Most clients facing the prospect of bankruptcy have credit scores that are already impaired due to past due payments on credit cards and other debts. Bankruptcy stays on your credit report for 7-10. However, filing for bankruptcy is often the first step to rehabilitating your credit score. Filing for bankruptcy does not mean you will never have credit again – it just means that credit may be more expensive until you have re-established your credit.The most important thing to remember is to only use credit that you can afford to repay when the bill is due. Many people may begin to rebuild their credit by obtaining a “Secured Credit Card” which may be a credit card backed by deposit in a bank or a pre-paid credit card with the amount of credit limited to the amount of the pre-paid deposit. Responsible and prudent use of credit after bankruptcy can help to rebuild your credit score. I have had clients tell me that they were able to purchase a new home within 18 months of filing Chapter 7 because they now had sufficient income to qualify for the mortgage and since filing bankruptcy they were paying all of their new bills right on time. Their mortgage rate was a bit higher than someone who had not filed bankruptcy, but after one year of mortgage payments they were able to convert their higher interest mortgage to a confirming loan with the same rate of interest offered to someone without bankruptcy on their credit report.
Most debtors are able to keep all of their property because it is protected from creditors by exemptions that exist under federal and state law to prevent property from being taken to pay off debts. For most debtors, the most generous exemptions are those provided by Massachusetts law which protect necessary wearing apparel, beds and bedding for the debtor and the debtor’s family, customary kitchen appliances, 1 computer and 1 television; other household furniture necessary for the debtor and the debtor’s family not exceeding $15,000 in value; tools of trade not exceeding $5,000 in value; materials and stock used in the debtor’s trade or business not exceeding $5,000 in value; $2,500 in cash or savings; wages equal to the greater of 85 per cent of the debtor’s gross wages or 50 times the greater of the federal or the Massachusetts hourly minimum wage for each week or portion thereof and the full amount owing or paid to a person as public assistance; and an automobile not exceeding $7,500 of wholesale resale value, except that if the debtor is either a handicapped person or a person 60 years of age or older the exemption is $15,000. Massachusetts law also provides a “wild-card” exemption for a debtor’s aggregate interest in any personal property up to $1,000 in value, plus up to $5,000 of any unused dollar amount of the exemptions provided for household furnishings, tools of the trade and your motor vehicle. Federal law provides exemptions for many of the same things but in some cases, the amount of the exemption is not as generous. However, under federal law, certain types of insurance policies are exempt, as are personal injury recoveries up to $21.625.00 that are not exempt under Massachusetts law. My job as your lawyer is to help you select the exemptions that will best protect the property that you own.
Generally, credit card debts, personal loans, medical debts, , business debts, unpaid rent, and other unsecured debts are forgiven in bankruptcy. Secured debts, such as mortgages and car loans, may also be forgiven but must continue to be paid if you want to keep the property to which the secured debt relates – if you want to keep your house, you must continue to be able to pay your mortgage. Also, some types of debts are not forgiven in bankruptcy. Common examples include student loan debts, most types of tax debts, although income taxes that are more than 3 years old may be dischargeable, debts for alimony, maintenance and support, and debts incurred in a fraudulent manner.
Many companies advertise plans to get out of debt. While there are legitimate credit counseling companies, many companies are simply unable to provide debt relief because much of the money paid in the programs is used first to pay the fees and expenses of the debt settlement company. In most cases, bankruptcy is the only source of complete relief from creditors.
The answer is yes. When a bankruptcy if filed, all credit collection activity must cease and you will have a chance to save your home by using the tools that bankruptcy law provides to you for this purpose.
Many debtors are faced with mounting pressure from the IRS and State taxing authorities but bankruptcy can provide relief from tax obligations. The benefits of filing for bankruptcy to address tax debts may be summarized as follows:
a) Discharge of Taxes in Bankruptcy
Generally, a taxpayer may discharge federal income taxes in Chapter 7, 11 and 13 if the tax claims are old enough. Thus, income taxes may be dischargeable in bankruptcy if ALL of the following criteria are met.
- The tax is for a year for which a tax return is due more than 3 years prior to the filing date of the bankruptcy petition; (Example: Assuming no tax filing extension, if Client files for bankruptcy on 4/16/11, income tax for 2007 will be discharged; not discharged if he files on 4/14/11) ;
- A tax return was filed late but more than two years prior to the filing of the bankruptcy petition;
- The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
- The tax must not be due to a fraudulent tax return and the taxpayer is not attempting to evade or defeat the tax.
- Note: If no tax return is filed, the tax for that year is not discharged. This is a common problem when the IRS increases the tax due since the taxpayer is required to file a report of the change with DOR but usually doesn’t.
- Note: So-called trust fund taxes such as sales and meals tax are not discharged.
b) Stretch out payment of tax claims in bankruptcy
Generally, in both Chapter 11 and Chapter 13, repayment of “priority” tax claims may be made over a period of time ranging from 3 to 5 years.
Secured tax claims must be paid in full with interest at the applicable rate then in effect for the taxing authority holding the claim. There may be a possibility of reducing the amount of a secured tax claim to conform to value of security, commonly known as cramdown. Tax liens remain valid for collection period (10 years) unless extended and attach to exempt property if unpaid, including retirement assets, which matters depending on the age of client.
Tax penalties are subject to less favorable treatment than the underlying tax and interest portion of the tax claim such that the penalty portion of the claim may not have to be paid in full but may be paid in the same manner as general unsecured claims.
Most importantly, interest on tax claims that are not secured tax claims (i.e. a federal or state tax lien recorded in the appropriate Registry of Deeds for Court Clerk’s Office) will stop so that the taxpayers only obligation is to pay the amount of tax and interest due on the date the bankruptcy petition was filed.
Remember that your tax returns should be up to date before filing for bankruptcy
The purpose of the initial consultation is to listen to your story – how you got into financial difficulty and what you hope to accomplish. It is also an opportunity for us to get to know one another – bankruptcy is a collaborative process between attorney and client and it is essential that we be able to work together to attain the goals that you want to achieve. I will be able to access your financial situation and provide you with solid recommendations on the options that are available to you to address the hardships you are experiencing in a meaningful and responsible manner.
The typical consultation is 60-90 minutes
- List of all your debts – who do you owe money to, how much and why
- List of all your property – what do you own, what is its value (i.e. houses, cars, retirement plans, etc.)
- Most recent filed tax returns with the IRS for yourself and any businesses that you own
- Pay stubs and other sources of income for the preceeding 6 months (i.e. rental income, social security, self-employment income) for all people in household
- List of all monthly household expenses 6. Divorce papers
- Legal papers/law suits and collection letters
- Identification – drivers license and social security card
Filing bankruptcy is a very serious legal process that, when handled properly, provides much needed relief from financial stress. Preparing all of the papers that are part of a Bankruptcy Filing can be extremely complex and lengthy. All of the papers must be true and correct and the penalties for filing false documents can be severe, including fines and imprisonment. Without an attorney who is familiar with the bankruptcy laws, the filing requirement, the applicable time limitations and the many forms and procedures, it is very easy to file the wrong papers, miss an important deadline, fill out the papers incorrectly or incompletely, or miss a payment which can result in the bankruptcy petition being dismissed. Dismissal of the case means that the automatic stay protecting you from your creditors is immediately discontinued and there may be limitations on your ability to file a bankruptcy case again.