Fundamental Misunderstandings

No one expects the average person without legal training and experience to be an expert on bankruptcy.  I have, however, encountered a number of questions in the past couple of weeks that demonstrated a fundamental misunderstanding of what bankruptcy is and how it works.  So I thought now would be a good time to clarify a few things.
“Am I likely to win my bankruptcy case?”  OR  “How will the Trustee decide if my bankruptcy goes through or not?”
Bankruptcy is NOT an adversarial area of law – at least not in the vast majority of cases.  Bankruptcy is highly bureaucratic, and although it technically doesn’t fall into the realm of “administrative law”, that’s basically what it is.
In bankruptcy, an individual files a petition with the bankruptcy court.  Once filed, a discharge is PRESUMED to be the end-result, and really only doesn’t happen in a small set of circumstances and mostly only if/when a creditor or other party objects to that discharge.
Assuming you’ve hired an attorney to determine that you meet eligibility requirements, disclosed all of the relevant information, provided all of necessary paperwork, etc. – the rest of process should be relatively simple.  A lot of “pro forma” stuff to make sure all of the i’s have been dotted and t’s crossed.  There are opportunities for creditors to file objections, or for the Trustee to object to exemptions, or for disputes over the Means Test.  But in the majority of cases, these things never happen.  A good and experienced bankruptcy attorney will have already litigated the case before he files the bankruptcy case, ensuring that whatever issues may affect your bankruptcy case and your ultimate result have been addressed or mitigated in some way before the petition is filed.
In other words, this isn’t a “win” or “lose” situation.  You get the discharge automatically unless someone steps in and objects to the discharge.  Furthermore, the Trustee doesn’t make any sort of determination about your discharge or qualifications.  Trustees (especially in Chapter 7) are there to take your testimony and look for assets or preferences that he/she can recover – that’s it.  The scope of their duty is extremely limited.
“How do my creditors get paid?”
There MIGHT be payments to unsecured creditors if you file Chapter 13, or if your Chapter 7 case has non-exempt assets or recoverable preferences.  Also, you might reaffirm secured debts or other debts might not be dischargeable, and therefore you’ll remain responsible for them after your case is filed.  But I’m not talking about any of these exceptions.
There is a common misconception that whatever is “discharged” in bankruptcy must be paid from somewhere.  And that is not the case.  A bankruptcy discharge is basically a formal court order that requires most of your creditors to write-off the debts you owe them without being paid, and to cease and desist any further collection efforts for those debts.
Creditors make their money from interest and other miscellaneous fees they charge, and if a lender’s business is doing well, those forms of revenue will wash out any debts that get discharged in bankruptcy.
“How/when does the judge determine what debts are discharged?”
Again, I’m going to stick to Chapter 7 just to keep things easy and clean.  Many of these questions get a bit more complicated when we talk about Chapter 13.
Most debts are dischargeable.  This includes secured debts, such as mortgages and auto loans.  Most people will “reaffirm” on secured loans (and continue to pay them) in order to retain the collateral that secures the loan.  Reaffirmed debts are not discharged by virtue of the reaffirmation agreement.
Apart from that, the bankruptcy code specifically lists all of the types of debts that are not dischargeable.  That list can be found at 11 U.S.C. § 523.  It’s a pretty long list, but for most people, there are only three types of debts that aren’t discharged: student loans, certain taxes, and domestic support obligations.
Of the items listed under section 523, all of them except for three are statutory.  That means that if you owe a student loan, it is automatically not part of the discharge.  Your student loan creditor is not required to go to bankruptcy court and have their debt declared non-dischargeable – it’s automatic.  No judicial determination required.
If a creditor asserts that their debt is non-dischargeable under any of those subsections, and you disagree, you can file an action with the bankruptcy court for a violation of the discharge injunction, and then have the court rule whether or not the debt in question is non-dischargeable.
There are only three subsections of 523 that require a judicial determination: 523(a)(2), 523(a)(4), and 523(a)(6).  523(a)(2) is for fraudulently-incurred debt.  523(a)(4) is for fraud committed while acting in a fiduciary capacity.  523(a)(6) is for willful or malicious injury.  Any creditor who wants their debt declared non-dischargeable under one of those three subsections must get the judge to make a ruling in their favor.

Discharging Tax Debts in Bankruptcy

Most people who owe taxes to the government cannot have those tax debts discharged in bankruptcy.  Although most tax debts are non-dischargeable, some actually can be discharged.  And while those dischargeable tax debts are the exception to the rule, those exceptions are worth knowing about.
Morgan King, an attorney from California, put together this handy little flowchart in 2011 that shows how to determine if a tax debt can be discharged and/or whether it is a priority or non-priority debt.  Whether a tax debt can be discharged generally depends on the type of tax that is owed and the age of the debt, although several other factors also come in to play.  While the chart itself is pretty straightforward, actually finding out the information to answer some of the questions in this chart is often more problematic.

And here’s the relevant statutory text:
11 U.S.C. § 523

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required—
(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

11 U.S.C. § 507

(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—
(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
(ii) assessed within 240 days before the date of the filing of the petition, exclusive of—
(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and
(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case;
(B) a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition;
(C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;
(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (4) of this subsection earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;
(E) an excise tax on—
(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or
(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;
(F) a customs duty arising out of the importation of merchandise—
(i) entered for consumption within one year before the date of the filing of the petition;
(ii) covered by an entry liquidated or reliquidated within one year before the date of the filing of the petition; or
(iii) entered for consumption within four years before the date of the filing of the petition but unliquidated on such date, if the Secretary of the Treasury certifies that failure to liquidate such entry was due to an investigation pending on such date into assessment of antidumping or countervailing duties or fraud, or if information needed for the proper appraisement or classification of such merchandise was not available to the appropriate customs officer before such date; or
(G) a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.
An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.

Alternatives to Bankruptcy: are 401(k) draws or loans a good idea?

Most people don’t want to file for bankruptcy, even if they have to.  There’s a lot of stigma attached to bankruptcy, and so people try to avoid it except as a last resort.  In the process of trying to avoid bankruptcy, people try certain alternatives.  Some of them are wise efforts.  Others – not so much.
Generally-speaking, efforts to modify your budget and living without incurring additional debt are the best way to try to avoid bankruptcy without causing yourself more harm.

For example, say you were doing fine with a mortgage and a car loan, but then you were involved in an accident and racked up $20,000 in medical bills, and now you can’t afford to pay everything.  One possible strategy might be to use payday loans to “punt” the problem down the field.  That’s a bad idea and will most likely cause you more harm.  On the other hand, if you can scale back on other expenses and slowly pay down the medical debt – that’s likely to be more successful.

One of the more common tactics people use is to withdraw money from their retirement accounts or to take a loan out from their 401(k).  Is this a good idea?
Answer: it depends.  As with most complicated situations like this, your best options will always depend on the specific facts of your case.  No two people are identical, and what may work for one person is not always the best option for another person.  An experienced attorney can help you parse the pros and cons of various approaches to determine which is likely to be the best option for you.
That being said, it has been my experience that drawing or borrowing from a retirement account is usually not a good idea.  Here are some of the common reasons why:
  1. Drawing from a 401(k) is going to trigger tax consequences.
  2. Borrowing from a 401(k) means you’re still paying on a debt, with interest.  It’s the proverbial “robbing Peter to pay Paul” except in this case, you’re robbing yourself.
  3. The obvious: you’re depleting savings that is meant to carry you through your retirement.
  4. You’re doing so to pay a debt that may be dischargeable in bankruptcy, and using an asset that is fully exempt in bankruptcy.  (In other words, someone who burns $10k of his retirement funds to pay a $10k credit card bill could have had the $10k debt paid off and fully retained his retirement money in Chapter 7.
  5. If you are using these funds to settle a debt (pay less than what is contractually owed), your credit will still be impacted negatively, and you are likely to have tax consequences as a result of the canceled debt.

Missed Debts, New Debts, and Conversion

You filed for bankruptcy.  A year later, you’re sitting at your dining room table staring at a billing statement for medical services.  Do you have to pay it?
Step 1 – Gather the Relevant Data

  1. When exactly (i.e. what date) was your bankruptcy case filed?
  2. What chapter of bankruptcy did you file under?  Chapter 7?  Chapter 13?
  3. Was this bill listed on your bankruptcy schedules?
  4. When was the debt incurred (in this example – what was the date of service)?
  5. What is the billing address and the statement date?
Step 2 – Determine What Kind of Debt This Is
  1. If the debt was incurred before your bankruptcy filing date, then it is a pre-petition debt.
  2. If the debt was incurred after your bankruptcy filing date, then it is a post-petition debt.
Pre-Petition Debts
  1. If the debt was listed on your bankruptcy schedules, then check the address to determine if notice was sent out to the right place.  Also check the statement date.  If within a few days of your bankruptcy filing date, then this may be a harmless “letters crossed in the mail” situation.  If the statement date is substantially after your bankruptcy filing date, then you are likely looking at a stay or discharge violation.
  2. If the debt was not listed on your bankruptcy schedules and you filed a Chapter 7 case that had no distributions (the trustee did not sell any non-exempt assets, recover any preferences, or void any transfers) and the debt was otherwise dischargeable, then the debt is discharged.  (This is a result of case law called “Guseck” in the Eastern District of Wisconsin.  If you filed bankruptcy in another district, a different result may occur.)
  3. If the debt was not listed on your bankruptcy schedules and you filed a Chapter 13 case or a Chapter 7 case that had distributions, then the debt is non-dischargeable under 11 U.S.C. sec. 523(a)(3).
Post-Petition Debts
  1. Post-petition debts are generally non-dischargeable with one exception.
  2. If you file Chapter 13, then later convert to Chapter 7, debts incurred between the filing and conversion dates may be dischargeable under 11 U.S.C. sec. 348(d).

Cases of Note: Fahey; and whether certain taxes can be discharged in bankruptcy.

Most people assume that taxes cannot be discharged in bankruptcy.  While it is true that some taxes cannot be discharged, some can.  11 U.S.C. § 523(a) reads as follows:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, or equivalent report or notice, if required

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

For purposes of this discussion, I’m not going to go through a detailed analysis of § 507 nor discuss how the outcome is different if filing under Chapter 7 or Chapter 13 (though it is worth noting that taxes – even non-dischargeable taxes – can be folded into a Chapter 13 bankruptcy case, just like child support arrears and student loan debt).  Suffice it to say, taxes that are more than 3 years old are generally dischargeable, provided that one of about a half dozen exceptions doesn’t apply.  Whether a tax is dischargeable or not is intensely fact-specific, sometimes not entirely knowable in advance, and certainly not worth the effort of walking through all of the various contingencies.
What I do want to discuss is the hanging paragraph at the end of § 523(a)…
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
The First Circuit Court of Appeals has recently handed down a decision In re: Fahey, joining Fifth and Tenth Circuits in holding that taxes due for a retun that is filed after the date which the return is due cannot be discharged because a late-filed return does not meet the definition in the hanging paragraph, DESPITE § 523(a)(1)(B)(ii)’s apparent directive to the contrary.
Wisconsin falls within the 7th Circuit, so these rulings do not yet affect cases filed here.  Some courts have held to the contrary of Fahey.  If any of them is affirmed by their respective Circuit Court of Appeals, then a circuit-level split will occur which makes it likely that the U.S. Supreme Court will step in to resolve this question.

The lesson?

Even if this patterns ends up reversed, § 523(a)(1)(B)(ii) will still prohibit discharge of late-filed returns filed within the past two years.  If you owe the IRS or your state department of revenue money for taxes and you can’t afford to pay those taxes, you achieve nothing by postponing the filing of your tax return or not filing your tax return at all.

File your tax returns by the due date.  Worry about paying the taxes later.  At the very least, by filing your returns on time, you open up more avenues of resolution down the road, especially if you ultimately end up filing for bankruptcy.  If you file your returns late – at the very best, you’re forcing yourself to have to wait even longer for them to be dischargeable, and at the very worst – you may be ensuring that they are never dischargeable.

Reaffirmation Strategies – Junior Mortgages

One of my jobs as your bankruptcy attorney is to help you prepare for life after bankruptcy – including rebuilding your credit while minimizing your potential risks.  Today, I’d like to discuss reaffirmation strategies – and specifically – whether you should sign a reaffirmation agreement for a second or third mortgage.
But first, let’s back up and explain what a reaffirmation agreement is and why you might need one.
A common misconception I have encountered among my clients is that secured debts are non-dischargeable.  This is not true.  Your secured debts (e.g. mortgages and auto loans) are every bit as dischargeable as a credit card, payday loan, civil judgment, or medical bill.  And that’s a good thing.  This allows people to file for bankruptcy and walk away from their home and car free-and-clear – so they can get a true fresh start.
However, bankruptcy only discharges debt.  It doesn’t get rid of the liens.  So, if you file for bankruptcy and stop making payments on your mortgage – the lender may not be able to sue you for payment, but they can take back possession of their collateral (i.e. foreclosure).
Not everyone wants to surrender their home or car when they file bankruptcy.  In fact, I’d estimate my clients choose to retain between 85% and 90% of their secured loans.  So what do they do if their secured debt is dischargeable but they want to keep the collateral?  Well, that’s where reaffirmation agreements come in.
Plainly-speaking, a reaffirmation agreement is the voluntary exemption of a debt from discharge.  (Another way I like to think of it is that they turn a pre-filing debt into a post-filing debt.)  Reaffirmation agreements are great in that they let you keep your stuff and help rebuild your credit faster.  The downside to a reaffirmation agreement is that if you run into financial trouble again after your bankruptcy, the discharge won’t protect you from collection on that debt.
There are a number of things a bankruptcy client should consider before signing a reaffirmation agreement.  I won’t get into those here.  Suffice it to say, I include a comprehensive list of considerations as a cover letter when I send out reaffirmation agreements for the client to review.
What I want to discuss is a strategy in dealing with junior mortgages.  IMPORTANT: This advice should not be followed blindly.  There are a number of considerations that could affect your decision to sign an agreement or not, and you should discuss those particular circumstances with your bankruptcy attorney.
What I have found to be the best strategy in about 95% of cases is for the debtor to sign the reaffirmation agreement on the first mortgage, but not on any secondary mortgages (or HELOCs).
Why?  Let’s pretend you file bankruptcy, sign the reaffirmation agreement on the first mortgage (let’s say Bank of America), don’t sign a reaffirmation agreement on the second mortgage (let’s say Associated Bank), and later hit another financial snag and default on your mortgage payments.  The house is going into foreclosure and you’ve elected to walk away from it, but you’re hoping to not have to file bankruptcy again.
In the state of Wisconsin, primary mortgage lenders almost always waive seeking a judgment for a deficiency balance (the difference between what you owe on the mortgage and what the house sells for).  Even though you signed a reaffirmation agreement with Bank of America, they’re not pursuing you for the money.
Associated Bank, on the other hand, is not required to waive deficiency.  Because you didn’t sign a reaffirmation agreement, the bankruptcy discharge still protects you from collection attempts on this mortgage.
You might be asking yourself: Wouldn’t Associated Bank foreclose if I don’t sign a reaffirmation agreement?  Highly unlikely.  First, a junior lienholder will almost never foreclose (even in the event of a default), because at auction, the house will sell for less than what is owed on the first mortgage, which means the junior lienholder will have paid all of the expenses of a foreclosure and get nothing out of it in return.  Second, most lenders won’t foreclose simply because you didn’t sign a reaffirmation agreement (it’s possible, but rare).
If you continue to make monthly payments to the creditor without signing a reaffirmation agreement, this is called a “ride-through”, and often considered a safe way to reaffirm while insulating yourself from liability down the road.  The only real drawback to a ride-through is that many lenders will refuse to report payments to the credit bureaus in this instance.  (If lenders report to credit bureaus, they are required to report accurately.  However, they have no affirmative duty to report at all.)

Are discharged debts taxable income?

Does filing for bankruptcy have an effect on your tax return?
Generally, no.
26 U.S.C. § 108(a)(1)(A) excludes from your income any debt that was discharged in a Title 11 (not Chapter 11) bankruptcy case.
There are other exclusions enumerated at 26 U.S.C. § 108, but I leave those exclusions to be addressed by tax law professionals.  Suffice to say, if a debt was cancelled for reasons other than a bankruptcy discharge and one of those other exclusions does not apply to the, you could be taxed on that balance for what is known as “cancellation of debt” income.
26 U.S.C. § 108 is a federal statute, and therefore only applies to income for purposes of your federal tax return.  What the federal government excludes as income may be included in other states.  You will want to talk to an experienced tax professional to determine any tax obligations you may have due to debts discharged in bankruptcy.I am given to understand that the State of Wisconsin generally follows the federal standards for including and excluding income, which means that Wisconsin taxpayers should also experience no adverse tax impacts from filing for bankruptcy.  However, I have heard reports in a couple of isolated cases where the Wisconsin Department of Revenue included income that was discharged in bankruptcy.  These cases were dealt with by tax attorneys, and I have heard no news on the results in those cases.  It isn’t clear yet whether the taxpayer simply misunderstood the tax assessment, whether there were special circumstances in these cases, or if the Wisconsin Department of Revenue was “testing the waters” to expand their powers.  If and when I hear news on these cases, I will – of course – share them.Suffice to say, most bankruptcy debtors experience no issues with their state taxes, and until we learn otherwise, these instances should be considered flukes.

Reader-Submitted Question

Someone posted a question in the comments section of an old post I wrote in 2009.  It’s an excellent question (and I welcome readers to post questions), and since it’s buried, I decided to re-post it here.
I had a Chapter 7 discharged in 2009 (in Wisconsin). I recently became aware that my first and second mortgages were on my credit report as “part of the bankruptcy”, though I have always paid on time, before and after the bankruptcy. I was unaware that I needed to sign formal agreements to do so and my attorney did not advise me in this area. I certainly was never presented with the forms, and in fact, the mortgagor says they did not receive any paperwork. It is now too late to do so and, as a result, I am not getting credit for my payments through the credit bureau. When I asked Bank of America why they did not originate a request to reaffirm (which I assume they would rush to do) I was told it would now be easier for them to foreclose on me, should I ever stop making payments. Should I be concerned? What, if anything can i do at this point? Thanks!
Bankruptcy is good against the world. All of your debts, whether they are listed or unlisted, presumptively dischargeable or non-dischargeable – they are all affected by a bankruptcy filing. In the case of secured loans, bankruptcy eliminates debts, but it does not eliminate liens. Therefore, in having a secured debt discharged in bankruptcy, a secured creditor can still realize their security interests via repossession or foreclosure. This is why – in extremely rare cases – certain vindictive creditors will repossess or foreclose in the absence of a reaffirmation agreement.
Secured debts like mortgages and car loans are actually dischargeable. The reaffirmation agreement is a tool that excepts those debts from discharge and prevents the lender from repossessing or foreclosing unless there is some future default in plan payments. Without the reaffirmation agreement, the debt is technically discharged. With the reaffirmation agreement, the debt survives, and the creditor can collect deficiencies against the debtor in the event of foreclosure or repossession. (Which is why it makes no sense for Bank of America to say it is easier to foreclose – the reaffirmation agreement actually gives them more protection.)
The vast majority of secured creditors will not foreclose or repossess, even if the debtor does not sign a reaffirmation agreement, so long as the debtor continues to make monthly payments. This is called a “ride through”, and it’s a pretty good deal for the debtor, because if they do default in the future, their bankruptcy still protects them from collections.
The downside to the ride through is that the lenders are not required to report payments to the credit bureaus (though some do as a courtesy). And that’s the issue you’re faced with now. Once the case is discharged or closed, the court here in the Eastern District of Wisconsin (other districts may have different policies) will not allow you to reopen the case to file a reaffirmation agreement.I would venture to say that your only two options are to contact Bank of America to see if there is someone you can talk to about having your payments reported or to file a dispute with the credit bureaus (see
The only other option I can think of is for you to refinance. Get a new company to assume the debt, pay off Bank of America, and then – having a valid new debt with the second creditor – your payments would be reported correctly. Unfortunately, this would be a tough feat to accomplish in this economic environment.
Most of the bankruptcy attorneys I know (myself included) will not initiate drafting of reaffirmation agreements, because the lender is generally in the best position to have the details of the original loan agreement necessary to complete the forms. Also (and I’m just speaking for myself), there is no practical way of tracking whether certain creditors have submitted reaffirmation agreements for our clients (especially since it is not always in our clients’ best interest to file a reaffirmation agreement). However, because of the very issue you’re facing, I’ve made a point of informing my clients about reaffirmation agreements, their consequences (both in signing and not signing one) and what they need to do if the lender does not initiate a reaffirmation agreement. Most secured creditors will submit reaffirmation documents without being prompted.
Unfortunately, I don’t have a good answer for your situation, but I hope – at least – you find the information useful.  Although the lack of credit reporting is unfortunate, I wouldn’t be too concerned about foreclosure.  Just keep making your mortgage payments.  And in the event you do default on your mortgage in the future and the home does foreclose, you can at least rest easy knowing that they can’t come after you for more money.

Bankruptcy MythBusting #9

Myth:  Debts I list on my bankruptcy schedules will be discharged.  OR  Debts I do not list on my bankruptcy schedules will not be discharged.  OR  I can pick and choose which debts to include.
Fact:  A lot of confusion arises because most people think that “listing” a debt is synonymous with “filing against” or “discharging” a debt, which is inaccurate.  Unfortunately, too many people do not disclose all of their debts as they should, and this causes big problems down the road.  Listing a debt on your bankruptcy schedules is NOT synonymous with having the debt discharged.  Whether a debt is discharged depends on the nature of the debt, not whether it was listed and disclosed.A non-dischargeable debt (such as a student loan or tax debt) is what it is.  You could file bankruptcy over and over again, and list your student loans on your bankruptcy petition each and every time.  Unless you can demonstrate the nearly impossible standard of undue hardship, those student loans are not going away.And a dischargeable debt (such as a credit card or medical bill) is what it is.  So many clients want to keep a particular store credit card, a credit card for making fuel purchases, or they don’t want to file against their favorite doctor.  But the bankruptcy is universal, and all unsecured debts are discharged, whether they were listed on schedules or not.

Stated another way, the Chapter 7 discharge is “good against the world,” including unscheduled creditors.  The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523.  In re Guseck, 310 B.R. 400, 402 (Bankr. E.D. Wis. 2004)

Nor does listing your home mortgage and auto loan mean that you are going to lose your house or car.  Most people get to pick and choose which secured debts they will reaffirm or surrender.  Listing secured creditors on your bankruptcy schedules is not itself an affirmation of intent.So if a debt will be discharged whether or not it is listed on schedules, or if a debt is non-dischargeable whether or not it is listed on schedules, then why is it is so important to list creditors on schedules?No matter who the creditor is – a non-dischargeable student loan, a dischargeable credit card, or a home mortgage you intend to reaffirm – they are all legally affected by your bankruptcy filing.  Your bankruptcy case automatically endows you and all of your creditors with certain rights and responsibilities.Disclosing all debts is a matter of proper notice and due process rights.  Each of your creditors is entitled to be made aware of your bankruptcy so that they can conform their behavior accordingly.  If their debt is dischargeable, they may be entitled to object to discharge if they can prove fraud.  Though student loans won’t be discharged, your lender is still required to not make collection attempts while the bankruptcy is pending.  And though you intend to reaffirm your home mortgage, the debt is technically dischargeable, so your lender needs to execute a reaffirmation agreement.And if your case is an “Asset Chapter 7” (non-exempt property available to the trustee to be sold for the benefit of unsecured creditors) or a Chapter 13 (which includes monthly plan payments to be redistributed among creditors), then all of your creditors have a right to know about the bankruptcy so they can file claims.Sure, there are other reasons to list all creditors.  (1)  So you get the full force and benefit of your automatic stay and discharge injunction protections.  (2)  Because your debt to income ratio, who your creditors are, and how much your creditors are owed (regardless of class) may very well have a material impact on your case and how it is administered.  (3)  Because keeping unsecured debts “out of bankruptcy” usually means you’re still making payments to them, which would suggest that you have been making preferential payments.But at the end of the day, it is primarily a due process issue.  Each and every one of your creditors, regardless of your intent to pay and regardless of dischargeability, will be affected by your bankruptcy case and have a right to know that you filed for bankruptcy.
Want to find out what bankruptcy could mean for you?  Call (920) 490-6160 now to schedule a free consultation.

Taxes On-Time

Oftentimes, when an individual owes income taxes that they cannot afford to pay, they just decide not to file a tax return.  Ordinarily, I don’t give tax advice, because tax law is not my field of expertise.  Outside of bankruptcy, I don’t know if there is any advantage to not filing a return until you can afford to pay the debt.  However, an interesting case passed through my office the other day, and I’d like to share with you this brief cautionary tale.
The individual hadn’t filed taxes since 2006, because she knew she owed a lot of tax debt, but couldn’t afford to pay it.  She is now contemplating a Chapter 13 Bankruptcy to repay the tax debt she owes.  By law, she will need to file her taxes for – at minimum – 2007, 2008, 2009, and 2010 (and 2006 if she expects to deal with that debt).  The thing is, had she filed her taxes on-time, 2006 and 2007 would be treated as non-priority tax debt and potentially paid nothing in her Chapter 13 Plan.  Only her 2008, 2009, and 2010 taxes would have to be treated as priority and paid in full.  However, 11 USC 507(a)(8) – which defines income taxes as priority debts – will necessarily require that we treat 2006 and 2007 as priority as well, because taxes were late filed and not yet assessed.  Depending on how much tax she owes for those two years, that could easily bump up her plan payments hundreds of dollars per month.