Bankruptcy is the official legal status that a person seeks out when they are unable to repay their debts. There are varying kinds of debts and there are both state and federal laws that affect debtors who need to file for bankruptcy. Furthermore, an experienced legal professional could counsel you on how best to proceed with a Chapter 7 or a Chapter 13 bankruptcy. If you are located in the Los Angeles area, Los Angeles Bankruptcy Attorney can help you with your bankruptcy case today.
What is Bankruptcy?
Bankruptcy generally falls under federal laws which govern the exact protocol and procedures of bankruptcy cases. The debtor must file their bankruptcy case in the United States Bankruptcy Court, which is a subdivision of United States District Courts. However, the ways in which the bankruptcy affects the property rights of the debtors is determined by state laws. Residents of Los Angeles would be subject to the laws of the state of California.
There are various kinds of debt that a debtor can be saddled with. There are three basic categories, however: secured debt, priority unsecured debt, and non-priority unsecured debt. It requires extensive legal analysis to determine which category a debt falls into and is best handled by attorneys with experience in these kinds of cases.
In the process of recovering some of these debts, creditors with the requisite powers can place liens on pieces of collateral that were put up in order to get a secured loan. It is important to note that the official legal definition of alien is when an entity and/or person secures a right to take possession of some piece of property and/or asset until a debt they are owed has been repaid (or discharged). For example, a lien is also created when a mortgage creates in security interest.
What is Secured Debt?
Secured debt refers to a kind of debt that is effectively backed by some amount of collateral. In the event that the debtor is unable to repay this debt, their creditors could seize this collateral. In other words, if you are the debtor and there is a lien against a piece of property that you own, then it would be considered a secured debt in case you file for bankruptcy.
Liens can either be voluntary or involuntary. The former occurs when you place a lien against some asset you own (most frequently a house or car) while you are still in the process of paying it off. The latter occurs when someone wins a judgment against you and has a lien placed on some piece of property or asset that you own.
Several examples of secured debt are:
- Loans to pay for a car.
- Personal loans that were approved by placing up some asset as collateral (such as a house).
- A mortgage for a home (the home itself acts as collateral against the loan to pay for the house).
- Tax liens set on real estate properties.
- Liens set on civil lawsuit judgments.
In order for the debt to be categorized as a secured debt during the bankruptcy case, then the lien has to be perfected. This is a legal term meaning that the lien has been filed with the appropriate agent and/or agency to ensure that the securing interest is binding in a collateral asset. In other words, the creditor has followed through on the entire legally binding process of giving notice they have an interest in the property.
The creditor can perfect the lien by using a county agency to record the lien, like making note of it on the title of a car with the Department of Motor Vehicles (DMV) and/or by filling out a financial statement to specify that the lien is being used as collateral against property that is personally owned by the debtor. If the creditor in question has won a judgment against the debtor in a civil lawsuit and further perfected the lien, then that judgment effectively turns into a secured debt.
Filing Chapter 7 versus Chapter 13 on Secured Debt
All of this means that secured debt is backed by assets and/or property that are personally owned by the debtor. If you, as the debtor, wish to retain said property, then you will have to repay those secured debts. As a result, filing for Chapter 7 bankruptcy means that you will have to remain up to speed on those payments or, at the very least, be able to quickly catch up if you are a little behind. In some cases, you will be required to prove that you have the means to get back on track with your payments.
If you cannot make the payments on the secured debt, or find yourself too far behind, you do have the option to surrender the asset and/or property to your creditor. Any secured debt that remains, such as a car loan, personal loan, and/or mortgage, would then be discharged through the Chapter 7 bankruptcy.
If you decide to file Chapter 13 bankruptcy, however, there is a possibility that you could restructure your payments made on the secured debt via your Chapter 13 plan. As long as you are making payments to that plan, as delineated by a bankruptcy court agreement, your property will remain protected from seizure, foreclosure, and/or repossession.
If you have a backlog of past due payments that have accumulated from years of not paying, it is possible to use the Chapter 13 plan to spread out paying them. Usually, this means that both a car loan and a personal loan will be fully paid by the time the plan ends. The majority of people still have a balance on their mortgage once their Chapter 13 plan has ended, meaning that they must be financially stable again to begin making normal payments once Chapter 13 has ended.
What is Priority Unsecured Debt?
An unsecured debt is a debt that holds no collateral. If it is a priority unsecured debt, it is the type of debt that must be repaid no matter what (it cannot be discharged). Most priority unsecured debts are owed to the government or a government agency. Any financial obligations that are owed to an ex-spouse or children as a result of divorce proceedings (such as alimony and/or child support) are also priority unsecured debts.
Examples of this type of debt are:
- Taxes, both federal and state. If they are the former, then they are owed to the Internal Revenue Service (IRS). If they are the latter, then they must be paid to the State of California Franchise Tax Board (FTB).
- Any amounts owed for child support and/or alimony (also known as spousal support). Failure to pay these may result in criminal charges.
- Any criminal fines that were ordered as the result of a criminal trial.
- Any time that government benefits, such as Social Security and/or Disability, must be repaid.
- Any time that you owe damages in a personal injury lawsuit due to the fact that you were operating a vehicle while intoxicated.
If you decide to pursue a Chapter 7 bankruptcy filing, any assets that are sold will go to paying priority unsecured debts before other debts like outstanding medical bills or unpaid credit cards. If, on the other hand, you do not have any assets to sell off, then you will likely still owe any of these debts once the Chapter 7 is complete. This is because priority unsecured debts are not easily discharged during bankruptcy proceedings; they have considerably stricter discharge requirements.
Much like regular secured debt, filing for Chapter 13 will likely allow you to pay these debts via a payment plan. The debts will have to be fully paid, but using the Chapter 13 plan effectively spreads their payment over a period of three (3) to five (5) years. By breaking up the payments into smaller, more manageable chunks, many debtors find it more affordable to pay them off. The goal is that once the Chapter 13 plan has ended, you will be entirely caught up on all child support, alimony, and tax payments.
What is Non-Priority Unsecured Debt?
All other debts that do not fall under the previous two categories are known as non-priority unsecured debts. Most of these debts can be discharged through either filing for Chapter 7 or Chapter 13 bankruptcy. This means that once the bankruptcy period has ended, none of these debts will be owed.
Examples of non-priority unsecured debt include:
- Unpaid medical bills.
- Unpaid bills for credit cards.
- Personal loans that were approved without having to put up any collateral.
- Utility payments that are past due (such as power or water).
- Various overdue bills that are in the hands of collection agents.
- Any business debts.
Under Chapter 13 guidelines, however, a small proportion of non-priority unsecured lenders may be paid. Following the successful completion of the plan, the rest of the debt is entirely discharged.
The Exception of Student Loans
Because student loans are funded and guaranteed by the federal government, they are a major exception to these rules. Student loans are considered to be in the same class as other non-priority unsecured debts (note that no collateral is needed to secure a student loan as students traditionally have no collateral). However, discharging these types of debts is exceptionally difficult, and student loans are usually still owed once bankruptcy proceedings have ended.
It is hypothetically possible to get student loans discharged by proving that act of repaying them would cause the debtor “undue hardship” and prevent their ability to maintain a minimal standard of living. However, this is an incredibly difficult standard to meet. You will also need to prove that you made every single effort to repay the loan but are inhibited by some disability or inability to earn money. Furthermore, most student loan lenders will implement what is known as a hardship program that can lower the payments or extend the loan’s term.
It may appear that student loans issued by a private organization are themselves private loans, but because they are provided by government-affiliated institutions, it essentially means that owing student loans is the same as owing the federal government.
You could possibly argue that the undue hardship is due to the fact that the school engaged in deceptive and/or unfair practices and that you were the victim of predatory lending. For example, there have been cases of illegitimate schools shutting down without reimbursing the tuition paid by their students. This results in a mountain of debt and no degree to provide an income to pay it off. In these cases, the bankruptcy court may agree to discharge your student loans.
Chapter 7 and Chapter 13 for Tax Debt
Tax debts are some of the gravest types of debt that a person can face. The federal government has wide-reaching powers to get whatever money may be owed to them. This includes imposing severe tax penalties via wage garnishments and/or payment deductions, tax liens placed on assets and/or property, charges in interest, and the outright seizure of assets. If state taxes are owed, then you may be facing serious financial repercussions.
Contacting a bankruptcy attorney is absolutely necessary. They can effectively advise you on whether filing for Chapter 7 or Chapter 13 bankruptcy can discharge some of these tax debts. The ins and outs of these discharges are immensely complicated, meaning that an experienced bankruptcy attorney with a wide range of experience is best suited to analyze your situation.
There are, however, some general criteria as to whether federal and/or state tax debts can be discharged by filing for Chapter 7 or Chapter 13 bankruptcy. They include:
- The three-year rule. This means that filing the return for income tax was due no more than three years ago.
- The two-year rule. This means that filing the return for income tax occurred more than two years before the bankruptcy was declared.
- The 240-day rule. The income tax return assessment (an acknowledgment of tax debt) occurred at least 240 days before the act of filing for bankruptcy.
Furthermore, you cannot be committing tax evasion and/or have a fraudulent tax return in order to meet these criteria.
With these criteria being met, filing for Chapter 7 bankruptcy means that all debts on income taxes can potentially be discharged within three (3) to four (4) months. In order to qualify for Chapter 7, a means test will be administered. For residents of Los Angeles, this means test will compare the income and size of your family for the past six (6) months to the median income of a family with the same size in the state of California. If you earn less than the median income established by the means test, it is highly likely that you will be approved for Chapter 7.
In the event that you do qualify for Chapter 7, it may be possible to find some relief for your tax debts through Chapter 13. This type of bankruptcy holds you responsible for paying the majority of your non-dischargeable taxes and secured debt via a payment plan. This plan will be developed during the bankruptcy proceedings and approved by the bankruptcy court judge to ensure that the payments are possible given your income. Certain types of tax debt are dischargeable, including some of the fines and/or penalties accrued via nonpayment in the past.
If you are using the Chapter 13 payment plan for credit card bills, medical bills, and various unsecured debts, you will be repaying your tax debt with percentage points that are the same. In other words, if the payment plan specifies that you pay your medical bills at 10%, you will pay your non-dischargeable tax debts at 10%. Even if you are unable to discharge all your tax debts, you will still save a considerable sum of money.
Debts Due to Criminal or Malicious Conduct
Certain other types of debts cannot be discharged by either Chapter 7 or Chapter 13. This includes any debts where the debtor may owe the courts a settlement due to criminal and/or malicious acts. This includes both criminal penalties and civil lawsuit judgments.
This conduct may include white collar offenses like fraud, embezzlement, larceny, and/or false representation. It may also include more serious offenses, including any damages owed to a victim or a victim’s family for a personal injury, criminal negligence, and/or wrongful death lawsuit. There are various charges related to these types of lawsuits, including vehicular manslaughter, driving under the influence, and/or operating a boat or aircraft while intoxicated.
These are classified as “willful and reckless acts” and can never be discharged under any sort of bankruptcy proceeding. The debtor will always be obligated to pay the courts any penalties incurred and their victims any damages they were awarded.
Find a Bankruptcy Lawyer Near Me
The process of filing for bankruptcy is very complex. There are federal laws that apply to the overall process and California state laws that apply to the particulars of property ownership. Furthermore, you may be at the mercy of various creditors who will do anything to get every cent you owe them back. It is absolutely vital that you hire a bankruptcy lawyer who can be on your side and protect your interests. Call Los Angeles Bankruptcy Attorney at 424-285-5525.