Do I have to file with my spouse?
NO. One spouse can file without their spouse. This situation could arise where all or most of the debt giving rise to the financial difficulties, and therefore the need to consider bankruptcy, is in the name of one spouse. A non-filing spouse may have excellent credit, and therefore the couple would benefit from the non-filing spouse maintaining his or her good credit for the benefit of them both. Although subject to anti-abuse considerations, spouses can often strategically time their filings such that they are able to collectively gain more time than they might otherwise have been able to obtain if each spouse files individually.
Can my taxes be dischargeable?
YES. Although there are a variety of rules that apply, income taxes may be dischargeable. There are three primary rules that come into play as it relates to the dischargeability of income taxes: (1) A 3-year rule; (2) A 2-year rule; and (3) A 240-day rule. The 3-year rule generally requires that an income tax liability be more than three years old before it is eligible for discharge. The 2-year rule generally requires that the tax return for the year for which a discharge is sought must have been filed more than two years prior to the bankruptcy filing. Finally, the 240-day rule generally prevents discharge of any amounts assessed by the IRS within 240 days from the date of filing bankruptcy – notwithstanding satisfaction of the other tests. There are other rules that can come into play, but there is definitely opportunity to obtain a discharge of income taxes in bankruptcy.
Do I lose everything when I file?
NO. Individual consumer debtors are allowed certain exemptions when they file for bankruptcy. These exemptions are what is designed to assist the debtor in their “fresh start.” Exemptions are property that a debtor can keep despite the bankruptcy filing. Although exemptions vary by state, the most common exemptions include a homestead, a vehicle, home furnishings, retirement funds (IRA, 401(k), 403(b)), and other basic assets needed to live (i.e., food, clothing, etc.). In some states, debtors may elect either the federal exemptions provided under the Bankruptcy Code or state exemptions provided under state law. Neither is necessarily better; it just depends on the debtor’s circumstances. There are some anti-abuse provisions that debtors should be cautious of. For example, certain rules prevent someone from moving from one state that may have a less generous homestead exemption to another state with a more generous homestead exemption and then immediately filing for bankruptcy. In such a situation, the homestead exemption may be limited to a certain amount.
If I file BK for my small business, do I also have to file for personal BK?
Not necessarily, but possibly. It is not uncommon for business owners who file bankruptcy on behalf of their business to be forced to turn around and file personal bankruptcy, but it depends on the circumstances. The most common situation where this might be required would be where a business owner personally signed as a guarantor for one or more loans. Many financial institutions will require individuals to sign as personal guarantors on debts to their business before they will agree to fund the loan. Personal guarantees help financial institutions protect their investment. On the other hand, if an individual funded their business through their own equity, or perhaps used unsecured credit cards or loans in the name of the business to fund their business, then they will likely be able to successfully avoid a personal bankruptcy filing.
How long does it take to get credit after a BK?
This is a common question that potential debtors ask, and the answer is the classic “It depends.” And it depends on a variety of factors, including the circumstances of the particular debtor and what they are trying to finance post-bankruptcy. For example, finding funding to purchase a vehicle is almost always available – even shortly after filing for bankruptcy. Vehicle lenders presumably understand that even debtors need vehicles and will most likely be willing to pay first available funds to ensure that they have a vehicle. Similarly, vehicle lenders can simply repossess a vehicle if the debtor fails to pay. Homes, on the other hand, generally have stricter requirements in order to have government backing. Most lenders will require a 2-3 year separation from a personal bankruptcy filing before they will consider providing home loans. Of course, as mentioned above, if one spouse that has good credit is able to avoid filing for bankruptcy, then that spouse might be able to qualify in their own name to purchase something that the recently-discharged debtor might not qualify for. Generally, the more time that elapses following a bankruptcy filing, the better the chances a debtor will have in qualifying for a loan. Of course, debtors should take care to “do all of the right things” after emerging from bankruptcy, including re-establishing credit and paying all bills on time.
Will filing BK hurt my credit score?
Without a doubt, filing bankruptcy will cause an immediate hit to a debtor’s credit score. However, it is often the case that, by the time a debtor files for bankruptcy, their credit score is already in shambles, and the bankruptcy filing may not make things that much worse. Additionally, it is also often the case the debtors will recover more quickly after filing bankruptcy than they otherwise would have had they not filed. There are multiple potential reasons for this. First, those debtors have successfully eliminated debt, thereby making their credit report much cleaner (notwithstanding the bankruptcy filing). Had they not filed, those debtors likely would have continued making late payments or been unable entirely to repay certain debts. Additionally, debtors who are no longer burdened by the debt load they previously had may be much better equipped to save money that will allow for a larger down payment on a future purchase and more reliable payment of future bills.
What is a fraudulent transfer?
Generally, fraudulent transfers are transfers of property by a debtor within a certain period – generally two years – prior to filing bankruptcy. Fraudulent transfers come in two forms: (1) Actual fraudulent transfers; and (2) Constructively fraudulent transfers. Actual fraudulent transfers involve transfers of property by a debtor where there is actual intent to hinder, delay, or defraud a creditor. Constructively fraudulent transfers, on the other hand, do not require actual intent. These are transfers that involve less than reasonably equivalent value being transferred at a time when the debtor was either already insolvent or became insolvent by virtue of the transfer. In either case, a trustee may be able to “avoid” fraudulent transfers – meaning that they can essentially undo such a transfer. A transferee in such a case may have certain rights as long as they provided sufficient value and took the property in good faith without knowledge of the intentions of the transferor debtor.
What is a preferential transfer?
A preferential transfer is similar to a fraudulent transfer in that a trustee can potentially avoid a preferential transfer, but for a different reason. Preferential transfers are not “fraudulent” in the sense that they are not necessarily engaging in any intent to avoid creditors. In fact, preferential transfers are made to creditors; it’s just that they are made to creditors in “preference” to other creditors. The classic example involves a debtor who, before filing for bankruptcy, takes what little money he has and uses it to pay off a debt to, say, a brother-in-law, while making no payments to other unsecured creditors such as credit card companies. Both the brother-in-law and the credit card companies are similarly-situated creditors, as they are all unsecured creditors who have the same priority in bankruptcy. The goal of bankruptcy law is to have similarly-situated creditors treated the same. Therefore, if a debtor tries to “prefer” his brother-in-law over credit card companies, the trustee can avoid that transfer, recover the transfer made, and then distribute the funds recovered more equitably pro rate to similarly situated creditors.
What debts are non-dischargeable?
A variety of different debts are considered non-dischargeable. Most are found in Section 523 of the Bankruptcy Code (Title 11). The most common include things like: (1) Taxes (subject to exceptions); (2) Child support obligations; (3) Other obligations arising out of a domestic support agreement or divorce decree; (4) Student loans; and (5) Debts that are determined to have been taken out fraudulently. While some of these non-dischargeable debts are per se non-dischargeable – meaning that creditors are not required to do anything to ensure their non-dischargeable status (e.g., child support obligations), creditors seeking a non-dischargeability determination of other debts are required to file an adversary proceeding in bankruptcy court in order to have such debts deemed non-dischargeable. Debts alleged to have been the result of fraud under Section 523(a)(2) are probably the most common in this category. An adversary proceeding is essentially a separate lawsuit – a “case within a case” – that is filed in bankruptcy court and that is related to a particular bankruptcy case. Adversary proceedings are similar to any other lawsuit, but usually progress much faster than typical lawsuits based on the notion that debtors are entitled to quick resolutions in order to obtain their “fresh start.”
Will I be taxed on the amount of debt discharged in a bankruptcy?
NO. The question refers to a concept in tax law known as discharge of indebtedness income. Such an obligation generally arises when debts are discharged. A common example of discharge of indebtedness income arises when a taxpayer settles a credit card debt for less than what is owed. For example, if a taxpayer settles a $10,000 credit card debt for $5,000, then the card issuer will likely send the taxpayer a 1099-C – which is a 1099 for canceled debt – for $5,000.00. Under general tax rules, income from the discharge of indebtedness is taxable. See 26 U.S.C. §61(a)(11). However, in another section of the Internal Revenue Code – Section 108 – we see an exception to the discharge of indebtedness rule where the discharge occurred in a bankruptcy case (where the “discharge occurs in a Title 11 case” – see 26 U.S.C. §108(a)(1)(A)). Based on this concept, debtors who are considering the difference between filing bankruptcy and working with companies that claim to be able to reduce debt without filing bankruptcy, should carefully consider the economic impact of going the debt reduction route – where cancelation of indebtedness income will be incurred – as opposed to a bankruptcy filing (where no such cancelation of indebtedness will arise as a result of the exception noted above).