When You are Considering Bankruptcy

Bankruptcy is a legal action that you can take to free yourself from all or part of your debts.

In a straight bankruptcy ("Chapter 7" or "Liquidation" bankruptcy) a debtor is released or "discharged" from some or all of the debts. A debtor is allowed to keep exempt property. For Oregon residents, the exemptions you can claim in bankruptcy are mostly the same as the exemptions from garnishment listed in "Exempt Oregon Wages, Money, and Property." All other property is sold to pay off the debts. Property that you are buying on credit usually must be returned to the creditor.

If you previously discharged your debts through a Chapter 7 bankruptcy, you will not be allowed to discharge new debts through another Chapter 7 for eight years. The eight years starts to count on the date you filed for bankruptcy in the earlier case. If you filed for bankruptcy under "Chapter 13" during the last six years then you may also have to wait before you can discharge new debts in a Chapter 7 case. Bankruptcies may affect your credit rating for ten years.

Questions you should ask if you're thinking about filing for straight bankruptcy.

1) Are your debts larger than your income and the value of your property?

If not, you may not be able to discharge your debts.

2) Are your debts for child support, spousal support, taxes, or school loans?

Usually, you cannot discharge unpaid child support.

Personal income taxes may be discharged if (1) you filed a tax return for the year in which you earned the taxable income; (2) the return was not fraudulent; (3) more than two years have passed since you filed the return; (4) more than three years have passed since the tax was due to be paid (taxes usually must be paid on April 15^th of the year following the year in which the income was earned); and (5) the Internal Revenue Service assessed the tax at least 240 days before the date you filed bankruptcy. For example, taxes for income earned in 1998 were due to be paid on April 15, 1999. Three years from April 15, 1999 is April 15, 2002. If you filed your tax return sometime before April 15, 2000, you could usually discharge your tax liability in a bankruptcy filed on April 16, 2002.

Most educational debts, such as student loans, are not dischargeable in bankruptcy unless you are able to prove that the denial of a discharge would cause you and your dependents an undue hardship. This means that (1) your income does not exceed your expenses by such an amount that you can pay the debt and still maintain a minimal standard of living; (2) you have made a good faith effort to increase your income and reduce your expenses; and (3) there are special circumstances that make it unlikely that your inability to make payments on your debt will continue for the term of the debt. Even if all of these elements exist, you must raise and prove them in a special proceeding during the bankruptcy process.

3) Do you expect to have more debts soon?

If so, it may not be a good idea to file for bankruptcy at this time. Your bankruptcy petition should include all the debts that you have. You can only file for straight bankruptcy once every eight years; you won't be able to bankrupt any additional debts during that eight year time period.

4) Are you judgment proof?

If so, it is probably not a good idea to file for bankruptcy at this time. If you owe money for unpaid bills, your creditors can get judgments against you. But, if you are judgment proof, creditors cannot collect on the judgments. As long as you are judgment proof, you don't need bankruptcy to protect your income and property from your creditors. See What it means to be judgment proof.

5) Are you entitled to tax refunds?

If you file for bankruptcy before the time you receive and spend any state or federal tax refunds to which you are entitled, the right to these refunds will transfer to the bankruptcy trustee. In this situation, you may exempt the first $400 of any refunds (or usually $800 if you are married and you and your spouse file bankruptcy) to which you are entitled on the date you file bankruptcy, but the trustee would be entitled to any excess amount. So, if you expect to receive a refund of state or federal taxes which will exceed $400 (or $800 if applicable), you may wish to consider delaying bankruptcy until after you receive and spend the refunds. The right to receive a federal earned income credit is totally exempt. This can be a complicated matter. If you received more than $800 in tax refunds in the prior year, contact a lawyer who specializes in bankruptcy for advice about this issue.

For more information about the answers to these questions and for advice as to whether bankruptcy is a good idea in your situation, you should talk with a lawyer who specializes in bankruptcy cases.

What is a Chapter 13 Plan?

A Chapter 13 plan is another type of case you may file in bankruptcy court. With a Chapter 13 plan the judge can require your creditors to take payments through a payment plan that lasts three to five years. You must have a regular income to make payments under the plan.

With a Chapter 13 plan, you usually don't have to pay all of your creditors the full amount this is owed. You may also be able to keep non-exempt property.

Do you need a lawyer in a bankruptcy case?

Many companies sell forms and booklets for people to use in filing for bankruptcy on their own. But bankruptcy rules can be complicated and mistakes might mean that you still owe on bills that you thought were bankrupt. It is a good idea to consult with an attorney.

In addition, bankruptcy can affect your ability to buy a car, a house, or other property for at least ten years. An attorney can help you decide if filing for bankruptcy is the best solution in your situation.

For information about bankruptcy or for help in a bankruptcy case, you should contact a lawyer who specializes in bankruptcies.

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