Does Bankruptcy Clear All Debts?
by Francesca Toledo, J.D.
If you are in a difficult financial situation, filing for bankruptcy may be the option of last resort. A correct bankruptcy filing can help you start fresh, manage debt, and avoid poverty. But you cannot clear all debts during bankruptcy.
When you file for bankruptcy, some debts are easy to discharge. Others, though, may take more work. Then, some debts simply can’t be discharged in a bankruptcy filing. Learn what types of debt a bankruptcy filing can help you with below.
You can connect with an unbundled bankruptcy attorney in your area today to learn more.
Here’s How Filing for Bankruptcy Works
Bankruptcy is a legal procedure that helps persons and businesses who find themselves in a complicated financial situation clear or restructure certain kinds of debt.
Under Title 11 of the U.S. Code, there are five types of bankruptcy procedures. With individual filings, the most common are Chapter 7 and Chapter 13.
What is Chapter 7 Bankruptcy?
Under Chapter 7 bankruptcy, most of your debt will be discharged. But you will need to sell your assets and personal property (with certain exemptions). This is why Chapter 7 bankruptcy is also known as liquidation processing. The proceeds from selling these assets will be distributed to your creditors.
To qualify for Chapter 7 bankruptcy, you will need to prove your income is low enough and you cannot pay off your debts. If you don’t pass the “means test” required to qualify for Chapter 7, you can file for Chapter 13 bankruptcy.
What Is Chapter 13 Bankruptcy?
Under Chapter 13 bankruptcy, your debt will be restructured. You will be assigned a court-appointed trustee who will then review all your obligations with your creditors and develop a payment plan you will need to complete within a specific period. After that, your remaining debts will be discharged.
You can file for Chapter 13 bankruptcy even if you have already filed for Chapter 7 bankruptcy.
What Debts Can a Bankruptcy Clear?
Most people or businesses who file for bankruptcy seek relief from the debts they’ve accumulated. But what debts can a bankruptcy discharge?
If you file for bankruptcy under Chapter 7, these debts can typically be discharged:
- Credit card debt and related overdue fees
- Medical fees
- Personal loans
- Student loans (in rare cases if you can prove undue hardship)
- Utility bills (limited to past due amounts)
- Dishonored checks (unless related to fraud)
- Car accident claims (except for those involving drunk driving)
- Debts acquired in business
- Debts acquired in lease agreements (such as past-due rent)
- civil court judgments (unless related to fraud)
- Unpaid taxes past a certain number of years and related tax penalties
- Social security overpayments
- Legal fees (except for the legal fees related to child support and alimony)
- Revolving charge accounts (unless these are extended payment charges)
- Social security overpayments, and
- Veterans assistance loans and overpayments
It’s important to understand that any fraud or misconduct related to the debts that you are trying to discharge will make these debts non-dischargeable.
Another factor to consider is timing. When you file for bankruptcy and when you incurred the debt obligation are important factors with debt discharge.
Pre-filing debt is the debt you’ve accumulated before you make your bankruptcy filing. In most cases, this debt will be cleared during bankruptcy proceedings.
Post-filing debt is the debt you incur after submitting your initial paperwork for bankruptcy. You will be responsible for paying off the debt you accumulate after filing for bankruptcy.
In a word, if you file for bankruptcy under Chapter 7, only the debts you incur before your bankruptcy filing will be discharged. All the debt accumulated after your petition filing will be your responsibility.
What Debts Won’t Be Discharged in a Bankruptcy?
Certain debts cannot be eliminated in a bankruptcy:
- Secured debt. If you use credit or a loan to purchase a vehicle or other merchandise, your obligations won’t be cleared in bankruptcy. In this case, you will need to decide if you want to return the item you’ve purchased or continue to make payments.
- Child support and alimony. Any debt related to your legal obligations to pay child support and alimony can’t be discharged. And if you have outstanding child support or alimony debts at the time of your bankruptcy filing, you will still be liable for these payments after your bankruptcy proceedings.
- Legal fees and related debt accumulated in a divorce. In many divorce cases, one spouse may agree to pay divorce-related legal fees or outstanding debt incurred by the other spouse. These debts will not be discharged during the bankruptcy filing. Your ex-spouse may still force you to pay these bills even after your bankruptcy case is over.
- Restitution. Restitution refers to a sum of money that needs to be paid because you have caused financial loss or injury to someone. For instance, a shoplifter may be ordered to repay the store owner for the stolen items. Court-ordered restitution will not be discharged in a bankruptcy filing.
Besides the debts that can’t be discharged in a bankruptcy filing, some debts are quite difficult to eliminate. This includes student loans.
Often, you won’t be able to discharge debt related to college tuition. This includes federal student loans, private loans, and loans offered by the university.
Sometimes, however, these loans can be discharged:
- If you can prove that you have complete disability
- If you can prove undue hardship. You will need to demonstrate you have made efforts to repay the loan but repaying it will prevent you from having a minimum standard of living for yourself or your dependents.
Discharging student loans in a bankruptcy filing is rare.
Do I Need a Lawyer To File for Bankruptcy?
In personal bankruptcy cases, you are not required to have legal representation. This means you can represent yourself. However, this may not be the most efficient way to approach your bankruptcy filing, especially if you are not familiar with the proceedings.
A bankruptcy lawyer can take on a lot of responsibilities in the filing process:
- They can offer you guidance on which bankruptcy chapter to file under
- They will fill in and file all related paperwork
- They will negotiate on mortgages, car loans, and other debts
- They can also talk to creditors on your behalf to work out a repayment plan — and more
If you represent yourself in a bankruptcy filing, be prepared to do substantial research.
Bankruptcy filings are complicated, and you may have to deal with strict deadlines for submitting paperwork. If possible, consult a bankruptcy lawyer.