Bankruptcy Questions & Answers

Answers to Common Questions About Bankruptcy From Bills.com Readers

The following are 19 common bankruptcy questions Bills.com readers have asked. We include our answers and links to additional discussion.

• What is the Role of a Trustee in a Bankruptcy?
• What are Bankruptcy Exemptions?
• If One Co-Debtor Files Bankruptcy, What is the Other Co-Debtor’s Liability?
• How Often Can I File Bankruptcy?
• How Will Bankruptcy Impact My Spouse?
• May I Include Delinquent Student Loans in Bankruptcy?
• May I Include Delinquent Taxes in Bankruptcy?
• Can Bankruptcy Prevent Foreclosure?
• Can Bankruptcy Wipe Out a Deficiency Balance?
• What Impact Will Bankruptcy Have on Child Support?
• How Is Bankruptcy Shown on a Credit Report?
• What Can I Do If a Derogatory Item on a Credit Report After Bankruptcy Won’t Disappear?
• What Can You Tell Me About Bankruptcy in Canada?
• What Impact Will Filing Bankruptcy Have on My Immigration?
• How Will Bankruptcy Impact My Vehicle?
• What is Reaffirmation?
• May I File an Emergency Bankruptcy?
• May I Include a Payday Loan in a Bankruptcy?
• May I File Bankruptcy While Living Overseas?
• Should I Cash Out My 401(K) To Pay My Debt Or File Bankruptcy?

What is the Role of a Trustee in a Bankruptcy?

Once a debtor files for bankruptcy protection, the bankruptcy court will appoint a trustee to oversee the case. The trustee’s job is to act as a referee. The trustee is impartial. The trustee acts to make sure that all assets of the estate (the real property and personal property the debtor owns or has rights to) are included in the bankruptcy. The trustee can collect property of the estate and raise claims regarding the exemptions a bankruptcy petitioner may claim. The trustee can also liquidate any of the estate’s property that is deemed non-exempt and then distribute the funds to appropriate creditors.

In a Chapter 7 bankruptcy, the trustee’s role is limited. In most Chapter 7 cases, the debtor does not have any assets available. In cases where there are assets, however, the trustee is responsible for the liquidation of debtor’s assets and distribution of money to the creditors. The trustee monitors the bankruptcy. The trustee examines the exemptions that a debtor claims and makes sure that the debtor is sticking to the plan of action laid out by the court, alerting the court if the debtor does not comply. The trustee is also involved with meeting with creditors. The trustee is empowered to deny a debt being discharged, if the trustee sees evidence that the debtor has supplied inaccurate information that is fraudulent or perjurious or if the trustee discovers that the debtor is not eligible for bankruptcy protection.

In a Chapter 13 filing, the trustee has a more active and in-depth role. A Chapter 13 bankruptcy does not involve the liquidation of the debtor’s assets. Instead, the trustee works to manage the debtor’s finances, so that the creditors are receiving full or partial payment of the outstanding debts. The trustee attends all the hearings that determine the asset value of the estate’s assets, monitors the payments from the debtor, and disburses the money to the various creditors.

What are Bankruptcy Exemptions?

In a Chapter 7 bankruptcy, the trustee may liquidate a debtor’s assets, if there are any. However, the trustee cannot seize and sell every asset that belongs to the debtor. Some assets may be exempt from any creditor claims. These assets are protected, in part or in full. The size of the exemptions varies from state to state. Some states offer wide protections to the debtors, allowing the debtor to hold onto significant assets. Other states are much less consumer-friendly and offer very narrow exemptions.

For example, a person in Florida could file for Chapter 7 bankruptcy and liquidate all of his debts while retaining ownership on a primary residence that is worth $1,000,000. This is because Florida has an unlimited bankruptcy exemption for a homestead; the entire value of the home is protected from creditor claims. Contrast this with Kentucky, where a person can only have $5,000 in equity of his or her primary residence.

Other exemptions cover the value of a vehicle, the funds in bank accounts, and some personal property. Again, exemptions vary from state to state.

If One Co-Debtor Files Bankruptcy, What is the Other Co-Debtor’s Liability?

Generally speaking, if both debtors are jointly liable to a creditor, the bankruptcy of one does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other debtor for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt to be paid 100 percent through the Chapter 13 plan, the co-debtor may protected by the bankrupt-filing debtor’s stay.

You may have noticed the use of several qualifiers in the above paragraph. This is intentional. Bankruptcy law is federal. However, each state is free to create their own exemptions that modify the bankruptcy law. In California, for example, consumers can choose one of two sets of state exemptions, or reject both and choose the default federal exemptions. Also, if the person filing bankruptcy is married, his or her spouse may be protected automatically, depending on their state of residence.

The issue of co-debtor liability comes up often regarding credit card debt. An authorized user has no liability to a credit card issuer if the debtor defaults on payments. The authorized user has no liability if the debtor files for bankruptcy. The credit card issuer may report the default or bankruptcy on the authorized user’s credit report. However, if the account is joint, then as discussed in the paragraph above, the other joint account holder has liability if the other files for bankruptcy.

How Often Can I File Bankruptcy?

According to the U.S. Federal Courts bankruptcy Web site, "The court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter 11 in a case filed within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort. A debtor is ineligible for discharge under chapter 13 if he or she received a prior discharge in a chapter 7, 11, or 12 case filed four years before the current case or in a chapter 13 case filed two years before the current case."

How Will Bankruptcy Impact My Spouse?

Generally speaking, you should be able to file for bankruptcy without including your spouse. Accordingly, his or her credit score will be unaffected by the filing spouse’s bankruptcy.

Prenuptial

Premarital debt is fact and state law dependent. Marital property and debt may or may not be separate depending on its nature and how it was acquired.

In non-community property states, pre-marital property and debt are considered separate property. If the spouses now live in a community property state, or lived in one at the time the consumer debt account (such as a credit card account) was opened, the non-signing spouse may have incurred liability without signing a credit contract as co-debtor.

May I Include Delinquent Student Loans in Bankruptcy?

There is a limited exception to when you can discharge a student loan in bankruptcy. To do so, you must prove to the bankruptcy court you are in an undue hardship. Undue hardship is defined as the permanent physical inability to work. You must prove in bankruptcy court:

• You are physically unable to work
• You are likely to be unable to work for most of the loan term
• You have made a good faith effort to repay the debt
• Paying it would prevent you, your spouse, and your dependents from maintaining a "minimal" standard of living.

The court case creating this test was Carnduff v. U.S. Dep’t of Educ. (In re Carnduff), 367 B.R. 120, 127 (9th Cir. BAP 2007).

Student Loan Cancellation Programs

Several federal and state agencies offer programs to help you cancel or reduce all or a portion of your student loan debt without filing for bankruptcy. Most programs involve a commitment to some kind of public service, such as teaching, nursing, or military service. To learn more about available programs and how you can apply, visit the Federal Student Aid Web site.

As I mentioned, bankruptcy will not erase your student loan debt, in most cases. Although bankruptcy is still a viable solution for desperate financial situations, it is best for your future financial well being to avoid it. Contact your lenders as soon as a problem develops, attempting to work out a solution with them, in an attempt to avoid bankruptcy. See the Bills.com resource Student Loan Bankruptcy to learn more.

May I Include Delinquent Taxes in Bankruptcy?

Generally speaking, newer tax debts cannot be discharged in either Chapter 7 or Chapter 13 bankruptcy.

However, you may be able to discharge some types of older tax obligations, particularly those more than 3 years old. To qualify for discharge, taxes must result from a tax return due at least three years ago. In addition, the return must have been filed at least two years ago, and the taxes must have been assessed at least 240 days before the date the bankruptcy petition is filed. Finally, if the taxpayer filed a fraudulent return or attempted to evade payment of taxes, the taxes may not be eligible for discharge in bankruptcy regardless of their age.

Again, if you are unable to repay your tax debts, you should consult with a bankruptcy attorney or a tax relief agency to determine if your tax obligations are dischargeable in bankruptcy.

If, after consulting, you find that your taxes are non-dischargeable, you may want to seek the assistance of a professional tax negotiation service to resolve your delinquent taxes. To learn more about settling IRS tax debts, and for a referral to a pre-screened tax negotiation service, I encourage you to visit the Bills.com IRS Tax Debt page.

Can Bankruptcy Prevent Foreclosure?

Whether a bankruptcy filing can stop foreclosure action on your home depends on several factors, including what type of bankruptcy you filed (referred to as "chapters" in bankruptcy law), what you or your attorney asked for in your bankruptcy petition to the court, and the decisions made by the court and/or the bankruptcy trustee handling your case. There are two basic types of bankruptcy available to consumers — Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy, often called a "liquidation bankruptcy," completely discharges many unsecured debts if you qualify to file. Most consumers who do not have significant assets or income choose to file for protection under Chapter 7 bankruptcy. Chapter 13 bankruptcy, also called a "wage-earners bankruptcy" is primarily designed for those debtors who own significant assets and have a regular income, but who cannot afford their monthly debt obligations.

In a Chapter 13, the debtor makes payments to the bankruptcy court for a certain period, usually three to five years, until all of the petitioner’s debts are paid. If the consumer cannot afford to repay all of his debts within the time period specified by his Chapter 13 plan, any debts remaining after all payments are made are usually discharged, meaning the debt is "forgiven." Both bankruptcy chapters create an "automatic stay" when filed, meaning that the debtor’s creditors must cease all collection activity until the bankruptcy case is either finalized or dismissed, unless the stay is lifted by the court.

Chapter 7 bankruptcy generally does not stop foreclosure action against consumers. The automatic stay ordered by the court when the case is filed would prevent a mortgage company from proceeding with foreclosure; however, since secured debts, such as mortgages, are not usually dischargeable in bankruptcy, the court or the trustee will usually grant relief from the stay to mortgage company to proceed with foreclosure if the homeowner’s mortgage remains delinquent. One benefit that filing Chapter 7 can have for consumers is that the delay in foreclosure proceedings created by the automatic stay can allow additional time to bring mortgage notes current. You must keep the loan current; if you continue to miss your mortgage payments, the mortgage company is likely to proceed with foreclosure action against you. Another possible benefit of Chapter 7 is that is that it can free up money every month that you were paying toward your unsecured debts, allowing you to bring your mortgage current and allowing you to make your payments on time in the future. So, Chapter 7 will not directly stop a foreclosure action against you, but it may delay the process and free up funds to help you prevent foreclosure.

Chapter 13 bankruptcy has much more direct influence on mortgages and foreclosure actions than Chapter 7. As I mentioned, in a Chapter 13, the debtor proposes a repayment plan to the court, with the monthly payments based on his income. If the plan is approved, the court would distribute these payments to the creditors included in the Chapter 13 plan until the debts are paid off or until the plan period ends. A consumer can include the delinquent balance on his mortgage in a Chapter 13 plan; if the plan is accepted by the court, the mortgage would be brought current and the delinquent amount would be repaid over the course of the Chapter 13 plan. Although a Chapter 13 could bring your mortgage current, you would be responsible for making all regular mortgage payments going forward in order to prevent the loan from becoming delinquent again; it is not unheard of for a consumer to lose his home to foreclosure after filing Chapter 13 because he was unable to make his regular mortgage payments on top of the Chapter 13 payments.

Chapter 13 is a good option for many consumers who have experienced a temporary financial hardship, causing them to fall behind on their mortgage, as it gives them time to repay the delinquency and avoid foreclosure. However, if you truly cannot afford your mortgage payments, you may want to strongly consider selling the home, as you could find yourself facing foreclosure again in the near future.

If you are considering filing for bankruptcy protection, I strongly encourage you to consult with an attorney in your area who can better analyze your financial situation and tell you whether or not bankruptcy is a viable option for you, and if it is, what type would be best for you.

Can Bankruptcy Wipe Out a Deficiency Balance?

When a home is foreclosed upon, the mortgage lender usually auctions the property at a foreclosure sale, applying whatever amount is received at the foreclosure sale to the debt owed on the mortgage. In many cases, the sale price at auction is not sufficient to cover the mortgage and other secured liens on the property, such as home equity loans; the difference between what you owe on the property and what the lenders actually receive is called a deficiency balance. In many states, deficiency balances can be collected like any other unsecured debt.

Some states prohibit creditors from collecting a deficiency balance with "antideficiency balance statutes." These laws state a lender may not obtain a judgment for a deficiency balance arising from a purchase money loan. This means an original mortgage lender cannot obtain a judgment for a deficiency balance if it forecloses. Antideficiency statutes vary significantly. Therefore, you should consult with an attorney in your state who has experience in property law to determine whether your state offers antideficiency laws and your rights under these laws according to your situation.

Whether a deficiency is created on a loan will depend on the balance of the loan compared to the value of the home. For example, if a home is worth more than the total amount of your loans, the loan may be covered by the auction sale price. See the Bills.com Foreclosure page to read more about the foreclosure process, and Anti-Deficiency to learn about these laws in each state.

What Impact Will Bankruptcy Have on Child Support?

Delinquent child support payments are generally non-dischargeable in bankruptcy. This means that back child support debts cannot be forgiven like other unsecured debts in a Chapter 7 bankruptcy, commonly called a "straight bankruptcy." Like student loans, most taxes, and some other types of debt, you must repay child support even after filing Chapter 7 bankruptcy. Although child support cannot be discharged in a Chapter 7, some parents with delinquent child support find Chapter 7 helpful; by discharging other unsecured debts, Chapter 7 could free up money allowing you to bring your child support current and to make your payments on time going forward.

You can include delinquent child support in a Chapter 13 bankruptcy, which is a court administered repayment of your debts, but child support debts must generally be paid in full as part of the Chapter 13 plan, and the court will expect you to make your regular child support payments timely while you are in Chapter 13. Essentially, a Chapter 13 may be able to bring late support payments current, but it will not relieve the debtor past or future.

How Is Bankruptcy Shown on a Credit Report?

Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies. This law is known as the Fair Credit Reporting Act (FCRA). Under FCRA §605 (a) and (b), an account in collection will appear on a consumer’s credit report for up to 7½ years. A bankruptcy will appear for 10 years from the date of the filing. Delinquent federal student loans can be reported indefinitely, i.e., for as long as they are delinquent.

Generally speaking, any account included in a bankruptcy filing will appear on a credit report as “included in bankruptcy,” and reflect a $0 balance. It should not appear as open and past due, though previous delinquencies may remain even after a bankruptcy filing.

What Can I Do If a Derogatory Item on a Credit Report After Bankruptcy Won’t Disappear?

To correct any problems you are experiencing with your credit profile, you should first pull a copy of your credit report from each of the three major consumer credit reporting agencies (Equifax, TransUnion, and Experian), then carefully review the reports to identify which discharged accounts are being reported inaccurately. You can access free copies of your credit reports at AnnualCreditReport.com, a Web site sponsored by the credit bureaus in compliance with federal law allowing all consumers to obtain a free copy of each bureau’s credit report once every 12 months. Next, you should dispute the incorrect listings with the credit bureaus. See the Federal Trade Commission document FTC Facts for Consumers: How to Dispute Credit Report Errors for more information.

When disputing an account discharged in bankruptcy, include a copy of your credit report showing the inaccurate listing, as well as a copy of your creditor schedules from your bankruptcy filing and the order of discharge from the bankruptcy court. These documents will show that the same account appearing on your report as delinquent was actually discharged in your bankruptcy filing. Once the credit bureaus receive your dispute letter, they should forward the documents to the creditors in question so the creditors can either challenge the disputes or correct the inaccurate listings.

If the debts were discharged in bankruptcy, there is no reason that the accounts should not be updated to reflect an accurate status. Having these accounts correctly listed on a credit report should reduce their negative impact on a credit score, helping the consumer rebuild their credit after the bankruptcy filing. Although accounts being discharged in bankruptcy is not good for a credit score, having both a bankruptcy and delinquent balances on a credit report is usually worse.

Credit reports are notoriously inaccurate, so it is important to review your credit profile regularly to verify all of the information being reported by creditors is accurate. Carefully monitoring your credit history and disputing inaccurate items can significantly increase your credit score, which could save you thousands of dollars in interest on a mortgage, auto loans, and other forms of credit. If you would like to learn more about credit scoring and credit reports, I encourage you to visit the credit solutions section of Bills.com.

What Can You Tell Me About Bankruptcy in Canada?

To learn about bankruptcy in Canada, start with the Office of the Superintendent of Bankruptcy Canada home page. The key resource for you is the declaring bankruptcy page, which outlines the steps a debtor needs to take to file for bankruptcy in Canada. If you are a debtor, be sure to review the resources for debtors page.

The Canada Revenue Agency Bankruptcy page and the Bankruptcy Assistance Program are also good resources.

In Canada, the Bankruptcy and Insolvency Act (R.S., 1985, c. B-3) covers the law of bankruptcy. The BIA makes references to foreign corporations filing for bankruptcy, but I could find no laws concerning a requirement for a private person to be residing in Canada as a condition of filing bankruptcy. I hasten to add that I am not a Canadian lawyer, and you should consult with a Canadian lawyer who has experience in bankruptcy for a more precise answer.

To learn more about the relationship between US and Canadian credit reports, see the Bills.com resource Canada Credit Report.

What Impact Will Filing Bankruptcy Have on My Immigration?

You do not need to be present in the US to file for bankruptcy. You will, however, need to tell the court your address in documents you swear are accurate.

Creditors have no hotline to US immigration, and there is no known correlation between filing bankruptcy and a person’s ability to get a green card or become a US citizen.

How Will Bankruptcy Impact My Vehicle?

Filing for bankruptcy protection creates an "automatic stay" that prevents creditors from proceeding with any collection action on debts owed by the bankruptcy petitioner. If you have a loan on your vehicle, the stay will prevent repossession temporarily.

If your vehicle has been seized for enforcement of a judgment, the automatic stay enacted by the court will stop the creditor from proceeding with an auction of the property, as would normally happen after seizure. Until the automatic stay is lifted, the creditor cannot sell the vehicle.

The vehicle will likely be considered part of your bankruptcy estate (the money and property which is used to pay your creditors), the bankruptcy trustee assigned to your case may force the creditor to turn the property over to the estate. The trustee could then sell the vehicle and distribute the proceeds amongst your various creditors.

Depending on the value of the vehicle, you may be able to retake possession by asserting your automobile and other personal property exemptions, allowing you to prevent the vehicle from becoming part of your bankruptcy estate. If the trustee takes the car, it will likely be sold to pay your creditors; if the trustee does not claim the vehicle for your estate, the creditor which seized the car may apply for relief from the automatic stay and proceed with its plans to sell the vehicle to pay down its judgment.

What is Reaffirmation?

One option a person filing bankruptcy has is to reaffirm a debt. If, for example, you want to hang onto a vehicle has a loan against it, you can sign a reaffirmation contract with the lender — bankruptcy trustee permitting. The reaffirmation agreement continues your auto loan, mortgage, or other loan as though no bankruptcy ever took place.

May I File an Emergency Bankruptcy?

In cases where a bankruptcy petition must be filed quickly in order to prevent some particular action against a debtor, like the sale of a vehicle in your case, the bankruptcy courts may allow a petition to be filed without all of the documents generally required when initially a filing a case. Such emergency filings are generally called "skeletal" or "bare-bones" filings by the bankruptcy court. Once a debtor files an emergency petition, the court will give him a set period of time, generally either 2 or 15 days depending on the documents needed and the circumstances of the case, to file the remaining required documents with the court.

The benefit of being able to file an emergency petition is that it allows a debtor to commence a bankruptcy case and invoke the protections provided by the automatic stay even if the filer does not have time to gather all of the necessary documents. The automatic stay generally stops any collection action against the debtor, including repossessions and foreclosures, so filing an emergency bankruptcy petition may allow you to retake possession of your vehicle while you are working with your attorney to resolve your debts through a bankruptcy filing. To learn more about the process of filing an emergency bankruptcy petition, start with the United States Bankruptcy Court, District of Rhode Island Filing an Emergency or Skeletal (Bare Bones) Bankruptcy Case. The procedures would be similar in other district courts.

May I Include a Payday Loan in a Bankruptcy?

Payday loans can be discharged in Chapter 7 bankruptcy, along with other unsecured debts. However, your ability to qualify for Chapter 7 will depend on your income, your assets, and the laws in your state of residence. Many people who file for Chapter 7 protection are able to keep all of their property because they have no non-exempt property. Each state has its own schedule of exempt assets, so you should consult with a qualified bankruptcy attorney in your state to find out if Chapter 7 is a workable solution for your situation. An attorney will also be able to tell you if you qualify to file Chapter 7 under the guidelines enacted by Congress in 2005.

A Chapter 13 bankruptcy, also called a wage-earner’s bankruptcy, allows you to propose a plan to repay creditors over time — usually five years. Your monthly payment amount will be based on your monthly disposable income as defined by the bankruptcy code. After you have made payments to your creditors for five years, any remaining unsecured debts will be discharged. Again, you should be able to include your payday loans in a Chapter 13 reorganization plan. Chapter 13 is commonly used by debtors whose assets exceed the exemptions offered by state or federal law. It is also used by many consumers who do not qualify for Chapter 7 relief under the means test, which went into effect in 2005 with the Bankruptcy Reform Act.

Again, if you are considering filing bankruptcy, you should consult with an attorney to find out if bankruptcy will benefit your financial situation.

Bills.com also offers more information on the Payday Loan Information page, and has answered reader questions about payday loans in California, Florida, Illinois, Massachusetts, Missouri, New York, Texas, and Virginia.

May I File Bankruptcy While Living Overseas?

If you have property in the United States you may file for bankruptcy protection in the federal court in that state. The U.S. bankruptcy code (11 U.S.C., §109) states "a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor…" in a bankruptcy proceeding. You may still be able to qualify simply by owning a bank account or other relatively small asset in the United States. The bottom line is that living outside the U.S. should not bar you from filing for bankruptcy protection if you otherwise qualify under federal law.

Does It Make Sense To File For Bankruptcy?

Do you really need to file for bankruptcy protection in the US? Many individuals with US debt see no need to resolve their debts in the United States, as it is rather uncommon for an American creditor to pursue a consumer outside of the United States, beyond just making collection calls. To force you to pay this debt, the creditor would need to file a lawsuit and obtain a judgment against you in Washington, then apply in your local courts to domesticate its judgment. Once domesticated in your present country, the creditor can pursue collection of the debt by executing against any non-exempt assets you may own in your country. However, it is uncommon for creditors to pursue international collection of consumer debts, so I highly doubt that this creditor will try to collect in your country. Assuming that you do not have assets in the U.S., you may be able to let this debt sit unpaid indefinitely, as there would likely be little risk of the creditor being able to enforce it. On the other hand, if you still have any assets in the U.S., such as other land or homes, bank accounts, or if your employer is headquartered in the U.S., then the creditor may be able to more easily enforce a judgment obtained in the state where you own US assets. Whether or not you plan to reside in the United States at some time in the future is also a factor that may be important.

Consult With An Attorney

Consult with an attorney licensed in your state (preferably one with cross-border legal experience) to discuss you situation; an experienced attorney should be able to tell you if you qualify to file for bankruptcy in the U.S., if filing bankruptcy is necessary in your case, and if it is, which type of bankruptcy would best serve you.

The Risk of Doing Nothing

If you are living and working overseas, then it is unlikely that your creditors would be able to garnish your wages, even if they obtain a judgment against you in your state courts. On the other hand, if you have any assets in the US, any judgment creditors may be able to lien, or potentially even seize, your property and bank accounts.

A creditor that obtains a judgment may be able to file a petition in your new country of residence to "domesticate" its US judgment, depending on the country and what treaties the US government signed with that country. Generally speaking, the closer the economic ties the US has with your country of residence, the easier it is to domesticate a judgment. Also, the larger the amount of the judgment the greater the chance it will be domesticated. A debt of $10,000 probably will be ignored. A $1 million debt will not.

Should I Cash Out My 401(K) To Pay My Debt Or File Bankruptcy?

Consider long and hard before resorting to liquidating 401(K) plans to pay creditors: These assets are generally protected from collection actions by creditors; they are hard to replenish once spent; but most importantly, using retirement savings to pay creditors may create new debt in the form of income taxes and penalties for early withdrawal.