How does Bankruptcy Work?
While bankruptcy can absolve you of some or all debt, it doesn’t necessarily eliminate every type of debt. Prior to filing for bankruptcy, ensure that you know which debts will be cancelled and which will still be owed. This is where having a bankruptcy attorney can save you many headaches down the road. A majority of the time, you may eliminate credit card debts via Chapter 7 and Chapter 13 bankruptcy proceedings while you may not be able to eliminate other debts, including tax debt, debts incurred due to an act of negligence, child support, alimony, student loans, and secured debts. Depending on your circumstances, Chapter 13 can help, whereas Chapter 7 cannot.
Read on to learn how different types of debt are treated in bankruptcy.
What Bankruptcy Can Do
If you have substantial debt problems, bankruptcy can be a very powerful tool. Below is a list of some of the things Bankruptcy can do:
Eliminate credit card debt/unsecured debts. Bankruptcy is and effective tool for wiping out unsecured credit card debt. Unless you have a “secured” credit card, the balance you carry on your credit card(s) is an unsecured debt — that means, the creditor does not have an interest in any of your property and may not repossess anything if you do not pay the debt. This is specifically the type of debt that bankruptcy was created to eliminate. Aside from unsecured credit card debt, you may have other unsecured debts, and bankruptcy can eliminate those as well.
Should you file under Chapter 13 as opposed to Chapter 7, you may be required by the court to pay back some of the unsecured debts. However, any unsecured debts remaining after your repayment plan is complete will be discharged.
Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the harassment is only phone calls and letters, there are easier ways to stop it; If the harassment is more serious — for example, if a creditor is about to repossess your car or foreclose on your home, bankruptcy can help through what is called an “automatic stay.”
Eliminate certain kinds of liens. A lien is a creditor’s right to take some or all of your property and will survive bankruptcy unless you take certain actions during your bankruptcy case.
What Bankruptcy Cannot Do
Here’s what bankruptcy cannot do for you:
Stop a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. If you have secured debt(s) (a debt where a creditor has a lien on your property and can repossess it if you don’t repay the debt), bankruptcy can eliminate the debt, but it does not stop the creditor from repossessing the property.
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy — you continue to owe these debts in full, as if you had never filed for bankruptcy. If you use Chapter 13, your plan will have to provide for these debts to be repaid in full.
Wipe out student loans, except in rare cases. Student loans can be discharged in bankruptcy only if you show that repaying the debt would cause you “undue hardship,” a difficult standard to meet. You must show that not only can you not afford to pay your loans now, but also that there is very little likelihood of being able to pay the loans in the future.
Eliminate most tax debts. Discharging tax debt(s) in bankruptcy is no simple task, but it is sometimes possible for aged debts of unpaid income taxes. There are substantial requirements to be met, however.
Eliminate other non-dischargeable debts. These debts are not dischargeable under Chapter 7 or Chapter 13 bankruptcy:
- Debts you omit in your bankruptcy filing, unless the creditor knew of your bankruptcy case
- Debts for negligence, personal injuries or death caused by driving under the influence
- Fines and fees for violations of the law, such as traffic cases and restitution in criminal matters.
Should you file under Chapter 7, these debts will still be owed when your case is Discharged. If you file under Chapter 13, these debts must be paid in full during the course of your repayment plan. If they are not paid in full, the balance will remain when your case is discharged.
Additionally, some debts may not be discharged if a creditor can show the bankruptcy judge that they should survive bankruptcy. These can include debts incurred through fraud, such as lying on a credit application or using loaned property as your own for collateral on a loan.
What Chapter 13 Bankruptcy Can Do
Chapter 7 cannot resolve these situations, but Chapter 13 can:
Stop foreclosure. Filing under Chapter 13 protection will stop a foreclosure and force your lender to accept a plan where you catch up on any missed payments over a period of time while staying current with normal monthly payments. For this plan to work, you must show that you will have enough income in the future to justify such a repayment plan.
Allow you to retain certain non-exempt property. You won’t have to forfeit property in Chapter 13 because you are using income as a basis for the repayment plan.
Cram some secured debts that exceed the value of the property used to secure the debt. You may be able to utilize Chapter 13 protection to reduce a debt to the replacement value of the property securing it, and then pay that debt off through your plan. For example, if you owe $30,000 on a car loan and the car is valued at only $20,000, you can provide a plan that pays the creditor $20,000 and have the remainder of the loan discharged. It should be noted that under recent changes to bankruptcy law, you cannot cram down a car debt if the vehicle was purchased during the preceding 30 months before you filed for bankruptcy protection. For other types of property, you cannot use this method for a secured debt if the property was purchased in the year preceding the filing for bankruptcy protection.