Last week we discussed debts, lawsuits and judgments creditors can have against a debtor. . . What if the debtor doesn’t have the money to pay off these debts? This type of situation can occur when there has been a loss of a job, the inability to work due to an injury or a family crisis.

In the event that the debtor is unable to pay his or her debts for a short time period, the debtor can contact his or her creditors to request for additional time to pay off the debt; this could be an agreement to make smaller payments and then a lump sum in a few months, etc. Depending on the creditor, the amount of the debt and amount of the delinquency – this can be a fast and the least costly solution.

If the creditor is unwilling to provide time to pay off the debt based on the debtor’s current financial condition, the debtor can seek the Court to provide avenues of relief. The United States Bankruptcy Court provides different solutions to different types of debtors. A debtor can file a Chapter 13 bankruptcy, which allows all collection by creditors to stop in exchange for a promise by the debtor that he or she will pay their debts according to a Court ordered Chapter 13 plan. This payment plan allows the debtor to make payments over a 3-5 year time-frame, at the end of which all of his or her debts are cancelled. This cancellation of debts occurs even if the debts are not paid in full by the end of the plan, as long as the debtor follows the plan.

A debtor should consider a Chapter 13 bankruptcy if the debtor knows it can work out a way to pay off part of his or her debts over a period of time and still afford the reasonable costs of living. For example, a person who lost his job and has obtained new employment with a steady flow of income is a good candidate. Additionally, the debtor must owe less than the requisite debt value in secured and unsecured debts to qualify for a Chapter 13 bankruptcy. Current guidelines will be available to an experienced attorney.

In the event the debtor does not have steady income and is unable to pay his or her debts, the debtor can file a Chapter 7 bankruptcy to ask the Court to cancel the debtor’s debts. Even in the event that a debtor filed a Chapter 13 plan but is unable to meet the plan’s guidelines, the debtor may convert the bankruptcy to a Chapter 7. A Chapter 7 bankruptcy allows an “honest” debtor to make a fresh start by having a court discharge his or her debts. Bare in mind, bankruptcy does not cancel secured debts, most income taxes incurred in the last three years, student loans, child and spousal support or any money judgments debtor owes for willful conduct, such as drunk driving or assault.

For both forms of bankruptcy, debtor must show the Court his or her income, expenses, assets and liabilities to obtain relief. Examples of property a debtor can keep in the event of bankruptcy are: If the debtor is married, up to $75,000.00 in equity in your home (up to $50,000.00 if debtor is single); $2,775.00 equity in one or more cars; up to $2,000.00 each in a bank account; etc.

These types of exemptions allow the debtor to keep his or her property and deny the right for the Bankruptcy Trustee to take over and sell the property for payment of your debts. Before filing any documents or even seeing a Bankruptcy attorney, the debtor must make a list of the debtor’s assets and value them, especially a home with the rising real estate market in California. Should the debtor’s home have more equity than allowed in the exemption, the Trustee has the right to take possession and sell the home to pay the debtor’s debts just like any other unexempt property in the debtor’s name.

In these times of financial crisis a debtor should seek the help of an experienced bankruptcy attorney to provide competent legal advice based on the debtor’s assets and liabilities.

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