No. Not all debts are eliminated in bankruptcy. The bankruptcy process is designed to eliminate some debts, while others aren’t eligible for elimination, which means they are non-dischargeable. To figure out what debts you can eliminate in bankruptcy, contact our bankruptcy attorney after reading this article.
Debts You Can Eliminate in Chapter 7
If you file for Chapter 7 bankruptcy, you should be able to eliminate most unsecured debt. This is debt that isn’t secured by collateral the lender can seize in the event you stop paying on the debt.
For example, the most common debts a consumer can eliminate in Chapter 7 are:
- Medical debts
- Credit card debts
- Personal loans
- Unpaid rent
- Old unpaid income taxes
- Certain court judgments against you
These debts get discharged at the end of the Chapter 7 process, which usually takes two or three months. Helpfully, an automatic stay goes into effect when you file for bankruptcy which prevents creditors from taking any collection action against you.
Debts You Can’t Discharge
Not all debts are dischargeable in Chapter 7 bankruptcy. This means you can go through the entire bankruptcy process and these debts will still be with you. The bankruptcy code actually lays out what debts you can’t discharge:
- Child support or alimony payments
- Debts owed to an ex-spouse which arise from divorce
- Attorney’s fees for child support or custody
- Criminal restitution and fines
- Student loans (usually)
- Recent unpaid income taxes
- Personal injury debts related to drunk driving
- Debts arising from fraud
Why can’t you eliminate these debts? Well, Congress essentially thinks these debts are so important you need to pay them back. Letting you discharge unpaid child support, for example, would penalize your child. Allowing you to wipe out debts related to drunk driving or fraud would allow you to profit from criminal behavior.
You also can’t really eliminate secured debts. These are debts tied to an asset. Think of your car loan, which is secured by the car itself, or a mortgage secured by your home. The bankruptcy process can’t wipe out the security interest the lender has in the collateral.
Consequently, if you stop paying on these secured debts, the lender can seize the collateral. Yes, the automatic stay will delay them briefly, but they know how to ask a judge for permission to take action against you.
More on Student Loans and Bankruptcy
Since student loans are unsecured, you might think you can easily eliminate them in bankruptcy. After all, they aren’t too different from credit cards. If you used a credit card to pay for school tuition, you could ultimately discharge the debt. Why can’t you discharge a student loan?
Again, Congress has decided to make it harder to eliminate student loans in bankruptcy. Harder, but not impossible. It’s sometimes possible to file an adversary proceeding within bankruptcy and get a judge to agree to discharge student loans.
A judge will decide based on three factors:
- Whether you can maintain at least a minimal living standard if you are forced to repay your loans.
- The likelihood your financial situation will improve during your repayment period.
- Whether you’ve made a good faith effort to repay your loans.
For example, if you are experiencing temporary unemployment, then you probably won’t receive a discharge of your student loans. But if your financial difficulties have lasted a long time—and you made concerted efforts to repay your loans—then your odds go up.
Chapter 13 & Debts
So far, we have discussed Chapter 7, which is the quicker of the two bankruptcies. However, consumers can also file for Chapter 13 protection. This bankruptcy works a little differently. It typically takes between 3-5 years, and you come up with a payment plan based on your disposable income. You’ll live a lean lifestyle, but the benefit of Chapter 13 is that you don’t lose any of your property if you successfully complete it.
It’s possible to end up paying back the majority (or even all) of your debts during this period. The amount you pay back will depend on your disposable income and the debts you have. Those non-dischargeable debts are given priority, so all available disposable income will be thrown at them first. What’s left over will go to unsecured debts, like credit cards and medical debt.
Any unpaid qualifying debt gets wiped out at the end of your repayment period. Talk with an attorney to review how much you might eliminate.
Wenarsky & Goldstein Knows Bankruptcy
Before filing for bankruptcy, consumers should meet with an attorney to review their financial situation. Bankruptcy makes sense for some people, but less sense for others. Go into the process with your eyes wide open. Contact us today to schedule a consultation by calling 973-453-2838.