Bankruptcy, Mortgages, and Reaffirmation Agreements

If you’re a homeowner and you find yourself in a Chapter 7 bankruptcy situation, the idea of mortgage reaffirmation might arise. Your lender might send a reaffirmation agreement to your bankruptcy lawyer, but the question is: should you sign it?

Benefits of Reaffirming Your Mortgage Debt



A Reaffirmation Agreement is like a promise that people dealing with Chapter 7 bankruptcy can make. Some of your debts are wiped away when you go through Chapter 7 bankruptcy. But with this agreement, you can keep owing money on things like your car, boat, or valuable items.

When you decide to reaffirm a debt during bankruptcy, you’re giving up the safeguard that comes with the bankruptcy discharge. Instead, you agree to stay responsible for the debt personally, even after the bankruptcy is closed.

By reaffirming, you commit to making regular mortgage payments, which can contribute positively to your credit history. This sustained payment behavior demonstrates responsibility and can aid in improving your credit score over time.

Additionally, reaffirming the mortgage ensures you can continue living in your home without the risk of foreclosure as long as you stay current on payments.

Reaffirmation might not appear concerning for individuals who wish to hold onto their homes or other assets tied to debt. After all, they intend to keep making payments, so it might seem insignificant to be obligated to do so by law.

Mortgage Payments and Reaffirmation Agreements



When you file for Chapter 7 bankruptcy, the bankruptcy’s automatic stay (the bankruptcy protection) prevents your creditors from taking any action against you outside of bankruptcy, and if you made any repayment arrangements with your creditors, then those arrangements will be void and your debt reverts back to the contract.  . But if you sign a Reaffirmation Agreement, it’s like making those deals active again. Usually, you need to be up-to-date on your payments, although sometimes you can include a small amount of missed payments in this new deal.

To make it official, a Reaffirmation Agreement must be submitted within 60 days after the initial scheduled 341(a) Meeting of Creditors. But remember that this timeframe can be stretched if the Bankruptcy Court grants the creditor an extension or if there’s an extension to the date of discharge.

The Top Risk in Reaffirmation



Now, if you’re a homeowner and decide not to keep being responsible for your mortgage after bankruptcy, that’s okay. You won’t have to pay that debt anymore, but you might lose the property if you stop paying. The bank can foreclose on the property, but that’s their option.

But here’s where it gets tricky: if you decide to stick with the mortgage and reaffirm the debt, then you still have to make payments and if you default later you will still be personally responsible.

However, some lenders after bankruptcy will continue to accept your payments if you are current on the debt obligation even if you do not actually reaffirm the debt obligation.  This adds more risk for foreclosure even if you are current as the lender will have the right to foreclose.  .


So, the big thing to remember is that when you reaffirm a debt, you’re saying you’ll pay it no matter what, even after bankruptcy. And if you don’t, the bank can take your property and chase you for more money. It’s like an extra risk you take on if you decide to reaffirm your debts.

Understanding the Impact of Reaffirming a Debt

Imagine someone goes through Chapter 7 bankruptcy to deal with their debts. Some essential things happen if they reaffirm a debt, which means they agree to keep paying it even after bankruptcy.

First, the creditor will send the attorney the reaffirmation agreement to consider and review with the Debtor.  If the Debtor can show that they can afford the debt to be reaffirmed based upon their bankruptcy schedules, then the court will approve the reaffirmation.  If they cannot show feasibility to reaffirm the debt then the Debtor will have to convince the court that they need to reaffirm the debt and explain to the court how they will be able to afford the payment. 

The Reaffirmation Hearing

At the reaffirmation  hearing, the person who went through bankruptcy and their lawyer will explain to a judge in charge of their Chapter 7 case why  it’s a good idea for the person to stick with this reaffirmed debt. The judge wants to know whether the person can afford to make the payments every month, so the Debtor will not jeopardize their fresh start after the bankruptcy discharge is received.

It’s super important for the person to think hard about whether they can afford these payments. If they can’t and end up not making payments, the lender can take back whatever the debt is tied to, like a house or a car and then the lender will be able to collect any deficiency balance against the Debtor.

Don’t Forget Your Mortgage Lender

The mortgage lender can also sue the person for any unpaid money because the Reaffirmation Agreement cancels out the usual protection from foreclosure that comes with bankruptcy.

Remember that if the court has approved a Reaffirmation Agreement, you have 60 days to change your mind and cancel it for any reason.

Finding the Right Bankruptcy Attorney To Reaffirm Debt



Reaffirming a mortgage can be particularly risky when the house’s value is lower than the mortgage balance amount, this is known as being “underwater.” If the homeowner loses the house, they might be responsible for the remaining difference in debt.

Anyone going through the bankruptcy process which decides to reaffirm should seriously consider the higher chances of facing significant future financial responsibility and the added time and cost in the bankruptcy procedure.

Before signing this kind of agreement, it’s wise to talk to a lawyer and consider whether it’s the right choice. It might only sometimes be the best move, depending on their situation.

Only Reaffirm With a Lawyer (And a Good One!)

If you need clarification on bankruptcy or reaffirming your home loan, it’s best to consult experts. Consider reaching out to a real estate or bankruptcy attorney for guidance. Additionally, talk to your tax professional to understand the tax implications of your option. Getting advice from professionals can provide clarity and help you make informed decisions.

Tips for Finding an Excellent Bankruptcy Attorney

Selecting the right bankruptcy attorney to reaffirm a debt is crucial. Follow these steps:

  1. Research: Find attorneys in your area.
  2. Experience: Choose one experienced with reaffirmation agreements.
  3. Reviews: Read client reviews for insights.
  4. Consultations: Schedule meetings with potential attorneys.
  5. Questions: Ask about their approach and success rate.
  6. Fees: Understand their pricing structure.
  7. Communication: Ensure they’re transparent and responsive.
  8. Compatibility: Work with someone you feel comfortable with.
  9. References: Request references from past clients.
  10. Trust Instincts: Choose someone you trust and feel confident in.
  11. Engagement Agreement: Review and sign the agreement.

Choosing the right attorney can significantly impact your reaffirmation process and financial security.

Can I Sell My House if I Did Not Reaffirm?



You could sell your house even if you didn’t reaffirm the mortgage during bankruptcy. In this situation, you still maintain ownership of the property, and because you didn’t reaffirm the mortgage, you’re still not personally liable or responsible for the mortgage debt.

If you choose to sell the house for an amount lower than what you owe, commonly known as a “short sale,” you may be held accountable for any remaining balance on your mortgage, so it is very important to make sure you have the proper legal counsel before closing on this type of sale. However, it’s important to note that such a sale would need your mortgage lender’s approval.

This process enables you to sell the property without carrying the burden of the mortgage debt and potential shortfall, given that the lender agrees.

Bankruptcy And Cosigners Joint Debts

Declaring bankruptcy erases certain debts, so you don’t have to repay them. However, if someone else, like a cosigner or joint account holder, co-signed or is responsible for the debt with you, they still have to pay it not to be considered in default. Here’s what happens:

  • If you file for Chapter 7 bankruptcy, the creditor can still collect from the cosigner.
  • If you file for Chapter 13 bankruptcy, the creditor must pause their collection actions to comply with the Co-Debtor Stay.
  • You can protect the cosigner by paying off the debt alone.

What Is A Cosigner?



A cosigner is a person who agrees to take responsibility for repaying a loan if the primary borrower is unable to do so. Lenders may ask for a cosigner when the primary borrower has a limited or poor credit history or low income. Having a cosigner improves the chances of the loan being approved because the cosigner is considered creditworthy and can be pursued by the lender if the principal borrower defaults on monthly payments.



Cosigners and guarantors are similar but have some differences. Creditors can try to collect from both cosigners and primary borrowers at the same time if there’s a loan default. However, with guarantors, creditors must first attempt to collect from the primary borrower before going after the guarantor. In the case of bankruptcy, both cosigners and guarantors are treated the same way, as they both become personally liable for the debt.

Will Bankruptcy Affect Joint Accounts?



Cosigners and guarantors are similar but have some differences. Creditors can try to collect from both cosigners and primary borrowers at the same time if there’s a loan default. However, with guarantors, creditors must first attempt to collect from the primary borrower before going after the guarantor. In the case of bankruptcy, both cosigners and guarantors are treated the same way, as they both become personally liable for the debt.

Will Bankruptcy Affect Joint Accounts?



Under Chapter 7 bankruptcy, the automatic stay, the legal protection that prevents creditors from pursuing collection actions against the debtor, does not extend to cosigners and guarantors.

When the debtor files for Chapter 7 bankruptcy, creditors can pursue collection action against the cosigner or guarantor for repayment as if the debtor had defaulted on the loan. This means the cosigner or guarantor may be held responsible for the debt and may face collection actions from the creditors. Cosigners and guarantors must know this risk when agreeing to cosign or guarantee a loan for someone else. The debtor filing for bankruptcy should notify the cosigner or guarantor of the bankruptcy at the time of bankruptcy filing.

Safeguarding Cosigners and Joint Account Holders Post Chapter 7 Bankruptcy



If you want to keep certain assets, like a car, you can agree to remain responsible for the debt by signing a reaffirmation agreement with the lender while you are in bankruptcy. But think carefully because you won’t benefit from the loan payments after the bankruptcy discharge.

Even after bankruptcy, you can choose to keep paying your debts voluntarily. By doing so, you can ensure your cosigners and joint account holders pay debts and won’t face negative consequences. 

The Impact of Bankruptcy Chapter 13 on Cosigners and Guarantors


Chapter 13 bankruptcy protects your cosigners and guarantors, giving you more time to repay the debt you owe jointly. During Chapter 13, the automatic stay prevents creditors from collecting on consumer debts, safeguarding personal loans to your cosigners and guarantors (called the Chapter 13 codebtor stay).

However, creditors can ask the court to lift the automatic stay under certain conditions:

  • If your cosigner or guarantor benefited from the creditor’s claim.
  • If you are not planning to pay the debt in full through your Chapter 13 repayment plan.
  • The creditor will suffer significant financial harm if the stay remains in place.

Protecting Cosigners and Joint Account Holders After Chapter 13 Bankruptcy

Chapter 13 bankruptcy differs from Chapter 7 because it can safeguard cosigners and joint account holders if you fully repay the debt in your Chapter 13 repayment plan. When you file for Chapter 13, a codebtor stay protects cosigners and joint account holders from creditors trying to collect on consumer debts.

However, creditors can request the court’s permission to lift the stay under specific circumstances:

  • If the cosigner or joint account holder benefited the most from the loan, such as driving the purchased car.
  • If your Chapter 13 plan needs to pay the cosigned debt fully.
  • If the creditor would suffer severe harm if the codebtor stay continues.

Your cosigner will likely be protected if you plan to pay off the debt, like a car loan. But if some debts get paid less than usual in Chapter 13, creditors might object to your plan if it prioritizes paying the cosigned debt more and other obligations less.

Additionally, the codebtor stay ends if the court dismisses your case or converts it from Chapter 13 to Chapter 7 for bankruptcy protection.

Whether you are considering Chapter 7 or Chapter 13 bankruptcy, seeking professional legal counsel can help you navigate bankruptcy more effectively and protect your interests. Find a bankruptcy attorney right here.

Car Loan Options and Their Impact on Primary Borrower And Cosigners



If the debt you owe is typically paid back in full through your bankruptcy plan, like a car loan with only a few payments left, your cosigner would probably be protected.

This is because all creditors would still receive the same amount they were supposed to get, ensuring your cosigner loan account is safe from additional liability.

When you have a co-signer for your car loan and file for bankruptcy, there are three options you can choose to file bankruptcy:



Keep the Car and Reaffirm the Loan

If you reaffirm the car loan, you’ll still be responsible for the debt even after bankruptcy. If you miss payments, both you and your co-signer can be pursued for the remaining balance of the auto loan even after the car is repossessed



Keep the Car and Redeem it with a New Loan

Redeeming the car means paying the current value to the lender for a clear title. Your co-signer remains responsible for the car loans remaining loan balance, and if you stop paying, their credit may be affected.

Surrender the Car and Discharge the Debt

If you surrender the car in a bankruptcy filing, your obligation to pay the loan is discharged. However, your co-signer will still need to pay off the car loan, and they can keep the car if they continue making payments, regardless of who possesses the vehicle during the bankruptcy case.

Bankruptcy and Business Partnerships

Business owners often proceed with creating their company, forming partnerships, securing loans, and entering the market without considering potential risks. They tend to believe that merely incorporating the business shields them from liability.

Additionally, relying on the assumption that losses are distributed among partners according to the company bylaws, they perceive the risks as proportionate and manageable. While incorporating a business does offer some liability protection, and a well-crafted operating agreement can help mitigate risks, the potential repercussions of a partner filing for personal bankruptcy are frequently underestimated.

Plans for dealing with this situation and managing the business loan-associated debt should be addressed, leading to potential complications for the business in the future.

Personal Bankruptcy When You Have a Business Partner



Having a partner who manages a business can be immensely advantageous for certain small enterprises, as it allows for sharing operational costs.

However, if one of the business partners declares personal bankruptcy, it can potentially entangle the other parties in a complicated situation, jeopardizing both the business partners’ files, assets, and investments.

Upon discovering your partner’s bankruptcy filing, you must adhere to the bankruptcy laws, even if you have not received formal notice. Any business-related actions will require prior court permission to avoid potential fines.

A trustee will be appointed under the bankruptcy code to manage bill payments and asset collection, but their actions will be limited to court recommendations. It is vital to have a capable attorney who can defend your interests during this process. Find someone experienced in handling bankruptcy cases to represent you effectively.

Understanding Responsibilities When a Business Partner Declares Bankruptcy



Establishing a business partnership leads entrepreneurs to overlook the intricate financial implications that arise, particularly when debt becomes a factor. Few consider these consequences while setting up a block or during prosperous times.

However, it is crucial to contemplate the potential ramifications if the business encounters difficulties in the future. In such a scenario, the personal bankruptcy of your partner can significantly impact your business partnership.

The interwoven financial positions expose both partners to risks and potentially jeopardize the stability and success of other partners in the business venture. It is essential for business partners to be aware of this possibility and to have clear agreements and contingency plans in place to mitigate the effects of such a situation.

Engaging a bankruptcy attorney enables safeguarding sufficient assets for your business during your partner’s bankruptcy.

Safeguard Your Assets

Protective measures must be implemented to safeguard your business partnership assets and personal assets. A business partnership is akin to a long-term legal commitment, much like a marriage, tying you to another individual or individuals.

The Implications of Your Business Partner’s Bankruptcy Filing

Once your business partner files for bankruptcy, safeguard your interests. The moment the filing occurs, a legal provision called the ‘automatic stay’ comes into effect, halting all activities related to the business. Everything is frozen in its current state as of the time of filing. The automatic stay is strictly enforced, and any actions that breach it can lead to severe penalties.

To ensure that your rights and interests are adequately protected during this process, seeking the guidance and representation of a qualified business attorney is essential. They will help navigate the situation’s complexities and take the necessary steps to safeguard your position and assets.

Acting swiftly and seeking legal counsel can significantly minimize potential risks and find the best possible outcome for your business during this challenging period.

Buy-sell Agreement

Partnership agreements may include provisions for ending the partnership if a partner files for bankruptcy trustee or personal bankruptcy. Personal bankruptcy can negatively affect the business, and planning such events is crucial. It is essential to clarify how personal and business debts will be treated in case of a partner’s bankruptcy in the partnership agreement.

When your business partner declares bankruptcy, her 50% ownership in the company is regarded as an asset within the bankruptcy estate. However, selling a 50% equity stake in a privately held company can be challenging since there is typically only a readily available market for a considerable company.

As a result, the most logical buyer for this stake is often you, the other partner. This situation presents a favorable opportunity to buy out your partner’s share at a reasonable cost, allowing for a clean and efficient exit from the business for them.

Reach out to a Bankruptcy Attorney for the help you need to create this agreement.

Bankruptcy Fraud Cases

Bankruptcy is a way for honest people struggling with debt to get relief and a fresh start. It’s meant to help individuals facing challenging situations like losing a job, having big medical bills, divorcing, or dealing with a disability.

But sadly, some dishonest people misuse the bankruptcy system. They might have enough money to pay back their debts, but they try to get away with not paying by filing for bankruptcy. They might even use bankruptcy to hide their illegal activities, like scams or fraud, and keep the authorities from catching them.

The FBI and the Department of Justice are the agencies that investigate these kinds of fraud cases in bankruptcy. Even though they have other financial crime cases they oversee, they take bankruptcy fraud seriously. They focus on cases involving money, connections to organized crime, or when suspects file for bankruptcy in multiple states.

Civil and Criminal Bankruptcy Fraud

Bankruptcy fraud can take on different forms, and some of the most common types involve dishonest actions during the bankruptcy process.

Civil cases arise when a creditor files a lawsuit (adversary proceeding) for wrongdoing involving a specific debt. Consequences may include case dismissal, denial of debt discharge, or other sanctions.

Criminal bankruptcy fraud involves significant schemes to cheat multiple creditors and is investigated by the FBI and prosecuted by the DOJ. While most cases focus on debtor activities, creditors, trustees, court personnel, and third parties can also face charges for bankruptcy crimes.

Here are some examples:

Providing False Information

People may lie under oath or give false information during their bankruptcy proceedings. This could be about their income, assets, debts, or other important financial details. Providing false documentation is also a common way people try to deceive the bankruptcy court.

Concealing or Transferring Assets

Some individuals might hide their valuable assets so the court and creditors don’t know about them. They might transfer assets to family members or friends to keep them safe during bankruptcy.

Tax Fraud

Bankruptcy fraud may involve tax-related offenses, such as not reporting all of one’s income or claiming false deductions to lower the amount owed to creditors.

Multiple Bankruptcy Filings

Some fraudsters might use fake identities or aliases to file for bankruptcy multiple times in different places. This allows them to take advantage of the system and avoid paying their debts.

Bribing a Bankruptcy Trustee

In some cases, corrupt individuals may try to bribe a bankruptcy trustee to gain favor or get an unfair advantage during the bankruptcy process.

“Credit Card Bust-Outs”

This type of fraud involves running up credit card bills without the intention of ever paying them off. People rack up massive debt and then file for bankruptcy to get out of paying what they owe.

Bankruptcy fraud can also be linked to other crimes like credit card fraud, identity theft, mortgage fraud, money laundering, mail and wire fraud, and more. Sometimes, individuals simultaneously engage in multiple illegal activities, making the investigations more complex.

Federal Law And Bankruptcy Court


When considering bankruptcy, seek advice from a bankruptcy attorney to ensure compliance with federal law and avoid bankruptcy fraud.

An attorney can guide you through the process and help you make informed decisions while ensuring honesty and transparency in your filings.

18 U.S.C. § 157 Bankruptcy Fraud Case Examples


Let’s break down the situation in one example:

Jorge Droz Yapur is in big trouble because he’s accused of being involved in a “bankruptcy fraud scheme.” This means he allegedly made false statements related to his bankruptcy case. As part of his bankruptcy process, he tried to deceive his creditors, the people, or the companies he owed money.

Specifically, Jorge Droz Yapur faces nine charges of “concealment of assets” during his bankruptcy proceedings. This means he allegedly hid some of his money and income so it wouldn’t be discovered during the bankruptcy process.

He’s also facing eight charges of “making false statements” during the same bankruptcy proceedings. This means that he’s accused of lying under oath while giving testimony in court or providing information that wasn’t true.

One of the things he did was use a bank account that was in his adult son’s name to hide some of his money and assets. This way, it wouldn’t be traced back to him during the bankruptcy process.

Another serious accusation is that he testified under oath that his mother was alive and living in an elderly home. But in reality, she passed away.

He could face up to five years imprisonment for each violation if he’s guilty of all charges. He might have to pay a fine of $250,000. After serving his sentence, he’d have to report to authorities regularly.


Now let’s break down what happened with Yamil Fonseca Salgado:

Yamil Fonseca Salgado is in serious trouble because he’s accused of being involved in a “bankruptcy fraud scheme.” During several bankruptcy cases, he allegedly made false statements and lied about essential things. He did this to cheat his minor child out of the child support payments.

On top of that, he’s facing other charges. One of them is “willful failure to pay” child support. He allegedly didn’t pay about $107,200 in child support.

Another set of charges is related to “false statements” during his bankruptcy proceedings. This means he’s accused of lying or providing incorrect information while dealing with his bankruptcy cases.

According to the indictment, Yamil Fonseca Salgado tried to hide several things in his bankruptcy filings. He concealed assets, which meant he kept valuable things secret so that no one would know he had them. He also hid his income and connection to a maintenance company called CMM Janitorial, Inc.

In addition to that, he allegedly didn’t mention that he received money transfers through a payment system called ATH Móvil. These transfers came from the bank account of a construction company controlled by his close family members. This construction company, in turn, received money from the public housing management company where Yamil Fonseca Salgado worked.

Another thing he’s accused of is using and controlling a bank account at Banco Popular de Puerto Rico. But the account was in his grandmother’s name, and he used it to access funds for his expenses.

The consequences could be severe if he’s guilty of all these charges. He could face up to two years of imprisonment for the “willful failure to pay” child support. For each violation of 18 U.S.C. § 157 and § 152, he could be sentenced to five years in prison for each violation. Also, he might have to pay a fine of $250,000, which is a substantial amount. After serving his sentence, he could be under supervised release for three years, so he’d have to report to certain authorities regularly.

These charges are severe, and if Yamil Fonseca Salgado is convicted, he could face significant consequences for his actions. The legal system takes these cases seriously to uphold justice, protect those owed child support payments, and ensure honesty during bankruptcy proceedings.

Bankruptcy And Retirement Accounts

When facing financial difficulties, individuals in distress may view their retirement accounts as a convenient source of funds, using retirement money and hoping it can spare them from resorting to Chapter 7 or Chapter 13 bankruptcy filings to regain control over their debts.

Retirement accounts typically enjoy protection in bankruptcy, safeguarding them from being utilized to settle outstanding debts.

Nevertheless, it’s important to note that certain accounts have exemption limits, and withdrawing money from retirement funds before filing for bankruptcy can have potential ramifications.

Exemption Limits for IRAs (Individual Retirement Funds)


Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both Traditional and Roth IRAs are protected, subject to a limit of $1,512,350 per person.

This limit applies to the total value of all IRA accounts combined rather than to each account. If the combined value of your IRAs exceeds the allowed amount, the surplus may be utilized to repay your creditors.

When Does The IRA Exemption Limit Change?


The exemption limit is adjusted every three years to account for the cost of living, with the subsequent adjustment scheduled for 2025.

ERISA-Qualified Retirement Plans: Understanding Their Protection in Bankruptcy


ERISA-qualified retirement accounts are protected and offer robust protection in bankruptcy proceedings.

 According to federal law, these retirement plans are not considered part of the bankruptcy estate and cannot be seized by the appointed bankruptcy trustee. 

Whether you file for Chapter 7 or Chapter 13 for bankruptcy protection, your ERISA-qualified retirement funds are not at risk of being lost.

What Are ERISA Plans?

If you’re unfamiliar with ERISA-qualified plan plans, they are defined benefit plans established by employers, adhere to specific IRS guidelines, and enjoy tax-exempt status.

Some examples of ERISA-qualified retirement plans include 401(k)s, 403(b) or profit-sharing plans, 457(b) deferred compensation plans, governmental plans, and tax-exempt organizational retirement plans.

An additional advantage of ERISA plans is that, under federal law, there is no limit to retirement age or the amount of protection they repay creditors. Your retirement assets in these plans are safeguarded from creditors, offering you peace of mind.

If you’re unsure whether your retirement plan falls under the category of an ERISA-qualified account, it’s advisable to consult with your employer for clarification.

Protecting Your Retirement Account When Filing Bankruptcy: What You Need to Know


Withdrawals from tax-deferred retirement accounts are subject to regular income taxation.

Additionally, if you are younger than 59½ years old, you may be liable for a 10% early withdrawal penalty.

Moreover, once you withdraw funds from your retirement account, they are no longer safeguarded in a bankruptcy proceeding.

Chapter 7 or Chapter 13?

This could affect your eligibility for Chapter 7 bankruptcy through the means test or inflate your income in Chapter 13 bankruptcy.

Before pursuing this route of filing for bankruptcy, it is essential to determine whether filing for bankruptcy is the most suitable course of action for your family member and specific circumstances.

Consult With A Bankruptcy Lawyer


It is highly advisable to consult with a bankruptcy attorney in your local area before filing for bankruptcy. They possess the expertise to guide you through the complex federal, state, and local bankruptcy law and other federal laws and regulations, ensuring the optimal protection of your retirement assets.

They can also assist in adequately reporting your retirement income, including Social Security benefits. Furthermore, an expert bankruptcy attorney can help you explore alternatives to bankruptcy if applicable.

Taking money out of your pension or retirement account to address debt may initially seem like a viable option to mitigate the impact of bankruptcy. However, it is crucial to thoroughly explore your options with an attorney before making any decisions.

Protecting IRA Balances During Bankruptcy


Substantial exemptions are in place to safeguard IRAs in bankruptcy cases. Federal bankruptcy exemptions offer protection for IRA savings up to a limit of $1,512,350. This amount is periodically adjusted every three years.

When an individual possesses multiple IRAs, the exemption limit applies to the combined value of all the accounts rather than each account.

What Happens To My IRA If I Am Married?


When married individuals file for bankruptcy jointly, both spouses can claim the total exemption amount individually. The exemption applies equally to traditional IRAs, Roth IRAs, and other investment accounts.

Individual Retirement Accounts (IRAs) differ from 401(k) plans in that they are established and managed by individuals rather than employers.

Unlike ERISA-qualified plans, IRAs are not obligated to adhere to ERISA regulations, which means they do not enjoy the same unlimited federal bankruptcy exemption. However, there are exceptions to this rule.

Certain IRAs, such as Simple IRAs, may qualify for ERISA protections. Additionally, if you roll over an ERISA-qualified account, such as a 401(k), into an IRA, the account may still be eligible for the ERISA exemption in the context of bankruptcy.

Withdrawn Retirement Benefits

When it comes to retirement savings accounts, like an IRA, they are typically protected in the bankruptcy code. However, if you decide to withdraw money from your retirement account and put it into your regular checking account, those funds lose their protected status.

If you deposit the funds into a separate account, they are generally protected but still not considered exempt from bankruptcy.

It’s important to note that this rule is different regarding Social Security retirement benefits. Social Security income remains exempt if you keep it in a separate account.

This is because you can choose when and whether to withdraw funds with a retirement savings account.

What Do I Do With My Social Security Payments?


In contrast, Social Security payments are automatically deposited into your account by the government each month, and they maintain their exempt status as long as they are kept in a separate account.

So, while retirement savings accounts can lose their exemption if you withdraw funds, Social Security benefits are typically protected as long as they are kept separate from bank accounts in monthly payments.

In conclusion


When contemplating bankruptcy, it is crucial to comprehend its comprehensive impact on your financial situation, particularly regarding your retirement savings.

While existing retirement funds are generally shielded from bankruptcy, it’s essential to be aware of certain limitations and exceptions.

The specific type of bankruptcy you file for and your employer’s policies regarding bankruptcy filing can also influence your ability to make additional contributions to your retirement plan during the bankruptcy proceedings.

Consider these factors with a bankruptcy attorney that will help you understand how they may affect your retirement savings.

What Happens to My IRS Tax Debt if I File Bankruptcy?

Bankruptcy And Tax Debt

Within the realm of bankruptcy, taxes are generally classified as “nondischargeable priority debt.” It indicates that bankruptcy cannot eliminate tax debts, and the repayment of such obligations is prioritized over the claims of other creditors.

Nevertheless, there are situations where taxes can be categorized as “dischargeable debt,” meaning they can be eliminated by filing for bankruptcy.

When You Can Discharge Tax Debt

For tax debt to be considered dischargeable, it must meet specific criteria.

Firstly, it should pertain to income taxes, encompassing outstanding federal and state income tax obligations. However, it does not contain other back taxes, such as past-due payroll taxes related to Social Security and Medicare withholding.

Secondly, the tax debt must be of a different origin, typically within three years. The original tax return should have been due at least three years before the date of filing for bankruptcy.

For tax debt to be eligible for discharge in bankruptcy, it is necessary to have filed a valid tax return and for that tax return to have been assessed by the IRS at least Three (3) years before initiating the bankruptcy filing. Furthermore, the tax return must have been submitted within the prescribed deadline.

If an extension in filing taxes was requested and granted, filing the return by the extended due date is considered “on time.” However, suppose the return was filed after the extended deadline. In that case, it might be deemed invalid, resulting in the tax debt being ineligible for discharge since the assessment date will have been extended through the extension obtained.

Apart from the regulations concerning the debt age and the tax return timing, there is an additional prerequisite for tax debt to be considered eligible for discharge.

Specifically, the Internal Revenue Service (IRS) must have officially assessed the debt, meaning it has been recorded on the agency’s books at least three years before the initiation of the bankruptcy filing.

This requirement can also be fulfilled if the IRS still needs to assess the debt at the time of the bankruptcy filing.

One crucial factor to consider is ensuring that the taxing authority, typically the IRS, has not placed a tax lien on your assets. If a tax lien has been filed, a bankruptcy filing will not remove or lift the lien.

This scenario represents one of the most prevalent obstacles in seeking tax relief through bankruptcy, thus demanding special attention and careful consideration.

Bankruptcy cannot protect you if you have engaged in tax evasion or submitted a fraudulent tax return. The rules stipulate that tax returns must have been filed honestly to be considered for discharge in bankruptcy.

Moreover, various court jurisdictions may have additional criteria for eliminating tax debt through bankruptcy courts. While we have covered the primary conditions, you must familiarize yourself with local rules that may impose further requirements.

Federal Tax Liens and Bankruptcy

Distinctions exist between a tax debt and a tax lien. Tax debt refers to the money owed to the taxing authorities, while a tax lien is a legal encumbrance placed on your property to enforce the tax liability. This lien can encompass all your financial assets, including bank accounts, personal belongings, and real estate.

You Can’t Discharge Federal Tax Lien

Bankruptcy does not discharge a tax lien. Even if bankruptcy successfully discharges your tax debt, the IRS or other taxing authority will still maintain a legal claim to your property due to the existence of the tax lien.

Upon filing for bankruptcy, the IRS is prohibited from pursuing collection efforts on a tax debt that has been discharged. This holds even if a tax lien has been established.

As a result, the IRS cannot access your bank account or initiate wage garnishment to collect the discharged tax debt.

You can also continue residing in a home with a tax lien attached. However, it is essential to remember that when you eventually sell the house, the proceeds from the sale will need to be used to satisfy the outstanding tax lien. At that point, the tax lien must be paid off using the profits generated from the sale transaction.

Optimal Bankruptcy Options for Resolving Tax Debt

Tax debt has the potential to be discharged through various options provided by the federal bankruptcy code. Individuals can seek protection and relief by filing for bankruptcy under different chapters, including Chapter 7 and Chapter 13.

Chapter 12 is specifically designed for family farms and fishing operations, while Chapter 11 primarily addresses businesses and more significant debts.

These different bankruptcy chapters offer individuals and entities a range of options to address their tax debt and seek the necessary relief.

Addressing Tax Debt through Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy filing, the debtor’s nonexempt assets will be subject to sale/liquidation by the Chapter 7 Trustee, with the proceeds distributed among the creditors. If limited or no assets are available to satisfy the creditors, eligible debts are discharged through Chapter 7, resulting in creditors receiving no payment.

According to the IRS, tax debts can be eliminated through Chapter 7 if they meet specific criteria, including being at least three years old and the taxpayer having filed returns for the past four tax periods.

Resolving Tax Debt with Chapter 13 Bankruptcy

According to the Internal Revenue Service (IRS), Chapter 13 bankruptcy is the predominant form of individual bankruptcy used to address tax debt.

Chapter 13, known as reorganization bankruptcy, involves creating a structured repayment plan with creditors to settle outstanding debts over three to five years gradually.

In contrast, Chapter 7 bankruptcy eliminates a significant portion of debts, rendering them no longer required to pay creditors or to be repaid.

Under a successful Chapter 13 filing, tax debts are paid off through the reorganization plan, and tax debts over three years old at the time of filing can be discharged.

The taxpayer must fulfill certain obligations during the repayment period, including filing tax returns promptly and promptly using tax refunds and paying any newly incurred income taxes.

In specific circumstances, a Chapter 13 filing may also result in the discharge of interest and penalties associated with the tax debt. Furthermore, interest on discharged tax debts will be erased, while penalties can be discharged if they exceed a three-year threshold.

When Should I Consider Filing for Bankruptcy: Before or After Taxes?

There is no significant advantage in delaying your income tax return until after filing for bankruptcy. However, for various reasons, it is essential to be up to date with your state income taxes, even when filing for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy Filing and Tax Returns

When filing for Chapter 7 bankruptcy, the assigned trustee will request your last two years of most recent tax returns. It doesn’t have to be the return from the previous tax year, but if it isn’t, you’ll need to provide a written explanation.

The trustee will compare the income you reported on your tax return with the information in your bankruptcy paperwork. If you’re expecting a tax refund, the trustee will verify if you can protect or “exempt” it and if the claimed exemption amount is correct. Otherwise, you’ll be required to surrender the refund to the bankruptcy trustee, who will distribute it among your creditors.

Many individuals intend to use the tax refund for essential expenses before filing for bankruptcy. If you opt to file for bankruptcy using this strategy, it’s crucial to maintain records of your expenditures.

Chapter 13 Bankruptcy Filing and Tax Returns

Before filing a Chapter 13 case, it is crucial to have your tax returns up to date, although there is some flexibility within the rules. You must submit copies of the previous two to four years’ tax returns to the Chapter 13 trustee before the 341 meeting of creditors, a mandatory hearing for all filers.

If you are not required to file a return, the trustee may request a letter, affidavit, or certification explaining the reason. Sometimes, local courts may have additional document requirements specific to their districts.

Please file a return with the IRS, the state, or the city you reside in before your 341 meeting of creditors to avoid significant drawbacks for your bankruptcy case. Firstly, the trustee overseeing your bankruptcy will initiate a motion, allowing you a limited period to provide your tax returns. Please meet this deadline to avoid the court dismissing your case, depriving you of the opportunity to present your situation before a judge and seek a resolution.

Additionally, if you haven’t filed a return and owe the IRS, they might file a claim based on their own “best estimate” of your income. However, after filing an accurate and proper return, these estimates typically tend to be higher than you would own. Consequently, this can introduce complications and potential issues for your bankruptcy proceedings.

Income Tax Debt And Bankruptcy

Individuals often face various types of debts owed to the IRS, with unpaid income taxes being the most prevalent form.

The presence of looming unpaid tax debt can induce considerable stress, compounded by the fact that the IRS is known for its assertive efforts to collect such debts. As a prominent public entity, the IRS is the most significant debt collector worldwide, equipped with tools and capabilities that private debt collectors can only aspire to possess.

In Chapter 7 or 13 bankruptcy filings, income tax debt (subject to certain limitations) is the only type of tax debt that can be discharged. However, Chapter 13 offers the option to repay tax debts throughout previous bankruptcy filing through a structured repayment plan, typically spanning three to five years.

Does Bankruptcy Clear Tax Debts?

Achieving debt relief through bankruptcy requires careful consideration of timing and strategic planning, notably when eliminating tax debt. One crucial aspect of a successful bankruptcy filing is waiting until the tax debt has surpassed the three-year mark before seeking assistance from a bankruptcy court.

Gaining insights into your tax and debt repayment timeline is crucial, and to accomplish this, it is advisable to request transcripts of your tax account from the IRS. These transcripts will provide essential dates that will help determine whether it is appropriate to pursue bankruptcy to address your tax debt.

In cases where a tax lien complicates the process of eliminating tax debt through bankruptcy, it is essential to confirm the validity of the lien. Valid liens must accurately identify the taxpayer, specify the tax year for which the debt is owed, and include the correct assessed amount, among other pertinent details. Additionally, the taxing authority must have filed the lien in the appropriate office, which may vary depending on the state.

If a lien is found to be faulty or invalid, it will not impede the bankruptcy process. Reach out to a bankruptcy attorney for advice and understanding how to deal with liens.

If Chapter 7 bankruptcy is not a feasible strategy for eliminating tax debt, Chapter 13 may still provide a viable alternative. Under Chapter 13, debtors must make regular payments for three to five years, but it offers opportunities for discharging certain debts, including tax debt.

If bankruptcy turns out to be a bad option, then it is prudent to seek the advice of counsel that seeks a settlement directly with the IRS or the state taxing authority through an offer-in-compromise.  This option cannot be sought in bankruptcy. Still, it can provide a reasonable solution allowing you to reduce the overall tax liability while offering you a suitable payment plan and timeline to repay the settled balance.

Bankruptcy And Your Credit Score

Bankruptcy represents a tradeoff. It provides relief by eliminating debt obligations or reducing unmanageable debts, but it also signals to lenders that you pose a credit risk, dropping your credit score. This decline or bad credit can make it challenging to obtain loans, credit cards, and mortgages in the immediate future.

Bankruptcy can significantly impact credit scores, but the exact effects can vary depending on several factors. While it is generally true that bankruptcy affects higher credit scores more than lower ones, it’s important to note that the impact can still be substantial regardless of the initial credit score.

Effects of Bankruptcy on Your Credit Score


Bankruptcy typically leads to the lowest credit rating, R9, which indicates a significant credit risk.

Filing for bankruptcy can profoundly impact various financial aspects of your life. Once businesses and lenders review your new credit report with its negative information, several areas can be significantly affected:

  1. Getting a car loan may become more challenging as lenders view you as a higher credit risk, resulting in stricter loan terms or potentially even denial of credit.
  2. Purchasing a house or renting an apartment may become more complex as landlords and mortgage lenders may hesitate to approve applications due to the negative impact of filing bankruptcy on your creditworthiness.
  3. If you are approved for financing, you may face higher interest rates due to the increased risk associated with your credit history.
  4. Unsecured credit cards may come with low credit limits initially, making it harder to access higher lines of credit until you can demonstrate improved creditworthiness.
  5. Your student loan repayment schedules may be affected, potentially leading to changes in terms or repayment options.
  6. Penalties for late payments may be more severe, and it is crucial to make payments on time to avoid further damage to your credit.
  7. Credit utilization, especially for non-essential purchases, may be limited as lenders may be cautious about extending additional credit to you.
  8. Large cash deposits may raise concerns as lenders may question the source of the funds or cash deposit, given the bankruptcy filing on your credit report.
  9. Obtaining loans without a qualified co-signer may be challenging, as lenders may require additional security or guarantees due to the federal bankruptcy code.
  10. Authorizing users to certain credit cards may be restricted, as lenders may be cautious about extending credit access to bankruptcy-associated individuals.
  11. Security deposits or returns of security deposit safety deposits for utilities or rental properties may be affected, as landlords and service providers may consider bankruptcy when assessing potential risks.

Your Credit Scores After Bankruptcy

Bankruptcy is considered a major adverse event in credit scoring models, and as a result, it can significantly impact your credit score. The decline in your credit score reflects the increased risk of lending to an individual who has filed for bankruptcy.

However, bankruptcy filings do not solely determine credit scores. They consider various factors, including payment history, credit utilization, length of credit history, and recent credit inquiries.

Bankruptcy filings are indeed included in the public records section of credit reports. Credit bureaus actively gather or receive information from courts to ensure that credit reports remain current and accurate.

This information is then used to update the public records section, which contains details about bankruptcy filings, including the type of bankruptcy, filing date, and bankruptcy case number. As public records, this bankruptcy information is accessible to anyone who pulls your credit report and helps provide a comprehensive overview of your financial history.

When you file for bankruptcy, it will typically appear in two sections of your credit report: the legal or public record section and the personal loan individual account section.

Generally, a bankruptcy filing can remain on your credit report for a certain period. Under Chapter 7 bankruptcy, it typically stays on your credit report for ten years from the filing date. Chapter 13 bankruptcy, which involves a repayment plan, usually remains on your credit report for seven years from the payment plan or the filing date.

FICO Scores

Creditworthiness is assessed using FICO scores, a numeric scale ranging from 300 to 850. A higher score indicates stronger creditworthiness and better credit terms. Credit bureaus receive information from credit issuers and lenders, which calculates your credit score based on factors like payment history, credit utilization, length, and recent inquiries. These factors help determine your creditworthiness and generate your FICO score.

Rebuilding Your Creditworthiness: Steps to Improve Your Credit After Bankruptcy

While bankruptcy can substantially impact poor credit, responsible credit behavior and timely payments in the future can contribute to the gradual rebuilding of your credit score over time.

Consulting with a bankruptcy lawyer can be beneficial if you still need to determine how to proceed with your financial situation after considering bankruptcy. They can guide and help you develop a strategy tailored to your circumstances.

Rebuilding your credit after bankruptcy requires a disciplined approach. Call one of our bankruptcy attorneys if you need help visualizing a debt-free future.

Steps To Rebuilding Credit Scores

Monitor Your Credit Scores

Check your credit score and reports frequently

Stay updated on your credit score by accessing it through reputable sources. Review your credit reports from all three major credit bureaus—Experian, Equifax, and TransUnion—to get a comprehensive overview of your credit history.

Review your credit reports for accuracy

After going through bankruptcy, carefully examine your credit reports to ensure that all discharged accounts are accurately reflected with a zero balance and the proper indication of a bankruptcy discharge. Verify that each listed account belongs to you, and confirm that payment statuses and dates are correct.

Follow up on disputes

After filing a dispute, follow up with the credit bureaus to ensure that your concerns are being addressed. They have a specific timeframe to investigate and respond to your dispute.

Make Payments Your Priority

Focus on your payment history

Payment history is significant in determining your credit score, accounting for 35% of your FICO credit score. Consistently making payments on time will positively impact your creditworthiness.

Repay outstanding debts promptly

If you have any outstanding debts, work towards repaying them on time. This can help improve your credit score and demonstrate your commitment to managing your financial obligations responsibly.

Prioritize court-ordered payments (for Chapter 13)

If you filed for Chapter 13 bankruptcy, make all court-ordered payments to creditors on time. Adhering to the repayment plan you file bankruptcy on is crucial for completing the bankruptcy process and rebuilding your credit.

Stick To A Budget

Create a budget

Develop a comprehensive budget that outlines your income and expenses. Consider essential expenses, such as housing, utilities, transportation, and groceries, while also considering discretionary spending categories.

Stick to your budget

Discipline yourself to adhere to the budget you’ve created. Avoid overspending and make conscious choices about your purchases. Prioritize needs over wants and avoid unnecessary expenses that could lead to debt accumulation.

Plan a spending strategy

As your credit score improves over time, developing good credit habits and a thoughtful spending strategy is crucial. Consider your financial goals and prioritize your spending accordingly. Make informed decisions when using credit and maintain a responsible approach to managing your finances.

Try Secured Credit Cards

Building a positive credit history

As you use a secured credit card, you must keep your balance low about your credit limit and make timely payments every month. Responsible credit card usage and on-time payments contribute to building positive credit history, improving your credit score.

Interest-free if paid in full

You can avoid paying any interest charges by using your credit responsibly and paying your balance in full each month. This allows you to rebuild your credit without incurring additional costs.

Start with one secured credit card

In the early stages of post-bankruptcy, one secured credit card is typically sufficient. Focus on using the secured card more responsibly and making timely payments. This disciplined approach to monthly payments helps rebuild your credit score and fosters better spending habits.

Consider Becoming an Authorized User on a Credit Card

Positive impact on credit score

If the credit card issuer reports the card’s positive payment history to the major credit bureaus, becoming an authorized user of the credit line can boost your credit score. The primary cardholder’s responsible credit behavior can reflect positively on your credit report.

Potential risks

It’s essential to be aware of the risks involved. If the primary cardholder makes late payments or maxes out their credit limit, it can negatively affect your credit score. Before becoming an authorized user, ensure that the primary cardholder has a solid payment history and practices responsible credit utilization.

Communication and trust

Establish open communication and trust with the primary cardholder. Discuss expectations and ensure both parties are committed to responsible credit usage. Regularly monitor the account to ensure it remains in good credit standing.

Exploring Debt Consolidation as an Alternative to Bankruptcy

Consider various financial alternatives if you face difficulty handling your debts. When comparing debt consolidation and bankruptcy, it is crucial to grasp the disparities between these two methods and their advantages and disadvantages.

Debt consolidation entails obtaining a new loan or line of credit to repay your debt under potentially improved terms. On the contrary, bankruptcy can eliminate or decrease your debt, but it will negatively impact your credit score for several years.

In other words, debt consolidation presents an alternative for effective debt management. Through this approach, you can obtain a new loan or a balance transfer credit card, which will be used to pay off your existing debts.

Why Choose Debt Consolidation?

Debt consolidation is a financial strategy aimed at effectively managing and repaying debt. While it can be viewed as a form of debt relief, it’s important to note that it does not involve forgiving any debt.

Instead, it involves the consolidation of all your existing debts into a single new loan, often at a considerably lower cost. Doing so simplifies your repayment process and potentially reduces the overall interest expenses.

There are several compelling reasons to consider pursuing debt consolidation. Firstly, it simplifies your financial situation by consolidating all your debts into a single payment. Instead of juggling multiple monthly payments to various creditors, debt consolidation allows you to streamline your finances with one manageable amount.

Secondly, debt consolidation has the potential to save you money as you work towards paying off your debt. Depending on the amount of debt you have and your current interest rates, opting for a lower-interest debt consolidation loan or transferring your balances to a 0% credit card can save you hundreds of dollars each month.

Lastly, debt consolidation signifies a commitment to paying off your debts. By obtaining a debt consolidation loan or transferring balances, you embark on a path toward being debt-free, provided you are dedicated to making necessary lifestyle changes and adjusting your spending habits.

Debt consolidation offers the benefits of simplifying and focusing your finances and potentially reducing the overall cost of your debt through a lower annual percentage rate (APR). By consolidating your debts, you can also pay them off more quickly with the help of reduced interest charges.

By consolidating your debts, you can lower your overall interest charges and make your debt payments more manageable. It offers a practical solution to streamline your financial obligations.

Overall, debt consolidation offers the advantages of simplifying finances, saving money, and fostering a proactive approach to debt repayment.

Debt Consolidation: How It Works

To understand how debt consolidation works, let’s examine a few standard methods:

Debt Consolidation Loan

With a debt consolidation loan, you can streamline your debts by replacing them with a single loan. This loan can be in the form of a personal loan or a home equity loan. You simplify your debt structure by paying off your existing debts and combining them into the consolidation loan.

If you qualify for a lower Annual Percentage Rate (APR) than what you previously paid on your debts, debt consolidation can help reduce your interest costs.

What Is A Debt Consolidation Loan?

A method called debt consolidation involves the repayment of multiple debts from various lenders using a single new loan or line of credit. Debt consolidation loans, typically unsecured personal loans, are frequently utilized.

These loans generally do not require collateral. The goal is to obtain a new debt with a lower interest rate than consolidated debts, thereby reducing the overall repayment cost.

DMP (Debt Management Plan)

A debt management plan (DMP) is a commonly chosen option as it offers financial assistance, credit counseling, and educational programs. These components aim to help you identify the root causes of your financial difficulties.

Through DMPs, credit counselors can provide tailored solutions and strategies you can continue implementing even after completing the program.

However, DMPs typically span 3 to 5 years to eliminate the debt. Some individuals may find it challenging to remain committed to the program for a long time due to a lack of patience or other factors.

The Impact of Debt Consolidation on Your Credit

Debt consolidation generally has a minimal impact on your credit. While applying for a debt consolidation loan may require a hard credit check, resulting in a temporary decrease in your credit score, this effect is usually short-lived.

As you consolidate your debt and make faster progress in paying it off, your credit score may improve more rapidly. Debt consolidation can be a positive step towards improving your overall creditworthiness in the long run.

Is Debt Consolidation For You?

Debt consolidation offers a viable bankruptcy alternative for individuals who can repay their debts. While bankruptcy may eliminate some of your debts, debt consolidation involves repaying the debt under new terms while safeguarding your credit. This allows you to manage your financial obligations responsibly while working towards improving your credit standing.

Borrowers with good credit are more likely to obtain a debt consolidation loan. Their creditworthiness significantly affects the loan approval process. Their credit score will likely be favorable. However, disciplined borrowers need to maintain their responsible payment habits.

By consistently making timely payments, they can continue to benefit from lower interest rates throughout the entire term of the personal loan. Good credit and diligent payment practices contribute to a successful debt consolidation journey.

Debt consolidation is also particularly beneficial for consumers with multiple credit cards and debts. The main objective of debt consolidation is to decrease the overall interest on your debts and consolidate them into a single loan.

By doing so, you simplify your repayment process and have a better chance of managing your debts effectively. It allows you to streamline your finances and regain control over your debt.

Have You Heard Of Debt Settlement?

Debt settlement is a process where you work with an excellent company to try and reduce the amount of money you owe to your creditors. Here’s how it generally works:

  1. Setting up an account
    When you decide to use a debt settlement company, you must sign some agreements and provide some information. This may include permitting the company to act on your behalf, setting up a new bank account, and agreeing not to talk directly to your creditors.
  2. Sending monthly payments
    Instead of paying your creditors directly, you will send monthly payments to the debt settlement company. They will save this money for you over around three years or sometimes even longer. The debt settlement company won’t send any money to your creditors during this time. This is because they want to try and negotiate a deal where your creditors accept less money to settle your debt.
  3. Contact from your creditors
    Even though you are working with the debt settlement company, your creditors may still contact you during this time. They may contact you to ask for their money or make payment arrangements.

    1. Settlement offers
      Once you’ve been paying the debt settlement company for a while, they will start making settlement offers to your creditors. A settlement offer is when they propose paying your creditors a smaller amount than you owe. For example, if you owe $10,000, they might offer to pay $5,000 as a one-time payment to settle the debt.

The creditor can choose whether or not to accept the settlement offer. Sometimes they agree because they would get some money back. If they admit it, your debt will be paid off.
At the end of the debt settlement process, there might still be some debt remaining. This could be because some creditors refused to accept the settlement offer, or new fees were added to the original debt. Knowing this possibility and understanding that settling your debt might not eliminate everything you owe is essential.

Debt settlement is not a quick fix and only sometimes works. There are also some risks involved like your credit score being affected, and there’s no guarantee that your creditors will agree to settle for less money. That’s why it’s essential to talk to a trusted attorney before considering debt settlement.

Debt Settlement FAQs

Debt settlement and debt consolidation are two distinct approaches to managing debt, each with its characteristics and level of risk.

Debt settlement involves engaging with for-profit companies that aim to negotiate with creditors on behalf of their clients to settle their debts for less than the total amount owed. These companies, sometimes called “debt relief” firms, assume control over managing their clients’ debt accounts. They collect monthly customer payments and eventually offer the creditors lump-sum settlements.

Debt settlement is commonly used to address significant debts with a single creditor, although it can also be applied to multiple creditors.

On the other hand, debt consolidation focuses on combining multiple debts into a single loan or payment plan. This allows borrowers to streamline their debt repayment process and potentially secure more favorable terms, such as lower interest rates.

Debt consolidation can involve obtaining a consolidation loan, a balance transfer credit card, or working with a credit counseling agency to establish a debt management plan.

While debt settlement may seem appealing due to the potential for reduced debt amounts, it carries significant risks. Debt settlement can negatively impact credit scores, may involve upfront fees, and there is no guarantee that creditors will agree to settle the debt. Debt consolidation offers a more structured and potentially safer approach to debt management.

Ultimately, the choice between debt settlement and consolidation depends on an individual’s financial situation and preferences. It’s recommended to carefully evaluate the pros and cons of each option and Get in Touch With Our Experienced Bankruptcy Attorneys.

Go To A Credit Counseling Agency

Credit counseling is a valuable resource that can assist you in assessing your financial options and determining the best course of action to alleviate your debt burden. By seeking guidance from a credit counselor, you can gain insights into various strategies available to you, including alternatives to bankruptcy.

A credit counselor will review your financial situation, analyze your debts, and develop a customized repayment plan for your budget and goals. This process enables you to understand the potential benefits of a debt management plan, such as streamlined payments and potentially improved interest rates.

By exploring these alternatives, you may find a more manageable path to overcome your debts and avoid bankruptcy.

Alternatives To Debt Settlement and Consolidation

Consolidating debt doesn’t necessarily require a specialized loan.

Specific lenders provide personal loans backed by collateral, such as existing certificates of deposit or savings account balances. These loans often have lower interest rates than unsecured personal loans and may have more lenient eligibility criteria. However, it’s important to note that defaulting on payments could jeopardize the collateral assets.

Obtaining a home equity loan could be an option to borrow a portion of this sum and utilize it for debt repayment. This approach allows you to benefit from a lower debt interest rate.

However, your home becomes collateral in doing so and is at risk if you encounter difficulties fulfilling the loan obligations. Your home’s equity is determined by the disparity between its current market value and the outstanding balance on your mortgage.

Debt payoff planners, such as budgeting programs and apps, assist borrowers in prioritizing their expenses to achieve debt repayment. Using these tools to expedite their repayment schedule, borrowers can decrease the total interest paid. However, this option is only suitable for individuals with the necessary income and flexibility to make additional payments or adjust their plans accordingly.

Like a home equity loan, a Home Equity Line of Credit (HELOC) enables you to borrow against the equity in your home. However, unlike a home equity loan, where you receive a lump sum, a HELOC provides a flexible line of credit that you can access during a predetermined period.

HELOCs typically come with an adjustable interest rate, which can be a disadvantageous factor when interest rates rise. In such a scenario, your borrowing costs would also increase.

Another option is a nonprofit debt management plan offered by a credit counseling agency, which can provide valuable financial counseling and assist borrowers in reducing their finance charges. With this plan, the borrower makes a single monthly payment to the credit counseling agency, which then distributes the amount to their creditors on their behalf. It’s important to note that debt management plans may involve additional fees, which borrowers should be aware of before enrolling in the program.

Finally, a balance transfer card can be beneficial for consolidating revolving debt. Utilizing this method, you can transfer all your existing credit card balances to a new card offering a lower interest rate or an introductory period with no interest.

During the introductory period, typically 12 to 21 months, you must repay the entire balance to prevent accruing interest on the remaining amount. This approach can help you save on interest payments and streamline your debt repayment strategy.

Downsides To Debt Settlement

Dealing with for-profit debt settlement can be risky, and that’s why organizations like the Federal Trade Commission, the Consumer Financial Protection Bureau, and the National Foundation for Credit Counseling warn people about it. Heed these indications:

  • When you stop paying your creditors, they might charge you late fees, interest, and other penalties. It can make your debt even more extensive.
  • Debt settlement usually takes a long time, like two to three years. Many people need help to keep up with the payments and quit before they can settle all their debts.
  • If your creditors find out you’re not planning to repay your entire debt, they might take legal action against you. They could sue you for the money; in some cases, they may even garnish your wages or freeze your bank accounts.
  • Creditors don’t have to accept settlement offers. Some of them want to avoid working with debt settlement companies.
  • When your debt is settled, the IRS might consider the forgiven amount taxable income. You could owe taxes on the overlooked debt if it’s $600 or more.
  • There are many scams in the debt settlement industry. Some companies may take advantage of people in difficult situations. They might charge fees upfront before settling your debt, which is unfair. Also, some companies make false promises, like guaranteeing you can pay your debt for less than you owe.
  • Debt settlement can hurt your credit score, just like filing for bankruptcy. If you miss even one payment while settling your debts, your credit score can drop by a lot, like 100 points or more. And even after you pay a debt, it doesn’t automatically disappear from your credit report.
  • Debt settlement companies often charge fees, usually around 20% to 25% of the amount you settle. They might also charge fees for your savings account.

Be careful and consider other options before choosing debt settlement. It’s always a good idea to talk to someone you trust, like an attorney, who can help you make the best decision.

Is Bankruptcy Worth it?

If you’re overwhelmed by excessive credit card bills and other debts, bankruptcy can eliminate your outstanding balances and provide a fresh start. However, it’s essential to consider the drawbacks of filing for bankruptcy. Consider exploring debt consolidation as an alternative approach to simplify your finances and expedite your debt repayment in such situations.

While debt consolidation and bankruptcy offer relief for overwhelming debt, they differ fundamentally. Understanding the distinctions between these options allows you to make an informed decision when faced with a burdensome debt situation. This knowledge will help you select the best course of action if you struggle to manage your financial obligations.

Bankruptcy, while a challenging and lengthy process, is an option for individuals facing unmanageable and overwhelming debts who wish to start anew in their financial journey. It provides legal protection and a safety net for borrowers who experience financial difficulties or setbacks. However, many individuals may prefer to explore alternative methods of handling their overwhelming debt before considering bankruptcy as a last resort.

In conclusion, dealing with debt can be overwhelming, but exploring various options is essential before bankruptcy. Debt consolidation, debt management plans, and debt payoff planners can help simplify your finances and make it easier to repay your debts. However, it’s crucial to consider the potential impact on your credit, eligibility requirements, and any associated fees.

Additionally, be cautious when considering debt settlement, as it can have negative consequences and may involve risks such as late fees, damaged credit, and potential legal and tax implications. Exploring alternative solutions, such as selling belongings, increasing your income, or seeking support from family and friends, can also be viable options.

Ultimately, seeking advice from a reputed lawyer can provide valuable guidance in making informed decisions about managing and overcoming debt challenges. Everyone’s financial situation is unique, and finding the right approach requires careful consideration and understanding of the potential outcomes.

Bankruptcy Exemptions: Protecting Your Assets during the Bankruptcy Process

People filing for bankruptcy must maintain a certain standard of living to function as productive members of society, and thus are entitled to protect various real and personal property under the bankruptcy code.

Bankruptcy exemptions protect these essential possessions, preventing the bankruptcy trustee from seizing and selling them to satisfy creditors’ claims. Bankruptcy exemptions allow you to protect certain assets when filing for bankruptcy.

These bankruptcy exemptions ensure you can keep essential items, like your home, (to a certain extent), a basic car, necessary tools for your profession, clothing, and retirement savings. If an asset is exempt, you don’t have to worry about the bankruptcy trustee taking it away and selling it to pay creditors.

Exempt Assets in Chapter 7 and Chapter 13


Exemptions can vary depending on the type of bankruptcy you file, such as Chapter 7 or Chapter 13. They often have specific dollar limits or may cover the entire value of the asset.

Federal and state laws outline which assets are protected from bankruptcy and the allowable claim amounts.

While some states mandate the use of state-specific exemptions, other states provide the option to choose between federal exemptions and state exemptions. It’s important to note that these two versions cannot be combined.

The specifics of what property can be claimed vary from state to state. While some states have stricter guidelines, others are more lenient. However, most states do have common exemptions that are widely shared.

Additionally, some states offer a “wildcard exemption” that can be used for any property you own up to a certain dollar amount. These exemptions allow individuals to safeguard their essential belongings during the bankruptcy process.

The Bankruptcy Trustee


When claiming exemptions for your property in bankruptcy, it is crucial to do so with care. The bankruptcy trustee overseeing your case will carefully review the exemptions you’ve claimed. If the trustee disagrees with your exemptions, they may initially attempt to resolve the matter informally.

However, the trustee will object to the exemptions used to protect property with the bankruptcy court if they cannot resolve this. Ultimately, it will be up to the judge to decide whether you can retain the property.

Finding a bankruptcy attorney is crucial for bankruptcy exemptions because they have expertise in navigating the complex legal requirements and ensuring you maximize the available exemptions. An experienced attorney can assess your financial situation, help you understand the applicable exemptions, and guide you through adequately claiming and protecting your assets.

They can also represent you in court if any challenges arise regarding your exemptions, increasing the likelihood of a favorable outcome. Having a knowledgeable attorney by your side can significantly enhance your chances of preserving your property and achieving a successful bankruptcy outcome.

Chapter 7 Bankruptcy Exemptions

Chapter 7 bankruptcy is a legal process designed to help individuals struggling with overwhelming debt they can no longer repay.

It is often used for unsecured debts, such as credit card bills, medical bills, or personal loans. Then the court appoints a trustee to sell assets not protected by bankruptcy exemptions.

These nonexempt assets are used to repay your creditors. In bankruptcy, if you can protect an asset with an exemption, the Chapter 7 trustee cannot sell it.

Understanding Property Exemptions: What Can I Keep in Chapter 7 Bankruptcy?

Filing for bankruptcy doesn’t mean you lose all your belongings. Bankruptcy exemptions are in place to ensure that you can keep a reasonable amount of property to help you with a fresh start once the bankruptcy process is complete.

These exemptions provide a fresh start by allowing you to retain certain assets even after filing for bankruptcy.

Most Common Chapter 7 Exemptions

Regarding Chapter 7 bankruptcy exemptions, the specific rules can vary depending on whether the state or federal exemption system is applied.

However, there are common exemptions that are typically allowed. These may include protecting a certain amount of home equity, public benefits, clothing, household goods, tools of the trade, some jewelry, spousal or child support, a portion of a car’s value, insurance benefits, retirement accounts, and personal injury awards in most cases.

These exemptions safeguard essential assets and ensure individuals can maintain a foundation for a fresh start after bankruptcy.

The Chapter 7 Bankruptcy Estate


A bankruptcy estate refers to all the property owned by the debtor who filed for bankruptcy.

Various assets are part of your bankruptcy estate, including property in your possession, property in someone else’s possession (even if borrowed), recently gifted property, future entitlements, proceeds from your property (e.g., rental income), assets received within 180 days after filing (e.g., inheritance or lottery winnings), and your share of marital property.

However, certain assets are exempt from the bankruptcy estate, including specific pensions, educational trusts, and investments necessary for maintaining a job and household.

Keeping Your Bankruptcy Estate Property


The ability to keep a property in Chapter 7 bankruptcy depends on the value of the assets and the exemptions available to your state bankruptcy exemptions. Most Chapter 7 filers can retain all or most of their property thanks to exemptions.

If there is a property you cannot exempt from the bankruptcy estate but still want to keep, purchasing it from the trustee at a negotiated price is possible.

The discounted price would be the asset’s value minus any costs and fees associated with the sale. However, you must show evidence that the funds used for the purchase are not part of the bankruptcy estate. This could include using wages earned after filing for bankruptcy or obtaining a loan from a family member or friend.

Chapter 13 Bankruptcy Exemptions

In Chapter 13 bankruptcy, you keep your property while following a court-approved repayment plan for three to five years. Regular payments allow you to maintain control over your possessions and stop creditor actions such as a home foreclosure if you stay current on mortgage payments within the plan.

Chapter 13 bankruptcy is for people with sufficient income to offer a feasible repayment plan and debt amounts below specified limits. The repayment plan to file bankruptcy considers your disposable income after essential expenses.

While in Chapter 13 the Trustee is not seeking to sell your property if it is not fully exempt, the inability to fully exempt your property in Chapter 13 will affect the monthly payment amount. The value of the non-exempt property determines the repayment to creditors, so maximizing exemptions reduces that value.

The non-exempt total is divided by the number of months (between 36 and 60, or three to five years) in your repayment plan to get to your monthly payment sum.

Personal Items, Vehicle, And Household Goods: Typical Exempt Property

In bankruptcy, the exempted property can include your necessary car, work tools, primary residence, and household belongings that make your house a home. Bankruptcy exemptions may also cover most of the clothes in your closet.


Exempt property in bankruptcy can also include a computer, essential medical supplies, a television (typically limited to one), certain jewelry like a wedding ring, personally created art, and a musical instrument if it supports your livelihood.

Several additional assets can be exempt from bankruptcy proceedings. These include veteran’s benefits, retirement accounts, unemployment benefits, wages earned after filing for bankruptcy, alimony, child support payments, social security benefits, life insurance policies, monetary awards from personal injury cases, and crime victim awards.

Additionally, a wildcard claim can protect assets not covered by any other specific exemption.

Non-exempt Property


Non-exempt property in bankruptcy refers to assets that are not protected and can be sold by the trustee in Chapter 7 to repay creditors.

In Chapter 13, the value of non-exempt property influences the repayment amount for creditors without collateral.

The non-exempt property includes secondary residential properties, additional cars (unless filing jointly), non-retirement investments, recreational vehicles, valuable art, luxury clothing, extra televisions, valuable jewelry, expensive collections, family heirlooms, and non-essential musical instruments.

These assets are subject to potential liquidation or payment in bankruptcy proceedings.

Michigan’s Bankruptcy Exemptions


Here are some common-used Michigan bankruptcy exemptions that can help protect your property during bankruptcy. Additional exemptions are available and may change over time. You can find the Michigan bankruptcy exemption statutes on the Michigan Legislature website. To stay updated, check the Economic Reports section of the Michigan Department of Treasury.

Michigan Homestead Exemption


In Michigan, you can protect up to $46,125.00 in equity in your residence or $69,200.00 if you are over 65 or disabled.

If spouses file together, they cannot double these exemption amounts. Additionally, the surviving spouse of the owner can claim the homestead exemption.

Debtors who hold property in tenancy by the entirety can protect equity against personal debts but not joint debts. Consulting with an attorney is advisable to understand this protection in more detail.

Michigan Motor Vehicle Exemption


In Michigan, filers can safeguard up to $4,250.00 of equity in a motor vehicle.

Michigan Pension and Retirement Account Exemptions


In bankruptcy, most pension and retirement accounts receive complete protection. This includes individual retirement accounts (IRAs), annuities, ERISA-qualified pension plans, profit-sharing plans, and stock bonus plans.

However, contributions made within 120 days before filing may receive insufficient protection.

Specific protections exist for retirement benefits, such as those for firefighters, police officers, legislative members, public school employees, state police, state employees, and judges. These protections ensure the preservation of rights and benefits for individuals in these professions throughout the bankruptcy process.

Michigan Personal Property Exemptions

In Michigan’s bankruptcy code, there are various personal property exemptions available, including burial grounds, milk or cream sales proceeds, a portion of unpaid wages, family pictures, required arms and accouterments, clothing (excluding furs), family cemetery rights, health aids, provisions and fuel for six months, household goods, seats or pews, farm animals and crops, household pets, a computer and accessories, and tools for your profession.

Michigan Public Benefit Exemptions

In Michigan, there are public benefit exemptions available in bankruptcy. These exemptions include compensation for crime victims, veterans’ benefits, welfare benefits, worker’s compensation benefits, and unemployment compensation.

Michigan Insurance Exemptions

In Michigan, there are insurance exemptions that protect against bankruptcy. These include benefits from fraternal benefit societies, insurance benefits regardless of the amount, benefits paid on behalf of an employer, and benefits paid by various types of insurance companies.


In conclusion, securing the assistance of a bankruptcy attorney is essential when it comes to bankruptcy exemptions. Their expertise in the field allows them to effectively navigate complex legal requirements and help you make the most of available exemptions.

By analyzing your financial circumstances, an experienced attorney can guide applicable exemptions and assist you in adequately claiming and safeguarding your assets. Furthermore, they can represent you in court if any challenges arise, significantly improving your prospects for a favorable resolution.

With a skilled attorney, you significantly increase your chances of preserving your property and achieving a successful outcome in your bankruptcy case.

The Impact of Bankruptcy on Student Loans

It is a common misconception that student loans are immune to bankruptcy discharge, but that is not entirely true. Although challenging, it is possible to discharge federal student loan borrowers’ loans through bankruptcy under certain circumstances.

If you can successfully demonstrate undue hardship, then through the successful filing of an adversary proceeding in the bankruptcy case, your student loans may qualify for complete discharge, partial discharge, or restructuring.

With a complete discharge, you will no longer be obligated to make further payments toward your student loans. In the case of partial discharge, you will be responsible for paying the remaining portion of your loans.

However, if your loans are restructured, you may still be required to repay them, but you will receive new repayment terms designed to be more manageable, including a lower interest rate.

If you have explored all other alternatives and meet the eligibility criteria for discharge, consider pursuing this route. Here is some vital information to keep in mind if you are contemplating how to file for bankruptcy on your student loans.

Obtaining Student Loan Discharge in Bankruptcy



To obtain a bankruptcy discharge for your student loan debt, you must establish that repaying the loans would cause significant harm to you and your dependents. This requires demonstrating that the financial burden is so severe that it would have an overwhelmingly detrimental impact on your life.

The Brunner Test

Most federal courts of appeal use the Brunner Test, a set of criteria established in 1987 to determine your eligibility for student loan discharge in bankruptcy.

The U.S. Department of Education’s Federal Student Aid office outlines the three main factors of the Brunner Test. These factors collectively play a vital role in determining your eligibility for student loan discharge through bankruptcy.

Firstly, you must demonstrate that repaying your loans would prevent you from maintaining a basic standard of living. This means the financial burden would be so severe that meeting essential needs would become challenging.

Secondly, you need to establish that this hardship will persist for a significant portion of your repayment period.

Finally, it is crucial to show that you have sincerely tried to repay your federal and private student loan borrowers’ loans before considering bankruptcy.

Other Court Options to Discharge Student Loan Payments Through Bankruptcy



In 2018, legislation called the Higher Ed Act was introduced in Congress. This legislation broadened the definition of undue hardship, enabling many student loan borrowers to qualify for reduced or discharged student loan obligations.

Also, the Department of Education recently requested public comment regarding the factors used to assess undue hardship and whether the two standards create disparities for borrowers seeking to discharge their student loan debt.

This request invites input from the public to evaluate the existing criteria and consider whether any inequities exist in the process for borrowers seeking relief from their student loan obligations. The aim is to gather feedback and insights to ensure a fair and consistent approach to evaluating undue hardship claims.

On the other hand, the 1st U.S. Circuit Court of Appeals and the 8th U.S. Circuit Court of Appeals use the totality of circumstances. This standard considers your past, present, and future financial resources, reasonable living expenses, and other pertinent factors concerning the bankruptcy process.

Should You File Chapter 7 or Chapter 13?

Student loan bankruptcy can be approached through Chapter 7 or Chapter 13 bankruptcy.

To qualify for Chapter 7, you need to demonstrate that you have limited disposable income available to repay your debts. In this type of bankruptcy, most unsecured debts, including student loans and credit card debt, can be discharged.

Discharging student loans in Chapter 7 can be challenging and requires meeting specific criteria. The Chapter 7 bankruptcy process typically takes around four months to complete.

The House Judiciary Committee introduced the Consumer Bankruptcy Reform Act of 2020 with the intention of fewer consumer debts and streamlining the process of discharging student debt by replacing Chapter 7 and Chapter 13 bankruptcy proceedings with a new Chapter 10.

However, at present, the interpretation of standards by individual bankruptcy courts can lead to varying outcomes. The determination of undue hardship and the absence of a federal standard leave it to each court’s discretion. That is a powerful reason to find a reliable bankruptcy attorney to work by your side.

Proving Undue Hardship for Student Loans



Borrowers are responsible for providing evidence that meets the court’s requirements for proving undue hardship. However, establishing dire financial straits is more complex than it may seem.

To successfully demonstrate undue hardship, you must be in an exceptional circumstance. This often includes individuals facing health issues, receiving disability benefits, or experiencing an extreme and unchangeable financial situation.

Start With Putting Paperwork In Order

If you want to use bankruptcy to eliminate your federal student loan debt, you must be well-prepared by gathering all your student loan documents and personal financial records. Being organized will significantly improve your chances of successfully presenting your case.

Federal Student Loans or Private Student Loans?

Whether they are federal or private loans doesn’t matter when filing for bankruptcy on student loans. If you have fallen behind on your monthly payments and have missed some, it will be easier to show that you are facing significant financial hardship that makes it challenging to repay the loans.

Seek Legal Assistance to Eliminate Your Student Debt



Although hiring a lawyer when filing for bankruptcy on student loans is not mandatory, it is crucial to recognize the complexity of the process. Bankruptcy entails deciding the appropriate type of bankruptcy to file and initiating an additional legal action known as an adversary proceeding.

Attempting to have your student loans discharged in bankruptcy alone could result in additional time, incorrect filings, and the risk of an unfavorable outcome. By working with a knowledgeable lawyer, you can navigate the intricacies of the process more effectively, increasing your chances of success and avoiding potential pitfalls.

The Adversary Proceeding

This distinctive aspect of the bankruptcy and student loan journey is crucial, as it sets this process apart from other forms of bankruptcy. Whether you enlist a lawyer’s support or take on the task independently, be prepared for a crucial step called the adversary proceeding.

This hearing serves as a pivotal moment where the possibility of discharging your student loan debt is determined. Picture yourself in a bankruptcy court, with your creditors present, as you present evidence to establish your eligibility based on undue hardship criteria.

Exploring Non-Bankruptcy Options for Student Loan Debt



There are alternatives to filing for bankruptcy for student loans. For instance, federal loans offer income-driven repayment plans, deferment, and forbearance options. These programs can provide relief without resorting to bankruptcy.

Student Loan Forgiveness

You can also seek forgiveness by applying for an income-driven repayment plan or Public Service Loan Forgiveness (PSLF). PSLF is specifically for individuals employed by eligible public services organizations like government agencies or nonprofits.

Hardship Programs For Student Loan Payments

Contact your lender to discuss potential loan forgiveness programs if you have a private student loan. Consider sending a certified letter to your private loan servicer explaining your financial difficulties, income, and affordable payment amount. Your student loan servicer might offer a repayment plan that provides relief. If you prove undue hardship, they can scheme your monthly payment.

Student Loan Bankruptcy Consequences

Filing for bankruptcy can impact your existing student loans and restrict your ability to obtain new ones. Filing for bankruptcy can affect your existing loans and limit your ability to get new ones.

While it may be challenging to eliminate student loans through bankruptcy, the potential debt relief you could receive from filing bankruptcy may outweigh the difficulty. Consult with a bankruptcy attorney or a specialized lawyer in student loan bankruptcy for guidance and assistance.