Bankruptcy FAQ

Bankruptcy, Educational Loan

Q. Is education loan secured?  I have a delinquent loan from the U.S. Department of Education and I want to file chapter 7. Is it a secured creditor?

A. It is most likely not a secured debt. However, student loans creditors are preferred creditors and the loan will not be discharged in bankruptcy unless some very limited and severe circumstances can be shown to the bankruptcy court in a proceeding within the chapter 7 petition that would warrant a discharge.

Cost of Bankruptcy

Q. How much does it cost to file myself, jointly with spouse (soon to be ex) or through an attorney? How does one afford this? Are there plans available?

A. It is highly dependent on your situation and you firm must qualify for Chapter 7 or Chapter 13 (or, I guess, Chapter 12, if you are a farmer). That is a fairly engaged process, so you need to consult attorney to find out what he or she would charge for your specific case. Generally, it is my experience that the fees for Chapter 7 (without complications or creditors objecting or filing adversary proceedings against the debtor) usually range from $1500 to $3000 and for Chapter 13 (with the same disclaimer) – $3,500 and up.

1099-C, Discharge, Forgiveness of Debt

Q. When a debt has been charged off by a bank (lender) how long does the bank have to file a 1099-C with the IRS? Say a credit card debt was charged off/ account closed 2-3 years ago, how long does the bank have to file with the IRS the 1099-C? Is there a time required of the bank to do this legally correct? What if the bank does not file the 1099-C until 2-3 years after the account has been closed, is it legally correct (okay)?

A. The form would have to be issued for the tax year in which the forgiveness occurred. However, when the debt is discharged in bankruptcy, there is no requirement to issue 1099-C. There is no income tax implications to the debtor associated with the debt discharged in bankruptcy.

Q. The credit card has offered to accept one-half of $10,000 balance in settlement of the entire debt. Is this a good deal?

A. It certainly sounds as a good deal.  You need to consider, however, that at the end of the calendar year, the credit card company will issue 1099-C form to you and the amount forgiven ($5,000 in your case) will need to be added to your income and be subject to income taxes in accordance with your tax bracket.  If you were to file for bankruptcy or be insolvent (under the federal law) at the time of forgiveness, you do not need to add the amount to your income.

Student Loans, Dischargeability

Q. I have about $150,000 worth of student loans. I’m a single mother and wondering if bankruptcy is an option I should look into.  My child is getting older and I would like the opportunity to improve my credit so that I may be able to get a home at some point, so that my kid can have a home to enjoy.

A. Unfortunately, the student loans are not dischargeable except for very limited circumstances, where you would be able to show the court that the hardship and your specific circumstances would never improve and the loans would never be paid back. This is usually limited to those people who became disabled and other extreme circumstances.

Discharge, Property Exemption, Property with Negative Equity

Q. What happens to my motorcycle in a chapter 7 if it has negative equity? I am current on payments and need it for transportation.

A. The negative equity can be exempt in bankruptcy petition and you can keep the motorcycle.  You will have to continue to make payments because the bank may still repossess if you fail to pay them.  The lender may want you to execute the reaffirmation agreement, but you should be able to keep the motorcycle even without signing one, so long as you are current on your payments.  The local attorney will be able to explain the details to you, so please seek a consultation.