Can I Choose What to Include in My Bankruptcy?

Many people ask me if they can choose what to include in their bankruptcy. The answer is, it depends. Yes, a bankruptcy filer is free to choose what they would like to do with secured assets. A Statement of Intention is required to be filed in Chapter 7 cases. This Statement of Intention is a form completed by the debtor that discloses to the court, the Trustee, and your creditors what you intend to do with your secured collateral such as your home or car. The Statement of Intention requires you to state whether 1) the property will be retain; or 2) surrendered.

If you choose to retain an asset then you must continue to pay for it. Notice will be given to the creditor of your intentions to retain and pay for the collateral. Alternatively, if you choose to surrender property the notice is given to the creditor and they are given notice of your intentions to surrender the property.

Secondly, when people ask: Can I choose what debts to list in my bankruptcy? No, you cannot choose to exclude certain assets or debts from being disclosed to the bankruptcy court. Failure to disclose all of your assets is a felony and is punishable by up to five years in prison. You cannot simply leave assets or debts off of your bankruptcy Schedules for personal benefit. But remember just because you disclose an asset on your bankruptcy schedules doesn’t mean that you will necessarily have to give them up.

Can I Discharge Tax Debt in Bankruptcy?

Is tax debt dischargeable in bankruptcy? Generally the answer is no, however, there are exceptions to this rule. If the debt is not discharged then it will still be owed at the end of a chapter 7 bankruptcy or you’ll have to repay them in full in a Chapter 13 bankruptcy repayment plan.

Dischargeable Tax Debt

You can discharge debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are met:

1. The due date for filing a tax return is at least three years ago.

2. The tax return was filed at least two years ago.

3. The tax assessment is at least 240 days old.

4. The tax return was not fraudulent.

5. The taxpayer is not guilty of tax evasion.

Nondischargeable Tax Debts

The following type of non-income-related tax debts cannot be discharged in a Chapter 7 bankruptcy:

Tax liens. A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. However, tax liens, also known as secured taxes, will remain attached to your property. This rule applies only to tax liens recorded against your property before you file for bankruptcy. This means that although you might not be personally liable for the tax debt, you’ll have to pay the lien from any profits when you sell the property.

Recent property taxes. If a property tax is incurred before you file for bankruptcy, the tax is non-dischargeable. However, this only applies to property taxes last payable within one year of your bankruptcy filing. You can discharge your personal liability for property taxes that were payable more than one year before your bankruptcy filing. Keep in mind, though, that many counties attach a lien to your property upon assessment or one year afterwards. If you have a lien against your property for the property tax, that lien will remain after your Chapter 7 discharge.

Taxes that a third party is required to collect or withhold. This covers the so-called “trust fund” taxes such as FICA, Medicare, and income taxes than an employer must withhold from the pay of employees, and sales taxes paid by the debtor’s customers that the debtor is required to send to a governmental unit.

Certain employment taxes, excise taxes, and custom duties, depending on specific time periods.

Non-punitive tax penalties on nondischargeable taxes if the transaction or event that sparked the penalty occurred less than three years before filing the bankruptcy petition.

Erroneous tax refunds or credits relating to nondischargeable taxes.

Trustee Now Holding Funds for the Estate

If you end up turning money or assets over to the trustee then you case will be held open for much longer. If your Trustee receives funds then they must go through a lengthy process to distribute those funds to qualified creditors. There are four main steps that will occur during this process.

First, your Trustee will file a report stating that they are now holding funds. The entry on the Court docket will read; “the Trustee reports that he or she now holds funds of this bankruptcy estate or expects to receive funds which should result in a dividend to creditors who were previously instructed not to file claims. The Trustee hereby requests that the Court fix the last date for filing proofs of claim and that notice be given to creditors.”

Second, the Arizona Bankruptcy Court will file a “NOTICE FIXING LAST DATE TO FILE CLAIMS”. This notice informs creditors that they have 90 days to file a Proof of Claim with the Court and request a piece of the money that your bankruptcy trustee is holding.

Third, once the Notice to file a Proof of Claim has been sent out to creditors, your creditors have just 90 days to file a Proof of Claim with the Bankruptcy court.

Fourth, your Trustee will disburse funds to qualified creditors. In addition to creditors who file a Proof of Claim with the court, your Trustee will also reimburse themselves for all their time and costs involved in administrating your case. They also will make payments to any bankruptcy law firms that were hired to help them with your case. However, before your Trustee can reimburse themselves or co-counsel they must file an Application for Compensation with the Bankruptcy court.

Unfortunately, this entire process takes at least a year! During which time your bankruptcy is deemed to be “open” even if you have received your discharge.

Discharge Contract in Bankruptcy

Generally speaking, courts do not like agreements to make a debt non-dischargeable in bankruptcy. Bankruptcy courts have been unreceptive to the use of consent decrees and settlement agreements which attempt to create, by contract, a debt that will be nondischargeable in the bankruptcy of an individual.

Waivers of Discharge

Even the U.S. Supreme Court has held that waivers of discharge are unenforceable. A creditor cannot contract away a debtor’s right to defend his right to a debt discharge by using “boilerplate” covenants of nondischargeability. Occasionally a creditor will slip language into a contract that says something like: “I understand that this debt is still owed even if I file bankruptcy”.  Often this language is put into contracts used by less reputable creditors like Payday lenders or title companies.  Their hope is that the debtor will believe they are obligated to pay the debt even if they file bankruptcy.

If simply putting this language into a contract would keep the debt from being discharged in bankruptcy then every lender in the country would put that same language into every contract they entered into.  Additionally, this would completely negate the whole purpose behind personal bankruptcy.

Settlement Agreements

Settlement agreements are typically used to bring an end to parties’ disputes and provide a clear outline of the parties’ respective rights and obligations going forward.  Attorneys representing creditors will often spend a great deal of time and energy in trying to ensure that settlement agreements will actually be enforceable.

While, covenants in a settlement agreement that provide for the debtor to waive his right to a discharge are unenforceable as against public policy, creditors will still include such covenants in their settlement documents because this is an evolving area of law.  Because settlements agreements related to a fraud claim may provide a narrow exception to the normal rule of discharge ability.  If a debtor admits to fraud in a settlement agreement and later files bankruptcy the creditor may try and use the settlement agreement as the basis of a §523 action in bankruptcy court.

If you signed a nondischargeability agreement and want to know what your rights are then call us at: or 480-389-6529 for a free consultation with a Phoenix bankruptcy attorney.

What if I Don’t Pass the Means Test?

The means test was introduced to the Bankruptcy Code in 2005. It is designed to limit those individuals eligible to file for Chapter 7 bankruptcy. The Chapter 7 bankruptcy means test compares your current monthly income against the median income for households similar in size. The means test looks at the average household income over the six months prior to filing. However, not all income is considered in the means test. Social security income, social security disability, veteran’s disability benefits, and child support payments are not considered. Conversely  income from; employment, gifts, financial assistance from others, and income from a non-filing spouse are included in the calculation.

If you household income exceeds the median income for households of a similar size in your state you still may be able to qualify for a Chapter 7.  This is because certain expenses are deducted from your current monthly income in order to determine your net monthly income. Now not all expenses are qualifying expenses, however, the following kinds of costs can be deducted: child support, alimony, tax withholding costs, health savings account, garnishments, certain utilities and several other types of expenses.

However, if you still do not qualify for a Chapter 7 even after deducting the qualified expenses you can still file bankruptcy. For most people who do not qualify for Chapter 7 bankruptcy because of their high income file Chapter 13 bankruptcy. Chapter 13 bankruptcy is a reorganization of your debts. The bankruptcy lasts for 3 to 5 years during which time you make payments to your creditors. At the end of the bankruptcy whatever balances are left over will be discharged.