Top 4 things People Don’t Expect When Filing Bankruptcy

Bankruptcy sometimes doesn’t work the way people think it will work.  Here are the top 4 ways that it doesn’t work the way people expect it to work:

1. BANKRUPTCY AUTOMATICALLY INCLUDES ALL CREDITORS.  That’s right, it automatically includes every company or person to whom you owe money.  You can’t keep one loan or credit card out, but file on others.
   • But what about car loans or mortgages?  Simple, these are included, but then you can take them out again if you want to keep the collateral.  For loans with collateral you can choose whether to keep paying the loan at the same interest rate and monthly payment, or to stop paying it and give back the collateral after the bankruptcy.
   • The best way to understand this is to think that all debts go into the bankruptcy, but then you can choose to take some debts back out again.  Usually this is done by signing a reaffirmation agreement for the debt that you want to keep.
   • But don’t creditors have to be listed, what happens if I don’t list a creditor?  In this day and age, most finance and bank companies are looking at your credit report every month and will see it whether or not they get listed on the bankruptcy paperwork.  These are called “account review inquiries.”
     • Want to see how often the loan companies are doing account review inquiries?  Just look at your credit reports on www.annualcreditreport.com.  This is the governments free website for credit reports.  You will see that many of the loan and credit card companies do an account review inquiry every month.
2. OLDER INCOME TAXES OFTEN GO AWAY IN BANKRUPTCY.  That’s surprising because student loans, which are also owed mostly to the government almost never get discharged in bankruptcy.  Why would the government be so generous with income tax?  That’s because the bankruptcy laws are designed to help people get a fresh start.  Having your tax refunds get taken every year makes it impossible to start saving any money.
   • When do income taxes get discharged?  Only when each of the following 3 things are true:
     1. The tax return was due at least 3 years ago.  For example, 2021 taxes are due on April 15, 2021 unless you request an extension.  The 2021 taxes will then become dishargeable in a bankruptcy file after April 16, 2024.  It’s a few months longer if you got an extension.
     2. The returns were filed by you or an accountant or website you used at least 2 years ago.  If the IRS or Minnesota Department of Revenue filed the tax returns for you, then they are never dischargeable in bankruptcy.
     3. The taxes were assessed at least 240 days ago.  This rule doesn’t come into play very often because taxes are usually assessed about a month after the return is filed.  It only comes up where there is an audit or the IRS or Minnesota Department of Revenue finds something new where you should have paid taxes, but didn’t.  An example is where you did some extra work as a delivery driver one year and got a 1099, but didn’t include that income.
     4. There was no tax fraud or tax evasion.
   • I commonly meet people that satisfy all of these requirements and can get their taxes discharged.  At Walker & Walker we specialize in going to the IRS and getting their file on you to make sure that the taxes will go away.  After all, who can remember all those details about taxes from years ago?
3. BANKRUPTCY IS OFTEN GOOD FOR THE CREDIT OF MOST PEOPLE!  Why is this?  Because having a high amount of debt where you are occasionally missing payments, or getting sent to collections gives you a bad credit score anyhow.
   • If you are living paycheck to paycheck to pay debt, then your utilization rate and debt to income ratio are already bad.  What’s more, is that sometimes people live this way for 5-10 years of their working lives.  this means that people get charged extra for interest rates and charged extra for insurance.  If you are paying only the minimum payments, then the score does not usually improve very much month to month.
   • Filing bankruptcy makes all of the debts get marked as $0 balance and discharged in bankruptcy on your credit report.  No more late payments, no more collections, and a much better utilization rate and debt to income ratio.
   • It is not uncommon for a credit score to be in the 700s only 2 years after filing chapter 7 or chapter 13.
   • It is true that a chapter 7 is on the credit report for 10 years from filing and a 13 is on the credit report for 7 years from filing, but because bankruptcy IMPROVES a person’s financial stability, their credit score is usually better in only a few months after filing.  Walker & Walker sticks with people to help them improve their scores in the time after filing.
4. CREDIT REPORTS DON’T SHOW ALL OF A PERSON’S DEBTS.  Americans tend to think that credit reports show the entirety of a person’s financial situation, but this is not true.  In addition to occasional errors, there are entire categories of debts that don’t show up on credit reports.  What are they?
   • Medical bills. For medical privacy reasons, medical bills generally don’t show up on credit reports.  Sometimes when a medical bill has been sold to a debt collector, then the medical bill will show up on the report, but not beforehand.
   • Taxes.  In Minnesota, income taxes and other types of taxes (like property tax or sales tax) don’t show up on credit reports at all.  People commonly owe taxes, but the taxing authorities don’t report to the credit bureaus.  In some states tax liens appear on credit reports, but they don’t appear there in Minnesota.
   • Most business loans.  That’s right, credit reports are for personal credit.  Lots of business loans don’t appear on credit reports at all.  This is often true for mortgages of larger rental properties and also for business loans like SBA loans.
   • Lenders are not required to report to the credit bureaus at all.  Many of them don’t want to spend the time and money to give updates to the 3 credit bureaus every month.  It’s a lot of work, so some things just never get reported at all.  For example lots of payday loans don’t appear, and smaller storefront loan places don’t appear either.