What debts cannot be discharged in bankruptcy?
We’ve talked about bankruptcy before in this column, but this week I’d like to simplify things a bit and discuss more specifically debts that can and cannot be discharged in bankruptcy.
Can Credit Card Debt Be Paid?
As with all debts, when it comes to bankruptcy it depends on the chapter under which you are filing. Chapter 7 will pay off credit card debt almost immediately. Chapter 13 will reorganize your debt (likely including your credit card debt) so that at least some of that debt will be paid off over time. Once you have paid off the portion of your debts demanded by the court and based on your income and expenses, the rest is paid.
In addition to credit card debt, other debts that can be discharged through a Chapter 7 filing include medical debts, personal loans, and promissory notes. You should also be aware that some debts can only be discharged through a Chapter 13 filing, which as noted above will reorganize those debts (i.e. they will be at least partially paid off. ). These include legal fees, condominium, co-op or HOA fees, retirement plan loans, non-dischargeable tax debts, and debts that could not be paid in a previous bankruptcy.
What debts cannot be discharged?
As for debts which generally cannot be discharged by bankruptcy, there are three categories: those which are never discharged, those which cannot be discharged because a creditor successfully objects to it, and those which, by exception. legal, could be acquitted (with a strong enough argument from you and your lawyer).
The first category includes alimony and child support, many types of taxes and most tax liens, fines or penalties imposed by government agencies for breaking the law, and personal injury debts resulting from ‘an incident of impaired driving. The second category includes debts resulting from fraud, debts for items purchased within 90 days of deposit, embezzlement, theft or breach of fiduciary debts, and any debts or creditors left out by your request.
Finally, you may have seen student loans listed as one of those items that cannot be discharged by bankruptcy. This is where this last category comes in. It is true that student loans are very difficult to pay off in bankruptcy, which requires you to demonstrate undue hardship. This hardship is measured court by court by means of various tests.
This category also includes income taxes, which include other legal requirements and the passage of a certain period of time. As noted above, the latter category will require you to make a convincing case to the judge. This is why it is so important to have a knowledgeable bankruptcy lawyer on your side, especially if you have a student loan or other debt that requires you to prove your case.
How Bankruptcy Affects Your Credit Score
Bankruptcy is a last resort option for debt, and one of the main reasons is the devastating effect it will have on your credit score. Not only will you lose 100, 150, or even 200 points (depending on how high your initial score is), bankruptcy will stay on your credit report for 10 years for a Chapter 7 filing and seven years for a Chapter 13.
And while your score will likely recover before those years are out, the rating on your credit report will be there for lenders, homeowners, insurance agents, and employers to see the entire time. This means you might have a harder time qualifying for new loans at good rates, you might lose new home, and you might see your insurance premiums go up.
You could also lose a promotion at work or a new job opportunity. I knew a young woman who refused to be serious with a young man until they exchanged credit reports. Explaining bankruptcy could have had a chilling effect on a fragile new relationship.
Alternatives to bankruptcy
If you think bankruptcy is all about getting rid of some debt and annoying creditors, think again. Its financial and personal impact is more on the scale of divorce than ending a relationship. In other words, it is a step that you only take after all the alternatives have been tried and exhausted.
Evaluate your budget
For all of these reasons (not to mention the emotional burden that bankruptcy can bring), it’s crucial to explore all of your alternatives before taking this step. Take a look at your spending and see if you can find places to cut back, consider a second job or a part-time job to supplement your income or sell something you don’t want or need anymore. Use these funds to pay off your debt.
As you watch your spending, make sure that you have enough income to make ends meet once you get rid of your debt. If you can’t live off your income, I strongly suggest that you delay your deposit until you can to avoid going up a stream, but this time without your bankruptcy paddle!
Contact a credit counselor
If credit card debt and other unsecured debt is your main concern, I suggest you contact one of the good guys at National Foundation for Credit Counseling and see if a debt management plan will work for you. Like a Chapter 13 filing, a DMP will allow you to pay off your creditors over time, likely lowering your interest rates and eliminating your late and over-limit fees.
But unlike a Chapter 13, a DMP won’t show up on your credit report. Your score may go down due to your accounts being closed, but if you’re about to consider bankruptcy, your score has probably already taken a hit and it wouldn’t cause much more to drop. The bonus is that your on-time payments through DMP will positively affect your reports and score over time.
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