Will filing for bankruptcy clear all my debt?

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If you’re under a heavy debt load, filing bankruptcy may be an option of last resort. Many types of debt can be discharged during bankruptcy, but it’s important to understand that not all debts qualify. Some types of debt are difficult — though not impossible — to discharge in bankruptcy.

What does filing for bankruptcy do?

There are two major avenues for individuals filing for bankruptcy: Chapter 7 and Chapter 13. Both of these types of bankruptcy attempt to help you reset your finances, but they do it in slightly different ways.

What is Chapter 7 bankruptcy?

In Chapter 7 bankruptcy, most of your debt is discharged, but you also must give up personal property. There are exemptions for essential or personal property, but all nonexempt property is sold. The proceeds are then distributed among your creditors.

What is Chapter 13 bankruptcy?

With Chapter 13 bankruptcy, you instead reorganize your existing debt. Working with a court-appointed trustee, you review your creditors and debt and come up with a payment plan. Over the course of three to five years, you pay a set monthly amount to the court, which will disperse the funds among your creditors. Following this period, your remaining debts will be discharged.

It’s possible to file Chapter 13 bankruptcy after previously filing Chapter 7 bankruptcy as well.

What does discharging debt do?

When your debts are discharged, the creditor can no longer require you to pay the debt. Many types of debt are discharged as part of Chapter 7 bankruptcy. In Chapter 13 bankruptcy, your debt is reorganized, and any debt remaining after the payback period is discharged.

What debts cannot be eliminated in bankruptcy?

There are certain types of debt that cannot be eliminated in bankruptcy. Here are a few examples:

Secured debt: If you purchase a car or other merchandise with a loan, you make an agreement with the lender to pay for the item in exchange for the current use of it. If you later file for bankruptcy, you’ll have to decide whether to give the item up or continue paying the lender for it.

Child support and alimony: You can’t eliminate a legal obligation to pay child support or alimony. Any outstanding balance owed at the time of a bankruptcy filing will still remain after the case is over.

Legal fees and debt in a divorce decree: In many divorce decrees, one spouse agrees to pay for legal fees or some outstanding debts owed by the other spouse. These debts will survive your bankruptcy. For example, if you agree to pay the credit card balances in your name and the name of your ex-spouse, you couldn’t then file bankruptcy to wipe out those debts or the agreement to pay. Your ex-spouse could still force you to pay those bills.

Restitution: Court-ordered restitution is not dischargeable in bankruptcy. Restitution is a court-ordered sum of money you must pay for causing financial loss or personal injury to another. This includes payments for any injury you cause resulting from driving under the influence.

What debts are difficult to eliminate in bankruptcy?

With some other types of debt, it’s possible to get a clean slate with bankruptcy.

Student loans: Loans taken out for college may not be eliminated in the vast majority of cases. All types of education loans qualify as student loans and are generally exempt from elimination in bankruptcy: federal student loans, private lender student loans and loans directly from a university.

There are exceptions, though. One is that you can prove you’ll never be able to work again because of a complete and permanent disability. Another exception is undue hardship, which requires you to prove that you’ve made good faith efforts to repay the loan, repaying it would keep you from maintaining a minimal standard of living for yourself and your dependents and the circumstances making it difficult for you to make payments are unlikely to change during the repayment period.

The standards for both options are very high, however, and it’s rare that either exception is granted.

Income tax liability: You can wipe out some income tax liability in a bankruptcy filing, but there is a very specific and extensive test required to do so.

The Bottom Line

Discharging your debt through bankruptcy has a drastic effect on your credit score, so it’s not something you’ll want to take lightly. Still, if you find yourself unable to make payments to all of your creditors, it may be time to consider filing bankruptcy.

There are two types of bankruptcy available to most people: Chapter 7 and Chapter 13. In both cases, the majority of your unpaid debts will be discharged, though some types of debt are difficult or impossible to eliminate through bankruptcy.

Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a contributing writer for Bankrate. Dan writes about loans, home equity and debt management.
Edited by
Associate loans editor