Defining Nondischargeable Debts
When you file for bankruptcy, some of your debts may not be forgiven or dischargeable. These nondischargeable debts that are not eliminated through the bankruptcy proceeding and may depend on the type of bankruptcy for which you file. Nondischargeable debts include most taxes, local, state and federal, credit card debt to pay these taxes, student loans, as well as alimony and child support. If the creditor of other debts objects to your bankruptcy discharge, then other types of debts may become nondischargeable. These can arise from debts incurred from fraudulent acts, from a marriage or divorce settlement, from malicious and intentional acts caused against another person or their property including larceny, breaching fiduciary responsibility, and embezzlement.
How a Debt Can Become Nondischargeable
Oftentimes, a debt becomes nondischargeable because the debtor committed an act of malfeasance. Malfeasance is defined as an act of sabotage where one person intentionally causes damage to another. The person on the receiving end of the malfeasance damage has the right to settle the case by means of a civil lawsuit. Errors committed by the debtor regarding the bankruptcy petition, including omitting certain debts by accident could result in them being nondischargeable. However, exceptions can be made, especially when a creditor takes no action after finding out that the debtor is filing for bankruptcy.
California Bankruptcy Exemptions
In most cases, if you maintain residency in the state of California for two or more years before filing for bankruptcy, you will be entitled to California's exemptions.
California Section 704 Bankruptcy Exemptions
Home assets: A non-married single person can protect up to $50,000 in the equity of their home. For a head of household or families, they can protect up to $75,000. This limit increases to $150,000 for those aged 65 years old or more, as well as for those with mental or physical disabilities.
Vehicle assets: An owner of the vehicle(s) is entitled to protect a total maximum value of $2,550 in an unlimited number of vehicles.
Jewelry assets: Jewelry owners can protect heirlooms, works of art, and jewelry of up to $6750 in value. Household goods: Homeowners can protect their reasonably necessary household goods such as appliances, furnishings, and clothes.
California 703 Bankruptcy Exemptions
Home assets: Section 703 allows a homeowner to protect as much as $20,725 in home equity.
Wildcard protection: This wildcard can be used in various ways. You can protect as much as $1,100 in the equity of your property plus an unutilized portion of your home protection. If you do not own a home or equity of $20,725 in your home, you can transfer the homestead protection to other assets or property. In all, your maximum wildcard can be $21,825 ($1,100 property wildcard + $20,725 homestead wildcard) in the case that there is no equity in your home or that you do not own one.
Household Goods: You are permitted to keep and protect household items, including furniture, clothes, and goods, as long as no particular item exceeds $525.
Vehicle Assets: You are permitted to keep and protect one (1) vehicle of no more than $3,300. In the case that the value of your vehicle exceeds $3,300, you are able to utilize your wildcard to protect the rest of your vehicle's value.
Filing For Bankruptcy In California
To discharge your debt and get a fresh start, you have to main legal processes at your disposal: Chapter 7 and Chapter 13. There are distinct qualifications, costs, and dischargeable/nondischargeable debts for each one. If your goal is to maintain your property, but are behind on your business or mortgage payments, chapter 13 may be the best option for you. This type of bankruptcy will allow you to reinstate your original mortgage agreement, especially if your property is not covered in California’s 704 and 703 exemptions. Chapter 13 can also be an attractive option if your debt is nondischargeable in Chapter 7 or if you earn too much income to qualify for Chapter 7. Read more about if filing for Chapter 13 is the best option for you on the Chapter 13 page on our website.
If you qualify for Chapter 7 in California, your fresh start means that you would only continue to owe debts on secured assets, for which you sign a "Reaffirmation Agreement.” Reaffirming your debt means that you agree to pay back the debt according to your original contract with the creditor. Thus, you are still liable for this debt on a secured claim on a property asset, such as your house. For example, if you took out a loan, you may have put your house up as collateral, that the bank or creditor could sell if you default on the loan. This collateral is a secured asset that you cannot protect under Chapter 7 bankruptcy.
Nonetheless, upon filing Chapter 7, you are immediately protected from your creditor's efforts to collect on your debt and from trying to withhold your paychecks as in 'wage garnishment.' In addition, any earned wages or property that you acquire (other than inheritances) after filing for chapter seven are yours to keep. Neither the bankruptcy court nor your creditors can take these away from you. Some potential downsides of Chapter 7 are that your nondischargeable debts include property such as your home or care. In addition, any co-signers of loans you took out would not be protected, and unless they file for Chapter 7 or another form of bankruptcy, they will be liable for your debt. Find out how the Los Angeles Bankruptcy lawyer can advise you on filing for Chapter 7 here.
Nondischargeable Debt Specific to Chapter 7
In order for a Chapter 7 filer's debts to be properly discharged, they must follow the bankruptcy law requirements of 11 U.S.C. § 727. Failing to submit necessary information or follow these requirements could lead to the court or any interested party objecting to your debt discharge and your petition being completely denied. These requirements may require you to do the following: provide tax documents requested by the court, obtain the financial management course certification.
If you do any of the following your Chapter 7 petition may be denied: Attempt to hinder or defraud your creditors by hiding property, hide or destroy records or books, commit fraudulent acts or perjury relating to the bankruptcy case, violate a mandate from the court, are unable to account for lost assets, have been granted a bankruptcy discharge within a certain period of time depending on the type of bankruptcy filed. The 11 U.S. Code § 727 (a) (8), (9) explains that these time periods include six years for section 1228 or 1328 for Chapter 7 or for the Bankruptcy Act's section 660 or 661 or eight years for section 1141 of Chapter 7 of the Bankruptcy Act's section 14, 371, or 476.
Nondischargeable Debt Specific to Chapter 13
As you must for Chapter 7, if you file for Chapter 13, you must also repay certain debts. In fact, Chapter 13 includes many more potential nondischargeable debts than Chapter 7 does. For your payment plan for Chapter 13, nonpriority, unsecured creditors must be paid back in most cases. Certain obligations include child support and alimony, so these payments are nondischargeable. Criminal restitution orders or fines resulting from a sentence of any criminal conviction are nondischargeable for Chapter 13 bankruptcies.
If any government agency fines you, imposes a penalty on you, or makes you forfeit property; these debts would be nondischargeable. However, if you were fined as a result of overpaid benefits to you because you failed to report certain income, or because of other non-legal behavior you participated in, then only the fine portion is nondischargeable. This overpaid amount is considered as dischargeable like other unsecured debts. However, this overpaid portion can become nondischargeable if the government agency alleges that you frauded them in order to obtain the money, and they file a court action and the court rules in their favor.
Tax debts that were initially due within three years to you filing for Chapter 13 are considered priority debts, meaning that they need to be fully paid in your bankruptcy plan. For whatever reason, if the Chapter 13 comes to an end prematurely, unpaid tax debts need to be resolved either outside of your bankruptcy or by converting your bankruptcy plan from Chapter 13 to Chapter 7.
If you have been convicted of injuring or killing someone while driving under the influence of alcohol or illicit drugs, then any debt that results from the injury or death is nondischargeable. Even if someone sues you for injuring or killing another person in the accident and the jury or judge does not believe you to have necessarily been intoxicated, a state or bankruptcy court can later prove that you drove under the influence. In this situation, debts for any personal injuries caused by you in the accident are nondischargeable. However, if property damage was caused in this accident, these debts would be dischargeable.
Your malicious or willful actions can leave certain debts nondischargeable as well. For example, if a civil court orders a judgment to your creditor against you for causing death or personal injury, the resulting judgment or fines are nondischargeable. Different from the Chapter 7 category of malicious and willful actions, for a Chapter 13 bankruptcy, the creditor does not need to open a separate court case to prevent this debt from being discharged. In this cause, the debts are automatically considered nondischargeable.
The terminology used, “malicious or willful” can be used generally and widely to encompass many types of actions that would cause your debts to become nondischargeable under Chapter 13 bankruptcy law. For example, driving recklessly can be considered or judged to be “malicious,” and therefore, related debts would not be dischargeable. However, the same situation under a Chapter 7 bankruptcy does not include this language for its dischargeable debt requirements. Another difference between Chapter 7 and Chapter 13 dischargeability is that only property damage that was caused by death or personal injury would make this debt nondischargeable.
Under bankruptcy law, you must submit a list of all of your creditors and if possible, include updated their home or office addresses. This list is required so that the court can provide your creditors with notice of your filing for bankruptcy. This obligation to hold up your end of the bargain will allow your debts to these creditors to become dischargeable if they fail to respond or object, as long as all other requirements are fulfilled. If there were other reasons for the creditor to find our or reasonably know that you filed for bankruptcy, a phone call or personal letter, your debt to them may also be discharged. Nonetheless, if you fail to notify your creditor(s) directly, do not list them when you file for bankruptcy or submit an incorrect address or identity of a creditor, the court will be unable to properly notify them. In this case, the debt(s) to the unnotified creditor(s) would most likely become nondischargeable.
In general, any debt that you fail to list in your Chapter 13 petition will be nondischargeable. Therefore, it is vital that you carefully list each of your debts and creditors as well as any pertinent information. For secured debts in particular, but not exclusively, you should submit a proof of claim for any debt that your creditor does not.
Just as for Chapter 7, student loan debts are nondischargeable for Chapter 13 bankruptcies, unless you are able to prove to the court that paying your student loans would cause significant hardship. In some cases, the court may allow you to discharge your student loan’s interest while leaving the principal loan nondischargeable.
Chapter 11 and Its Nondischargeable Debts
Chapter 11 or "reorganization" bankruptcy is another way to find financial relief and usually involves a partnership or corporation. This type of bankruptcy is designed to keep a business afloat while paying creditors over a period of time. Individuals and those pertaining to a business can also file for chapter 11 relief.
For an individual or business to successfully file for chapter 11, this debtor must present and submit a plan to the court for reorganization and paying back the debt. Any interested party may object to the plan by filing with the court, and once this notice has been received by the bankruptcy court, a hearing will be held to determine the confirmation of the plan. Whether or not an objection has been filed, the court will determine the feasibility and legality of the plan. More specifically, according to the US Courts Bankruptcy Basics page, the bankruptcy court must decide the following: (1) the plan submitted is viable, (2) the plan has been proposed in good faith, lastly, (3) the details and plan's purpose satisfy Bankruptcy Code requirements. On less the submitted plan is to liquidate, the court must confirm that the plan shows a low risk of liquidation or that the debtor will need subsequent financial reorganization.
In most cases, once the court confirms the debtor's plan, they are discharged from debts that arose before the confirmation date. At this point, the debtor is bound by the reorganization plan and must make the payments as laid out by the plan's provisions. These provisions create updated contractual rights, which replace or suspend contacts made prior to the bankruptcy filing.
While the court's confirmation of the debtor's plan discharges most debts, Bankruptcy Code section 523 explains nondischargeable debts. For example, unless you file for chapter 11 as an individual, a plan to liquidate assets would not discharge you of the debts. If you do petition as an individual and your court confirmed plan is to liquidate, then your associated debts will be discharged once you have paid the plan's payments. However, your debt would not be discharged if Chapter 7 rules would cause grounds for denial. In other words, your circumstances must pass through Chapter 7 requirements for your debts to be dischargeable under Chapter 11 as an individual. For example, the individual's debts would become nondischargeable if they try to defraud, delay, or hinder their creditor or estate custodian by concealing, mutilating, destroying, removing, transferring the property of the debtor or the estate (or knowingly allowing this to happen).
Costs of Filing for Bankruptcy and How a Lawyer Can Help Discharge Your Debts
Paying for bankruptcy fees is the last thing you do, especially because you're doing so when financial issues are at their worst.
If you decide to file for Chapter 7, you'll have to pay a $335 filing fee, and for Chapter 13 a $310 filing fee. If you can prove to the bankruptcy court your financial hardship, you might be able to pay in installments instead of all at one time. An additional $15 to $20 fee may be added from the Department of Justice’s Bankruptcy Trustee. If you have first filed for Chapter 7, and later find out you are not qualified, so you convert to a Chapter 13, you do not need to pay an extra fee. However, going the reverse route will cost you an extra $25 due to the difference between the two fees. Outside of these filing fees, you will need to obtain a debtor education certificate from a financial management course. These courses can range in cost from $10 to $100.
The assistance of a bankruptcy attorney has proved invaluable for folks who file for Chapter 7 and even more so for those who file for Chapter 13. While those who file "Pro Se" in California perform better than the national average, in 2018, they had a success rate of only 16.4% (Central District of California Bankruptcy Court). A bankruptcy attorney can file an 'adversary proceeding' on your behalf which is a lawsuit or complaint against the bankruptcy court. These proceedings require a judge's attention and are highly successful: In 2018, 82% of these cases ended in a successful filing (ibid).
Find a Bankruptcy Attorney Near Me
If you are considering filing for bankruptcy in California, speaking with a local attorney would help you best navigate your situation. To speak with a Los Angeles bankruptcy lawyer about your situation and dischargeable versus nondischargeable debts, contact our office at 424-285-5525