Bankruptcy is a powerful legal tool that can help individuals and businesses overcome overwhelming debt by providing them with a fresh start. Filing for bankruptcy can seem like a daunting process, but it can be beneficial in the long run. This article will discuss what happens to debt after filing for bankruptcy and how it can affect different types of debt.

What is Bankruptcy?

Bankruptcy is a legal process that allows individuals and businesses to reorganize or discharge their debts. There are two types of personal bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is a liquidation process that eliminates most unsecured debts, such as credit cards and medical bills. It is the most common type of bankruptcy and usually takes about four to six months to complete.

Chapter 13 bankruptcy is a reorganization process that allows individuals to pay off their debts over a three to five-year period. This type of bankruptcy is used to catch up on mortgage payments, prevent foreclosures, and pay off creditors in an organized manner.

What is a Bankruptcy Discharge?

When a debtor files for bankruptcy, the court issues an automatic stay that prevents creditors from attempting to collect on the debt. This means that creditors cannot call, write, or pursue legal action to collect on the debt.  The automatic stay typically remains in effect until the case has concluded.

At the conclusion of the bankruptcy the court issues a discharge order. A bankruptcy discharge is a court order that releases a debtor from personal liability for certain specified debts. It ultimately means the debtor is no longer personally liable to pay those debts. However, certain debts, such as alimony and child support, are not dischargeable in bankruptcy.

What Types of Debt Can be Discharged in Bankruptcy?

Unsecured Debt: In general, most unsecured debts can be discharged in bankruptcy. Unsecured debts are those that are not secured by collateral, such as credit card debts, medical bills, and personal loans. In a Chapter 7 bankruptcy, these debts are discharged without the debtor being required to pay anything and the debtor is no longer responsible for them. In a Chapter 13 bankruptcy, the debtor’s income, expenses, and non-exemptable assets are considered to determine if it is necessary to repay any amount to unsecured creditors.   After successfully completing the repayment plan, any remaining balance of the unsecured debts is discharged.

Secured Debts: Secured Debts are those that are backed by collateral. Examples of secured debts include mortgages, car loans, and other loans that are secured by collateral. In a Chapter 7 bankruptcy, the debtor must either surrender the collateral to the creditor or continue to make payments on the debt. In a Chapter 13 bankruptcy, the debtor can often keep the collateral.  Chapter 13 provides options to catch up arrears on delinquent secured debts or to restructure the repayment of the obligation..

Student Loans: In the past, student loans have generally not been dischargeable in bankruptcy. However, recent changes in policy by the Department of Justice and Department of Education have streamlines obtaining a bankruptcy discharge on deferral student loan debt. However, bankruptcy does not automatically discharge these student loan debts.  It is necessary to initiate a separate legal proceeding in the bankruptcy court, during the pendency of your bankruptcy, and request a determination that the student loan debt is dischargeable. If the request is approved, the debtor could have all or part of their student loans discharged.

Tax Debt: Certain taxes, namely federal and state income taxes, can be discharged in bankruptcy, depending on when they were due. Generally, taxes that are over three years old can be discharged. However, taxes that are less than three years old may not be dischargeable. In a Chapter 7 bankruptcy, it may be possible to discharge the tax debt  without further payment from the debtor. In a Chapter 13 bankruptcy, the debtor may have to make payments under the bankruptcy payment plan but will often pay less than the original balance due. In any case, taxes due for years with unfiled tax returns are not dischargeable in bankruptcy.

Getting Help Filing Bankruptcy

Deciding to file bankruptcy can be scary, but it can provide you with a way to get out of debt and get a financial fresh start. It is important to understand the different types of bankruptcy and determine how your debts can be treated in each of them.  Filing for bankruptcy can be a complicated process and most courts have their own local rules to be aware of; so, it could be important to consult with an experienced bankruptcy attorney to understand the implications of filing for bankruptcy and help guide you through the process.

Brock and Stout’s bankruptcy lawyers have over 25 years of experience helping clients break free from debt and get a fresh start. Contact us for a free evaluation of your financial situation if you need relief from the burden of debt. Let our family help your family.