If you are weighed down with debts you can’t repay, you might think about declaring bankruptcy. But can that process wipe away every type of debt? The short answer, unfortunately, is no.
Let’s consider what bankruptcy can and can’t do.
The Two Main Types of Bankruptcy
The typical individual debtor has two options for declaring bankruptcy: Chapters 7 and 13. Which one you qualify for depends on a formula calculated using your income, expenses, and equity in assets.
Chapter 7 Bankruptcy
Chapter 7 provides a debtor a discharge releasing them from liability for certain unsecured debts, prevents creditors from harassing the debtor, and prevents or stops creditors from taking legal action against the debtor or their property (except for support payments or criminal cases). It takes around three to four months to complete. Certain restrictions – such as your income level or excess equity in property – can disqualify you; Chapter 7 is primarily for low-income earners with minimal assets.
Chapters 7 and 13 both grant a temporary reprieve from foreclosure and repossession while the stay is in place. However, Chapter 7, unlike Chapter 13, requires you to forfeit assets impaired by a lien if you are unable to bring the debt current (like the house being foreclosed upon or the car up for repossession). This surrender occurs because a secured debt comes with a secured lien, and bankruptcy doesn’t eliminate the lien, meaning the creditor can foreclose once the automatic stay expires. The benefit is that any personal liability that would be owed following the surrender and sale of collateral is discharged like other unsecured debts.
Most nonpriority unsecured debts can easily be wiped out by bankruptcy, including medical bills, gym contracts, and overdue utility bills. One notable exception is generally school loans.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy entails creating a trust that consolidates a debtor’s debt. This trust is administered by a court-appointed trustee who collects payment from a debtor and pays it to creditors. Payments are generally based upon your income and expenses. For this reason, you only qualify for Chapter 13 bankruptcy if you have regular monthly income. You will pay back some of your debts over three to five years; any unsecured debt balance is discharged after that period, just like in Chapter 7.
Chapter 13 can halt a mortgage foreclosure or repossession by getting you set up on a repayment plan, protect more of your assets than Chapter 7 (although you must pay the excess value of these assets to your creditors via the payment plan), and sometimes even “cram down” a secured debt when the market value of the asset is significantly less than the amount due. Chapter 13 also allows for repayment of priority unsecured debt – such as taxes and child support – before any funds are distributed to your general unsecured creditors.
Which Debts Can You Not Avoid by Declaring Bankruptcy?
So far, it sounds like you can get out of most debt through this process. But do you get out of all debts if you declare bankruptcy?
The following situations require you to keep making payments:
- Alimony and child support
- Most student loans – although if you are not on an IBR plan, you may benefit from a bankruptcy forbearance
- Most newer tax debts if your return was timely filed but not paid
- Secured debts when you want to keep the asset liened
- Debts you neglected to mention when declaring bankruptcy
- DUI-related death and injury debts
- Penalties for crimes, including some traffic tickets
Do You Need Expert Legal Advice About Bankruptcy?
If you are behind on payments and need the services of a lawyer, reach out to Mette, Evans, & Woodside for understanding, advice, and assistance. The formulas for bankruptcy qualification are difficult without knowing the legal principals behind them. We offer compassionate and zero-judgment legal counsel for debtors in Pennsylvania.