Several debts can be eliminated through bankruptcy, but others will remain on your record.
Through bankruptcy, those who are drowning in debt can either reorganize (Chapter 13) or liquidate their debts (Chapter 7). Bankruptcies commonly discharge certain debts. Upon discharge of a debt, a creditor cannot pursue collection or seize collateral against the debtor. There are, however, some debts that cannot be discharged, and others are extremely difficult to discharge.
- If you file for Chapter 7 or Chapter 13 bankruptcy, then the court may discharge some of your debts.
- This means that you do not have to pay back your debt. Nor can the creditors come after you for money. Even if the court decides to get rid of your debt there still may be some debts that cannot be bankrupt.
- Certain debts, however, are not eligible for discharge, and some can be discharged only in rare cases.
Chapter 7 vs. Chapter 13
Two of the most common types of personal bankruptcy are Chapter 7 and Chapter 13.
If you file for Chapter 7 bankruptcy, you will have a trustee sell off many of your assets to pay off creditors. The good news is you will not be forced to liquidate all your assets. Some examples are equity in your home, your car, clothing, tools you need for your workplace, pensions, and Social Security benefits.
In addition to your primary residence, nonexempt property that can be sold include a second house, a second car, a boat, collections, or other valuable items, as well as bank and investment accounts.The Administrative Office of the United States Courts(1) reports that your Chapter 7 debts are usually discharged four months after you file your petition. (Although some rules differ from state to state, bankruptcy is governed by federal law and handled by federal bankruptcy courts.)
Alternatively, if you file for Chapter 13, you will pay back an agreed-upon portion of your debt over a three- to five-year period. The non-exempt assets can be kept as long as you comply with the terms of the agreement. After the period is over, any remaining debts will be discharged.
Most people who are in financial difficulty choose Chapter 7. For example, Chapter 7 qualifies you only if you can prove you can’t pay back your debts. Other than that, the court might decide Chapter 13 is the only option.
Non-dischargeable debts in bankruptcy
Creating a fresh start in your life is the goal of Chapter 7 and Chapter 13 bankruptcy. However, not all debts are dischargeable.
Under Chapter 7, Chapter 13, or Chapter 12 (a more specialized form of bankruptcy for farmers and fishermen), there are 19 categories of debt that cannot be discharged. (1) Examples of non-dischargeable debts vary depending on the chapter, but usually include:
- Alimony and child support.
- Tax liens, such as unpaid taxes. If the taxes date back several years, some federal, state, and local taxes may be eligible for discharge.
- If you have harmed someone or their property intentionally. By “willful and malicious”, we mean deliberate and without justification. There may be a discharge of debts for damage to property only in Chapter 13 bankruptcy.
- Liabilities for wrongful deaths or personal injuries resulting from the debtor’s operation of a motor vehicle while intoxicated or impaired.
- Unreported debts.
Any condominium and cooperative association fees, as well as any other debts not discharged in a previous bankruptcy, will not be discharged in a Chapter 7 bankruptcy. The best way to keep your car is to reaffirm your loan and keep making payments. Likewise, even if you owe money on your home, you can usually keep it if you declare bankruptcy, provided you continue to make payments and do not have more equity than your state or federal bankruptcy laws permit.
Important note: If you owe taxes or student loans, you may be able to negotiate an affordable repayment plan without declaring bankruptcy.
Bankruptcy Debts Not Dischargeable
Generally, student loans are very difficult to discharge in bankruptcy, unless you have demonstrated undue hardship to yourself or your dependents, such as being unable to maintain a minimum standard of living.2 A court may discharge part of your student loan debt, but not all of it. Consider negotiating a repayment plan that works for you with your loan servicer first if student loan debt is a major reason you are considering bankruptcy. A variety of repayment plans are available for federal student loans, for example.
Without a special exemption, which can only be obtained through a bankruptcy petition and explanation of your circumstances, income tax debts cannot be discharged. You may be better off consulting with a tax lawyer about your options before declaring bankruptcy if you cannot repay income tax debts.
Those unable to pay their federal taxes have a number of options, including an offer in compromise, in which the IRS agrees to accept a lesser amount.3 The IRS will accept a lesser amount if you make an offer in compromise. Payment plans, or installment agreements, let you spread the cost of your tax bill over a longer period of time.
There is a possibility that your creditors can block the discharge of certain debts. Additionally, they are entitled to seek relief from the automatic stay that restricts their ability to pursue collection activity. It isn’t always as quick or as smooth as debtors may hope when they file for discharge.
Bankruptcy Alternatives to Debt Relief
There are serious consequences to filing for bankruptcy. Chapter 7 bankruptcy remains on your credit report for ten years, while Chapter 13 bankruptcy remains on your report for seven years. Then it may be more difficult or even impossible for you to obtain a mortgage or car loan, or qualify for a credit card, in the future. Your insurance rates may also be affected.
Therefore, before filing for bankruptcy, consider other forms of debt relief. You may be able to reduce the interest rate or cancel some portion of your debt under debt relief, such as by negotiating with your creditors. The benefit of debt relief is that it is often in the creditors’ best interest, since they may be able to get more money than they would through bankruptcy.
If you require help negotiating debt relief, you can do it yourself or hire a reputable company. It’s important to check out any company that you’re considering for debt relief, as there are scam artists who pose as debt relief experts. (4)
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Important Information: All data and information are off the government site. But always make sure you talk to a professional before you do any kind of legal or health decisions.
- United States Courts. “Discharge in Bankruptcy — Bankruptcy Basics.” Accessed Feb 26, 2021.
- Federal Student Aid. “In Some Cases, You Can Have Your Federal Student Loan Discharged After Declaring Bankruptcy.” Accessed Feb. 26, 2021
- Internal Revenue Service. “Additional Information on Payment Plans.” Accessed Feb. 26, 2021.
- Federal Trade Commission. “Debt Relief and Credit Repair Scams.” Accessed Feb. 26, 2021.