Bankruptcy can provide financial relief for individuals overwhelmed by debt, but it is not a one-size-fits-all solution. While filing for bankruptcy can eliminate many types of debts, some obligations cannot be discharged. Understanding which debts can and cannot be wiped out through bankruptcy is essential to making an informed decision about your financial future.
How Bankruptcy Eliminates Debt
Bankruptcy is designed to give individuals a fresh financial start by eliminating or restructuring debt. The two most common types of consumer bankruptcy are Chapter 7 and Chapter 13.
Differences Between Chapter 7 and Chapter 13 Bankruptcy
- Chapter 7 Bankruptcy – Often called “liquidation bankruptcy,” Chapter 7 wipes out most unsecured debts. It is typically completed within a few months, but certain assets may be sold to pay creditors.
- Chapter 13 Bankruptcy – Known as a “repayment plan,” Chapter 13 allows individuals to restructure debt into manageable payments over three to five years. Some debts may be reduced or discharged at the end of the repayment plan.
While both types of bankruptcy can help manage overwhelming debt, not all debts are eligible for discharge.
Debts That Can Be Discharged in Bankruptcy
The main benefit of filing for bankruptcy is that it can eliminate many types of unsecured debt, meaning debt that is not backed by collateral.
Common Debts That Can Be Wiped Out
- Credit card debt – Most credit card balances can be discharged in bankruptcy.
- Medical bills – Hospital and doctor bills are considered unsecured debt and are usually eliminated.
- Personal loans – Unsecured personal loans, including payday loans, can typically be discharged.
- Utility bills – Unpaid electricity, gas, water, and phone bills can often be wiped out.
- Lease obligations – If you break a lease on an apartment or vehicle, the remaining balance may be discharged.
- Some business debts – Personal liability for business debts may be eliminated, depending on how the business is structured.
If you have overwhelming unsecured debt, filing for bankruptcy can provide significant relief.
Debts That Cannot Be Discharged in Bankruptcy
While bankruptcy can eliminate many financial obligations, some debts are protected by law and cannot be discharged.
Debts That Survive Bankruptcy
- Student loans – In most cases, student loan debt is not dischargeable unless the borrower proves “undue hardship,” which is difficult to establish.
- Recent tax debt – Most federal, state, and local taxes must still be paid, though some older tax debts may be eligible for discharge.
- Child support and alimony – Family court obligations, including spousal and child support, cannot be eliminated through bankruptcy.
- Criminal fines and restitution – Debts related to criminal activity, including court-ordered fines and restitution, must still be paid.
- Debts from fraud or misrepresentation – If you obtained credit or loans through fraudulent means, the court may rule that they are not dischargeable.
- Debts from personal injury cases – If you owe money due to injuries caused by drunk driving or other reckless actions, bankruptcy will not eliminate the debt.
If your debt includes these obligations, filing for bankruptcy may still provide relief by eliminating other financial burdens, making it easier to meet your remaining obligations.
Reaffirming Secured Debts in Bankruptcy
Some debts are secured by collateral, such as a home or vehicle. In bankruptcy, you may have the option to reaffirm these debts if you want to keep the property.
How Secured Debts Are Handled
- Mortgages – Bankruptcy does not automatically eliminate home loans. If you want to keep your home, you must continue making payments or negotiate a loan modification.
- Car loans – If you wish to keep your vehicle, you may reaffirm the loan or include it in a Chapter 13 repayment plan.
- Secured personal loans – Loans backed by collateral, such as jewelry or electronics, may require you to surrender the item unless the debt is reaffirmed.
Understanding your options for secured debts can help you make the best decision for your financial future.
Choosing the Right Bankruptcy Option for Your Situation
Determining whether to file for bankruptcy—and which type is right for you—depends on your specific financial circumstances. A bankruptcy attorney can review your debts, assets, and income to help you make the best choice.
Factors to Consider Before Filing
- The type of debt you owe – If most of your debt is non-dischargeable, bankruptcy may not be the best solution.
- Your income and assets – Higher-income individuals may qualify for Chapter 13 rather than Chapter 7.
- Your long-term financial goals – Bankruptcy impacts your credit, but it may also provide the fresh start you need to rebuild.
If you are struggling with debt and considering bankruptcy, seeking professional legal guidance is the best way to ensure you make an informed decision.
Get Legal Help for Your Bankruptcy Case
Bankruptcy can be a powerful tool for eliminating debt, but it is not a one-size-fits-all solution. Understanding what debts can and cannot be discharged is essential before moving forward. If you need help determining the best path toward financial freedom, contact Law Offices of Terrence Fantauzzi at (909) 552-1238 to discuss your options and take the first step toward a debt-free future.