The Effects Of Bankruptcy On Your Home, Credit Score, And Taxes
Financial insecurity can happen to almost anyone. Even financially responsible people can incur mounting debt after an unexpected employment loss, an injury, or a long-term illness. Interest payments and fees on credit cards alone can be enough to make an individual feel the ever-increasing burden of debt.
When you find yourself facing debt that feels insurmountable, bankruptcy relief might be a way to reclaim your financial stability. Individual consumers who are considering filing for bankruptcy generally have two options: Chapter 7 and Chapter 13. Let’s explore both options more before we detail how each could affect your real property, credit score, and tax returns.
Chapter 7 And Chapter 13 Bankruptcy Relief
Chapter 7 bankruptcy relief (also known as straight bankruptcy or liquidation) is the most common. The debtor must give up certain property, which will then be sold to pay their creditors. Chapter 7 is designed to eliminate the majority of your debt but allow you to retain assets, which generally means a fresh financial start for the debtor. In most cases, individuals are able to keep their homes and cars as they discharge debt from credit cards, car loans, medical bills, utility bills, wage garnishments, judgments, and lawsuits. Individuals must pass a means test to qualify for Chapter 7; in other words, they must show they do not earn enough income to be capable of repaying their debts on top of their standard living expenses.
Chapter 13 bankruptcy relief, also known as debt reorganization or debt adjustment, offers people struggling with their bills a way to pay past-due payments to creditors over time, while also eliminating some of their debt. The individual’s debt is consolidated, meaning they pay one amount on a regular basis. To qualify for Chapter 13, an individual’s income must be sufficient enough to allow them to commit to the repayment obligation (this income would be too high for them to be eligible for Chapter 7).
Now let’s look at the impact bankruptcy can have on your real property, credit score, and tax return.
Most people who file bankruptcy in California do not lose their home or car during their bankruptcy case. Your ability to keep your home will depend on whether your equity in the property (or the difference between the property’s value and what is still owed) is fully exempt under California’s two exemption systems. If your home is secured by a loan, you are current on your mortgage payments, and the equity is covered by your exemptions, then you can elect to keep making payments on the loan and retain the property. Going forward, you would need to continue making monthly mortgage payments to avoid having your lender file for foreclosure.
If, on the other hand, the equity is not covered, your home may be liquidated to repay creditors with the proceeds of the sale. Alternatively, you could pay the trustee the value of your non-exempt property in order to keep it.
Under Chapter 7, your bankruptcy trustee could sell your home to pay back your creditors if your home’s equity is more than the exemption. In most cases, however, the California Homestead Exemption protects your home’s equity. An individual must pay in order to keep the collateral on a house or car and avoid having secured loans discharged. If you have a great deal of equity to protect, Chapter 13 might be the more favorable option, as it allows you to protect secured assets like your car and your home as long as your income is high enough to allow for monthly payments on your debt.
For real property (vacant land, buildings, and homes), if you had a recorded state tax lien before you filed bankruptcy, then the lien may remain in place even if your personal liability for the debt is removed.
If your home is an important asset that you would like to keep, the best way to meet that goal is by consulting an experienced bankruptcy attorney here in Ventura, California.
Your Credit Score
The impact on your credit score will depend on what your score was prior to filing bankruptcy, as well as which type of bankruptcy relief you file. If you’ve been consistently late on your bills, the chances are your credit score is already low, and filing will certainly not make your score worse. While your declaration of bankruptcy can appear on your credit record for up to ten years, you are still in a better position than you’d be if you were saddled with debt. You may even be able to get new credit.
If you managed to maintain a good credit score while your debt accumulated, a bankruptcy could significantly lower your credit health. Those with a score of 700 or higher could stand to lose 200 points.
Chapter 7 can be noted on your credit report for up to ten years, while Chapter 13 will remain for up to seven. Between Chapter 7 and Chapter 13, the former will have a more negative impact on your creditors, which means you’re now considered a higher credit risk. That will make your score take a larger hit than it would with Chapter 13, where your creditors can expect to be repaid in three to five years.
It’s important to note that under federal law, you cannot be discriminated against by the government or by private employers for having filed a bankruptcy petition. While your credit score may be negatively affected, filing bankruptcy is not a black mark on your personal record, nor is it a crime. You have the legal right to be provided relief from debt.
Once you have filed for bankruptcy, it’s up to the bankruptcy court in California to decide how much, if any, of your tax debt will be reduced. Certain taxes are not dischargeable, including income taxes incurred within the three years prior to filing for bankruptcy.
Once the government is made aware that you’ve filed for bankruptcy, it immediately stops collection attempts from the IRS or the state on your tax debt, including liens, wage garnishments, and seizures. This protection against tax collection runs the duration of the bankruptcy case, which means three to six months for Chapter 7 and three to five years for Chapter 13. Even though you’ve filed for bankruptcy, you’re still required to file a personal income tax return each year and will be responsible for present taxes owed.
In regards to expected refunds, what happens to your refund will depend on the refund tax year and the timeline of the debt. Those refunds from the year before you filed for bankruptcy could be taken and used toward your tax debt. Other refunds could be considered an asset in your bankruptcy case or held until your case is closed.
Under Chapter 7, priority tax debts that cannot be discharged must be paid in full over time. Other tax debts are treated as general unsecured debts and are paid to the extent that your income allows. The IRS has a payment program to help with past-due taxes.
Under Chapter 13, tax debts that have been due for less than three years are paid through the timeline of your repayment plan. Those taxes that are dischargeable are paid based on your disposable income, often for pennies on the dollar. Should your financial circumstances change, you can go through the appropriate channels to adjust your plan payments. The flexibility of repayment under Chapter 13 can make the burden of tax debt feel more manageable.
It’s important to speak with an experienced bankruptcy attorney to determine whether Chapter 7 or Chapter 13 would be better for you based on the amount of tax debt you owe and your current ability to make payments.
Bankruptcy Expert For Ventura, California, At Your Service
If you’re considering bankruptcy as a means of freeing yourself from crippling debt, you need an expert attorney who is dedicated to getting you positive results. Whether you choose to file Chapter 7 or Chapter 13 or go an entirely different route, you’ll need the help of someone with experience handling creditors and bankruptcy judges both in and out of the courtroom.
In the last three decades, attorney Janet Lawson has helped hundreds of individuals in Ventura, CA, free themselves from the burden of debt. After a one-on-one consultation, she can determine which route is best for your financial future based on your personal situation and goals. If you decide to move forward with a bankruptcy petition, her office will file your case within 24 business hours of completion and keep you informed regarding the progress of your case. She works for a flat fee so that clients are not discouraged from using her expert services to assist in their filing process.
When you’re reading to rid yourself of crippling debt, contact attorney Janet Lawson for your free initial consultation with a bankruptcy professional.
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