Debt elimination is typically one of the primary reasons a debtor will pursue bankruptcy. While filing for bankruptcy is often the best course of action if you are overwhelmed by debt and struggling to stay afloat, it’s important to understand what debts can and cannot be discharged in bankruptcy.
Bankruptcy can often eliminate most of or make it easier to pay off your debt—it simply depends on the type of debt you have and the type of bankruptcy you file. Debts are handled differently in Chapter 7 versus Chapter 13.
If you are interested in filing for bankruptcy, it’s best to consult with a bankruptcy attorney first. They can offer you guidance and recommend the best option based on the types of debt you have. They can help you throughout the entire process and even after the bankruptcy has ended when you are trying to get back on your feet.
The type of bankruptcy you file will determine how your debts are handled.
While not guaranteed, most debts are often discharged when you file a Chapter 7 bankruptcy. However, you may have to give up some of your property in return. There are exemptions depending on the property and how essential it is, but anything considered nonexempt will likely be sold to help pay off your creditors.
Chapter 13 bankruptcies work a little differently. Instead of discharging most of your debt and using your personal property to pay off creditors, a reorganization plan is filed to dela with the debt. You will then be required to pay a monthly amount over the course of three to five years. That money will go to your Chapter 13 trustee, who will then distribute it amongst your creditors. A Chapter 13 Plan can help get you back on track with secured debts that you are behind on, like house or car payments. It can also force unsecured creditors to take what the bankrutpcy law says you can afford to pay, many times cents on the dollar. After the repayment period, any remaining debt will likely get discharged.
There are various types of debt that cannot be eliminated no matter which type of bankruptcy you file. A total of 19 categories are listed by the U.S. Bankruptcy Code for debts that are not eligible for discharge. The more common types of debts that many debtors hold that cannot be eliminated include:
If you have a legal obligation to pay alimony or child support to an ex, this debt cannot be eliminated through bankruptcy. If you are behind on child support or alimony payments, you will still be required to pay what is owed after your bankruptcy case has ended.
Certain Tax Debts
Taxes that you owe to the federal or state government are sometimes dischargeable, and sometimes not. Discuss your tax debt with a bankruptcy attorney to make sure you get the most out of your discharge.
Most student loans are not discharged without filing a separate lawsuit in the bankruptcy asking for a court order declaring them discharged. The courts will only discharge student loans if certain requirements are met and there is no likelihood that you could repay any of the loans in a structured, income-based repayment plan now or in the foreseeable future.
In divorce cases, there are often other things that are agreed upon outside of child support. For example, one partner will often agree to pay the legal fees or other debts as a stipulation of the divorce. If you are unable to pay these fees and debts, they may not be included in the bankruptcy, and you will have to find another way to pay them.
When you file for bankruptcy, most unsecured debts will be eligible for discharge. Some unsecured debts may still be a challenge to get eliminated, but there is no hard rule that says they are not eligible like the debts listed above. Some common types of unsecured debts that get discharged include:
- Credit card debt
- Medical bills
- Personal loans
- Utility bills
- Business debts
- Tax penalties
- Auto accident claims
- Past due rent
- Attorney fees
- Student loans
*Student loans can be particularly challenging. There are many cases where these types of debts do not get eliminated. To eliminate debt from private or federal student loans, you must be able to prove undue hardship.
At Sawin & Shea, we believe in providing compassionate and understanding representation to those struggling with debt. We understand how stressful and even confusing filing for bankruptcy can be. Our attorneys can help walk you through the process every step of the way. We can even offer guidance after your bankruptcy case has ended.
Contact us at 317-759-1483 or send us an email for a free consultation today!