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There are several types of bankruptcy, but chapter 7 and chapter 13 are among the most common forms pursued as they apply to individuals. Under chapter 7, an individual’s non-exempt assets are liquidated and debts are repaid with the proceeds. Chapter 13 bankruptcy allows for restructuring your debts and paying some creditors back with interest, while others will receive a portion of the outstanding debt. Once your repayment plan is completed, the remaining debts can be discharged.
No matter which form of bankruptcy is sought, not all debt can be wiped out through a bankruptcy case. Taxes, spousal support, child support, alimony, and government-funded or backed student loans are some types of debt you will not be able to discharge in bankruptcy.
Which debts are discharged in bankruptcy?
When filing for bankruptcy, the goal is to eliminate as much debt as possible and get a fresh financial start. As part of this process, several types of debts will be discharged immediately or at the end of the bankruptcy process. Once discharged, you will no longer be required to pay the debt. This is a permanent order, and creditors cannot pursue collection.
Credit card debt
As part of chapter 7 bankruptcy, your credit card debt is typically discharged immediately.
Chapter 13 debt focuses on reorganizing your debts. This often includes credit card debt, which means some credit card debt may be included in a Chapter 13 repayment plan. However, once that plan has been completed and all required debt repaid, the remainder is eligible for discharge based on your income and expenses.
As unsecured debt, meaning it is not backed by collateral, medical debt can be discharged through chapter 7 bankruptcy.
Under Chapter 13 bankruptcy cases, similar to credit card debts, a portion of medical debt may be included in your repayment plan. Once you’ve completed the repayment portion of your bankruptcy case, the remaining debts, including medical bankruptcy, are discharged.
Unsecured personal loans can be eliminated or discharged through a bankruptcy filing. Unsecured loans are those not backed by your personal property. In addition, personal loans from friends, family, or employers are also eligible to be discharged.
Some of the additional types of debt that can often be discharged in bankruptcy include condo, co-op or HOA fees, which can be discharged through Chapter 13, and loans from retirement plans, which also qualify for discharge under Chapter 13.
Which debts are not discharged in bankruptcy?
Not all debts can be discharged in bankruptcy–though the specific exceptions and reasons for the exception vary based on the type of bankruptcy pursued. In many cases, they are debts that Congress has deemed not eligible for public policy reasons.
Many types of taxes cannot be discharged in bankruptcy. There are some exceptions, however. It is possible to wipe out tax debt that meets certain qualifications. Federal or state income taxes may be discharged in chapter 7 cases if the taxes are associated with a return due at least three years before your bankruptcy case. The three-year timeline includes any extensions you may have received on the tax payment from the state or federal government.
Non-income tax debts, such as property taxes and tax liens attached to your property, cannot be eliminated in a bankruptcy filing.
Spousal or child support and alimony
Money owed for spousal or child support or alimony also is not discharged in bankruptcy. You are unable to eliminate these types of legal obligations. As a result, any outstanding balance you owe for such items will still be due after your case is over.
In most cases, student loans are not eligible for discharge. This includes federal student loans, private lender student loans and loans provided by a university.
There are a few limited exceptions to the student loans rule. For instance, if you can never work again due to disability and can prove this, the student loans may be discharged. In addition, if you can establish that the loans cause undue hardship and prove that you made every attempt to repay the loan, the loans may qualify to be discharged.
However, qualifying for such a discharge is very difficult, and you must establish that paying the loan would mean you cannot maintain a minimal standard of living. Additional debts that cannot usually be discharged through bankruptcy include fines or penalties from government agencies for breaking the law and personal injury debts resulting from a drunk driving incident. Debts from fraud, debts for items purchased within 90 days of filing, embezzlement, larceny or breach of fiduciary duty debts, and any debts or creditors left off of your bankruptcy petition are also not likely to be discharged.
Should you file for bankruptcy if it doesn’t discharge all of your debts?
Even though bankruptcy does not always discharge all of your debts, it can still be helpful in some cases to file. Bankruptcy is designed to give filers a fresh financial start. And depending on the particular type of bankruptcy you pursue, many of your outstanding debts will be addressed through a payment plan or paid off through liquidation of non-exempt assets, which can help you regain control of your finances.
It’s important to realize. However, that filing bankruptcy can have a variety of serious and long-term implications. Not only will you lose 100, 150 or even 200 points depending on your score, but the bankruptcy will stay on your credit report for 10 years for a chapter 7 filing and seven years for a chapter 13.
Because of the devastating effect it can have on your credit score, bankruptcy should typically be a last-resort option for debt. A bankruptcy case can decrease your score by hundreds of points and remain on your profile for as long as a decade.
Before pursuing bankruptcy, consider your alternatives, which could include working with a credit counselor or reevaluating your budget to see if you can find places to cut back. You might even consider obtaining a second job to supplement your income, sell items you no longer need and use the funds to put toward your debt.