Can you favor 1) creditors with collateral you want to keep, 2) creditors you feel loyal to, and 3) creditors with leverage against you?
Our clients are often very concerned about what will happen to debts that they want to keep paying. They are sometimes reluctant to file bankruptcy for fear of what will happen with these debts that are so important to them.
These special debts fall into three categories.
1. Debts with Crucial Collateral
For both practical and deep emotional reasons our clients’ homes and vehicles are often tremendously important to them. They often make the decision that holding on to their home is their absolutely highest priority, both as a way to build equity and for family stability. They need and want to keep their vehicle, both because of needing it to get reliably to work and to keep their family and personal life sane.
Chapter 7 and Chapter 13 both have ways that enable you to keep your home and vehicles. Sometimes these involve not paying other creditors so that you can pay the mortgage or vehicle loan. In other situations you may be able to keep your home and vehicle while paying significantly less to do so. Overall, bankruptcy usually allows you to focus your limited financial resources on these kinds of debts if they are your highest priority.
2. Debts Involving Moral Obligation
Many of our clients feel different levels of loyalty towards different creditors. It’s only human to feel differently about a personal loan owed to a relative than about a credit card balance owed to a national bank. And it’s normal to feel more loyalty to your long-time family doctor compared to some medical debt that is now at a second or third collection agency so that you don’t even know which medical bill it’s even for.
If you feel a strong moral obligation to pay a debt even if you are filing bankruptcy, there are safe ways to pay it and very dangerous ones. We’ll tell you about this in an upcoming blog post. In the meantime, be sure you tell your attorney about this because it can effect whether you file a Chapter 7 or a Chapter 13 case, and often the timing of the filing of your case.
3. Debts with Extraordinary Creditor Powers
Because the law makes distinctions among different kinds of debts, some are much more dangerous than others, both in and out of bankruptcy. You may well be aware of the extraordinary collection powers of tax authorities, support enforcement agencies, or student loan creditors, for example. You have probably also heard that some debts cannot or might not be discharged (permanently written off) in bankruptcy. You’re understandably concerned if you have these kinds of debts what would happen if bankruptcy doesn’t get rid of them.
The reality is that usually a bankruptcy will help you with even the most aggressive creditors, even those whose debts will not be discharged. Sometimes it involves using the bankruptcy system’s own substantial powers over these creditors. Sometimes it involves discharging other debts so that you have the means to pay the undischarged debts. Sometimes it involves directly favoring these creditors by paying them over time ahead of or instead of other creditors in a Chapter 13 case, while under continuous protection under the bankruptcy laws. In most circumstances bankruptcy can find you some manageable way to handle these legally favored creditors.
Our next few blog posts will give you specific information about how bankruptcy can help you keep valuable collateral, satisfy your moral obligations, and deal successfully with your most dangerous creditors.