When is a Chapter 7 Bankruptcy not an Option?

There are some people who do not really have bankruptcy as an option despite low income. Some can only benefit from a payment plan provided by a Chapter 13, but they can’t afford the payments. Here’s an outline of people who may not benefit from a bankruptcy. Since everyone is different and there are exceptions to every rule, it’s always best to speak with an attorney when considering bankruptcy.

Prior Bankruptcy Filing: People who received a Chapter 7 discharge within the last eight years must wait before filing another Chapter 7. The option to file a Chapter 13 bankruptcy may still be available if the person has income and can afford to make monthly payments.

Too Little Unsecured Debt: People with a very small amount of unsecured debt typically should not file a Chapter 7 bankruptcy. Examples of unsecured debt are credit cards, medical bills, deficiency from a repossessed vehicle, and utility bills. It’s usually not worth filing if there’s less than $5,000 in unsecured debt. In a way, it’s wasting the right to file bankruptcy since you have to wait so long before filing another one. Also, people with a very small amount of unsecured debt aren’t as harmed by the creditors as someone with higher debt.

Too Much Equity in Real Estate: This is often a problem with low income elderly homeowners who have paid off their mortgages. Despite the low income, they risk losing their home in a bankruptcy because the home is worth too much. In Michigan, married couples may still be able to keep their homes even if there is too much equity. There’s a Michigan exemption that can be used by some couples.

Only Non-Dischargeable Unsecured Debt: Some debt can’t be discharged or canceled in a bankruptcy. Student loans, child support, most income taxes, and certain criminal fines are non-dischargeable. A Chapter 13 payment plan may benefit someone who only has non-dischargeable debt, a Chapter 7 will not.

What to Avoid Before Filing Bankruptcy

Doing certain things before you file bankruptcy can result in problems with your case. For example, creditors can object to the discharge of their debt if you had no intention of repaying the debt when you obtained it. Therefore, it’s important to stop using credit cards as soon as you decide to file bankruptcy. If you decide to file bankruptcy and continue to use your credit cards, one or more creditors might believe that you are committing fraud by filing bankruptcy. If the court agrees, you will have repay the debt.

Another problem may arise if you sell or transfer property before filing bankruptcy. If you are concerned about keeping your home or other property, do not suddenly give it away to a friend or relative. Also, speak with a bankruptcy attorney before you even think about selling any property. Sales or other transfers can be considered to be fraudulent if done shortly before a bankrupcy filing. Bankruptcy trustees are especially suspicious of transfers to relatives for less than the full value. If you gave away something to a relative within the past year, the trustee can cancel the transfer, recover the property, and sell it to get money for your creditors.

In the same way, bankruptcy courts look at payments to creditors made before the bankruptcy filing. If you paid more than $600 to a creditor during the 90 days before filing bankruptcy, you must disclose the payment in your bankruptcy paperwork. You must also disclose loan payments made to relatives within one year prior to filing the bankruptcy. The trustee may believe that you are showing favoritism or a preference to the creditors or relatives by making the payments. They can recover the payments from the preferred creditor so that all of your creditors can share in the money. (You’re allowed to make your regular mortgage and car payments so don’t worry about those.)

Prior to filing bankruptcy, you should also avoid withdrawing money from an IRA, 401K or other ERISA qualified retirement plan. Funds in those plans are protected from your creditors and the bankruptcy court, but if you remove the money and put it in your bank account, it is no longer protected. Also, if you use some of the money to make large payments to some of your creditors, it may be a preference as described above.

Discharging Income Taxes in Bankruptcy

Generally, most people who file bankruptcy will not receive a discharge of their income taxes. Therefore, they will still have to pay the taxes even after the bankruptcy is complete. However, it is possible for some people to discharge income taxes in bankruptcy. The first issue is whether the income tax return was due more than three years ago. For example, the 2003 tax return was due April 15, 2004 which was more than three years ago. Since it was due more than three years ago, the 2003 income taxes may be dischargeable.

The 2003 income taxes will not be dischargeable if they were not filed timely. For example, if they were filed in 2007 instead of when they were due in 2004, then they will not be discharged in the bankruptcy. A person who owes non-dischargeable income taxes can still use a Chapter 13 bankruptcy to set up an affordable payment plan to pay the delinquent taxes. Another option is to wait until enough time has passed for the taxes to become dischargeable before filing bankruptcy.