Bankruptcy Chapter 7
A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in Chapter 13 bankruptcy. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain "exempt" property; but a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors should realize that the filing of a petition under Chapter 7 may result in the loss of property.
Tax Debt Discharges in Chapter 7
You can discharge your tax debt if:
- The taxes you owe are at least three years old.
- The tax return for those taxes was filed at least two years ago.
- The tax assessment is at least 240 days old.
- Your tax return was not fraudulent.
- You are not guilty of tax evasion.
Consumer Debt You Can Possibly Discharge Under Chapter 7
- Auto accident claims
- Business debts
- Credit card debt
- Debts incurred through embezzlement or larceny
- Leases
- Monetary judgments against you
- Personal injury claims
- Personal loans
- Repossession deficiencies
Nondischargeable Tax Debt
Owed taxes less than three years old cannot be discharged through Chapter 7, but may be discharged under Chapter 13 bankruptcy. Similarly, owed taxes may not be discharged in Chapter 7 if they are older than three years but no tax returns were filed for those years, but they may be discharged in Chapter 13 bankruptcy.
Bankruptcy Chapter 7 Does Not Allow You To Discharge These Items:
- Criminal fines and debts
- Debts that are not listed
- Dischargeable debts incurred to pay off nondischargeable debt
- Divorce settlements (property)
- Fraudulent debts
- Spousal support or child support
- Student loans
- Tax debt from within 3 years
Avoidance of a Lien
The avoidance of a lien is related to claiming an exemption in bankruptcy. Under normal circumstances, a debtor filing for personal bankruptcy is allowed to exempt certain property from the bankruptcy estate. If a judicial lien exists against this property, the bankruptcy court can remove the lien to the extent that the claim of exemption is being impaired by the lien. Therefore, it is possible to completely eliminate or partially avoid a lien. The debt underlying that lien would be discharged as well, leaving the property fully protected in the hands of the debtor.
Consensual and Nonconsensual Liens
There are two types of liens: consensual and nonconsensual. A consensual lien is where you have agreed to use an asset as collateral for a debt. Mortgages and auto loans are good examples of consensual liens. Consensual liens on real estate, like mortgages, are typically not capable of being avoided.
A nonconsensual liens are liens that a creditor imposes on you and that essentially gives them the right to force you to sell the asset so they get paid. Liens arising out of personal injury judgments or taxes are good examples of nonconsensual liens.
One of the main criteria for avoiding liens is that the asset to which the lien is attached must otherwise qualify as an allowable exemption under normal circumstances. Consensual liens against houses can be avoided if the house value is less than the value of the lien. This is becoming more and more common as housing prices continue to fall. Nonconsensual liens that possibly can be avoided include judicial liens on exempt property and liens involving a homestead exemption.
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