Does Bankruptcy Clear All My Debts?

Before considering bankruptcy filing, a person must understand how bankruptcy works and be able to determine the effect it may cause. There are people filing for bankruptcy are surprised on how much debt can be erased through this process. Whether you are filing for chapter 13 or chapter 7, the amount of debt you can eliminate can help you get a fresh start and live a happy life. However, bankruptcy is not the answer to all problems. Not all debt can be erased with this process. There are certain debts which are dischargeable in bankruptcy. To distinguish which debts can be eliminated, you must first need to understand the types of debts.

Types of Debts

secured-debt-vs-unsecured-debt

secured-debt

Bankruptcy can be a good option for you depending on the amount of total debt you currently have. There are 2 kinds of debts, the secured and unsecured. In bankruptcy process, unsecured debts are usually discharged most but not for secured debts.

What is Secured Debt?

Secured debts are those that are linked to some valuable properties that you own. They are usually known as “collateral properties”. If you fail to fulfill your obligation to creditors, they can take your properties. You can either agree to secure the debts or not. Debts are considered secured if the property agrees to be a collateral in order to pay the debt. The collateral can be either a home or car that secures the debt. If the person fails to pay on the agreement, the creditor has the right to claim the collateral as a payment.

What is Unsecured Debt?

Unsecured debts are opposite of secured. If you fail to fulfill your obligation to the creditor, he cannot take anything of your valuable properties without acquiring a legal process against you. As the name describes, this kind of debt is not attached to any collateral. The most common types of unsecured debts are:

  • Student loans
  • Medical bills
  • Lawyer fees
  • Utility payment
  • Rent payment
  • Credit cards
  • Health memberships
  • Unsecured Personal loans

Although unsecured debts are not tied to any properties, this doesn’t mean that the creditors can’t do anything to collect payment that you owe. Most of them sue a person when debts are not settled. Once they have acquired a legal process against you, they can collect from your bank accounts or garnish wages.

To better understand which debts can be discharged in bankruptcy, you must know what are the dischargeable and non-dischargeable debts:

Dischargeable Debts

dischargeable-debt

dischargeable-debt

Unsecured debts are usually discharged in Chapter 7 Bankruptcy. These consists of medical bills, personal loans, utility payments and credit cards. Money that you lend or any credit that you use which is not tied to any properties is considered as unsecured debt. Since the creditors cannot take the assets you have, the interest rates are expensive especially for unsecured debts.

Also, you may not be allowed to discharge the debt in bankruptcy if you acquired unsecured debt through criminal offense or fraud. An example of this is when you lied about credit card information in order to get a loan and etc.

Under chapter 13 Bankruptcy, unsecured debts are able to discharge if you can’t pay it through the repayment plan. You can also dismiss some income taxes for chapter 13 or chapter 7 bankruptcy that are at least 3 years old.

Non-Dischargeable Debts

non-dischargeable-debt

non-dischargeable-debt

For non-dischargeable debts, bankruptcy does not allow several types of debts to be discharged. However, there are some that you can eliminate such as the following:

  • Child support
  • Alimony payments
  • Other taxes that are less than 3 years
  • Personal loans that are obtained through criminal acts
  • Student loans

 

What Other Debts Does Bankruptcy Cannot Eliminate?

  • Spousal support that includes child support
  • Penalties to government agencies
  • Most taxes
  • Student loans
  • Debts that are not listed on your bankruptcy petition
  • Loans acquired from criminal offense

What Bankruptcy Can Eliminate?

  • Credit card payments that include penalty and overdue fees
  • Medical bills
  • Personal loans from relatives, friends and employers
  • Collection agencies
  • Past due rent or payment under lease agreements
  • Utility payments—only those past due payments only
  • Balances on repossessions
  • Student loans
  • Dishonored checks
  • Car accident claims
  • Business debt
  • Attorney fees
  • Unpaid taxes that includes penalties
  • Overpayments in social security
  • Veterans loans and overdue payments
  • Civil court payments

Bankruptcy cannot eliminate all types of debts but it can be a solution for most common problems like credit cards, repossession, wage garnishment, foreclosure and utility payments. There are certain types of debts like mortgage and car loans that can be settled with chapter 13 bankruptcy through creating a repayment plan.

To learn more about chapter 7 or chapter 13 bankruptcy, schedule a free case evaluation with us.

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