With the current financial and economic system, most individuals and businesses operate on debt. There is nothing unusual with having a manageable debt that builds your credit rating while paying it off gradually. Unfortunately, a loss of job, illness, divorce, or business failure can make it impossible to manage debt. Your whole life becomes stressful because your income won’t be enough to service the debt.
When beleaguered by towering debt as a debtor in Laguna Woods, you might want to consider bankruptcy to resolve or come out of the challenging financial situation. Hire the Los Angeles Bankruptcy Attorney if you’re going to organize your finances and obtain a clean slate.
The Advantages of Filing for Bankruptcy
Titles 11 is the federal statute that helps individuals or big businesses overwhelmed by debt to acquire financial relief and obtain a clean slate in life. When you file for bankruptcy, you must disclose your income, expenses, assets, and the number of people you owe. A trustee evaluates all these documents to establish the time and manner you will pay your debts.
Many individuals seeking financial relief declare under Chapters 7 and 13. Before deciding on the type of bankruptcy to file, speak to your Laguna Woods bankruptcy attorney to determine which form of bankruptcy will have more merits than demerits.
Declaring bankruptcy has many benefits if you do it right. One of the advantages of the legal process is it triggers the automatic stay that compels all creditors to hold all debt recovery actions like filing suits, making phone calls and repossession of property used as security. Collateral is any value item that secures or guarantees the loan repayment. The stay gives you peace of mind as you reorganize your debts or seek financial relief.
As mentioned above, collateral secures various kinds of loans. When you fail to repay the debt, creditors and the court will sell off the property used as collateral like your vehicle or estate to repay the loan. Note that once your property is sold off to repay debt, the remaining debt will be forgiven if it is dischargeable. Your creditor will not come collecting money again. However, not all debts are dischargeable, independent of the bankruptcy type you are filing.
Although declaring bankruptcy means the filing will appear in the records for seven to ten years, it provides you with the opportunity to retain your property, enabling you to acquire a fresh start at the end of the process.
Further, based on the form of bankruptcy you choose to declare, your property and assets can be sold off to repay the debt and discharge the rest, or you design a payment proposal. If the plan is approved, you make payments over a particular period. The good news is that you need to worry less about damaging interest rates on loans with bankruptcy. To maximize the bankruptcy process’s benefits, speak to a Laguna Woods bankruptcy attorney for legal guidance.
Pre-Filing Vs. Post-Filing Debts
Before discharging a debt, the courts consider many elements, one of them being the time you incurred the debt. Any debt accrued before bankruptcy is a pre-filing debt. In case of dischargeable pre-filing debt, the court will forgive you the debt but based on the bankruptcy you have filed.
When you declare bankruptcy, all your expenses won’t go away. You will have other obligations other than paying the debt. Because of the tight budget and the fact that you are denied access to credit card lines, you will incur more debt while enjoying the automatic stay status. The debt incurred at an ongoing bankruptcy is called post-filing debt and is the debtor’s responsibility independent of the contract’s outcome or agreement.
It means there are dischargeable and nondischargeable debts. Of all the two kinds of debt, the one obtained before the bankruptcy date will be forgiven but based on the case’s nature. However, any debt you acquire after the process commences will still be your obligation and is non-dischargeable. Talk to your Laguna Woods bankruptcy attorney to better understand these debts and how they affect the process’s outcome.
Priority Vs. Non-Priority Debts
Debt discharge is where the court releases the debtor of the obligation to repay the debt, or the creditor is prohibited from contacting the debtor for debt collection until the bankruptcy period is over. All nondischargeable debt are priority debts, and they include:
- Secured debts like car loans
- Fines, fees, or penalties you owe government agencies like the DMV
- Student loans that fall under government loans. The loans belong to the same classification as state fees.
- Taxes owed to local, state, or federal government
- Any overpayments received on unemployment or disability benefits
- Essential money that you owe to yourself like loans incurred from a 401k plan
Any debt you have incurred in the above scenarios is nondischargeable and must be cleared independently of the bankruptcy outcome. The only thing you should be asking is the manner and the time that is most appropriate to file either bankruptcy. When unsure which chapter of bankruptcy will provide maximum benefits, contact a Laguna Woods bankruptcy attorney to review your finances and find the best way forward.
When it comes to priority debts, bankruptcy outcomes can vary significantly. Chapter 7 is a liquidation process where a court-assigned trustee liquidates or converts some of your assets into cash by selling it off or an auction, and then the proceeds are used to repay creditors. If you wish to keep some or all your property, Chapter 13 is the best option. Chapter 7 won’t be beneficial because you will lose your assets.
Chapter 13 is suitable for debtors with high income and those who demonstrate the ability to repay the debt but cannot do so. When you opt for this form of bankruptcy, you propose a payment plan. Upon approval, you begin making payments to repay your priority debts first. The bankruptcy enables you to restructure the obligation, to pay it bit by bit for a specific period without increasing the penalties, late repayment fees, or interest rates. The court might also require you to pay debts that are not a priority, although this type of debt is forgiven most of the time.
On the other end, non-priority are dischargeable debts. They include all unsecured debts like credit card debts, medical insurance bills, business debts, utility bills, personal loans, or bills possessed by collection agencies. If you file for bankruptcy, you will be released from payment of these debts, thus enjoying massive financial relief.
Chapter 7 discharges debts that are not a priority in a top-bottom manner, giving you a fresh start and an opportunity to regain your life and build your credit score. Unluckily, under the chapter, you will lose a reasonable amount of assets to liquidation or a selloff. Therefore, if you intend to keep some of your assets, Chapter 7 won’t be beneficial. Consult with a Laguna Woods bankruptcy attorney to understand the bankruptcy type that will be beneficial based on the debt in question.
Secured Vs. Unsecured Debts
Unsecured debts are obtained without security in the collateral form to guarantee payment of the loan. Remember, you can’t use any asset as collateral. It must be an item with a generally accepted cash value in an open market or any other object with objective value.
On the other hand, secured debts are types of debt where before you are extended the credit line, you must provide an item of objective value. Average income earners can secure their loans using the house or car as collateral. You can obtain a secured loan for individuals with high income and own real property or have an investment portfolio. The type of debts you can secure with collateral includes home equity loans, mortgages, car loans, property, or judgment liens in civil actions.
If you find yourself using your home equity loan to settle secured and unsecured debts, it’s an indication you are headed for financial problems and eventually bankruptcy. Your home is a valuable asset, and using it to secure a loan is a mistake. You should instead explore debt management options or have the debt discharged through bankruptcy.
Upside Down Loans
Sometimes, your assets’ value might be below the amount of money you owe, creating a deficiency. The cases are common when there is a crash in the real estate market. If you acquire a mortgage loan using your home, if the home’s value depreciates after some time, it won’t be enough to repay the debt even if it’s sold off. When your property’s objective value is lower than the loan, you will end up with something known as an upside-down loan.
These loans are the most frustrating because you won’t pay for the property’s objective value. Fortunately, by declaring bankruptcy under Chapter 13, you get to retain your property, reorganize your debt, and be eligible for a cram-down modification. In this modification, the loan amount is lowered to equal the assets’ objective value.
The modification is, however, limited in terms of application. You can only use it on a car loan incurred at most thirty months or a personal loan incurred at most twelve months before the bankruptcy filing.
The IRS employs various tactics to ensure you pay your tax debts. One of the standard techniques they use to recover a debt is through wage garnishment, which involves deducting a particular amount of money from your check. The other approach is property lien, which grants them the right to acquire or repossess your properties as a security guarantee that debt repayment.
When looking for financial relief, declaring bankruptcy under Chapter 7 is an excellent move. However, for these taxes to be discharged, these conditions must be present:
- You haven’t committed tax fraud. If you didn’t file fraudulent returns or attempt to evade taxes by declaring bankruptcy, that’s the only time you can declare bankruptcy. Note that engaging in tax fraud can also causing a criminal conviction, which attracts a sentence of twenty years prison incarceration or a court fine amounting to $250,000.
- The tax debt can be from income tax only and not payroll taxes, penalties, or fraud penalties because they cannot be eliminated through bankruptcy.
- You filed the tax returns leading to the tax bill once, at least two years before the bankruptcy. If the filing of the returns happened late, the tax bill wouldn’t be considered when eliminating or discharging the debt. Instead, you will be permitted to design a payment plan or financial compromise independent of the bankruptcy filing outcome. Also, you can’t file several tax returns once before declaring bankruptcy to avoid substantial tax debts.
- The tax returns from your income tax debt must have been due at least three years before filing for bankruptcy to discharge the debt.
- You pass the 240-day rule that requires evaluating income taxes owed at least 240 days before declaring bankruptcy.
When you meet all the above conditions, then you are eligible for bankruptcy under Chapter 7. All your income dates dating three months before bankruptcy will be absolved. Note that in Los Angeles, CA, if you owe any tax bills to the county or state government, the taxes are nondischargeable because they are priority debts.
However, if your income is above the median required income for an American family, your only option might be Chapter 13. This kind of bankruptcy allows you to reorganize your tax debts and design a payment proposal that must obtain the court’s approval. Under the chapter, you will still be liable for your priority debts, but at a reasonable rate. You must also work closely with your Laguna Woods bankruptcy attorney and the court to review your payment plan.
Additionally, under this Chapter, tax debts will be treated equally with other priority debts. If you pay 5 percent for a priority debt, the same will apply to your tax bills.
Reach Out to a Bankruptcy Attorney Near Me
A bankruptcy filing can provide you maximum benefits, but the process comes with a fair share of challenges. You need to understand your choice of bankruptcy and how it will resolve your current situation. An experienced attorney can explain your choice of bankruptcy and the non-priority debts to be discharged at the end of the process. Call 424-285-5525 for a free meeting with the Los Angeles Bankruptcy Attorney.