What type of Debt is forgiven in Bankruptcy?
People seek bankruptcy when their efforts to meet their debts fall flat. Bankruptcy provides a legal pathway to eliminate your debts. This allows you to no longer repay your debts and start your journey towards financial recovery.
When an individual files for bankruptcy, there activates an automatic stay provision that prevents creditors from activities related to the collection of debts like filing lawsuits, sending threatening emails or phone calls, foreclosures etc. There are certain debts that cannot be discharged while others will either be eliminated or restructured to make it affordable for you to repay them. Filing for bankruptcy enables you to keep your car, home, and the majority of your possessions so that you can bring your failing financial affairs to life.
Two of the most popular types of bankruptcy are Chapter 13 and Chapter 7.
Chapter 13 Bankruptcy
This type of bankruptcy enables people to rearrange all their assets and combine their payments in order to get rid of fines and fees. The repayment plan is restructured according to the affordability of the debtor. This plan may extend to a period of about three to five years. If this repayment plan is completed, the court will issue a discharge notice that will eliminate a majority of the outstanding debts.
Chapter 13 is a better option in cases where the equity in secured assets is more than what can be protected with the bankruptcy exemptions. Similarly, those who want to keep all their assets and they have a higher income, it disqualifies them to opt for Chapter 7 bankruptcy. To be eligible to file for Chapter 13 bankruptcy, the individual should have a regular source of income and the disposable income should be sufficient to go for a Chapter 13 payment plan.
There is a long list of debts that can be discharged in Chapter 13 bankruptcy. These include the two major categories of Nonpriority unsecured debts and secured debts that are stripped off or crammed down.
The nonpriority unsecured debts include:
- Medical bills
- Credit card debt
- Personal loans
- Utility bills
- Old nonpriority income tax obligations (only if tax obligations were timely filed)
- Most lawsuit judgments
Chapter 13 requires people to pay some of their debts while the rest is eliminated when the plan gets completed.
The other type of debts is secured debts that are completely eliminated, stripped or crammed down. Moreover, in Chapter 13 reorganization, secured debts can be modified. It allows the removal of unsecured junior lien which means that the creditor has the right to hold someone’s possession until they repay the debt they owe, such as a second mortgage. However, to remove this, you will be required to classify lien as a nonpriority unsecured debt and then move on to lien stripping.
Chapter 13 may also allow you to reduce other types of secured debts like a car loan. This involves a restructuring of the car loan i.e. breaking the debt into unsecured and secured parts. There is a possibility that the unsecured part is eliminated but only when you complete the plan and pay all of the secured parts of the debt.
There are certain debts that are not discharged under Chapter 7 bankruptcy but they are dischargeable under Chapter 13. These are listed as under:
- Debts resulting from malicious or deliberate damage to property.
- Loans from the retirement account.
- Some types of penalties and fines that are owed to the government.
- Debts through which non-dischargeable tax obligations are paid.
- Debts that were not eliminated in a previous bankruptcy.
- Debts that resulted from a previous agreement of separation or divorce.
- Any condominium fees of a homeowner that are due after the bankruptcy was filed.
Chapter 7 Bankruptcy
Those who file for this type of bankruptcy can be discharged from a number of debts within the duration of a few months. It either prohibits stops or resolves collections, repossessions, loan deficiencies, civil judgments and wage garnishment. Sometimes, debtors are required to sell their property in order to pay off people they owe. However, there are a number of bankruptcy exemptions where the possessions can be exempted. This is possible only if there isn’t much property you own and you qualify for the “no asset” case.
All those debts that were due before you filed for bankruptcy can be eliminated in Chapter 7. For example,
- Medical bills
- Personal loans
- Collection agency accounts
- Credit card bills
- Utility bills
- Dishonored cheques that are not based on fraud
- Lease and business debts
- Automobile accident claims that didn’t happen because of drunk driving
- Non-fraud based civil court judgments
- Overpayments of Veterans or social security
- Fees of attorneys (this does not include alimony awards or child support)
- Student loans when excessive hardship is proved
- Unpaid taxes or older tax penalties over 3 years old
Debts that cannot be discharged by Bankruptcy
Some debts cannot be eliminated through bankruptcy whether you file for Chapter 13 or Chapter 7 Bankruptcy. You will have to repay these debts after the discharge when Chapter 7 is filed, whereas, when Chapter 13 is filed for, you’ll be required to pay these in your plan or the balance will remain at the end of your case. Those who want to hold their property like a car or house are required to continue to make payments.
Debts that cannot be discharged are listed as under:
- Debts that you didn’t mention in your bankruptcy paper
- Child support and alimony or alimony awards
- Debts resulting from accidents caused by drunk driving
- Student loans when excessive hardship is not proved
- Fines charged due to a violation of laws
- Income tax debts from the previous 3 years
Under Chapter 7, there are certain debts that will be made nondischargeable by the court if the creditor challenges the court decision. These include:
- Fraud based debts
- Debts resulting from embezzlement
- Debts that result from injury to a person or property. The injury must have been caused willfully.
- Cash advances, loans, or credit purchases that are made within 70 days before the bankruptcy was filed.
- Debts that result from a divorce agreement or decree, except when the individual is unable to pay them.
Though some of these debts may be declared nondischargeable, bankruptcy provides you a relief by removing the dischargeable debts and letting you pay some of your debts in manageable payment plans.