debt

Which debts can be discharged in bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
I have debts in the form of credit cards, material to suppliers, a car wreck (I was not insured and it was my fault) and a truck repo. Most of these creditors have judgments against me. I am so far underwater I cannot possibly make good on these debts. Can filing bankruptcy eliminate these debts? Thank you for your response.
-- Robert

Dear Robert,
Most of the debts you listed can be discharged in bankruptcy. Let's go through each type, plus other common debts that people seek to eliminate. An experienced bankruptcy attorney could discuss other debts you may seek to eliminate.

Debts that can usually be discharged in bankruptcy

  • Credit cards or unsecured loans.
  • Car repossessions and deficiency balances.
  • Some car accidents.
  • Material supplier debts.
  • Medical bills.
  • Lawsuits and judgments.
  • Evictions and unpaid rent.
  • Unpaid utility bills.
  • Foreclosure balances.

Credit card or unsecured loans: This is the most common type of debt eliminated in bankruptcy. Examples: department store cards, personal loans from a credit union, banks or other financial institutions, payday loans and gas cards.

Exception: Excessive credit card use in the months prior to filing your case may be problematic. The creditor may challenge your request to eliminate the entire balance, claiming you never intended to pay for those items. I have seen clients take expensive vacations or purchase high-priced merchandise prior to filing bankruptcy, only to pay for the excessive use or the expensive merchandise after the filing.

Car repossession: If you surrender the car or the lender repossesses the car, the lender sells the vehicle and bills you for the difference. The difference is called a deficiency balance. The deficiency balance may be eliminated in bankruptcy.

Vehicle accident: You may eliminate debts incurred as a result of a vehicle accident -- even if you hurt another person.

Exceptions: If you were under the influence of drugs or alcohol at the time of the accident or if you maliciously or willfully harmed another person with your vehicle, then you cannot eliminate these debts.

Material to suppliers: I hate to see these debts wiped out because usually the suppliers are small to midsize companies, and every dollar matters. To me, the credit card and car lenders are just big, amorphous companies, and eliminating debts to them should not hurt their bottom lines too much. However, smaller companies could be greatly impacted by a vendor filing bankruptcy.

I would say that in most cases, you can eliminate money owed to suppliers. If you have material that the supplier can recover and resell, you need to return those items. You don't get to keep the material, eliminate the debt and then sell the materials for a profit.

Medical bills: Bills associated with a hospital stay, doctor visits or ambulance service may be eliminated in bankruptcy.

Lawsuits and judgments: These result from creditors or collection agencies suing you for failing to pay. With few exceptions, you may eliminate the lawsuit even after it has begun or the judgment that results from the lawsuit.

Exception: If you are sued and the plaintiff claims you committed fraud, this may not be dischargeable in bankruptcy.

Evictions: The landlord typically sues former tenants for unpaid rents. Those unpaid rents may be eliminated in bankruptcy.

Utility bills: Unpaid electricity, water and gas or other utility bills may be eliminated as well. However, if you try to re-establish services with the same utility company after filing bankruptcy, you may be required to give a large deposit. This could offset the debt you previously had included in your bankruptcy.

Foreclosed homes: In most cases, when a house is sold in a foreclosure sale, there is a loan balance remaining. For example, if the house sells for $200,000 but the loan balance was $250,000, you may wipe out the difference in bankruptcy.

The debts listed above are the most common types included in bankruptcy petitions. Each case has unique circumstances, so you ought to do your own research or consult with an attorney to confirm whether you may eliminate your particular debts.

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To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.

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