Key takeaways

  • Filing for bankruptcy can help you to discharge debts and regain control of your financial life.
  • While bankruptcy clears many kinds of debt, it does not necessarily absolve you of all debt — so research upfront which kinds are eligible to be erased.
  • Student loans, owed taxes and court-mandated payments like alimony and child support often must still be paid, even after bankruptcy is granted.
  • There are two types of bankruptcy: Chapter 7 and Chapter 13. There are differences between the two and how they are executed by the court.

If you’re under a heavy debt load, filing for 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.

Does bankruptcy clear all debt?

Consumers weighing the pros and cons of bankruptcy may wonder if doing so would discharge all of their debts. The answer to this question is no — and though both Chapter 7 and Chapter 13 bankruptcy clear many kinds of debt from a filer’s credit profile, neither provides a guaranteed clean slate.

Borrowers who are overwhelmed by consumer debt (credit cards and personal loans) or crushing medical debt may find relief by filing bankruptcy. However, for those struggling with payments on certain types of loans, bankruptcy may not be the best

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.

Debts that can’t be eliminated in bankruptcy

There are certain types of debt that cannot be eliminated in bankruptcy.

Secured debt

If you purchase a car, home or other merchandise with a secured loan, you make an agreement with the lender to forfeit the item if you don’t pay back the loan. 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 can’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.

Debts that 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 if 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 repaying the debt would keep you from maintaining a minimal standard of living for yourself and your dependents.

The standards for substantiating either permanent disability or undue hardship 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.

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.

A good first step is to research credit counseling options. Before filing for either type of bankruptcy, courts will require you to complete a credit counseling course — so knowing more about the credit counseling process upfront can help you to prepare.