Do You Get Rid of All Debts by Declaring Bankruptcy?
Bankruptcy can provide financial relief from overwhelming debts by liquidating some non-exempt assets to pay off a portion of your debts or restructuring your debt payment plan. If your debts have become unmanageable, bankruptcy may be worth considering. However, it’s essential to understand that bankruptcy doesn’t make all your debts disappear. While you can eliminate unsecured debts like credit card debts and medical bills, you may still have to pay others like student loans and child support. So, while you’ll get some financial relief, filing for bankruptcy doesn’t mean you’ll automatically get a fresh start with zero responsibilities. Here’s what bankruptcy can do for you.
How Bankruptcy Works
Bankruptcy is the legal process through which individuals and businesses restructure or eliminate their debts. Once you file for bankruptcy, an automatic stay goes into effect. This requires all creditors to stop their collection efforts, including wage garnishment, execution on bank accounts, foreclosure on a house, or repossession of a vehicle. The type of bankruptcy determines how your debts will be handled. The most common types of bankruptcy for individuals are:
- Chapter 7 bankruptcy: This is known as liquidation bankruptcy, in which some of your non-exempt assets may be sold to pay creditors, and most unsecured debts are discharged.
- Chapter 13 bankruptcy: This involves a court-approved repayment plan that allows you to pay off debts over three to five years. At the end of the period, any remaining eligible debt is discharged.
Discharge means you’re no longer obligated to pay specified debts, and creditors cannot take action to collect on those discharged debts.
Debts That Cannot Be Discharged in Bankruptcy
Regardless of whether you file for Chapter 7 or Chapter 13, some debts cannot be eliminated. These include the following:
- Student loans (except in rare cases where you can prove undue hardship)
- Child support and alimony obligations (Domestic Support Obligations)
- Court-ordered fines and penalties
- Criminal restitution (fines ordered as part of a sentence)
- Debts resulting from personal injury or death to another person relating to Driving Under the Influence (“DUI”) offenses
- Unlisted debts (if you fail to include them in your bankruptcy filing schedules)
- Reaffirmed debts (such as a mortgage or car loan you choose or elect to sign a Reaffirmation Agreement with your secured creditor to reimpose your personal liability)
If any of these apply to you, filing for bankruptcy may not eliminate them. However, if you qualify for Chapter 13, you may be able to restructure certain obligations into a more manageable plan.
Typically, in a Chapter 13 case, what is commonly referred to as the “Means Test” is a legal calculation under the Bankruptcy Code will determine the amount of your repayment plan after it calculates your projected monthly disposable income from your average past 6 months of household income less permitted deductible expenses.
Also, your repayment plan may be calculated based upon a “hypothetical liquidation analysis”, meaning a calculation of the total amount of your non-exempt equity in your assets in which you must repay your creditors in order to keep all of your belongings as opposed to selling them. Exemptions are legal protections as to the amount of assets you may exempt (beyond the reach of creditor execution for collection of debts by law) under federal bankruptcy law under 11 U.S.C. § 522 or alternatively under state law, such as the Pennsylvania tenancy by the entireties exemption for married debtors.
Debts That Can Be Eliminated in Bankruptcy
If you qualify for Chapter 7, you may have the following debts discharged:
- Credit card balances
- Medical bills
- Personal loans
- Utility bills
- Certain tax debts, if they meet IRS criteria
As mentioned, Chapter 13 allows you to have a restructured repayment plan before any remaining balance is wiped out. With Chapter 13, you can catch up on secured debts like mortgage or car payments to avoid foreclosure or repossession.
Choosing the Right Bankruptcy Option
If you are concerned about eliminating unsecured debts, Chapter 7 may be the best option, as long as you meet the income requirements. On the other hand, if you’re behind on secured debts and want to keep your home or vehicle, Chapter 13 might be a better fit. Either way, an experienced bankruptcy attorney can help you determine the best option based on your financial situation.
Contact a Deerfield Beach Bankruptcy Attorney Today
If you’re considering bankruptcy and need legal guidance, contact our Lehighton & Carbon County bankruptcy attorney at The Law Office of Adam R. Weaver. Esq., today to schedule a consultation.
