Will filing for bankruptcy wipe out all my debts?
If you are heavily in debt, filing for bankruptcy may be an option of last resort. Many types of debt can be discharged in bankruptcy, but it is important to understand that not all debt qualifies. Certain types of debt are difficult, but not impossible, to pay in bankruptcy.
What is the purpose of filing for bankruptcy?
There are two main avenues for people filing for bankruptcy: Chapter 7 and Chapter 13. These two types of bankruptcy try to help you get your finances back on track, but they do it in slightly different ways.
What is Chapter 7 Bankruptcy?
In Chapter 7 bankruptcy, most of your debts are discharged, but you also have to give up your personal assets. There are exemptions for essential or personal goods, but all non-exempt goods are sold. The proceeds are then distributed among your creditors.
What is Chapter 13 Bankruptcy?
With Chapter 13 bankruptcy, you are instead reorganizing your existing debt. Working with a court-appointed trustee, you examine your creditors and debt and develop a payment plan. Over a period of three to five years, you pay a fixed monthly amount to the court, which will distribute the funds among your creditors. After this period, your remaining debts will be discharged.
It is possible to file for Chapter 13 bankruptcy after having already filed for Chapter 7 bankruptcy.
What is the purpose of paying off the debt?
When your debts are paid, the creditor can no longer force you to pay the debt. Many types of debt are discharged under Chapter 7 bankruptcy. In Chapter 13 bankruptcy, your debt is reorganized and any debt remaining after the payback period is discharged.
What debts cannot be eliminated in bankruptcy?
Certain types of debt cannot be eliminated in bankruptcy. Here are some examples:
Guaranteed debt: If you buy a car or other commodity with a loan, you make an agreement with the lender to pay for the item in exchange for the current use of it. If you later file for bankruptcy, you will need to decide whether to abandon the item or continue paying the lender for it.
Alimony and child support: You cannot eliminate a legal obligation to pay child support. Any balance owed at the time of filing for bankruptcy will always remain after the end of the case.
Legal fees and debt in a divorce judgment: In many divorce judgments, one spouse agrees to pay legal fees or certain unpaid debts owed by the other spouse. These debts will survive your bankruptcy. For example, if you agree to pay off your credit card balances in your name and on behalf of your ex-spouse, you won’t be able to file for bankruptcy to clear those debts or the payment agreement. Your ex-partner could still force you to pay these bills.
Return: The restitution ordered by the court is not releasable in the event of bankruptcy. Restitution is a court-ordered amount of money that you must pay for causing financial loss or personal injury to others. This includes payments for any injuries you cause resulting from driving under the influence.
What debts are difficult to eliminate in bankruptcy?
With other types of debt, it is possible to wipe out bankruptcy.
Student loans: Loans taken out for college may not be eliminated in the vast majority of cases. All types of student loans are considered student loans and are generally exempt from elimination in bankruptcy: federal student loans, private student loans, and loans directly from a university.
However, there are exceptions. The first is that you can prove that you will never be able to work again because of a complete and permanent disability. Another exception is undue hardship, which requires you to prove that you made good faith efforts to repay the loan, repaying it would prevent you from maintaining a minimum standard of living for yourself and your dependents and the circumstances. making it difficult for you to make payments are unlikely to change during the repayment period.
However, the standards for both options are very high and it is rare that either exception is granted.
Income tax : You can wipe out some income tax as part of a bankruptcy filing, but a very specific and thorough test is required to do so.
The bottom line
Paying off your debts through bankruptcy has a drastic effect on your credit score, so it’s not something you’ll want to take lightly. Nonetheless, if you find yourself unable to make payments to all of your creditors, it may be time to consider filing for bankruptcy.
There are two types of bankruptcy for most people: Chapter 7 and Chapter 13. In both cases, the majority of your unpaid debts will be discharged, although some types of debt are difficult or impossible to eliminate through bankruptcy.