What is a Dischargeable Debt?

When considering a bankruptcy, you will often hear your attorney refer to "dischargeable" debts. It's important to fully understand what the term means, because discharging your debt is the primary purpose of filing a bankruptcy.

A debt is dischargeable when bankruptcy can essentially eliminate it, or make it go away. The most common types of dischargeable debt are credit cards, medical bills, unsecured loans, and personal loans. Federal Income Taxes are sometimes dischargeable (if they were filed on time and are more than three years old), but in most cases taxes are not dischargeable. Student loans and government fines are rarely dischargeable.

When are your debts discharged? Debts are discharged when all the steps of your bankruptcy are completed. In a Chapter 7 bankruptcy, this happens relatively quickly, within 3 or 4 months of filing. A Chapter 13 bankruptcy takes much longer... the plan itself will be 3 to 5 years long, and the official discharge will take months longer.

The good news is, as long as you are complying with your bankruptcy requirements, the automatic stay prevents creditors from attempting to collect on your debts. So, in the time between filing and discharge, you will be protected from your creditors.

Why are some debts dischargeable, while others are not? The policy of Congress, as manifested through the United States Code,  largely determines what is discharged and what isn't. Congress has determined credit cards can be discharged... usually. If you used your credit cards to pay taxes or make a large purchase right before filing bankruptcy, they are NOT discharged.

Congress has taken the policy stand that student loans, whether Federal or private, are NOT dischargeable, except under the most extreme circumstances. It can be argued that a student loan is a debt not much different than a credit card. They both can be used to purchase services or goods. Both can prevent a debtor from enjoying the "fresh start" promised through bankruptcy. But, at least for now, Congress has taken the policy stance that student loan debts will survive through bankruptcy, to the point where your wages (or even Social Security benefits!) can be garnished.

Taxes and student loans involve money originating from or directed to the Federal government. So, maybe it should be no surprise that Federal bankruptcy law demands that they be repaid in full. For debtors facing financial hardship, relief is often denied. Unfortunately, the bankruptcy "fresh start" is not a reality for may debtors.

Contact us to meet with an experienced Pittsburgh bankruptcy attorney who can discuss which of your debts can be discharged, and what to do about those that cannot.

What Can Delay a Bankruptcy Filing?

You have discussed filing bankruptcy with your attorney, and it seems like the right course of action. You're ready to go.

But, sometimes you need to wait...

Several issues can make it preferable, or even necessary, to wait before filing either Chapter 7 bankruptcy or Chapter 13 bankruptcy. Faster and sooner is not always better.

The first issue may involve securing the proper venue to file. You can only file in a location where you have lived for a majority of the past 180 days. So, if you have not lived in Western Pennsylvania for the past 91 days, you cannot file here in Pennsylvania. Oftentimes, it is worth waiting, as filing in your new home will be much more convenient than commuting to your old state. But, it is a requirement that is absolute.

It may also be advisable to wait to file for purposes of exemption planning. The Court will look back at your domicile (where you lived) for a period of 180 days starting two years back from the date of filing. Sound confusing? It is! But, it will be discussed in another post, and your bankruptcy attorney can walk you through it. The relevant point for right now is that sometimes it is advisable to wait before filing to change the available exemptions. An experienced bankruptcy attorney will help you with this "exemption planning" to maximize the protection of your property.

Means test planning will likewise play a role in the timing of a bankruptcy filing. The means test looks at your income for the six months before filing. Depending on your employment history, the means test calculation may require a delayed (or expedited) filing. The means test is also discussed in greater detail elsewhere on the website.

A previous bankruptcy discharge can delay a new filing, as well. This will most often be the case when the debtor has previously filed a Chapter 7 bankruptcy. These debtors will not be eligible to file a new Chapter 7 bankruptcy for 8 years since the previous Chapter 7 was filed. Speak with your bankruptcy attorney about strategies for dealing with creditors during this time. 

Finally, making payments to your bankruptcy attorney for legal fees and filing fees may delay your case from being filing. I am always flexible in taking payments and devising payment plans for my clients. However, bankruptcy attorneys will not file a case before being paid in full, otherwise their fees will be discharged with the other debts. But, my office will provide clients with full and professional service during the duration of the payment plan. I will have the petition ready to file at the moment of the final payment.

The timing of bankruptcy is all-important. Contact us to discuss the issue with an experienced Pittsburgh bankruptcy attorney.

Car Accidents and Bankruptcy: A Summary

My last three posts have discussed the dischargeability of certain debts related to auto accidents. There are several distinctions to make... Chapter 7 or Chapter 13? Intoxicated or not? Willful and/or malicious? Personal injury or death? Or just property damage? I'll attempt to summarize the distinctions below. Please review my previous blog posts "Car Accidents and Bankruptcy, Parts I, II, and III for great detail.

Below is an attempt to summarize, in shorthand, what is (and is NOT) discharged in both Chapter 7 and Chapter 13 bankruptcy when dealing with damages in an auto accident.

Damages Discharged in Chapter 7:

• Not willful and malicious, AND;
• No intoxication or drugs influencing accident
• Intoxication/influence causing only property damage

Damages NOT Discharged in Chapter 7:

• Willful AND malicious damage to either property OR person, OR;
• Intoxication/influence causing personal injury or death

Damages Discharged in Chapter 13:

• All damages related only to property
• Damages related to personal injury/death but NOT willful OR malicious

Damages NOT Discharged in Chapter 13

• Personal injury or death resulting from intoxication/influence OR willful act OR malicious act

NOTE: Even though a debt may be "dischargeable" in Chapter 13, it may still end up paid in full or in part depending on the rate at which the debtor is required to repay unsecured creditors. More accident-related debts are dischargeable in Chapter 13 due to this being the case.

Home Appraisals and Bankruptcy

Individuals considering bankruptcy will sometimes need to obtain a formal appraisal of their home's value. Unfortunately, this is an added expense, but in most cases it is the wise and prudent thing to do.

So, why are home values so important in bankruptcy? In many cases, it is the most important variable in a bankruptcy petition. The value is so important because equity in a home can be exempted (or protected) in bankruptcy. Equity is the value of your home, minus what is owed on it. If your home is worth $100,000, and you have an $80,000 mortgage, your equity is $20,000.

This equity can be protected, but only to a certain degree. The Federal bankruptcy exemptions allow for $22,975.00 for the "Homestead" exemption. This doubles to $45,950.00 for married homeowners who file jointly. This equity in your home, and the exemption to protect it, is very important because if the equity in your home exceeds the exemption available to protect it, you must pay back unsecured (ie credit cards, medical bills, payday loans, etc.) creditors dollar-for-dollar the amount that is not exempt.

It's worth making another example to clarify. If your home is worth $100,000, but your mortgage is only $60,000, you have $40,000 in equity. $22,975 of this equity can be protected, leaving $17,025 as not exempt. This $17,025 that is not exempt must be paid back to unsecured creditors, in full. If you owed $10,000 to unsecured creditors, the full $10,000 would need to be paid, likely through a Chapter 13 bankruptcy.

Home values are so important in bankruptcy because they determine equity in the home, and differences in equity can obviously result in vastly different scenarios in bankruptcy. Bankruptcy filers with little or no equity will normally not need to hire an appraiser. Or, if the home was very recently purchased, or the value of similar comparable homes in the neighborhood is firmly established (such as in a housing plan), an appraisal will not likely be needed.

But, where a wide range of values could be reflected, it is worth having an independent, third-party appraiser value the home. (NOTE: An independent, third-party appraiser, as opposed to a friend or family member is important, as the chances of the value being challenged in Court will greatly decrease if the appraiser is a disinterested party). An appraisal may cost in the $300 to $400 dollar range, but this cost will be saved many times over if a value in your home is established that lessens the amount you pay to creditors.  When equity is fully protected, and income is below the means test threshold, clients can normally file a Chapter 7 bankruptcy and potentially save tens-of-thousands of dollars.

The appraisal itself is a quick process where that appraiser visits and inspects your home, and then does some research to compare it to other homes in your neighborhood. Once again, the minor hassle will normally be worth it financially many times over.

One last point, county tax assessment values CANNOT be used to establish home value, as the Bankruptcy Court does not allow these values in the calculation. Tax assessment values often differ greatly from actual real estate values, hence the Court's position on the matter.

If you are considering filing bankruptcy, contact us to set up a free consultation in person or over the phone. I will be happy to sit down and start the process of valuing your home, and more importantly, protecting it through bankruptcy.

Medical Bills and Bankruptcy

Medical bills are often an important factor in seeking bankruptcy relief. The good news is that they are mostly dischargeable, no matter how large. Given the exorbitant cost of medical care, these bills often grow huge. Here are some things to keep in mind when you are considering filing a bankruptcy to deal with medical bills.

• Medical bills are normally considered "unsecured" debt. That means they are not secured by your personal property (unlike a car loan or a mortgage), and therefore they can be discharged (or eliminated) like other unsecured debt such as credit cards. In a Chapter 7 bankruptcy, medical bills are completely eliminated. In a Chapter 13 bankruptcy, you may have to repay some or all of the debt, but it will be over a 3-to-5 year plan, and without interest. In either case, bankruptcy will probably be your best option for dealing with the burden.
• Make sure you gather up all of your medical bills for review by your attorney. Many medical providers do not report the bills to credit agencies, so they oftentimes do not show up on credit reports. Find your medical bills and provide a copy to your attorney. If you cannot find the statements, call your health care provider and ask for one. This is important, because just like other unsecured debts, medical bills are NOT discharged if they are not included in your bankruptcy petition.
• Let your attorney know if your medical condition is ongoing, or resolved. While medical bills are dischargeable in bankruptcy, you may run the risk that your health care provider in non-emergency situations may stop providing service if they are included in your bankruptcy petition. Timing is important, a good bankruptcy attorney will discuss your options.

Many of my clients are not even aware of some older medical bills. It is best to round up everything when you file a bankruptcy, there is no reason to pay a bill later that can be included and discharged now.

As a Pittsburgh bankruptcy attorney, I would be happy to review your medical bills and help you determine if bankruptcy is an option for you. Contact us for a free consultation.