Bankruptcy Law 102: Debt That Remains After Filing Chapter 7

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The main goal of a debtor in a Chapter 7 Bankruptcy proceeding is to be relived of all personal liability by receiving a discharge at the completion of their case. The term discharged is used to describe a debtor that is forgiven of legal obligations to pay his debts. However, not all debts are dischargeable. That is, even if the debtor receives a discharge, the bankruptcy filing will not relieve the debtor of personal liability of such a claim. The creditor will still attempt to collect from the debtor by sending notices, filing judgment liens, garnishing wages, and taking whatever necessary action available to get their money. Below is the five common types of debts you will still owe after filing for Chapter 7 Bankruptcy:

1. Tax Debts

As a practical matter, federal, state, local, sales tax, and payroll taxes are not dischargeable in a Chapter 7 Bankruptcy. However, federal or state income taxes that were due at least 3 years before the debtor filed for bankruptcy may be discharged. Although the debtor may be discharged of his personal obligations to pay income tax on the state or federal level, any tax liens incurred on the debtor’s property will remain.

2. Child Support Obligations

Child support obligations are taken very seriously by bankruptcy laws and are thus, not dischargeable. Any arrears or missing child support payments are not forgiven, and the debtor must continue to make any payments as they come due while his bankruptcy case is pending.

3. Student Loans

Student loans that were made, insured, or guaranteed by a governmental unit or made under a governmental funded program are not discharged in a Chapter 7 bankruptcy proceeding. However, in very narrow circumstances, a discharge may be possible if the debtor is able to show an extreme hardship on the debtor and the debtor’s dependents if the loan is not discharged.

4. Omitted Creditors

Any creditor not listed in the debtor’s schedules when he files for bankruptcy will not be discharged! If the debtor fails to list a creditor on his schedules so that the creditor does not receive notice of the bankruptcy filing, then that claim will be non dischargeable and the creditor can still collect during the bankruptcy proceeding and after. However, if the creditor has actual knowledge of the bankruptcy, despite lack of notice, the unlisted debt will be discharged.

5. Fraud

A debtor will be denied a discharge if, with the intent of filing for bankruptcy, the debtor maxes out his credit cards and withdraw cash advances to purchase luxury goods or services. If the debtor can show that the money has been used to purchase necessities, such as food, make rent payments, and/or pay utility bills, the debt may be dischargeable.

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3 Alternatives To Filing For Bankruptcy With A Lawyer

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bankruptcy lawyer, debt law, file for bankruptcy

If ever there was a decision in your life that you should take with all the seriousness you can muster, it would whether or not to file for bankruptcy. For some people who are in seemingly hopeless debt, bankruptcy may be a good option even after considering all the serious repercussions. While filing for legal bankruptcy can reduce or even completely get rid some of your debts, your credit score will take a serious blow, making it hard to loan money in the future.

You must take note though that student loans, along with certain kinds of tax, are notoriously difficult to write off. So before you call your local bankruptcy attorney and file for Chapter 13, Chapter 12, Chapter 11, or Chapter 7 bankruptcy, here are 3 alternatives you should look into.

Debt Settlement

This is one of the most common ways to avoid filing for bankruptcy. It is especially useful for those who have accumulated a lot of debt because of credit card bills. People in deep debt due to credit cards are usually harassed by several calls and strongly worded letters from creditors who are also threatening legal action.

Debt settlement is basically negotiating for a lower amount that you and the creditors can agree on. While it is possible to do this on your own, majority of people approach debt management companies and bankruptcy lawyers to help them do this.

The problem with debt settlement is that you’ll usually need a pay a lump sum. Through debt settlement, it is possible to get the debt reduced by up to 50% of the original amount. A common piece of advice given by debt settlement companies is to tell their clients to stop payments in order to gather enough for a lump sum that can be used to negotiate a reduced settlement in exchange for an instant payment.

Word of warning: the debt settlement industry is largely unregulated so it is possible to get yourself in even more debt than before if you aren’t careful. For some people, choosing a debt lawyer is much safer as they work solely in your interest.

Judgment Proof

This is a basic alternative to bankruptcy but very few people choose this route. For people who have incurred large amounts of debt but have a very limited income or no income at all, you could be labelled as judgment proof. What this boils down to is that creditors that take you to court will find that you have no means of paying them back.

Your debt may then be written off and cleared as some creditors would rather not go to the trouble of taking you to court. Your debt will be completely cleared after 7 years. Within the next 7 years though, creditors can come after you for payment again if they see that your financial situation has improved. To know if this is the route for you, seek legal help and they will fill you in on how the your exact situation will be perceived as well as guide you in the matter. Judgement proof can be a great alternative to filing for bankruptcy for debt.

Debt Consolidation

This is a popular option as it simplifies everything into one large payment. This involves taking out a large loan to cover all of your current debts and then slowly paying back this debt at lower interest rates. You can even reduce rates further by offering up collateral like putting property against the loan. Should you be unable to pay the loan, then your property will be seized.

The biggest disadvantage of the debt consolidation process is that it can turn several unsecured loans into one massive secured loan, usually against your house. This makes it a risky option in order to pay off debts.

Each alternative has their own advantages and disadvantages. Each one should be given plenty of thought as they can all directly affect the next 5 – 10 years of your life.