There is no question that a bankruptcy filing – either under Chapter 7 or Chapter 13 – can provide relief from creditor harassment. Bankruptcy can prevent garnishments , foreclosures, repossessions and collection calls. However, some individuals may find that their bankruptcy options are limited, or even unavailable, due to mistakes or omissions that have occurred in the months or years leading up to the consideration of bankruptcy. This list identifies some of the common issues which may confront a consumer who is considering filing for bankruptcy:
1) Failure to file state and federal income tax returns. You must be up to date in your income tax filings to file a bankruptcy, and you will be required to provide copies of recent tax returns to the trustee in your case. This is problematic for several reasons. A bankruptcy attorney cannot provide sound guidance, as the amount of tax debt that will be owed may affect the type of bankruptcy that you can file, or could make your Chapter 13 payment prohibitive. In addition, unfiled tax returns may prevent the filing of a bankruptcy in an emergency situation, such as a foreclosure or repossession. The requirement only requires that the returns be filed, and not paid, so don’t overlook the filing of your returns simply because there may not be income available to pay the taxes.
2) Failure to pay child support or alimony. While not as much of an issue in a Chapter 7 case, child support and alimony arrearages can affect the feasibility of a Chapter 13 case. These debts are priority debts, and must be paid in full through a Chapter 13 case. Unfortunately, the term of a Chapter 13 repayment plan cannot extend beyond 5 years, and some individuals with significant arrearages may not be able to afford to pay those arrearages in that amount of time.
3) Failure to maintain full coverage insurance on automobiles that are under lien. If you have a loan that is secured by a motor vehicle, the loan agreement will probably require that you carry full coverage insurance which names the lender as the “loss payee”. This means that in the event the vehicle is totaled, the lender will be paid first. If you are trying to protect a vehicle from repossession by filing for bankruptcy, you will have to provide proof to the lender that full coverage insurance is in place.
4) Failure to maintain business records. For individuals who are self-employed, there is an expectation that they will have sufficient business records to document income, expenses, and assets. This would include tax returns, insurance information and bank records. A complete absence of any of this information could jeopardize your ability to receive a discharge.
5) Failure to report all sources of income. Many times this goes hand-in-hand with failure to file income tax returns, but there are instances where the returns have been filed timely, but not all income was disclosed. Most bankruptcy attorneys will be wary of filing a bankruptcy for a consumer that lists income which may not have been disclosed in previous tax filings.
6) Filing multiple bankruptcies. There are limitations on the time period in which successive bankruptcies can be filed. For instance, a consumer cannot receive a discharge in a Chapter 7 case if they have received a discharge in a prior bankruptcy filed within 8 years. Or an individual who has filed multiple unsuccessful Chapter 13 cases may be limited in their ability to prevent a foreclosure or repossession. For this reason, it is extremely important to let your bankruptcy attorney know if you have filed any previous bankruptcy cases, regardless of their outcome.
Most of this information may seem like common sense. At the same time, most bankruptcy attorneys are aware that lack of income not only contributes to the need for bankruptcy, but also the failure to do things like file tax returns, maintain insurance and/or pay child support. But the important thing to keep in mind is that those decisions may have severe long-term consequences which far outweigh the perceived short term benefits.