Bankruptcy provides debt relief to a debtor through the automatic stay. All creditors are prevented from trying to collect any debt from a debtor. Even utility providers are required to reconnect their services if they were cut off due to unpaid bills. However, there are also limits to what the automatic stay can do.
If you are renting your home, the effect of automatic stay will depend on whether you are behind in your payments, whether the eviction process has been started, and if the landlord has taken other actions in the bankruptcy court.
Filing bankruptcy is not going to eliminate your obligations to pay the rent, but in certain cases it might provide relief by reducing any arrears. If you are current on your rent, then the payments must continue so the landlord will not be notified about the bankruptcy filing. Nevertheless, you are required to state in your bankruptcy petition all of your assets such as any rent deposit. But it will probably be within the exemption amount, so, the trustee is not going to use it to pay your debts. If you are behind in rent payments, but there is still no eviction order, then the eviction will be stopped by the automatic stay once the bankruptcy petition is filed. However, the landlord has the right to file a motion to lift the automatic stay.
After filing the bankruptcy petition, you have to make sure that you are current on your rent; otherwise, you can be evicted by the landlord because the automatic stay does not apply to any debts incurred after the filing. However, there are states that allow landlords to evict their tenants even if they are paying their current obligations, although the court will discharge any unpaid rent.
If the landlord has obtained a judgment for possession prior to the bankruptcy filing, then the eviction will be allowed to move forward, except if you are successful in challenging it in court. Then again, not all states allow debtors to challenge an impending eviction.
In case your landlord files a motion to remove the stay, the court will likely allow the eviction to proceed given that the property is owned by the landlord. Since you do not own the property, it cannot be included in the bankruptcy estate, which the trustee uses to repay creditors.
Bankruptcy affects the landlord's ability to evict tenants who have filed for bankruptcy. However, landlords do not have to file a motion to remove the stay if they are evicting a tenant for damaging the property or selling drugs on the property. The tenant will simply be served with a certification under penalty of perjury that an eviction action has been filed by the landlord for the previously mentioned reasons. This certification is also filed with the court. The tenant is given 15 days to file an objection to the accuracy of the certification.
If the landlord has completed or started the eviction proceedings prior to the bankruptcy filing, he does not have to get the approval of the bankruptcy court to proceed with the eviction process. Once the landlord has obtained an eviction order from the court, the tenant cannot stop an eviction through filing for bankruptcy.
Bankruptcy is often the last resort to fix debt problems. There are different reasons why people file for bankruptcy. The most common reasons are high medical bills, business failure and joblessness. A debt discharge in bankruptcy gives you an opportunity to have a fresh start financially by wiping out credit card bills, mortgage debt, medical bills, loans and others. Unsecured debts are mostly wiped out in Chapter 7 bankruptcy. In Chapter 13, you only have to pay what you can afford within 3 or 5 years through a repayment plan. Any remaining debt will be discharged by the court.
But not all debts are discharged in bankruptcy. There certain debts that cannot be discharged due to public policy reasons. The bankruptcy law does not state the specific debts that can be discharged. Instead it only enumerates the non-dischargeable debts. Examples of these are domestic support, student loans, and most unpaid taxes.
The Bankruptcy Code does not list the types of taxes which cannot be discharged but it states what is exempted. Income taxes are exempted provided that the debtor filed for the taxes at least two years before the bankruptcy petition is filed. Also, the income taxes must have been evaluated by the IRS no less than 240 days before the filing of the petition. It must also be filed without the intention of evading tax payments and there should be no fraudulent tax return. Lastly, the tax payments must be at least 3 years behind its due date. In order to receive a full debt discharge, the bankruptcy case should be filed under a Chapter 7 procedure. In a Chapter 7 case, the debtor's non-exempt assets are sold by the bankruptcy trustee. The income from the sale is distributed to the creditors and whatever remaining unpaid amount is wiped out.
Payroll taxes cannot be discharged in bankruptcy. Hence, a business owner who files for bankruptcy will have to pay the unpaid payroll taxes. It is the duty of the employer to withhold Social Security Taxes, Medicare, state income taxes, and federal income taxes. Employees expect that their employers pay their taxes out of the deductions on their salaries. Employers have to remit the taxes to the proper government agency. They would be held liable if the payroll taxes are not paid. There are various ways that the IRS may try to recover the tax payments. An example of this is by seizing an employer's private property, such as a real estate.
Unpaid taxes caused by tax fraud or an attempt to a fraud cannot be eliminated in bankruptcy. Moreover, tax debts that are results of tax evasion cannot be discharged in bankruptcy. Social Security taxes will also not be discharged and the entire amount has to be paid, regardless of the type of bankruptcy procedure. Self-employed individuals pay about 13 percent in Social Security taxes plus income taxes. Such taxes are used by the government to fund its Social Security and Medicare programs. The beneficiaries for these programs are the retired taxpayers.
The primary downside of filing for bankruptcy with unpaid taxes is that the IRS is given additional time to collect the debt. Normally, the IRS can collect for taxes, interest, and penalties for up to 10 years. If some IRS debts remain after the bankruptcy, the IRS will have the remaining time on the ten years, in addition to the time the bankruptcy case was pending, and an additional six months.