What happens to my credit rating if I file bankruptcy?
The impact of bankruptcy to one’s credit rating is counter intuitive. While a bankruptcy remains on your credit rating for ten years, most people have such bad credit rating by the time they file that it doesn’t matter much. More importantly, as soon as they get the benefit of a fresh start from bankruptcy they start to rehabilitate their credit and their credit rating improves. In fact, many people are able to purchase real estate and obtain a mortgage about two years after filing Chapter 7.
What are the advantages of filing bankruptcy?
A discharge of debt obtained in bankruptcy means that you do not have to pay the debt, including taxes if they are dischargeable. It is one of the principal reasons for filing a Chapter 7 bankruptcy.
The “automatic stay” stops all creditors, including the IRS, from collecting on unpaid debts. As indicated by its name, the stay against collection activity happens automatically upon filing of the bankruptcy petition.
What are the disadvantages of fling bankruptcy?
A bankruptcy petition stays on your credit report for ten years. Even if you do not go all the way through with the bankruptcy proceeding (that is to say, you voluntarily dismiss it), the fact that you filed a bankruptcy petition will be on your credit report for ten years. Lenders treat bankruptcies where no debts were discharged the same as bankruptcies where debts were discharged. This makes no sense, but it’s true.
An example is where the taxpayer files bankruptcy, discovers that his taxes are not dischargeable, and then immediately has the bankruptcy petition dismissed. The credit reporting bureaus will report the fact that that the taxpayer filed bankruptcy, and the lenders will not care that no debts were discharged.
Some taxes are not dischargeable in bankruptcy, no matter what. So know what you are doing before you file Chapter 7.
If you emerge from bankruptcy with unpaid tax debts, the time period in which the IRS has to collect on those tax debts (the statute of limitations) is extended by the bankruptcy.
A Chapter 7 bankruptcy may cause you to lose ownership of some of your possessions, such as real estate, expensive motor vehicles, and investments.
Recorded tax liens will survive the bankruptcy and continue to attach to the pre-petition property that you retain after bankruptcy. The Chapter 7 bankruptcy only discharges your personal obligation to pay the debt. The IRS is free after the bankruptcy to seize assets that are subject to a recorded tax lien, even if your personal liability has been discharged. However, they typically have no interest in consumer assets after the bankruptcy even thought their lien still attaches. Assets acquired after filing Chapter 7 are not subject to the IRS lien.
When should I file Chapter 13 instead of Chapter 7 bankruptcy?
A Chapter 13 is used to pay back all or a portion of the debt. Thus, it can be an effective arrangement for debts that are not dischargeable, such as certain tax debts. Also, if your house is in foreclosure, it can stop the foreclosure and give you time to catch up with the arrears (late payments). In some cases, if your first mortgage is more that the value of your house, you can strip the second mortgage off (terminate it) so that you only owe the first mortgage. Chapter 13 is called a wager earner plan for good reason.
Can I pick and chose what property of mine is included in the bankruptcy?
No. All property must be listed in your bankruptcy schedules. If you fail to do so, one potential penalty is that the court may decide you are not entitled to the discharge, meaning you will exit bankruptcy still owing all of your debt. That’s a pretty severe penalty for failing to list all of you property.
Can I pick and chose which debts are included in the bankruptcy?
No. All of your debts must be listed and, again, if you fail to list your debts the court may decide you are not entitled to the discharge of debt.
What does it mean to exempt property?
In a Chapter 7, the starting premise is that your property is sold, and the sale proceeds shared with your creditors. You get to keep all property that is exempt. So exemptions are very important. Most people are able to exempt all of their property and, therefore, keep all of their property despite filing Chapter 7.
What does it mean to reaffirm a debt?
In a Chapter 7, the starting premise is that your debts are discharged, meaning you do not have to pay them. A secured debt, such as a car loan or house loan, may be reaffirmed, which operates as if the bankruptcy was never filed. You keep the collateral and you still own the secured loan after the bankruptcy. But reaffirmation is essentially a three way agreement, so there is no guaranty that you can reaffirm your debt.
Do I have to appear before a bankruptcy judge?
Generally no. You have to appear before a bankruptcy trustee, who is an attorney appoint to hand the Section 341 hearing sometimes referred to a creditors meeting. This is an informal meeting that for Snohomish County is not held in a courtroom. The purpose of the meeting is for the trustee and creditors determine if any assets of the debtor are available to be sold and the sale proceeds distributed to creditors.
Will a bankruptcy stop foreclosure on my house?
No. It will temporarily stop the foreclosure, but the lender is free to get permission from the court to continue it.
Can I walk away from my house or car loan if I file bankruptcy?
Yes. That is called surrendering the collateral to the lender. The lender takes the collateral back and the debtor is discharged from having to pay the loan.
Law Office of John L. Hoffer
1710 – 100th Place SE, Suite 109
Everett, WA 98208