There are not that many tools available that can wipe out things like credit card debt, but bankruptcy may be one of them. However, even with the powerful tool of bankruptcy, you cannot wipe out certain types of debt such as student loans, secured de
bts, tax debts, alimony and child support.
What Bankruptcy Can Do For You
Bankruptcy can be a powerful tool that you can use if you are facing a number of debts. Here are some of the things that bankruptcy can help you with:
- Credit Card and Other Unsecured Debt. Some of the things that bankruptcy is very good at is wiping out unsecured debt, like credit card debt. There are only certain situations when debt carried on a credit card is secured (you will probably already know if your credit card is “secured), and credit card debt is most often unsecured. An unsecured debt is one where the creditor does not have a legal interest in any pieces of your property and does not have the right to repossess any of your property if you fail to make payments on your debt. Bankruptcy is well designed to take care of credit card debt. In addition, if you have any other types of unsecured debt, like department store
cards, legal bills, health care memberships, cell phone bills, signature loans, bankruptcy may be able to wipe those out as well.
If you choose to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy, you may have to pay back all, or a portion of, your unsecured debts. If your repayment plan under Chapter 13 ends before you have paid back all of your unsecured debts, they may be forgiven.
- Collection Agencies and Creditor Harassment. Bankruptcy can also be a powerful tool that you can use to stop collection agencies and creditors from harassing you. However, if the harassment is only letters and phone calls, there are other tools available to you that you should probably use before filing for bankruptcy. Bankruptcy should most likely only be used to stop harassment when it comes in the form of a creditor attempting to repossess your property or a bank foreclosing on your mortgage.
- Creditor liens. If a creditor has a lien on some or all of your property, this gives them the right to repossess your property. If you use certain procedures during your bankruptcy, you may be able to eliminate some or all of the liens that your creditors have on your property.
What Bankruptcy Can’t Do For You
Although bankruptcy is a powerful tool, it is not all-powerful. Here are some of the things that bankruptcy probably cannot help you with:
- Secured Debts and Property Repossession. Although bankruptcy is a powerful tool that you can use to wipe out many types of debt, it does not always eliminate liens that arise from secured debts. If you have a secured debt, that is a debt where your creditor has a right to place a lien on or reposes your property, bankruptcy may be able to eliminate the debt itself, but it probably will not stop your creditor from taking the property.
- Child Support and Alimony Payments. Because of their importance, bankruptcy will not wipe out any child support or alimony payments that you have. Even during your bankruptcy proceedings, you will have to continue to make payments for alimony and child support. Also, if you decide to file for Chapter 13 bankruptcy, you will have to include these payments on your proposed repayment schedule.
- Student Loans. In almost all circumstances, student loans will survive bankruptcy. However, if you are able to show that you would suffer “undue hardship” if you were required to pay back your student loans, you may be able to get your student loans discharged through bankruptcy. As many graduates have discovered, it is almost impossible to show “undue hardship,” meaning that you probably cannot get your student loans forgiven through bankruptcy. In order to show undue hardship, you will need to be able to prove that you cannot afford to pay your loans now and also that there is very little chance of you being able to pay your student loans in the future.
- Tax Debts. It can be very hard to discharge or eliminate tax debts through bankruptcy. However, it may be possible to eliminate tax debts for debts that arose from unpaid income taxes from years ago, but there are still a number of requirements that you need to meet in order to qualify.
- Other Nondischargeable Debts. There are also a number of debts that are considered nondischargeable whether you file for Chapter 7 or Chapter 13 bankruptcy. These include:
- Debts that you do not list on your bankruptcy papers, unless your creditor learns of your bankruptcy before it is over,
- Debts that you have that follow from an injury or death caused by your intoxicated driving, and
- Debts that you have for unpaid fines or tickets that you received for not following the law. These include things like unpaid parking or traffic tickets as well as unpaid criminal restitution judgments.
If you decide to file for Chapter 7 bankruptcy, these nondischargeable debts will still be there after your bankruptcy is over and will not be forgiven. Likewise, if you file for Chapter 13 bankruptcy, these debts must be paid in full during your repayment period because they will not be forgiven if you complete your repayment period without paying them in full.
In addition to these examples above, there are some other types of debts that cannot be discharged through a bankruptcy proceeding. In some situations, a creditor may convince a judge that their debt should survive your bankruptcy proceeding. Normally, these debts will arise from fraud (like lying on a credit application) or other misdeeds of yours.
Tools Available Only Through Chapter 13 Bankruptcy
Chapter 13 bankruptcy is quite different than Chapter 7 bankruptcy. Here are some of the things that Chapter 13 can help you with while Chapter 7 cannot:
- Foreclosure on Your Home Mortgage. If you decide to file for Chapter 13 bankruptcy, you may be able to stop a foreclosure proceeding on your home mortgage and force your lender to accept a repayment plan where you will make up for any missed payments while staying current on your monthly payments. In order for this to work for you, you need to show that you will have enough income to cover your entire repayment plan.
- Retain Possession of Nonexempt Property. There are certain types of property that are not exempt from bankruptcy proceedings. By filing for Chapter 13 bankruptcy, you may be able to keep some of this nonexempt property by showing you will have enough income to cover your repayment plan.
- Reduce Secured Debts That Are Worth More than the Property That Secures Them. By using Chapter 13 bankruptcy instead of Chapter 7 bankruptcy, you may be able reduce a secured debt that is worth more than the property that secures it. Chapter 13 may allow you to reduce a secured debt to the replacement value of the property that secures it. To make sense of this, an example is helpful. Suppose that you owe $20,000 on a boat loan, but the boat is only worth $10,000. Chapter 13 may allow you to reduce your secured debt to $10,000 and have the other $10,000 discharged. However, under new bankruptcy laws, you cannot do this with car loans where you purchased the car during a 30-month period before you filed for bankruptcy. For other types of personal property, you cannot reduce the debt to the replacement value of the property if you purchased the property within a year prior to filing for bankruptcy.