Asaph Abrams Attorney at law

San Diego Bankruptcy

bankruptcy attorney san diego

What debts does bankruptcy discharge (cancel)?

At the conclusion of your successful bankruptcy case, you will receive a general discharge order.  Absent rare objections by creditors or the U.S. Trustee, all debts that CAN be discharged/canceled are considered to be discharged.  The effect of the discharge depends on the type of debt in question.  Let’s start with the bad news.

In addition to debts acquired through fraud, there are two types of debt that are presumed to be nondischargeable (yes, that’s a word): student loans and priority debts.  Student loans are the cost for that diploma.  Priority debts are your societal obligations: recent taxes, domestic support and fines/penalties relating to wrongful acts.  Now, on to the good news.

In a  chapter 7, unsecured debts like credit cards and medical bills are wiped out completely.  A chapter 13 wipes them out too, except that you have to pay a usually small and affordable portion of the debt back.

Secured debts are not different in that a discharge relieves you from all personal obligation on their payment.  However, lenders will maintain their security interest in the collateral.  If you default on your mortgage or your car loan, you’ll still lose the property.  But due to the bankruptcy, you won’t owe on the unpaid balance.  However, in a chapter 13 bankruptcy, you can re-define secured debts in full or in part as unsecured debts.  This is accomplished when secured debts are no longer secured by actual value in the property, as a result of depreciation.  Thus, you can reduce the principal owed on car loans to the current market value (i.e. the secured portion of the loan), though you can only do this if the car was purchased more than 910 days prior to filing.  You have to pay for the principal + interest, but the remainder of the loan is considered unsecured and can be discharged in bankruptcy even if it’s not paid for.  In a chapter 13 bankruptcy, you can also discharge second mortgages, if they “become” unsecured due to depreciation.  This is called a “strip off” of a second mortgage.  It can be done when the balance on your primary or senior mortgage exceeds the property value. The strip-off converts or changes the second mortgage into unsecured debt.  As unsecured debt, it can be fully discharged in bankruptcy even if it’s not paid for in full. 

If you have a judgment lien on your home, you can avoid (remove) it in bankruptcy if there is no value to secure it after you apply mortgage interests and and exempt the amount of equity you’re allowed to keep.  Through avoidance, the judgment lien becomes an unsecured debt that is dischargeable in bankruptcy.  Consider Courtney, the cosmetician’s condo in Coronado.  The condo’s worth $225K and Courtney owes $150K on it to the bank.  Courtney is sued by frivolous Farrah for five facials gone bad to the tune of $50K.  Farrah wins her suit and a $50K judgment lien attaches to the condo. Courtney files for chapter 7 bankruptcy protection; she can exempt (protect from liquidation) her $75K of equity in the condo (as of a 2010 increase in the exemption amount).  Of the condo’s $225K value, $150K belongs to the bank and $75K belongs to Courtney.  There’s nothing left to secure the judgment lien.  Farrah’s lien can be avoided and discharged through bankruptcy.  A special motion must be made to the court to avoid liens; it is not accomplished automatically through a bankruptcy petition.

Bankruptcy will not discharge debt arising from willful malice, fraud, theft, drunk driving or breach of fiduciary duty.  Both the United States Trustee and creditors can attempt to prevent bankruptcy discharge based upon such allegations. 

If I file bankruptcy and return my car would I still be liable for the car payments?

If you return the car, bankruptcy wipes out the balance on the loan.  It protects you from deficiency claims.  You can then buy a new (used) car that you can afford and owe the lender nothing on the first car.  However, if you really dig the current vehicle, you can try to redeem it from the lender by paying its current worth in a lump sum (if the lender agrees) or simply maintain the contract by reaffirming it (if necessary) and continuing the payments (if you can afford them after your other debts are gone).

Should I keep paying my bills if I am going to file for bankruptcy?

Even though you are filing for bankruptcy, you need to keep paying necessary bills like health insurance, utilities and rent or else find yourself sick, in the dark and without a roof.  If you're facing foreclosure and plan to surrender the property, it makes no sense to keep paying the mortgage.  If you plan to keep your home and car, please keep current on the payments.  If you’ve fallen behind, we can catch you up with a chapter 13 bankruptcy payment plan.

It makes no sense to keep paying interest and penalties on credit card bills absent the means to do so.  Current debts can be wiped out in bankruptcy.  Please do not incur new debt.  Please do not buy on credit what you cannot pay for.

I have always made the minimum payments on my credit cards, but now I can't. Should I file for bankruptcy?

The credit card debt can start increasing exponentially.  So, you're facing a slippery slope.  If you can't make the minimum payments, it's a wake up call.  You need a ladder to climb out of the hole and bankruptcy can provide that relief.

I am renting my furniture. Should I keep paying for this if I am going to file for bankruptcy?

Yes, if you want to keep it.  However, when we file for bankruptcy, we can seek to redeem the property if possible, meaning own it for lump sum payment of its current value. 

If I file for bankruptcy, will the canceled debt count as income on my taxes?

No.  Bankruptcy is about a fresh start.  Debts wiped out in bankruptcy do not create capital gain. 

Are there any debts I cannot discharge through bankruptcy?

Yes, certain types of debts are excluded by bankruptcy law.  These include  most taxes, child and spousal support as well as student loans and debts arising from illegal or negligent activities (such as debts from a drunk driving accident).

General Bankruptcy Questions

San Diego bankruptcy attorney
San Diego bankruptcy attorney

To discuss your particular situation, please call (858) 344-0500 to schedule your free consultation.