What Types of Debt are Discharged in Bankruptcy
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For many people who have accumulated significant levels of debt through credit cards and other unsecured forms of credit, making the monthly payments required by the lender or creditor can be extremely difficult. This can lead to further debt issues and even legal problems if you cannot keep up with the monthly installments. Bankruptcy is one of the many debt relief options for people in this situation.
But what debt exactly will be wiped clean if you file for bankruptcy? Read on.
In this article
Types of bankruptcy
Individuals looking to declare bankruptcy have two types of options available. If your income is low enough, your may qualify for Chapter 7 of the U.S. Bankruptcy Code. You'll have to file for Chapter 13 bankruptcy if you exceed the threshold.
- Chapter 7: Consider it a liquidation because some of your assets may be sold to pay off creditors. While most debts are discharged, alimony and tax debt (aka income taxes) are non-dischargeable debts. All in all, the process can take six months.
- Chapter 13: This is essentially a rehab for your finances, and the process can take up to five years.
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Types of debts discharged in a bankruptcy
By now, you're aware that when a person files for bankruptcy, their debt is discharged. This means that the creditors can no longer force the debtor to repay the debt. Sometimes, the debt remains in place even after bankruptcy has been filed. This includes student loans and child support payments. Here is an overview of the types of debt typically discharged through bankruptcy.
important: A bankruptcy filing stays on your credit report for 10 years.
Chapter 7 bankruptcy
Unsecured debt is the most basic type of debt that can be discharged through bankruptcy. This type of debt is not backed by collateral like a house or car. Examples include:
- Credit card debt: Credit card debt is the most common type of unsecured debt discharged through bankruptcy.
- Personal loans: Took on a loan but can't make the payment? A bankruptcy filing can make it go, POOF!
- Payday loans: These loans are essentially cash advances. They carry a short repayment window (typically your next paycheck) and high interest rates.
- Medical bills: About 100 million adults in the U.S. face medical debt ranging from $500 to $10,000 or more, according to Kaiser Family Foundation. Utility bills can also be discharged.
- Student loans: If you can prove undue hardship , even student loans can be discharged.
Unsecured debts are considered dischargeable if the individual can show the court that they cannot afford to pay the owed money without sacrificing necessary living expenses, such as food, shelter, transportation, etc. To qualify for Chapter 7 bankruptcy, a person must demonstrate that they owe less than $383,175 in debts. However, the total amount of debt forgiven will count towards the amount that a person can owe to be eligible for Chapter 7 bankruptcy in the future. This is referred to as the "debt limit." If the debt limit has already been reached, the person will either need to repay some or all of their debt, or else they will need to file for Chapter 13 bankruptcy instead.
Related: How to Recover from Bankruptcy
Can secured debts be discharged?
A secured debt is a loan in which the borrower makes a down payment to secure the loan. The most common secured loans are mortgages, car loans, and real estate tax liens. If a person defaults on a secured loan, the lender can take possession of the asset used in the loan as collateral. This would include a car in the case of an auto loan or a home for a mortgage. As a result, these debts cannot be discharged through bankruptcy.
Eligibility criteria to file for Chapter 7 bankruptcy
To qualify for Chapter 7 bankruptcy, your income must be below the state median income for your family size. If your income falls within this range, you will be eligible to file a Chapter 7 bankruptcy petition and discharge your debt. You will need to complete a means test to determine your income level to determine your eligibility.
You will need to calculate your household expenses and determine how much of your monthly income is left after you have paid your monthly bills. Any excess funds remaining after paying your household expenses are known as disposable income. After determining how much money you have left each month, you will need to compare it to the state median income for the area where you live to determine the amount you can borrow to pay off your debts.
Individuals can file for Chapter 7 bankruptcy at any time, regardless of whether or not they are currently employed or own any assets. Individuals who do not own any significant assets and have a stable source of income typically qualify for this type of bankruptcy. Individual debtors who file for this type of bankruptcy must attend mandatory credit counseling sessions before their case can be approved.
Chapter 13 bankruptcy
If an individual's income is too high or they owe more than $336,900 in debt, they will need to file for Chapter 13 bankruptcy instead. So what types of debts are discharged under Chapter 13? None! Instead, you're put on a repayment plan.
Filing for Chapter 13 bankruptcy is more complicated and requires a set monthly income from the debtor to cover their debts over a three-to-five-year period. This type of bankruptcy is only available to individuals whose income is too high to qualify for Chapter 7 bankruptcy or who have a substantial amount of debt they cannot afford to pay in full. Individuals that have recently purchased a home that is no longer affordable may be able to save their home by filing for Chapter 13 bankruptcy.
Although a secured debt cannot be discharged in bankruptcy, it is still possible to file a Chapter 13 bankruptcy plan that will allow the debtor to catch up on their payments over time. In a Chapter 13 bankruptcy, the individual will make monthly payments to the court for a period the duration of the stipulated period. The court will use the funds to make payments to the creditor on the debtor's behalf.
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Benefits of filing for bankruptcy
Many people feel trapped by overwhelming debt, preventing them from reaching their financial goals. Filing for bankruptcy is often the best option for those facing financial difficulties. There are several benefits to filing for bankruptcy, including:
- Discharging your debts.
- Freeing up much-needed cash flow.
- Preventing foreclosure of your home and stopping creditor harassment.
- Providing you with a fresh start financially and helping you to rebuild your credit so that you can move forward with your life.
In addition, when you file for bankruptcy, the bankruptcy court will issue an automatic stay that will temporarily stop all collection actions against you, including repossession of your car or eviction from your home. Once the court issues the stay, you will be protected from further collection attempts while your bankruptcy case is pending. During bankruptcy proceedings, creditors are not allowed to continue to pursue collections activities against you.
Once the bankruptcy process is finalized, you will receive a fresh start financially and will no longer have most debts to repay. A vast majority of people find it much easier to live within their means when they no longer have the burden of monthly debt payments.
Related: How to Deal With Debt Collectors
The bottom line
For many people, filing for Chapter 7 bankruptcy is the best solution to this problem because it allows them to eliminate all of their unsecured debts and gives them a fresh start on their financial situation. Unlike a Chapter 13 bankruptcy filing, which forces the individual to repay their debts over a period of time in a repayment plan, a Chapter 7 bankruptcy filing allows you to wipe out all of your debt and leave you with a clean slate. This makes it a good choice for people who cannot meet their financial obligations and want to eliminate all of their debt.
You can eliminate credit card debt, medical bills, personal loans, and many other unsecured debts under Chapter 7 bankruptcy law. Eliminating these debts will allow you to take control of your finances and allow you to start over on a healthy financial path. The benefits of filing for bankruptcy are numerous. It can eliminate the burden of large debt and make it easier for people to start over financially after a punishing period. It can also prevent individuals from losing their homes or car to creditors.
If you are thinking about filing for bankruptcy, there are a few steps that you should take first. You should first seek out an experienced bankruptcy lawyer in your area to learn more about your options. Once you have met with a bankruptcy attorney, you should determine which type of bankruptcy is right for you based on your financial situation.
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- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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