Debts that Remain After a Chapter 7 Discharge

If you file for bankruptcy under Chapter 7, you should be aware that not all debts are eliminated (or “discharged”) once the bankruptcy process is complete. Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:

• Debts or creditors not listed on the schedules filed at the outset of the case.

• Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship (more on student loans below).

• Recent federal, state, and local taxes.

• Child support and spousal maintenance (alimony).

• Government-imposed restitution, fines, and penalties.

• Court fees.

• Debts resulting from driving while intoxicated.

• Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud.

Student Loans

As noted in the above list, educational loans are generally not discharged by a Chapter 7 bankruptcy. They may be dischargeable, however, if the court finds that paying off the loan will impose an “undue hardship” on the debtor and his or her dependents.

In order to qualify for a hardship discharge of a student loan, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed, and will not be able to make payments in the future. The debtor must apply for the hardship discharge before discharge of the debtor’s other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.

The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:

1. Income — if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents;
2. Duration — the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and
3. Good Faith — the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.

Additional Non-Dischargeable Debts

In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:

• Debts from fraud, including certain debts for luxury goods or services incurred within ninety days before filing and certain cash advances taken within seventy days after filing.

• Debts from willful and malicious acts.

• Debts from embezzlement, larceny, or breach of fiduciary duty.

• Debts from a divorce settlement agreement or court decree, if the debtor has the ability to pay and the detriment to the recipient would be greater than the benefit to the debtor.

– See more at: http://bankruptcy.findlaw.com/chapter-7/debts-that-remain-after-a-chapter-7-discharge.html#sthash.oIyN8wo5.dpuf

Finding a Bankruptcy Alternative

Filing for bankruptcy, either for Chapter 7 or for Chapter 13, is one option available to solve debt problems. Depending on the circumstances, the debtor may also choose a bankruptcy alternative. The following are possible choices.

Consolidate Debt

One bankruptcy alternative is to combine debt. Sometimes it is easier to repay debt when only one payment to one creditor is necessary. The following are some different debt consolidation options:

• Use a debt consolidation loan: Debt consolidation combines separate debts into one loan. A debtor still owes the same amount of debt, but the interest rate and the monthly payment are typically lower than separate payments to separate creditors.

• Transfer debt to a low interest credit card: Some credit card companies offer low transfer rates to new customers. When the transfer terms keep the interest rate low until the full repayment of the debt, the debtor will pay less interest over the term of repayment. The advantages are similar to a low interest loan.

• Consolidate with a home equity line: When a debtor has equity in their home, a home equity line is a good way to consolidate debt into a low interest and potentially tax deductible loan. It is important to be cautious when securing a loan against property, though, because if a debtor defaults on the equity line, the lender may have a right to repossess the property. This is an effective option in a strong real estate market.

See also Debt Negotiation Programs and Credit Counseling and Counseling Organizations.

Work With Creditors to Create a Repayment Plan

Another bankruptcy alternative is to ask creditors to agree to a repayment plan. Many creditors will consent when bankruptcy is the only other alternative for the debtor. The possibility of a debtor filing for bankruptcy will motivate some creditors to agree to lower the monthly payment, create a long-term repayment plan, or reduce the interest rate or the debt. This is a much better option for the creditor than if the debtor has the debt discharged in Chapter 7 bankruptcy or placed in a court-approved repayment plan in a Chapter 13 bankruptcy.

See also Dealing with Creditors Informally.

Create a Debt Management Plan

If it is difficult to negotiate with creditors, a credit-counseling agency can work on behalf of a debtor to create a debt management plan. The agency will create a repayment plan based on the debtor’s income and debts. If the creditors agree, the debtor will make one monthly payment to the agency. For a fee, the agency will disburse the money among the debtor’s creditors until full repayment of the debt. A conflict of interest may exist, however, since many debt-counseling agencies receive the majority of their funds from creditors.

A debt management plan does have some disadvantages. If a debtor misses a payment, any creditor can terminate the plan. If, on the other hand, a debtor misses a payment under a Chapter 13 repayment plan, the debtor receives protection from a creditor’s collection activities. Additionally, under Chapter 13, the debtor usually pays only a portion of the debt owed to unsecured creditors, while the debtor must repay the full debt owed in a debt management plan. There is one significant disadvantage to filing for bankruptcy, however: a bankruptcy will stay on a debtor’s credit record for up to ten years.

See also Debt Management Plans.

Default on the Debt

If a debtor has nothing left that is valuable, such as property or income, another bankruptcy alternative is simply to stop paying creditors. A creditor can attempt to collect the debt, but they must abide by the Fair Debt Collection Practices Act and applicable state laws. Creditors may not engage in abusive behavior, such as calling numerous times per day, using deceit to collect a debt, or calling during times prohibited by law. If a creditor’s actions violate the law, the debtor may seek monetary damages.

Creditors may also attempt to collect a debt through a court judgment. If the debtor has no assets or only has “exempt property”, however, then the debtor is “judgment proof.” Exempt property may include clothing, furniture, Social Security, and public assistance benefits. Consequently, a creditor cannot legally collect the debtor’s property to fulfill the judgment. Typically, a creditor will not sue a debtor when it is impossible to collect the debt. Instead, the creditor may choose to write off the debt as a business loss. The default may remain on the defaulter’s credit record for up seven years, though.

– See more at: http://bankruptcy.findlaw.com/what-is-bankruptcy/finding-a-bankruptcy-alternative.html#sthash.lVQhaUOd.dpuf

Understanding How Insolvency Works

A great deal of mistaken beliefs exist about insolvency, and consumer watch dog organizations such as the Federal Trade Commission work to promote only honest information around this debt-relief process. Common beliefs regarding bankruptcy include that it can deal with every type of financial obligation, you lose everything you have including your beloved animals when you submit a petition, you must be homeless, or you must have a job. Understanding the real facts about insolvency is a key toward aiding you in determining whether this is the right choice for your monetary situation.

Losing a job is among the most typical reasons behind personal bankruptcy or insolvency filings in the United States. Yet if you are unemployed you have fewer personal bankruptcy options and will likely ruin your credit history rating for the upcoming 10 years if you do definitely submit a request for bankruptcy.

Chapter 7 is possibly your best venture if you are out of work and required to file a bankruptcy request. If you possess a lot of property or have significant income from various other resources such as financial investments, exemptions to this regulation could apply. If you earned less than your state’s yearly average income figure in the last 12 months, you immediately meet the criteria for Chapter 7. Or else, you can try to show that your jobless status makes it difficult for you to cover basic living expenditures while partly repaying your creditors.

Chapter 13 is a partial financial obligation repayment plan in which you must have some kind of disposable income. So if you are out of work you are probably not a great candidate for Chapter 13. There are benefits as well as disadvantages to not being able to submit Chapter 13. First, this sort of personal bankruptcy instance harms you credit history ranking for 7 years. Additionally, some loan providers prefer to take care of possible clients who at least made an effort to partially repay their financial obligations.

Debts sustained right prior to filing insolvency are generally ineligible for insertion in your case; in extreme cases such as buying high-end products with the intent of skipping financial commitments you can be put on trial for the government crime of personal bankruptcy fraudulence. Nor will any sort of bankruptcy cover future financial obligations. Insolvency courts will not lessen or eliminate your commitment to pay past, present, or future familial support including alimony.

Stephanie Mojica, an award-winning personal finance journalist and money mentor, has harnessed her unique blend of intuition, creativity, practical business and personal development skills, rebellion, passion, and compassion to help hundreds of people who are struggling with financial self-sabotage slay their money demons and dragons so they can manifest more money and improve their credit scores.

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