Yesterday I had the pleasure to talking to a client of mine who was audited by the IRS for a 2005 tax return. The IRS proposed a change to this return that increased his tax liability by about $25,000. The increase was unwarranted, so we are going through the process of requesting a ”reconsideration” and perhaps an appeal…all as a result of the taxpayer not having representation at the time of audit …BIG MISTAKE!!! But that subject is for a different day.
Anyways, our conversation lead to the subject of bankruptcy and his options in that regard. Which conveniently lead me to today’s topic.
Bankruptcy is a very serious decision…one that can follow you around for seven to ten years. And the rules, regulations and requirements have become much stricter over the last few years, since the much needed changes to the bankruptcy law.
Here are some common questions and short answers…before taking any options always discuss your options with a good lawyer who is experienced in the field!
What is the difference between Chapter 7 and 13? If you file Chapter 7, most of your unsecured debts are written off within 90 days of filing. The bankruptcy will stay on your credit report for 10 years, and although your debts are dismissed, you may be forced to sell most of your assets, like house, jewelry, car, art, etc. to pay off your creditors.
Chapter 13, on the other hand, is a repayment plan. You set up a three to five year schedule with your creditors, it stays on your credit report for 7 years, and you are able to keep your assets.
Note that 401k accounts, social security income and individual retirement accounts are federally exempt from bankruptcy repayment.
When does a Chapter 13 filing make sense? Chapter 13 is usually recommended for a debtor who has fallen behind in their payments because of a temporary financial problem, like a job loss, but who can get back on track if given time to catch up.
Do I get to choose the type of bankruptcy I file? Today’s bankruptcy rules impose requirements for filing Chapter 7, since it is potentially more advantageous. According to these rules, you qualify only if your average income for the past six months before filling is lower than your state’s median. If your income is above your state’s median, you will have to take a “means” test to determine your ability to pay.
Do I have to go through credit counseling before I file? Sure do! You must be able to certify that counseling did occur within six months before filing your bankruptcy papers.
Are there restrictions on the kind of debts that can be discharged? Child support, alimony payments, and past tax bills are never dischargeable. Student loans are forgiven only in rare situations. Creditors also have the right to object to the discharge of certain unsecured debts, like luxury items.
What happens to my credit after filing? A notation is made on your credit report and your credit score will most likely take a significant hit. Purchasing an credit may be difficult to impossible, depending upon the item, interest rate and terms.
If you have more questions or need some guidance, give us a call and we will try to send you in the right direction.