We begin with the creation of the automatic stay. The stay is automatically created at the time of bankruptcy filing.

The automatic stay is actually a unique feature. If a creditor attempts to collect from the debtor in any way after the bankruptcy was filed and the automatic stay was enacted, the court can undo creditor’s actions. For example, if a car was repossessed without bringing a motion to lift stay, that car, can be requested to be returned to the debtor. So let’s say you filed your case, your case has been filed, and all of the sudden one of the creditors that has security on your car, purchased money security interest, comes in and repossesses your car. Well that means you can go and ask the court to make the creditor return the car back to you, because what the creditor did was actually illegal, and the creditor can actually be punished for that. So, the automatic stay has some benefits and one of the actual benefits is that it allows you to stay in a house you are surrendering for almost a year.

Taxes and Bankruptcy

Now, let’s talk about taxes, taxes owed to the government that were accumulated within three years prior to the bankruptcy won’t be discharged. However, if you file your taxes then you can actually get your taxes discharged that were accrued prior to three years of filing. So, let’s say its 2008 right now. Taxes that you were supposed to pay in 2004, 2003, 2002, 2001…. as long as you filed them, can actually be discharged.

Not paying your taxes can have a significant consequence. For example, the interest rate can amplify the amount you owe significantly. In a couple of years you can go to actually doubling your debt. Now, once bankruptcy is filed the interest on the debt stops.

Personal Guarantees on Businesses

There are different kinds of bankruptcies there is the business and personal bankruptcy. A lot of people have small little businesses that went downhill and are actually bringing owners along for the bankruptcy. Of course if you have an S corporation it’s a different kind of entity and it’s not totally connected to the owner. Let’s say a debtor has an S corporation, a body shop or a restaurant, whatever it is, in order to actually discharge the business debt, some of the liens that are from that S corporation, some of the credit cards that are on that S corporation, you actually have to file bankruptcy for the S corporation itself. However, most S corporations and other businesses have loans that are also secured by the debtors themselves, by the owners of the S corporations and not only by the S corporation itself. These loans cause the owners of the S corporation and the S corporation to have to file bankruptcy together.

Most of the time lenders won’t give you a loan just for the S corporation knowing that you can easily just file bankruptcy under the S corporations without being liable for the rest of the loan. Therefore most of the loans are secured by personal guarantees and by the corporations themselves. In this scenario both the owner of the S corporation and the S corporation has to file bankruptcy and that’s the only way you’re going to get discharged from that debt completely.

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