What Bankruptcy is Able and Unable to Do

What Bankruptcy is Able and Unable to Do

While bankruptcy can eliminate some types of debt, not all types of debt are eliminated. Prior to filing for bankruptcy, be sure to know which debts are forgiven and which ones are not. Through chapter 7 bankruptcy and chapter 13, your credit card debt is forgiven for the most part. However, other types of debt, including alimony, child support, secured debts, student loans, and most tax debts may not be forgiven. In cases, chapter 13 Bankruptcy may help, whereas chapter 7 Bankruptcy cannot. 

What Bankruptcy is Able to Do

When facing serious problems with debt, bankruptcy can offer a strong remedy. Continue reading to learn about the many things filing for bankruptcy can do:

Forgive credit card debt and other types of unsecured debts. 

Bankruptcy is great at eliminating credit card debt. Your credit card balance is considered an unsecured debt unless you have one that is special “secured”. With an unsecured credit card, there is no lien placed on any of your property by the creditor, which means they are unable to repossess any of your items should you fail to pay the debt. This is exactly the type of debt that bankruptcy is designed to forgive. In addition to credit card debt, bankruptcy can eliminate other unsecured debts you may have as well.

If you have filed chapter 13 bankruptcy instead of chapter 7, you may be responsible for paying back a portion of any unsecured debts you possibly have. However, once your payment plan is finished, any unsecured debts will be discharged. 

Stop collection activities and creditor harassment.

When you file bankruptcy, creditor harassment must stop. Also, in the cases where harassment is more serious, such as when a creditor is considering foreclosing on your mortgage or repossess your car – bankruptcy can help. 

Some certain type of liens eliminated.

With a lien, a creditor has the right to repossess some or all of your property and unless specific procedures are invoked by you during your bankruptcy case, a lien will survive bankruptcy. 

What Bankruptcy is Unable to Do

Stop a secured creditor from repossessing your property. 

While a bankruptcy discharge may forgive debts, it does not forgive liens. When you have a secured debt (creditor has placed a lien on your property and has the right to repossess it if you fail to pay the debt), the debt can be eliminated with a bankruptcy, however, it is unable to stop the creditor from repossessing your property. 

Forgive alimony and child support obligations. 

Alimony and child support obligations remain after a bankruptcy discharge. These debts remain and are owed in full as if you have not filed bankruptcy. Also, when filing for chapter 13 bankruptcy, the plan created for you must stipulate these debts are to be paid in full. 

Except in very rare situations, it does not eliminate student loan debt.

Student loans may be discharged in your bankruptcy case only if you have the ability to prove that repaying these loans would cause you “undue hardship”. This is an extremely hard standard to meet. In addition to having to prove that you are unable to afford to pay your loan now, you have to show that it is highly unlikely that you would have the ability to pay them in the future as well. 

Wipe out most tax debts.

It is difficult to eliminate tax debt in bankruptcy, but in some circumstances, it is possible for unpaid income tax debts. However, several requirements must be met. 

Wipe out other non-dischargeable debts. 

Other debts that may not be discharged in the case of both chapter 7 bankruptcy or chapter 13 bankruptcy include:.

  • Debts incurred for personal injury and/or death due to you driving intoxicated.
  • Unless the creditor has learned of the bankruptcy, debts you have forgotten to list in the bankruptcy papers cannot be discharged.
  • Fines and/or penalties that were imposed due to breaking the law such as criminal restitution and traffic tickets. 

If you have filed for chapter 7 bankruptcy, debts such as these remain after your case is finished. If you have filed for chapter 13, these debts must be fully paid through the course of your repayment plan. In situations where these debts were not pained on full, at the end of your case, the balance will remain.

Furthermore, if a creditor has convinced the judge in the case that the debt should remain after bankruptcy, the debts may not be discharged. These debts include ones that were acquired through fraud, such as using the borrowed property for collateral to obtain a loan or lying on a credit application. 

What Can Only Chapter 13 Bankruptcy Do

In the following situation chapter 7 bankruptcy cannot help you, however, chapter 13 can help:

Prevent a foreclosure on a mortgage. 

When you file for chapter 13 bankruptcy, foreclosure is stopped and the lender is forced to accept a repayment plan where the missed payments are paid over time as well as remaining current on the regular monthly mortgage payment. In order for this to work, you must have the ability to show that you have sufficient income to support this type of repayment in the future.

 Keep nonexempt property. 

Since your income is used to fund your repayment plan, you can keep all of your property in chapter 13. 

Reduce principle on a secured loan with a “cramdown”. 

In some cases when filing chapter 13, you are able to reduce the amount owed of a secured debt to the market value of the property used to secure it, then pay off the loan through your repayment plan. For example, consider you owe $10,000 on a vehicle loan but the vehicle is worth just $6,000. You may propose a plan where you pay the creditor $6,000 while the rest of the debt is discharged. Keep in mind, however, due to the new bankruptcy law, you may not cram down a vehicle debt if the vehicle was purchased during the 30-month period prior to your filing for bankruptcy. In situations of other types of personal property, personal property purchased within one year of you filing bankruptcy, the secured loan may not be cramdown. 

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