Bankruptcy does more than just write off debts. It can solve your financial problems in other ways as well.
Neglecting Bankruptcy as an Option
If you have a debt that you have heard can be discharged (legally written off)—such as a recent income tax debt—you may not be seriously considering bankruptcy as an option. You probably have not seen a bankruptcy attorney. That could well be a mistake.
Getting the Law Right
You may or may not be right about whether or not that tax debt, or some other kind of debt, can be discharged through bankruptcy. Often, with income taxes, for example, that’s mostly a matter of timing. So even if you really could not discharge a tax debt a few months ago, that may not be true today. Or it may not be true a few months from now.
But whether or not the debt can be discharged, you would be wise to get legal advice about it, for the following 6 reasons:
1. Some debts which can’t be discharged under some circumstances can be under other circumstances. For example, personal income taxes can be discharged under either a Chapter 7 or Chapter 13 case, depending on how old they are and a series of other factors. Another example: student loans are usually quite difficult to discharge, but still can be under the right facts. A final example: even though true child support obligations are never dischargeable, in rare situations a debt which you thought was a support obligation might not fit the legal definition for bankruptcy purposes.
So, it is worth finding out whether the debt you assume can’t be discharged actually can be.
2. Some debts that can’t be discharged now perhaps can be in the future. Almost all income taxes can be discharged after a series of conditions have been met, which mostly just involve the passage of enough time. So your attorney can create a game plan for you using the tax timing rules to discharge as much tax debt as possible. Timing can also be important with student loans, especially if you have a worsening medical condition or are getting close to retirement age, making for a better argument of “undue hardship.”
3. Even if you can’t discharge a particular debt, bankruptcy can permanently solve an aggressive collection problem. Often your biggest problem is how aggressively a debt is being collected. For example, you may want to pay your back child support but the state support enforcement agency is about to suspend your driver’s and/or occupational license. A Chapter 13 case will stop these threats to your livelihood, and protect you from them while you catch up on the back support under the protection of the “automatic stay.”
4. You have more control over how much time you’ll have to catch up on debts that cannot be discharged. Debts which the law does not allow to be discharged in bankruptcy often tend to be ones that give the creditors a lot of power against you—such as with income taxes and child support arrearage. Chapter 13 takes a lot of that power away from these creditors while you pay them based on what your budget allows, not what these creditors would otherwise have the ability to get out of you.
5. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts take more time to pay off because a part of each payment goes to the ongoing interest and penalties. Certain tax penalties in particular can be large. Most of these additions to the debt are stopped by a Chapter 13 filing, allowing you to become debt-free sooner and by paying less money.
6. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged, but you likely also owe a set of debts that can be. Even if bankruptcy can’t solve your entire debt problem by simply discharging all you debts, as long as you can discharge most of your debts that would likely make your remaining debt problem much more manageable.
So don’t let the fact that you’ve heard that you have a debt or two that can’t be discharged in bankruptcy stop you from getting legal advice about it. Your financial life could well still be greatly improved through one of the bankruptcy options.