Bankruptcy can provide individuals with a fresh start. This can be achieved in two ways, Using Chapter 13 bankruptcy debts can be reorganized, and with Chapter 7 debts may be liquidated. Both Chapter 7 and Chapter 13 can also result in some debts being discharged.
There is a common misconception that every single debt can be discharged. This is not the case and there are certain types of debt that can never be discharged. It is very important that prior to filing for bankruptcy, the individual knows what cannot be forgiven in bankruptcy.
Once a debt has been discharged, the creditor no longer has the ability to take further action against the creditor and is unable to make any further efforts to recover the money owed. Some debts are very difficult to have discharged, and some debts cannot be forgiven in bankruptcy.
Understanding what class of debts, you have should be a major factor in deciding whether bankruptcy is the way to go.
Chapter 7 Vs Chapter 13
When you declare bankruptcy, it is a life-changing decision with both positive and negative aspects. Should you conclude that bankruptcy is the path forward, then a decision has to be made on whether to file Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy – This type of bankruptcy is known as liquidation bankruptcy and means that some of your property is sold, to pay off your debts. This option is best suited to those who do not own a home and limited earnings. In Texas there are some generous exemptions for the property you are allowed to keep, these exemptions may include home equity, retirement accounts, and some personal possessions. To be eligible, you need to pass the Chapter 7 means test. It typically takes three to five months to receive a discharge.
PROS – With Chapter 7 debtors can quickly get most debts discharged and start their new life.
CONS – Trustees can sell any property that is not exempt and does not stop eventual foreclosure.
Chapter 13 Bankruptcy – Typically called reorganizational bankruptcy will allow you to keep your property (including secured assets – like your home and car). However, you have to complete a court-mandated repayment plan. This can last between three and five years. To be eligible, you cannot have more than $419,275 of unsecured debts or $1,257,850 of secured debts. Chapter 13 typically takes around three to five years (on completion of the planned payments) to get a discharge.
PROS – Chapter 13 allows debtors to retain their property and make-up on missing payments.
CONS – Debtors must make monthly payments to the trustee for three to five years and have to pay back a proportion of unsecured debts.
We now take a closer look at what cannot be forgiven in bankruptcy. It depends on the type of bankruptcy you have filed. With both Chapter 7 and Chapter 13 your unsecured debts like medical bills and credit card bills are discharged. In Chapter 7 they are wiped out in full, with Chapter 13 you must keep making payments throughout the court’s payment plan period, but then anything remaining is wiped out.
However, there are certain debts that may not be discharged by either filing type.
- Tax debts or government fees
- Auto loans
- Child support or alimony
- Student loans
- Debts you did not list when you filed your Chapter 7 bankruptcy.
- Fines and restitution
- Personal Injury claims or causing death.
This sounds quite discouraging, but in Chapter 7 there are certain ways of handling many of these debts that can improve the situation. Some examples …
- Your Home – You can often keep your home as long as you keep up payments and do not have more equity than permitted under state and federal bankruptcy laws.
- Taxes – Taxes are not dischargeable, However, In general taxes over three years old might be discharged depending on dates of filings and extensions given.
- Car Loans – You can often keep your car by “Reaffirming your car loan” and continuing to make payments.
- Alimony – Spousal support/alimony, and child support are not dischargeable.
- Student Loans – Theoretically, if you can prove that paying would make a minimal standard of living impossible there may be part discharge, but it is not easy. You may be better looking at ways of consolidating and refinancing these loans.
- Debts Not Listed When Filing – All debts must be listed when you file for bankruptcy. If you failed to list the debt, it will not typically be discharged. You could also be open to potential fraud charges.
- Fines & Restitution – These will not be discharged.
- Personal Injury Claims – These will not be discharged.
More Complex Discharge
Some debts may be discharged as long as the creditor fails to file a lawsuit against you and the bankruptcy court determines it is dischargeable. These debts may include debts created by fraud, embezzlement, debts arising from marital settlement agreements and more.
If you file for bankruptcy and the creditor does not, for some reason, file a lawsuit to have the debt determined as non-dischargeable, then the court may discharge them. This is a complex area, and it is advisable to seek counsel on these more complex matters. This article is not intended as legal or accounting advice.
Debt Relief Alternatives To Bankruptcy
Now you are aware that many kinds of debt will not be discharged in bankruptcy, the balance between going ahead with bankruptcy and not doing so may have swung against filing. It may be that the primary debts you face are not going to be discharged and that other forms of debt relief may be more beneficial.
A Chapter 7 bankruptcy will remain on your credit report for ten years and a Chapter 13 for seven years. They will both severely impact your credit. They may make it impossible, or very expensive, to borrow money in the future. You can negotiate directly with your creditors, who will get more back from an agreement than bankruptcy, or you can hire professionals to do this. Watch out for scam companies and make sure that any company you work with is legitimate.