What Bankruptcy Can Do for You…and What It Can’t

Contrary to popular belief, bankruptcy doesn’t eliminate all types of debt. Before filing, it is important to confirm which debts will be erased and which will remain.

Both Chapter 7 and Chapter 13 bankruptcy will wipe out credit card debt, but some secured debts, student loans, child support, alimony, and most tax obligations may remain. Chapter 13 can stop some proceedings, like foreclosures, while Chapter 7 can’t  (although it can typically delay it). The solution that’s right for you depends on your circumstances.

What Bankruptcy Can Do for You

  • Eliminate unsecured debts like credit cards. Bankruptcy can generally eliminate most credit card debt, with the exception being certain “secured” cards. If you file for Chapter 13 instead of Chapter 7, you may be required to repay a portion of these debts, but once the repayment plan is satisfied you will be discharged.
  • Stop collection activities. Filing for bankruptcy will stop creditor calls and automatically stay any repossession or foreclosure actions.
  • Erase certain types of liens. A lien, which represents the right of a creditor to seize property for nonpayment of debt, can be potentially removed if certain procedures are undertaken during a bankruptcy case.
  • Stop a mortgage foreclosure. If you file for Chapter 13 bankruptcy (but not Chapter 7), the lender will be required to accept an arrangement allowing you to make up missed payments while staying current with future ones. To qualify, you need to prove that your income can support the repayment plan.
  • “Cram down” secured debts that exceed the value of the securing asset. Chapter 13 debt can sometimes be used to lower a debt amount to the actual value of the property securing it. You can then pay off the new total through a repayment plan. Exceptions include secured debts acquired within one year prior to filing for bankruptcy, or car debts incurred within 30 months before filing.

Chapter 13 will also allow you to keep nonexempt property because you will be entering into a repayment plan. However, Chapter 7 does not offer this option.

What Bankruptcy Can’t Do

  • Erase most tax debts. Although it is occasionally possible for older income tax debt to be discharged, eliminating tax debt is a tough process with many requirements to be met.
  • Eliminate student loans. Generally, the only way to discharge student loans in bankruptcy is to prove that the loan payments cause you “undue hardship.” It’s not a standard that’s easily met.
  • Excuse alimony and child support obligations. These debts can’t be discharged by bankruptcy.
  • Wipe debts that are not dischargeable. Chapter 7 and Chapter 13 bankruptcy will not remove certain debts, such as those you forgot to list at the time of filing, injury or death caused by intoxicated driving, and financial penalties for breaking the law.
  • Debts acquired fraudulently. Examples include lying on credit applications or using property you don’t own as loan collateral.

Questions about the bankruptcy process and how it could help your financial situation? Give us a call today at (305) 227-4030!