Bankruptcy Basics - Should you file?

We post quite a few articles about the TCPA, FDCPA, and other consumer based legal issues, but clients have been telling us that some basic information about bankruptcy would be helpful. So here’s a brief rundown of some of the questions clients often have.  Keep in mind this is not an exhaustive list, nor custom tailored to a consumer’s specific needs. But, it does answer some of the main questions our clients usually have about bankruptcy.

WILL I HAVE TO WEAR A SCARLET B FOR THE REST OF MY LIFE?

One of the biggest concerns potential bankruptcy clients have is if filing bankruptcy will negatively impact their life. They’re often reticent to file bankruptcy because of the perceived stigma associated with it. Will they have to wear a Scarlett Letter like Hester Prynne? Here’s the thing. The success of America is based in part on bankruptcy. In the 1800’s bankruptcy law was established in America so people would take risks. Europe didn’t have bankruptcy at that time. So, if you were an inventor with a great idea, you had better be sure it will sell. If not, you were sent to debtor’s prison. Not so in America, where you could take a risk and not be saddled with lifetime debt if it didn’t work out. Why was that important? Henry Ford (cars), The Wright Brothers (airplanes), Thomas Edison (electricity). None of these great inventions would have come to be without the protection bankruptcy afforded.

CAN I KEEP MY HOUSE?

In most cases, yes. In 2021 the Washington legislature increased the homestead exemption amount. Previously you could only exempt $125,000.00 of equity in your home. Now you can exempt the medium sale price of your county. What does that mean? Well in King County that means you can exempt almost $900,000.00 of equity in your home. That means you don't have to sell the house to pay off creditors in bankruptcy. You simply sign a reaffirmation agreement with your lender, and that keeps your house, and its equity, out of your bankruptcy.

WHAT DEBT CAN BE DISCHARGED?

Most consumer debt (i.e. credit cards, loans, etc) can be discharged in bankruptcy.  This is called “unsecured” debt. What is secured debt? That’s any debt that has an item attached to it as collateral. A car you’re making payments on is a good example. You can usually keep things like cars in bankruptcy through a reaffirmation agreement. There is however a “big three” of sorts when it comes to non-dischargeable debts.

Taxes are the first. “Render unto Caesar” as the saying goes. The Government will always enforce tax debts. The good news is bankruptcy can clear out other debts and allow you to work with the IRS and set up a manageable long term repayment program.  

Student loans are the second. There is a general rule that they are non-dischargeable in bankruptcy. However, they can be discharged in certain circumstances. However, satisfying the elements to get a discharge, known as the Brunner Test, is difficult. Generally, there has to be zero chance you will ever be able to pay back the loans (i.e. major disability, etc). Just like with taxes, clearing out other debts can help you get back on track with repaying student loans.

Child support obligations. Generally these are non-dischargeable in bankruptcy. However filing bankruptcy will allow you to discharge unsecured debt and get caught up with any child support in arrears.

The thoughts, opinions and musings of this blog are those of Peter Schneider, a consumer advocate attorney at Northwest Debt Resolution, LLC. They are just that, his thoughts, opinions and musings and should be treated as such. They are not legal advice. If you have more questions or would just like to discuss your potential case, please contact me for a consultation.

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