“Incorporating legal options into financial strategies helps individuals navigate debt challenges responsibly and effectively. Proper planning post-bankruptcy enables the rebuilding of credit and the formulation of sustainable financial goals.” —LawGuide.help
Romans sold debtors into slavery and the British, writes Charles Dickens, sent debtors to prison. Today, bankruptcy measures affordability by mounting distress; Debt.org reports: “…574,314 bankruptcy cases filed in 2025, including both individual and business cases… In 2022, 387,721 bankruptcies were filed in the U.S.” in 2025, businesses accounted for just 5% of the total. Bankruptcies cheat lenders who pass costs on to consumers with higher rates. Bankruptcy—the new Scarlett letter—destroys credit ratings for seven years and denies loans, mortgages, apartments and jobs.
Planners are not lawyers plotting Bankruptcy Court strategies, but planners can help debtors avoid filing, survive filing with resources or recover renewed strength. Bankruptcy does not extinguish all debts as many student loan or divorce debts remain. Planners may save personal homes and other assets that rectify post-bankruptcy living.
Filing Considerations
Planners advise debtors to consider bankruptcy alternatives. With non-payment motivating creditors, debt settlement negotiates down loan balances and debt consolidation bunches multiple loans into a single loan that may reduce the debt burden. Home equity loans might consolidate debts at lower interest rates. Credit counseling, mandatory in bankruptcy proceedings, may generate viable debt management plans.
Most bankruptcies begin voluntarily with the petitioner filing for relief from creditors suing or calling for collections, sometimes repossessing vehicles, garnishing wages or foreclosing houses. Frugal petitioners file with $335 fees and $1,100 for lawyers; 37% file for medical bills and 27% for medical-related work problems with 29% for unaffordable mortgage loans and only 14% for student loans. When even planners concede bankruptcy debt solutions, they advise clients timing when to terminate personal tax years and when to sell assets to avoid capital gains taxes.
Bankruptcy Proceedings
Bankruptcy filing creates Bankruptcy estates managed by trustees who inspect debtors’ petitions and ensure partial payments to creditors. Estates can deduct expenses in tax filings, but not Federal income taxes. In a “Meeting of Creditors,” debtors must answer questions under oath as creditors resist discharges of debts. Finally, the Court confirms new payment or discharge plans.
Most individuals file Chapter 7 or 13 Bankruptcies. Chapter 7 pays creditors with the debtors’ remaining non-essential assets while Chapter 13 allows for consolidated debt payments over time (typically 3-5 years) with hopes that debtors may recover after protection from creditors after discharge following payments.
The “New Bankruptcy Law” of 2005 made Chapter 7 filing more difficult but chapter 13 filings were possible. To qualify for Chapter 7, courts measure “current monthly income” from the past six months and assume it shows whether Chapter 13 payments are possible. Larger families enable larger “median incomes” before presumption of abuse of creditors arises. Chapter 7 filers must wait eight years to file again while Chapter 13 filers need wait only six years.
Delinquent Taxes in Bankruptcy
Bankruptcy is an extreme alternative to Offers in Compromise or tax payment plans that preserve credit. Federal and CA tax debts more than three years old can be discharged fully or partially, but debtors must file for the past two years and keep filings and payments current. FICA, sales tax and trust fund tax debts can’t be discharged nor even income taxes generated in the past three years.
Tax collections efforts stop with filing but may resume after the Court determines remaining liabilities. Debtors still face capital gains taxes from sales of assets to pay creditors and possible Cancellation of Debt income from forgiven debt. With planning advice, debtors must choose between taxable COD income and retained tax attributes like Net Operating Losses, basis in property and tax credits. Insolvency can also extinguish COD income.
Post-Bankruptcy Planning
Post-bankruptcy, CFPs can help debtors revise life goals and impose budgeting. The bankrupt may continue employment or business as before. Dull financially conservative policies like spending less than earning are key to solvency. To avert crisis, planners preach three-to-six-month liquid emergency funds in banks, HSAs or Roth Accounts; business owners or others with unstable income or health need more. Retirement funds should be used for long-term wealth building that save the elderly who increasingly suffer bankruptcy with destitution or dependency.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
