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“Liabilities” or “debts” are the reason for bankruptcy. They are the negative items on your balance sheet which counter the “property” or “assets.” It is called a “balance sheet” because it balances the assets against the liabilities and sees which side the balance sheet tips. For most people filing bankruptcy means that they have a negative net worth. This is an unhealthy financial state that is unsustainable in the long term.
In bankruptcy, there are three main kinds of debts: secured, unsecured priority and unsecured nonpriority.
These are the ones secured by collateral. They include your car if you have a car loan, your house if you have a mortgage and various major appliances if you’ve bought them with a major department store issued credit card or pursuant to an installment agreement.
These debts have no collateral, but the Bankruptcy Code gives them priority over other unsecured debts. These include child support, most taxes, unpaid wages up to a certain sum, administrative costs and a list of other debts. These are paid in full before any nonpriority debts are paid. So if a case is a Chapter 7 asset case, while rare, if you owe taxes they would be paid first, which could be good because they are also not dischargeable. In a Chapter 13 case, you must propose a plan that pays these debts in full or the plan is not feasible.
These are your regular garden variety debts like credit cards, personal lines of credit, pay day loans, medical bills, unpaid rent, the deficiency amount from repossessed vehicles and the like. Student loans also are in this list because they have no priority if there is a pay out, and they are not secured by your education as that cannot be repossessed. However, they are nondischargeable which leads us into our next section.
While there is a whole section in “Bankruptcy Basics” on the “Discharge” and what is not dischargeable, it is important here to note that when planning a bankruptcy you need to take into account the type of debt. There is no point in filing a bankruptcy if you only have student loans and past due child support, at least if your goal is to get rid of the debt. That is an extreme hypothetical to make a point and is rarely the case.
Most cases are a mixture of debt that is usefully discharged, such as large credit card balances, and nondischargeable debt (typically student loans) and secured debt where the client wants to keep the collateral and so the debt has to be paid anyway (such as a car). It needs to be determined in the consultation phase what is the “bang for the buck” in filing bankruptcy. That is the cost/benefit analysis. It doesn’t make sense to file a bankruptcy for only $5,000, no matter how little you earn. If you are judgment proof because you have no assets and have no income which creditors can get at, then it probably does not make any sense to file bankruptcy unless you’ll have assets creditors can take in the future.
It really makes sense to have an attorney who has seen thousands of cases and does this analysis several times daily to figure out the cost benefit analysis before you undertake to file a bankruptcy. Bankruptcy is a serious step, and whether you should do it or not requires an expert and objective view. Moreover, if the bankruptcy is necessary, then the question arises as to how to best maximize the discharge in your favor. Bankruptcy cases are not a cookie cutter process. They are designed based upon the unique circumstances in each case.
This is another important way to slice and dice debts because if you have more debt incurred for “business” (but this can include other non-consumer debt such as taxes) than for consumer purposes you may get reclassified as to the kind of case you have altogether. This can be huge if you’d otherwise not pass the Means Test, because the Means Test does not apply in non-consumer/business cases. Even one more dollar of non-consumer debt than consumer debt does the trick.
Moreover, the “totality of the circumstances” test does not apply with business cases either. The “totality of circumstances” is the second catch-all net the OUST can use if they didn’t get a presumption of abuse from the Means Test. So it makes a motion to dismiss much harder if you have even 51% of your debt in this category.
To give one possible scenario in which this has enormous consequences is a tax case with a high earning debtor. They may have some consumer debt, but if the preponderance is tax debt they can file chapter 7 even if they have an income much higher than the median income and would never pass the Means Test.