What Bankruptcy Cannot Do

by San Antonio Attorney

While bankruptcy can provide relief for debtors from the actions of creditors, eliminate some consumer debts or lead to the creation of a repayment plan for those debts that must be settled, eventually leading to a discharge, there are some things bankruptcy cannot do.

Bankruptcy cannot protect the debtor from the claims of creditors not disclosed to the bankruptcy court when filing. Therefore, the debtor needs to be certain to make a full disclosure of all creditors however time consuming this may be.

Chapter 7 cannot offer complete protection for debtors’ assets, as it is an approach that leads to the liquidation of assets to settle secured debts. However, exceptions can be made with the support of the court and creditors. Chapter 7 cannot totally protect the debtor from creditors’ claims. Even after discharge, objections can be filed with the court within the deadline period by creditors or the trustee in the case if issues related to disclosure or some kind of irregularity can be proven.

Bankruptcy cannot prevent creditors with secured debts, such as liens on property, from repossessing the property. Chapter 13 halts foreclosures, but the debtor must prepare a repayment plan that enables payments to be made on the existing mortgage and catch ups on payments not made in the past. This requires the debtor to prove they have a regular income.

Bankruptcy cannot provide a quick and easy fix for struggling businesses. Depending on the size of the business, small businesses being the exception, a chapter 11 approach to bankruptcy could take up to 18 months to file and create a repayment plan. A lawyer is strongly recommended and other professionals may be involved. Expenses will need to be paid at intervals even during the process of filing and preparing the plan.

Generally speaking, bankruptcy cannot reduce or eliminate certain classes of debt. For example, debts of a personal nature related to child support, spousal support or alimony are not addressed when discharge occurs and the debtor remains liable for the repayment of these debts. Also, these payments must be part of a repayment plan under chapter 13, and this may lead to the plan having to involve the lengthier period of five, rather than three, years.

Other debts, such as fines owed to municipal or government bodies, or fines of a criminal nature cannot be discharged. Nor can debts related to harming or killing a person while intoxicated be discharged as a result of filing bankruptcy. Furthermore, debts related to fraud persist even after other debts are discharged.

Generally speaking, it is not likely that tax debts can be eliminated. Where this has been achieved, it has been a complex, lengthy and expensive process usually related to old tax debts.

In most cases student loans cannot be discharged under the Bankruptcy Code, although it is possible to plead hardship. However, this is not necessarily granted as it is required that the debtor proves inability to pay now and in the future.

Debtors should take into considerations these potential limitations on debt reduction when filing with the bankruptcy court.

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