There are times when we get into financial situations we cannot afford to get out of and we need to consider whether bankruptcy is the best option to get back on track. I have been representing clients filing for bankruptcy protection in Riverside County since 2010 and have been an attorney in California since 1991. Some common situations where bankruptcy should be explored, such as when a client: 1) cosigns a loan for a family member who stops making the payments; 2) gets audited by the iRS or finds themselves owing more than can be paid back in a simple installment agreement; 3) has extended illness of themselves or a family member, or a divorce gets them behind with credit card, medical or other bills; 4) has a reduction in income leaves them in a position where there is not enough money to pay all the bills; 5) is being sued or has a judgment arising from a car repossession, eviction, or credit cards; 6) has been making just the minimum payments, or has fallen behind, and finds that the payments do not put a dent in the amount owed; or, 7) has a failing business leaving them with not enough income to pay vendors and other creditors.
Filing a chapter 7 bankruptcy can get rid of all the unsecured creditors (credit cards repossessions, evictions, personal loans and medical bills) leaving “priority” (non-dischargeable) debt that is more manageable after the bankruptcy is over and a discharge is obtained. During a bankruptcy that usually lasts about 4-6 months there is an automatic stay order issued by the court that prevents all creditors from taking any collection action.
Recently, I have found that a large percentage of my clients are being sued on credit cards by collection agencies. Some have already gone to judgment and there are law firms garnishing paychecks, or levying bank accounts. Filing bankruptcy stops the garnishments and levies immediately and in most instances the underlying debt is erased in the bankruptcy.
Taxes can be discharged in a bankruptcy if they meet certain requirements. These are the basic rules for getting taxes discharged in a bankruptcy. The returns need to be filed by the taxpayer and not the IRS at least two years prior to the bankruptcy filing. The taxes have to have been due 3 years plus any extension (I.e., tax returns for 2010 are due by April 15, 2011. Add three years so April 15, 2014 or October 15, 2014 if an extension was filed). To determine if a particular year of taxes qualify for discharge my firm customarily orders transcripts of account from the iRS and the State to check when the returns were filed, whether an extension was requested, to see if other actions such as an offer in compromise or appeal of collections tolled the passing of the two years from the date of filing.
When there is not enough money to pay for your basic expenses such as your rent, mortgage, gas, and food — bankruptcy is probably at least worth considering.
To qualify for a bankruptcy there are income requirements. The client’s income is compared to other households in the State to determine if the household income is less than the median income of other households of the same size. Clients who have large amounts of tax debt or student loans can qualify for a chapter 7 bankruptcy even if their income is above the median income in many instances. Presently, most student loans cannot be discharged in a bankruptcy, however there is discussion in Congress of perhaps changing the laws affecting what student loan debt can be discharged. In every case before filing a bankruptcy case we plug all income information from pay stubs, or profit and loss for self-employed people, and all household expenses to see if there is any money left over each month (basically an income vs. expense analysis) to determine if the client qualifies for a Chapter 7 bankruptcy.
When filing a bankruptcy will leave the client in a better position going forward after getting rid of overwhelming debt it is time to consider filing a bankruptcy now.