The end result of a bankruptcy petition, in almost all cases, is a fresh financial start for the honest yet unfortunate debtor. To get this fresh start, the bankruptcy judge will discharge (legally forgive) many different kinds of debts.
Sometimes, debtors want to pay what they owe, or at least most of it, but they lack the means to do so. Such repayment is an option in both Chapter 7 and Chapter 13 cases, because even if the debt is legally discharged, the moneylender will almost always still accept payments.
The math is very simple. Since 2003, wages have increased by 28 percent and prices on many items have increased between 35 and 55 percent. Something has to fill in the gap, and in most cases, that something is borrowing money on credit cards. In fact, the average credit card-holding household has account balances over $16,000 in revolving debt alone.
There is no doubt that poor financial planning and overspending account for some of this debt, but unexpected emergencies, such as medical bills and unemployment, account for a lot more.
Since there is no security agreement, credit card debt is dischargeable in both Chapter 7 and Chapter 13 cases. In addition, because of the automatic stay, moneylenders cannot pursue any adverse actions, such as lawsuits, while the case is pending.
As most people might expect, medical bills have increased more than most other types of expenses over the past fifteen years, and even if the debtor has good medical insurance, the membership fees, copays, and deductibles are often financially debilitating.
Legally, medical bills fall into the same category as credit cards and so they are completely dischargeable.
Small Business Administration and other bank loans, as well as payday and other nonbank loans, are also unsecured, even if the lender required bank account information or if the debtor agreed to a certain withdrawal on a certain day.
Student loans, whether or not a governmental unit guaranteed them, are only dischargeable if the debtor establishes undue hardship, and admittedly, that is not an easy showing to make in court.
Somewhat similarly, income taxes, as opposed to payroll and other kinds of taxes, are dischargeable only under limited circumstance, but the showing is a little easier to make because it is based on time as opposed to other circumstances. The rules for both the IRS and state taxing authorities are:
- Tax must be at least three years old,
- Returns have been on file for the past two years, and
- The authority has not assessed the debt in the last 240 days, which usually means that the taxpayer has not received a notice or bill in that time period.
The IRS, as well as states, are very particular on dates, and it is not unusual to see opposition based on one or two days off the deadlines.
If the taxing authority placed a lien on the taxpayer’s assets, such liens remain, because the bankruptcy judge has limited powers.
Contact Experienced Attorneys
Most debts are dischargeable in bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We handle cases in both Illinois and Indiana.