5 Surprising Bankruptcy Benefits You Should Know About

Bankruptcy. From the first time you heard someone say it, you’ve known that word carried some social stigma. In Monopoly, players who go bankrupt are out of the game — “do not pass Go, do not collect $200,” etc. Fortunately, real life isn’t a board game. In life, bankruptcy isn’t nearly as bad (or even uncommon) as you might think. In fact, one in ten American households declared bankruptcy in recent years. And yes, there are even some benefits to filing either chapter 7 or chapter 13 bankruptcy. Let’s take a look at some bankruptcy benefits that can help you start moving forward after discharging all that debt.

Which Bankruptcy Filing Will Most Benefit You?

According to Experian, there’s one major difference between chapter 7 and chapter 13 bankruptcy: Whether or not you’ll have to pay back at least some of your outstanding debt. Those who file chapter 13 bankruptcy usually have regular income or financial assets, so they elect for partial debt repayment. For this reason, the bankruptcy public record only stays on your credit report for seven years from your filing date. Under chapter 7 bankruptcy, you don’t have to repay outstanding unsecured debt (except for student loans). As a result, the bankruptcy public record stays on your credit report for 10 years after your filing date.

Five Little-Known Bankruptcy Benefits

Regardless of which chapter you choose, here are five bankruptcy benefits you can look forward to after you file:

1. You’ll protect at least some cash to pay for urgent expenses.

Declaring bankruptcy means you’ll instantly have more cash on hand to pay for anything you need to live. This includes expensive medical treatments, which are still the largest issue driving personal bankruptcy filings in the United States. That said, the Affordable Care Act did cut bankruptcy filings in half since its implementation, according to a Consumer Reports study.

2. You’ll enjoy some tax deductions.

According to the Internal Revenue Service, you can deduct some surprising bankruptcy-related costs from your income taxes! For example: When another person or entity either cancels or forgives debt, the IRS sees that amount as taxable income. If that same debt’s discharged through a bankruptcy proceeding, however, the forgiven amount doesn’t count towards your taxable income. In other words, if you discharge $30,000 in credit card debt through chapter 7 bankruptcy, your taxable income won’t go up by $30K.

Furthermore, the bankruptcy estate (i.e., you) can also list any administrative expenses and fees as deductions on your income taxes. These typically include accounting fees, attorney fees, and court costs. After you file for chapter 7, you’ll also get an automatic six-month extension for filing your bankruptcy estate tax return.

3. You’ll live longer.

Stress kills, and worrying about money tops many people’s list. chapter 13 bankruptcy adds 30% to your lifespan after your filing’s approved, according to the National Bureau of Economic Research. The study also found debtors receiving chapter 13 protection reported 25.1% higher annual earnings in the five-year post-filing period. Those with unapproved chapter 13 filings earned $5,562 less annually during that same five-year timeframe. This proves that declaring bankruptcy benefits more than just your bottom line!

4. You’ll secure your most important financial assets.

Bankruptcy exemptions vary by state, but in most cases, you’ll keep key financial assets safe from repossession or foreclosure, including:

• Your home
• Clothing, including work uniforms
• Household goods, appliances and your wedding rings/most jewelry
• Important items you need for employment reasons, such as tools, musical instruments, equipment, etc.
• Health aids and medical devices (wheelchair, cane, mobility walker, glasses, etc.)
• Your primary vehicle

Stopping foreclosure proceedings on your home and protecting your car from repossession may be two of the biggest bankruptcy benefits. In fact, the moment you file, any current proceedings against your home or vehicle must stop immediately.

5. Creditors and debt collectors must immediately stop calling you.

Many people who’ve fallen into debt hate answering the phone — and for good reason. Creditors (or worse, debt collectors) calling at all hours would make anyone hesitant to pick up. Ending those calls is of the first bankruptcy benefits most people look forward to when declaring personal bankruptcy.

Biggest Bankruptcy Benefits: Less Debt, Greater Financial Literacy

When you declare bankruptcy, you’re forced to deal with the root problem that’s causing your financial stress. Whether you have low financial literacy and/or poor spending habits, federal law says all bankruptcy candidates must undergo credit counseling. This is true for both chapter 7 and chapter 13 filings. In fact, you’ll need to complete two separate requirements before filing personal bankruptcy, according to UScourts.gov, which include:

• Pre-bankruptcy credit counseling and
• Pre-discharge debtor education.

You’ll need to complete your credit counseling course within six months prior to filing bankruptcy. After you’ve filed, you’ll need to fulfill your debtor education requirements to complete your chapter 7 or chapter 13 bankruptcy.

If this all sounds like more information than you can process, a qualified attorney can explain all the ways that declaring bankruptcy benefits you personally. What’s more, an attorney can file your paperwork, help you decide which chapter best meets your financial needs, and offer legal advice.

To learn more about filing bankruptcy without attorney involvement, visit USCourts.gov. And if you live in Florida, sign up for your free consultation to speak with a nearby bankruptcy lawyer now.

Which Type of Bankruptcy May Benefit You?

For most individual consumers, the two primary bankruptcy options are Chapter 7 and Chapter 13.

Chapter 7 is sometimes called a “liquidation” bankruptcy. A Chapter 7 trustee is appointed to review the debtor’s financial affairs and determine whether the bankruptcy estate contains nonexempt assets that can be administered for the benefit of creditors.

Many Chapter 7 cases are “no-asset” cases in which the debtor’s available exemptions protect the debtor’s property and there are no nonexempt assets available for distribution to unsecured creditors.

In exchange, qualifying debtors can generally receive a discharge of many types of unsecured debt, including credit-card balances, medical bills, personal loans, and certain judgments.

Chapter 13 works differently.

Chapter 13 allows an individual with regular income to propose a court-supervised repayment plan, generally lasting three to five years. Depending upon the debtor’s circumstances, the plan may be used to catch up delinquent mortgage payments, address vehicle loans, pay certain tax obligations, protect assets, and pay some or all unsecured creditors.

Importantly, Chapter 13 does not necessarily require repayment of all outstanding debt. The amount unsecured creditors receive depends upon numerous factors, including income, expenses, assets, exemptions, and the requirements of the Bankruptcy Code.

Which chapter is appropriate depends on the debtor’s individual financial circumstances.

1. Bankruptcy Can Stop Many Collection Activities

One of the most immediate potential benefits of filing bankruptcy is the automatic stay.

Under 11 U.S.C. § 362, filing a bankruptcy petition generally creates an automatic injunction against many collection activities.

Depending upon the circumstances, the automatic stay may stop or temporarily prevent:

• Collection lawsuits;
• Wage garnishments;
• Bank-account levies;
• Collection calls and letters;
• Repossessions;
• Foreclosure proceedings; and
• Other efforts to collect pre-bankruptcy debts.

For someone dealing with multiple creditors, lawsuits, garnishments, or constant collection activity, the automatic stay can provide immediate breathing room while the bankruptcy case proceeds.

However, the automatic stay has important exceptions and limitations. It does not stop every type of legal proceeding, and creditors can sometimes ask the bankruptcy court for permission to continue collection activity against particular property.

The protection may also be limited for debtors who have had previous bankruptcy cases dismissed within certain periods before filing.

2. Bankruptcy Can Eliminate Many Types of Debt

The bankruptcy discharge is one of the principal benefits available to qualifying debtors.

A discharge generally eliminates the debtor’s personal legal obligation to pay debts that are dischargeable under the Bankruptcy Code.

Common debts that may be discharged include:

• Credit-card debt;
• Medical bills;
• Personal loans;
• Certain older financial obligations;
• Certain judgments; and
• Other qualifying unsecured debts.

However, not every debt can be discharged.

Depending upon the circumstances, debts that may survive bankruptcy include certain taxes, domestic-support obligations such as child support and alimony, many government fines and penalties, and debts determined to be nondischargeable because of fraud or other conduct specified by the Bankruptcy Code.

Student loans also receive special treatment. Educational debt is not automatically eliminated simply because a debtor files bankruptcy. Obtaining a discharge of qualifying student-loan debt generally requires additional proceedings and satisfaction of the applicable legal standard.

The discharge is therefore powerful, but its effect depends upon the particular debts involved.

3. Bankruptcy Can Provide Favorable Tax Treatment for Discharged Debt

This benefit is frequently misunderstood.

Ordinarily, when a creditor cancels or forgives debt outside bankruptcy, the canceled amount may constitute taxable income under federal tax law.

Debt discharged through bankruptcy, however, generally receives different treatment.

Under applicable federal tax law, debt canceled in a bankruptcy case is generally excluded from the debtor’s gross income. This can be important because a debtor who receives a discharge of substantial credit-card or other qualifying debt ordinarily does not simply add the discharged amount to taxable income because of the bankruptcy discharge.

For example, if a debtor receives a bankruptcy discharge eliminating $30,000 in qualifying credit-card debt, the $30,000 generally is not treated as taxable cancellation-of-debt income merely because it was discharged in bankruptcy.

This is an exclusion from income, not simply a bankruptcy “tax deduction.”

Bankruptcy can create other complicated tax consequences, particularly when a Chapter 7 bankruptcy estate has assets, a debtor owns a business, property is sold, or tax attributes are affected. Debtors with significant tax issues should consult an experienced bankruptcy attorney and, when appropriate, a qualified tax professional.

4. Bankruptcy May Help You Protect Important Property

Another common misconception is that filing bankruptcy means losing everything you own.

That is not how bankruptcy ordinarily works.

Federal and state exemption laws allow qualifying debtors to protect certain property from administration by the bankruptcy estate. Exactly what can be protected depends upon the applicable exemption system, residency requirements, the type of property involved, its value and equity, liens against the property, and the debtor’s individual circumstances.

Depending upon applicable law, exemptions may protect some or all of a debtor’s interest in property such as:

• A primary residence;
• A motor vehicle;
• Household goods and furnishings;
• Clothing and personal belongings;
• Certain retirement accounts;
• Tools used in a trade or profession;
• Certain insurance benefits;
• Health aids and medical equipment; and
• Other property protected by applicable exemption law.

Florida, for example, has its own exemption laws, including significant potential homestead protections when the applicable constitutional and statutory requirements are satisfied.

However, exemptions do not necessarily prevent a secured creditor from enforcing a valid lien.

For example, bankruptcy does not ordinarily allow a debtor to keep a financed vehicle indefinitely without addressing the creditor’s secured claim. Likewise, the automatic stay may temporarily stop a mortgage foreclosure, but filing Chapter 7 does not permanently eliminate a valid mortgage lien.

Chapter 13 can sometimes provide additional options for debtors who want to keep a home or vehicle, including the ability to cure certain mortgage arrears through a repayment plan.

Whether bankruptcy can protect a particular asset should therefore be evaluated before the case is filed.

5. Bankruptcy Can Stop Many Creditor and Debt-Collection Calls

For people struggling with debt, repeated collection calls, letters, lawsuits, and demands for payment can become overwhelming.

The automatic stay generally prohibits creditors from continuing most efforts to collect pre-bankruptcy debts directly from the debtor after the bankruptcy case is filed.

Creditors who receive notice of the bankruptcy generally must stop prohibited collection calls, collection letters, lawsuits, garnishments, and similar activity while the stay remains in effect.

After the debtor receives a discharge, the discharge injunction generally replaces the automatic stay with respect to discharged debts. Creditors are then prohibited from attempting to collect those discharged obligations as the debtor’s personal liability.

There are exceptions, and secured creditors may retain rights against collateral even when the debtor’s personal liability is discharged. But for many debtors, ending collection activity is one of the most immediate and noticeable benefits of bankruptcy.

Bankruptcy Can Provide an Opportunity for a Financial Fresh Start

The purpose of consumer bankruptcy is not to punish people experiencing financial difficulty. One of its fundamental objectives is to provide qualifying debtors with an opportunity for a financial fresh start.

Bankruptcy cannot erase every financial problem, and rebuilding credit takes time. But eliminating or restructuring overwhelming debt can allow a debtor to redirect income toward current living expenses, savings, housing, transportation, and other financial priorities.

Bankruptcy law also includes financial-education requirements.

Generally, an individual debtor must complete an approved credit-counseling course during the 180-day period before filing bankruptcy, subject to limited statutory exceptions.

After filing, an individual seeking a discharge generally must also complete a separate financial-management or debtor-education course within the applicable deadline.

These are two separate requirements:

• Credit counseling — generally before filing; and
• Debtor education/financial management — after filing and before receiving a discharge.

Failure to satisfy these requirements can interfere with a debtor’s ability to successfully complete the bankruptcy process.

Is Bankruptcy Right for You?

The potential benefits of bankruptcy can be significant, but the decision should be based on your particular circumstances.

Before filing, it is important to consider:

• The amount and type of debt you owe;
• Your income and household expenses;
• Whether you qualify for Chapter 7;
• Whether Chapter 13 may provide greater protection;
• Your home and other assets;
• Available exemptions;
• Secured debts;
• Recent transfers or financial transactions;
• Tax obligations;
• Previous bankruptcy cases; and
• Whether important debts will actually be dischargeable.

Bankruptcy can provide powerful protections, but filing the wrong chapter—or filing without understanding how bankruptcy will affect your property and debts—can create avoidable problems.

An experienced bankruptcy attorney can evaluate your financial circumstances, explain the advantages and disadvantages of each available option, and help determine whether bankruptcy is an appropriate path toward financial recovery.

Individuals considering filing without an attorney can also review bankruptcy information and resources provided by the United States Courts.

If you live in Florida and are considering bankruptcy, you can schedule a consultation with a Florida bankruptcy attorney to discuss your financial circumstances and determine which options may be available to you.

 

Share this story: