What You Didn’t Know About Bankruptcy

GOMEZ LAW, APC Aug. 18, 2016

Most people know that credit cards are dischargeable. However, we wanted to go over some items that most people might not about, that are in fact dischargeable in Bankruptcy. To start, “dischargeable” means that the money owed is wiped out and gone, forever. Donald Trump for example filed for bankruptcy a number of times and, in the right situation, Bankruptcy can be a wealth creation tool. As Mr. Trump stated during his presidential campaign, there was nothing wrong with “taking advantage of the laws of the United States.” Obviously, he did very well after these bankruptcies.

Business Debts, Civil Court Judgments Against You and Medical Bills

Sometimes tragedy hits and these three types of debts can come out of nowhere. Unless you are sitting on a ton of cash or home equity, you should meet with a bankruptcy attorney and discuss filing or negotiating down these debts.

Taxes, Including Penalties

Income taxes can be dischargeable. “Hallelujah!” As long as there is no fraud or willful evasion, you have a very good chance at wiping out your old income taxes and related penalties. You must wait 2-3 years (depending on your specific situation) but then you are allowed to file your petition and have the debt wiped out. One common scenario is a 1099 employee (independent contractor) who fails to save appropriately and is hit with a large tax bill come tax time. Wait 2-3 years and if your financial situation is still difficult, wipe out the debt.

Eviction Damages and Foreclosure Debts

If an eviction is filed against you any “holdover” damages you face are dischargeable. If you are foreclosed on, any mortgage debts on the property that you are a borrower on are dischargeable. Generally landlords and lenders will negotiate with attorneys that are experienced in these two areas because they know the right attorney can keep a person in the property for anywhere from 6-12 months and then walk away. Those with good credit can negotiate to have the eviction case sealed and removed from their credit completely. (One huge reason why your landlord should always be nice to you.)

Social Security Overpayments and Veterans Assistance Loans and Over Payments

Yes, sometimes the government pays people more than what they are entitled to and then sends them a bill years later to collect the overpayments. Most people living off of social security cannot pay this money back and should meet with a bankruptcy attorney to wipe out this “debt”.

Student loans

Can you wipe out your student loans through bankruptcy? Yes. Is it difficult? Yes.

Wiping out your student loans comes down to essentially whether you can prove a sufficient hardship. For federal student loans this is almost currently impossible because federal loans generally provide for income based repayment and are very flexible. HOWEVER, private student loans sometimes are NOT flexible in their repayment options and when lenders become inflexible in allowing a debtor to repay the debts then bankruptcy is usually beneficial for the debtor (you).

How much will it cost? Discharging student loans requires actual litigation and can be expensive especially for someone you cannot pay their student loans to begin with. Also, some attorneys do not practice litigation and stick to petitions only. “$499 bankruptcy filings!” are usually for filing the petition only and generally covers nothing else (better have a fee waiver).

That being said it is essentially an investment decision for you the debtor. You could set aside a few thousand dollars for attorney’s fees and have a six-figure student loan discharged. However, we also advise attempting to negotiate with the lender before filing. This negotiation generally costs a fraction of a full blown out bankruptcy adversary proceeding and can get you a reduced payment and sometimes a reduced interest rate resulting in thousands of dollars in savings. If the negotiations are unsuccessful (could take a month or two depending on the lender’s response time) we usually apply most of the deposit for negotiations towards your bankruptcy case.

Most Importantly: Bankruptcy Does Not Permanently Ruin Your Credit

People are often surprised by how quickly they will start getting credit card offers in the mail again. Offers for secured credit cards (which require a deposit to the bank) with a low limit can arrive within a month of the debt discharge. Credit is also a mystery to most people. For example, you can increase your credit quickly if you use it. Just make timely payments and then periodically call and ask for credit limits to be increased because you’re so awesome. This is America and we want people to take chances. If you take a chance and it fails, you can file for bankruptcy and start again. If you take a chance and succeed, you could be the next Donald with horrible hair and private jets.

(Anyone facing debts should meet with a bankruptcy attorney to evaluate their individual situation. This article’s content, including this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. We recommend that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.)