Will Filing for Bankruptcy Wipe Out All My Debts?

 

One of the most common questions for individuals considering bankruptcy is whether filing will eliminate all their debts. The answer is nuanced, as bankruptcy can discharge many types of debt, but not all. The types of debts that can be discharged depend on the chapter of bankruptcy you file under, either Chapter 7 or Chapter 13. Here’s a detailed exploration of how bankruptcy affects different kinds of debts and what you can expect from the process.

Types of Debts Affected by Bankruptcy

1. Unsecured Debts

• Dischargeable Debts:
  • Credit Card Debt: Credit card debt is one of the most commonly discharged debts in bankruptcy. Both Chapter 7 and Chapter 13 can eliminate the obligation to repay outstanding balances, including purchases, cash advances, and accrued interest.
    • Example: If you have $20,000 in credit card debt, filing for Chapter 7 can typically discharge this amount, freeing you from repayment obligations.
  • Medical Bills: Medical debt is a significant burden for many people, and it can be discharged in bankruptcy, offering relief from large, unexpected healthcare expenses.
    • Example: If you have accumulated $10,000 in medical bills, bankruptcy can eliminate this debt, reducing your overall financial burden.
  • Personal Loans: Unsecured personal loans, such as payday loans and loans from friends or family, can also be discharged.
    • Example: If you borrowed $5,000 for personal expenses, bankruptcy can discharge this loan, absolving you from the need to repay it.
  • Utility Bills: Unpaid utility bills can be included in your bankruptcy filing, preventing disconnection and helping you maintain essential services.
    • Example: If you owe $500 in utility bills, bankruptcy can discharge these debts, though a utility company might require a deposit for continued service.
  • Old Tax Debts: Certain tax debts that are over three years old and meet specific criteria can be discharged in bankruptcy.
    • Example: If you owe $3,000 in income taxes from over three years ago, this debt may be eligible for discharge in a bankruptcy filing.
• Non-Dischargeable Debts:
  • Student Loans: Generally, student loans are not dischargeable unless you can prove undue hardship, which is a challenging legal standard to meet.
    • Example: If you owe $50,000 in student loans, this debt will likely remain after bankruptcy unless you can prove that repaying it would cause severe financial hardship.
  • Recent Tax Debts: Taxes that are less than three years old are usually not dischargeable.
    • Example: If you owe $2,000 in taxes from the previous year, these debts cannot be discharged in bankruptcy.
  • Domestic Support Obligations: Child support, alimony, and other domestic support obligations are non-dischargeable in bankruptcy.
    • Example: If you owe $5,000 in back child support, this debt remains even after bankruptcy.
  • Court Fines and Penalties: Criminal fines and penalties, including those for traffic violations, cannot be discharged.
    • Example: If you owe $1,000 in court fines from a traffic violation, this debt is not dischargeable.
  • Debts for Personal Injury Caused by DUI: Debts resulting from personal injury or wrongful death caused by driving under the influence of alcohol or drugs are non-dischargeable.
    • Example: If you owe $10,000 in damages from a DUI accident, this debt cannot be eliminated in bankruptcy.
  • Certain Debts from Divorce Settlements: Debts arising from property settlements in divorce decrees are typically non-dischargeable.
    • Example: If you owe $15,000 as part of a property settlement in a divorce, this debt is likely not dischargeable in bankruptcy.

2. Secured Debts

• Secured Debts and Property:
  • Mortgage Loans: Mortgages are secured by your home, and while bankruptcy can discharge the personal obligation to repay the mortgage, the lien on the property remains. This means the lender can still foreclose if you do not continue to make payments.
    • Example: If you have a $150,000 mortgage, you must keep paying to avoid foreclosure even after a bankruptcy discharge.
  • Auto Loans: Similar to mortgages, auto loans are secured by the vehicle. To keep the car, you must continue making payments; otherwise, the lender can repossess it.
    • Example: If you owe $10,000 on a car loan, maintaining payments is necessary to retain ownership of the car.
• Handling Secured Debts:
  • Reaffirmation: You may choose to reaffirm a secured debt, agreeing to continue payments despite the bankruptcy discharge. This allows you to keep the collateral, such as a home or car.
  • Redemption: You may redeem the property by paying its current market value in a lump sum, which can be beneficial if the collateral is worth significantly less than what you owe.

3. Priority Debts

• Non-Dischargeable Debts:
  • Recent Income Taxes: Taxes that are less than three years old are typically not dischargeable.
  • Child Support and Alimony: Domestic support obligations must be paid in full, even after bankruptcy.
  • Court-Ordered Payments: Criminal fines and penalties remain due after bankruptcy.

Factors to Consider

1. Type of Bankruptcy

• Chapter 7 Bankruptcy: Often results in a quicker discharge of most unsecured debts but involves the liquidation of non-exempt assets to pay creditors. It’s suitable for those with low income and few assets who need immediate debt relief.
  • Example: If you’re a single individual with no significant property and high credit card debt, Chapter 7 might be the best option to quickly discharge your debts and get a fresh start.
• Chapter 13 Bankruptcy: This chapter involves a repayment plan over three to five years and can discharge some remaining debts at the end of the plan. It’s ideal for individuals with regular income who want to keep their assets and are able to repay a portion of their debts over time.
  • Example: If you’re a homeowner with a steady income but struggling with debt, Chapter 13 allows you to keep your home while catching up on missed mortgage payments through a structured plan.

2. Non-Dischargeable Debts: Understand that not all debts can be discharged in bankruptcy. Debts like student loans, recent taxes, child support, and alimony typically remain. Recognizing these limitations is essential for planning your financial recovery.

• Example: If a significant portion of your debt consists of non-dischargeable obligations like recent taxes or alimony, bankruptcy may not provide as much relief as you expect.

3. Legal Advice: Consulting with a bankruptcy attorney can provide clarity on which debts will be affected and guide you through the process. An attorney can help you understand your options and the implications of bankruptcy for your specific financial situation.

• Example: A lawyer can help you determine if your medical debts qualify for discharge and explain the potential consequences for your home and other assets.

Common Questions and Concerns

Q: What happens to my credit score after bankruptcy?

• Answer: Filing for bankruptcy significantly impacts your credit score, typically lowering it by 100 to 200 points. The specific impact depends on your initial score and overall financial situation. Chapter 7 remains on your credit report for up to 10 years, while Chapter 13 stays for up to 7 years.

Q: How does bankruptcy affect my ability to obtain future credit?

• Answer: Bankruptcy makes it more difficult to obtain new credit, and any credit you do receive will likely come with higher interest rates. However, many people find that they can start rebuilding their credit shortly after their debts are discharged by using secured credit cards and making on-time payments.

Q: Can I keep my house or car if I file for bankruptcy?

• Answer: In Chapter 7, you may keep your home or car if you can exempt enough equity and continue making payments. In Chapter 13, you can keep these assets by including the payments in your repayment plan. Reaffirmation agreements and redemption options also allow you to retain secured property.

Filing for bankruptcy can provide significant relief by discharging many types of unsecured debts, but it does not eliminate all financial obligations. Understanding which debts are dischargeable and which are not is crucial for managing your financial recovery effectively. Consulting with a qualified bankruptcy attorney can help you navigate these complexities and ensure you receive the maximum benefit from filing for bankruptcy.

 

Chapter 7 Bankruptcy