Eliminating Debt

Get Out of Debt

Bankruptcy is great for stopping foreclosures, lawsuits, garnishments, and collection calls. But the main reason people file for bankruptcy is to eliminate debt.  In bankruptcy, your debts may be completely eliminated, partially eliminated, or not go away at all.  It all depends on what kind of debt you have and what chapter of bankruptcy you file.

Unsecured Debt

An unsecured debt is any debt where there is no collateral or property securing the loan.  The most typical form of unsecured debt is credit card debt.  If you don’t pay your credit cards you will get phone calls (and a lot of them!), but you won’t lose any property until the credit card company sues you and gets a judgment against you.  This is why you are paying high interest rates on credit cards, because there is a lot of risk on the part of the credit card company.

Bankruptcy, particularly chapter 7 bankruptcy, is great for eliminating unsecured debts.  In bankruptcy lingo these debts are “discharged”.  They are generally totoally discharged – meaning there is no pay back of the debt. They cannot sue you, they cannot try and collect on them, they are gone.

But all unsecured debts are not created equally…

Tax Debt

Taxes, whether they are state or federal, are generally non-dischargeable, meaning they don’t go away, even in bankruptcy.  There are some exceptions to this rule, but in order to discharge taxes they must meet the following criteria: (1) they must be at least three years old; (2) you must have filed the tax return for these taxes at least two years ago; (3) the taxes must not have been assessed to you within the last 240 days; and (4) generally only income taxes can be discharged if the other requirements are met.  Other types of taxes like payroll taxes will not go away no matter how old they are.

If discharging taxes sounds complicated that is because it can be.  If you have taxes that you are looking to discharge I will order a tax transcript from the IRS and we can then accurately determine if you can eliminate your tax debt through bankruptcy.

Student Loan Debt

Student loans are very difficult to discharge in bankruptcy.  If you obtained a loan for an educational purpose, even if it is a private loan, it will likely not be discharged in your bankruptcy case.  There are exceptions to this rule.  If you are unable to make a living due to disability or other extenuating circumstances the bankruptcy court will make a determination whether they can be discharged or not.  My general advice is to not plan on this type of debt being eliminated and if it is then all the better.

While student loans are generally not discharged, the filing of a bankruptcy will place your student loans into a deferment.  The typical chapter 7 bankruptcy lasts about 4 to 5 months while a chapter 13 bankruptcy lasts anywhere from 3 to 5 years.  Whichever chapter of bankruptcy you file your student loans will be placed into a deferment until your bankruptcy case is over.  After your bankruptcy is over you can pick up making your regular monthly payments again.

Secured Debt

Secured debts are any debt where there is property or collateral backing up the underlying loan or promissory note.  Typical secured debts are homes, cars, boats, ATVs, etc.  When it comes to these types of debts if you don’t make the monthly payment the secured creditor is permitted to foreclose on your home or repossess the car, boat, or whatever the collateral is on the loan.

In bankruptcy, secured creditors retain their ability to go after the collateral securing the loan if you don’t make your payments.  However, they have to get the bankruptcy court’s permission before they do it.  For instance, if you file for bankruptcy but don’t continue to make your car payment, the bank will file written documents with the bankruptcy court asking for permission to come and repossess your car.  And unless you have a good reason for not making the payments or can get caught up on the missed payments, the bankruptcy court will likely let the bank come and repossess your car.  The same is true for your home, ATV, boat, or any other secured debt.

There are few tools in bankruptcy that can help in reducing what you owe on your secured debts.

Bankruptcy Redemption Loans

In chapter 7 bankruptcy you reduce what you pay on your car loans by “redeeming” your car.  If you redeem your car, you will be required to pay the bank what your car is worth, instead of what you owe.  For example, if you owe $20,000 on your car loan, but your car is only worth $10,000, then in a chapter 7 bankruptcy you could pay the bank $10,000 and the remaining balance is discharged.

Sounds great, right?  Well, there is catch.  You have to pay the full $10,000 immediately to the bank to take advantage of this discount.  Here is how it works.  As most people don’t have $10,000 lying around, you would need to get a loan.  Getting a loan while in a chapter 7 bankruptcy case may sound impossible, but in fact there are several banks that offer “redemption” loans and to qualify you must be in a chapter 7 bankruptcy.  I work with one bank that will evaluate your case, and let you know if redeeming your vehicle will save you money and how much.

Cram Down

In a chapter 13 bankruptcy you can reduce what you pay on your car, boat, RV, ATV, etc. through the chapter 13 “cram-down”.  First, a little background.  In a chapter 13 bankruptcy you will be required to pay back a portion of your debts over a 3 to 5 year period.  This will be done through a monthly payment to a bankruptcy trustee.  Part of that monthly payment will be your car payments.

Similar to redeeming your car as described above, you will be able to pay the value of your vehicle instead of what you owe.  However, this time it will be done by making a monthly payment to the bankruptcy trustee instead of obtaining a loan from a third party.  With the chapter 13 cram down not only will you be able to reduce the total amount paid, but we can lower your interest as well.  The chapter 13 cram down is a great way to pay less for your car and get out of a high interest rate loan.

As advertised, bankruptcy is a great way to eliminate debt and allow you to start over.  As shown above, it is also a great way to reduce what you owe on secured debts and keep your car or home.  I offer a free bankruptcy consultation where we can discuss your specific situation.

Arizona bankruptcy attorney John Skiba can be reached at (480) 420-4028 or via email at john@skibalaw.com .