Understanding Bankruptcy: Your Essential Guide

We post quite a few articles about the TCPA, FDCPA, and other consumer-based legal issues. Clients have been telling us that some basic information about bankruptcy would be helpful. Here’s a brief rundown of some common questions clients often have. Keep in mind this is not an exhaustive list, nor is it custom-tailored to a consumer’s specific needs. However, 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 whether filing for bankruptcy will negatively impact their lives. They’re often hesitant to file due to the perceived stigma associated with it. Will they have to wear a Scarlet Letter like Hester Prynne?

Here’s the thing: the success of America is partly based on bankruptcy. In the 1800s, bankruptcy law was established to encourage people to take risks. At that time, Europe didn’t have such laws. If you were an inventor with a great idea, you had to be sure it would sell. If it didn’t, you could end up in debtor’s prison. In America, however, you could take risks without being burdened by lifetime debt if things didn’t work out.

Why is this important? Think about it: Henry Ford (cars), The Wright Brothers (airplanes), and Thomas Edison (electricity). None of these great inventions would have come to be without the protection that bankruptcy afforded.

Can I Keep My House?

In most cases, yes, you can keep your house. In 2021, the Washington legislature increased the homestead exemption amount. Previously, you could only exempt $125,000 of equity in your home. Now, you can exempt the median sale price of your county.

What does this mean? In King County, for example, you can exempt almost $900,000 of equity in your home. This means you don't have to sell your house to pay off creditors in bankruptcy. You simply sign a reaffirmation agreement with your lender, which keeps your house and its equity out of your bankruptcy.

What Debt Can Be Discharged?

Most consumer debt, such as credit cards and loans, can be discharged in bankruptcy. This is known as “unsecured” debt. What is secured debt? That’s any debt that has an item attached to it as collateral. For example, a car you’re making payments on is a good example. You can usually keep things like cars in bankruptcy through a reaffirmation agreement.

However, there is a “big three” of sorts when it comes to non-dischargeable debts.

Taxes

Taxes are the first type of debt that is difficult or impossible to discharge. “Render unto Caesar,” as the saying goes. The government usually enforces tax debts, but old debts that they put into uncollectable status may get cleared out for good. The good news is that bankruptcy can eliminate other debts and allow you to work with the IRS to set up a manageable long-term repayment program.

Student Loans

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

Child Support Obligations

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

Conclusion

Bankruptcy can seem daunting, but it is a tool designed to help individuals regain their financial footing. Understanding the ins and outs of bankruptcy can empower you to make informed decisions about your financial future. Once you know bankruptcy is right for you, take a look at what documents you need to provide us.

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 like to discuss your potential case, please contact me for a consultation.

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