When an individual files for bankruptcy, they will usually file for two types of bankruptcy: Chapter 7 or Chapter 13:
- Chapter 7 Bankruptcy – The bankruptcy trustee appointed to administer your case will sell any nonexempt property and distribute the proceeds to creditors.
- Chapter 13 Bankruptcy – You can keep everything you own. You’ll pay creditors the value of the nonexempt property, your disposable income, or your nondischargeable debt (support obligations, most taxes, and the like), whichever is more, through a repayment plan.
For people who cannot pay their debts, bankruptcy is a saving grace, but it is not to be taken lightly. There are drawbacks to declaring bankruptcy, and it should only be used when absolutely necessary.
What Kinds of Debt Does Bankruptcy Eliminate?
If you’re considering bankruptcy, you are likely in dire financial straits. You may be choosing between paying down credit card debt and buying groceries. Alternatively, you may be able to make ends meet, but your debt is not getting any smaller because of staggering interest rates. Bankruptcy is a highly effective financial solution for hundreds of thousands of people each year.
But the question most people ask is, “Will it get rid of all my debt?” The answer, unfortunately, is complicated. In general, both Chapter 7 and Chapter 13 bankruptcy can discharge most types of unsecured debt—not secured debt. Unsecured debt is anything that does not have collateral backing, and it can include:
- Personal loans
- Credit card debt
- Medical bills
- Utility bills
- Student loans
- Court-ordered child support/alimony
- Fines or penalties for fraud or other crimes
- Tax debt
Because nothing serves as collateral, unsecured loans are riskier for lenders, which is why the interest rates are high. Secured debt, on the other hand, is backed by collateral, and the interest rates tend to be lower. With mortgages and automobile loans, for example, the lenders have the contractual right to seize your house or car (via foreclosure or repossession) if you stop making payments.
Although student loans, child support, alimony, fines/penalties, and tax debt are technically unsecured, bankruptcy courts do not treat them the same way as other types of unsecured debt.
- Child support, alimony, fines, and penalties cannot be discharged under any circumstances.
- Student loans can be discharged, but only through an adversarial proceeding, where the filer proves they would experience “undue hardship” if they continued paying off their loans. This is generally very difficult to prove.
- Tax debt can be forgiven, but only on very rare occasions. Specifically, the government must believe it cannot reasonably expect you to repay the full amount. Unlike other creditors, the federal government can place liens on your property, garnish your wages, and freeze your bank accounts without taking you to court first.
What to Do if You Owe Non-Dischargeable Debt
Bankruptcy might still be a viable option, even if a lot of what you owe cannot be discharged. Chapter 13, for example, can help you catch up on non-dischargeable debt (e.g. mortgage payments, student loans, tax debt, child support, etc.) over the course of a 3-5-year repayment plan. If you fully catch up on arrears by the end of this plan, you can keep your property and discharge qualifying unsecured debt.
Let Our Team Assess Your Situation
Ultimately, you will need the skills and insight of an experienced legal team to determine whether bankruptcy is the right option for you. At Hurtik Law & Associates, we understand the financial and emotional stress you may be experiencing, and we are committed to putting our experience to work for you. Let us handle the legal aspects of this procedure so you can focus on building a better future for you and your loved ones.