GENERAL OVERVIEW OF BANKRUPTCY
By Donald A. Hayes, Attorney at Law
Due to the prolonged recession, the financial and economic collapse in the economy coupled with the collapse in the California real estate market, vast numbers of people have taken refuge in the Bankruptcy court. They have done so in order to obtain a fresh start so as to not be forever burdened by lingering debt, which chokes off their ability to live productive enjoyable lives. Usually by the time a person is contemplating filing bankruptcy, a persons credit has already become damaged and stigmatized by the numerous derogatory information which has already been placed upon their credit profile.
A person files a Chapter 7 Bankruptcy to obtain a discharge of all of their obligations and debts, except for specific debts which the debtor wishes to retain after bankruptcy. This will give the individual a fresh start and enable the person to begin rehabilitating their credit which will be reported to credit reporting agencies. Creditors will now begin to look at the person’s credit post-bankruptcy to determine when they will again qualify for credit. The general rule is that a creditor will consider loaning money for home loans about two to three years after filing chapter 7. Most lenders will grant car loans and other secured loans immediately after bankruptcy with slightly higher interest rates; and normal interest rates after one year.
When we talk about discharge of all debts, it is important to know that certain specified debts and liabilities are considered nondischargeable under the Bankruptcy code. That is, the filing of a bankruptcy will not effect the collectability of those debts by the creditor. In some case the creditor will have to wait until the bankruptcy case is closed, unless they apply to the court for permission to continue its collection actions. In other cases the creditor will have the right to pursue collection of the debt even during the pendency of the bankrupt case; such a case is a liability for child and/or spousal support obligations.
Child and spousal support obligations are not dischargeable in bankruptcy. The Bankruptcy court has independent power to determine the nature of debts for dischargeability purposes. They have always had the power to look behind a property division debt arising out of a legal separation or marriage dissolution to determine if it was in the “nature of support” and thus nondischargeable. Also the label given to the debt by the parties agreement or the court’s Judgment or order is not dispositive. If the Bankruptcy court determines the debt in reality serves a child or spousal support function, the debt is nondischargeable. Even if the liability is not expressly labeled support, the Bankruptcy court could find that it is in the nature of support and hence nondischargeable.
Conversely, the Bankruptcy court may pierce through the debt labeled “support” and find that it is actually not in the nature of “alimony, maintenance or support”, and thus render it dischargeable, unless nondischargeable under some other Bankruptcy Code provision.
As in all legal matters, the “devil is in the detail”. So if you have, or are contemplating signing a property settlement agreement in your divorce case, and then filing bankruptcy later to discharge some of those debts you have undertaken in the divorce case, seek the advice of an attorney to better ensure the result you wish to accomplish.
