, or other relative? If you file for bankruptcy, must you still meet the undue hardship test in order to discharge your obligation to repay the student loan?
Some time ago, courts came out both ways on the question of cosigned student loans. Some would discharge the student loans of a cosigner without requiring the cosigner to meet the undue hardship test; others would not.
Recently, most bankruptcy courts considering this issue have ruled that a cosigner on a student loan is subject to the same discharge standard as the student loan borrower. The only federal appellate court to consider this issue, the Third Circuit Court of Appeals, came to the same decision. In re Pelkowski, 990 F.2d 737 (3rd Cir. 1993). This means that if you want to discharge your obligation to repay a student loan that you cosigned, you’ll have to meet the undue hardship test.
Keep in mind that the court will consider the factors as they relate to you, and not to the student for whom you cosigned the loan. So, for example, if you are living in poverty, you will most likely meet the first prong of Brunner, even if your son (the student borrowr) is a top-flight lawyer in New York. On the flip side, if your daughter is making minimum wage after graduating from college but you are well-off, you probably won’t be able to discharge your obligation to repay a student loan you cosigned with her.
The bankruptcy discharge applies only to the bankruptcy filer’s obligation to repay the debt. If the student you cosigned a loan with files for bankruptcy and discharges his or her obligation to repay the loan, you are still on the hook for the debt. Likewise, if you, as the cosigner, are able to discharge your obligation on the cosigned student loan, the student for whom you cosigned will still be on the hook for the debt.
There is a bit of a reprieve, however, if you file for Chapter 13 bankruptcy. In that type of bankruptcy, the automatic stay (which prohibits most collection efforts during the bankruptcy case) will apply to the cosigner as well. So if your son files for Chapter 13 bankruptcy and you cosigned a student loan with him, the student loan creditor cannot attempt to collect the loan from you during your son’s bankruptcy (unless the creditor successfully petitions the court to remove the stay). In Chapter 7 bankruptcy, however, the automatic stay won’t stop collection actions against nonfiling cosigners. (Learn more about what happens to cosigned debts in bankruptcy.)
]]>When you file for Chapter 7 bankruptcy, the automatic stay stops most creditors from coming after you to collect their debts. However, child support debt is an exception to this rule. The automatic stay does not prevent or delay a lawsuit to establish child support or collect it from property that is not part of your bankruptcy estate. (Learn more about the automatic stay in bankruptcy.)
In Chapter 7 bankruptcy, property acquired after your filing date is not considered property of the bankruptcy estate. This includes any wages earned after filing your case. Since your post-bankruptcy earnings are not property of the estate, child support creditors are free to go after them during your bankruptcy. (Learn more about property that is not part of your bankruptcy estate.)
In Chapter 7 bankruptcy, child support debt receives special treatment because it is considered a priority debt. Priority debts are nondischargeable in bankruptcy. This means that if you owe any outstanding child support debt, it will not get wiped out by your bankruptcy discharge. As a result, filing for Chapter 7 bankruptcy will not eliminate your obligation to pay child support and make up any missed payments. (To learn more, see Priority Debt in Chapter 7 Bankruptcy.)
Since child support is a priority debt, filing for Chapter 7 bankruptcy does not affect your obligation to make your ongoing payments as they come due. As discussed above, if you fall behind on your child support payments, the automatic stay will usually not prevent a lawsuit to collect past due amounts. If you can’t afford to keep up with your child support payments, Chapter 7 bankruptcy can help you by wiping out your other debts and freeing up more income to put towards child support.
If you have nonexempt assets, a Chapter 7 trustee can sell them and distribute the proceeds among your creditors. However, not all creditors are treated the same in bankruptcy. Whether a creditor will get paid depends on the type of its debt and the amount of available proceeds.
Priority debts, such as child support, get paid before general unsecured debts like medical bills and credit card debt. In fact, child support debt gets paid even before most other priority debts such as recent tax obligations. As a result, if you own nonexempt assets, filing for Chapter 7 bankruptcy can actually help a child support creditor collect past due payments without having to initiate a separate legal action.
To learn what happens to your other debts, see the articles and Q&As in Your Debt in Chapter 7 Bankruptcy.
]]>When you file for bankruptcy, you must include all of your creditors in your bankruptcy papers. After your case is filed, the bankruptcy court sends out a notice of your bankruptcy filing to all creditors listed in your schedules. In most cases, when a credit card company receives notice of your bankruptcy, it will cancel your card. However, under certain circumstances, you may be able to keep a credit card even after bankruptcy (discussed below).
(Learn more about what happens to credit card debt in bankruptcy.)
As discussed, you have to disclose all of your debts on your bankruptcy papers. This includes all credit cards with a balance. However, if you don’t have a balance on a credit card, it is technically not a debt. This means that you don’t have to list credit cards with a zero balance.
If a credit card is not listed in your bankruptcy, your lender will not receive notice of your bankruptcy through the court. However, your bankruptcy filing is a public record and the information is reported to credit reporting agencies. This means that even if you don't list a credit card company in your bankruptcy, the company will most likely find out about your bankruptcy.
In most bankruptcy jurisdictions, the trustee will not ask you to surrender your credit cards at the 341 hearing. However, depending on the procedures in your jurisdiction, certain trustees may request that you turn them over. (To learn more about what happens at the 341 hearing, see our Meeting of Creditors topic area.)
Most debtors don’t mind giving up their credit cards (especially since credit card companies typically cancel them upon receiving notice of the bankruptcy). However, keep in mind that there is no specific legal authority that allows the bankruptcy court or trustee to force you to surrender your credit cards. If you want to keep certain credit cards (such as your nondelinquent zero balance cards), you can oppose the trustee’s request. Generally, if you have a good reason for wanting to keep your cards, the trustee will not force the issue.
If you have a zero balance credit card that was not listed in your bankruptcy, the court will not send your lender notice of your bankruptcy. But even if a credit card company was not listed in your bankruptcy, it will typically still learn of it through other sources (such as credit bureaus or other reporting services). In that case, it may still decide to cancel your credit card.
You may also be able to keep a credit card by reaffirming it after your bankruptcy case is filed. By reaffirming, you are signing a new contract with the credit card company that makes you personally liable on the debt again (you essentially lose the benefit of your bankruptcy discharge for that debt). Since most debtors file for bankruptcy to wipe out their credit card debt in the first place, it is normally not a good idea to reaffirm a credit card absent an extremely compelling reason.
Many people can get a new credit card after bankruptcy. Learn more in Getting a Credit Card After Bankruptcy.
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The SSA is tasked with processing a large number of payments ranging from disability to retirement benefits. Due to the complexity of Social Security laws and the large volume of payments issued, overpayments and mistakes are common. Most overpayments occur because people lose their eligibility for disability or other benefits (typically when they get well enough to return to work) but still continue to receive checks from the SSA.
In most cases, people are not actually aware that they are being overpaid. Most people promptly notify the SSA when they return to work or experience a change that may affect their Social Security benefits. However, if payments continue, they erroneously believe that they still qualify to receive those benefits. As a result, most people are shocked and unprepared when they receive a letter from the SSA demanding repayment of the overpaid amount (which can be substantial).
(For more articles on Social Security and Social Security Disability, visit our Social Security Center.)
Just because you owe a debt to the federal government does not mean that you can’t discharge it in bankruptcy. Certain debts owed to the government, such as recent unpaid taxes or criminal fines, are nondischargeable in bankruptcy. But a Social Security overpayment is not one of them.
In bankruptcy, Social Security overpayments are treated as unsecured debts similar to credit card debt and medical bills. So if you are unable to pay back your Social Security overpayment, filing for bankruptcy relief can allow you to discharge your obligation to the SSA. However, keep in mind that the SSA has the right to object to your discharge if it believes you were committing fraud by accepting the additional payments.
Debts acquired by false pretenses or other fraudulent means can’t be discharged in bankruptcy. If a creditor believes that you committed fraud (such as providing false information on a credit application) when you obtained the debt, it can file a complaint (called an adversary proceeding) in your bankruptcy to have the debt declared nondischargeable. (Learn more about bankruptcy adversary proceedings based on fraud.)
Just like your other creditors, the SSA has a right to object to your discharge. But fraud is typically very difficult to prove in bankruptcy. So the chances that the SSA will object to your discharge are slim. However, if the SSA believes you accepted payments knowing that you were not entitled to them, it may have more incentive to file an objection to your discharge.
If you received a large Social Security overpayment and are not able to pay it back, consider talking to a knowledgeable bankruptcy attorney in your area to discuss all of your options.
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