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What Happens to Your Debt When You File Bankruptcy?

7 min read
Francesca Toledo, J.D.

by Francesca Toledo, J.D.

Financial struggles can have you feeling mentally and emotionally exhausted and defeated. It may seem as though there is no way out, and you feel yourself getting deeper and deeper into debt. Fortunately, bankruptcy can help you manage your debts and seek a financial refresh.

One of the biggest questions people have about bankruptcy is “What happens to debts once I file bankruptcy?” What happens to your debts generally depends on the chapter of bankruptcy you file and your situation. Nonetheless, bankruptcy can help you either discharge your debts or create a plan to repay your creditors.

If you’re considering filing for bankruptcy, don’t do it alone. An unbundled lawyer can provide valuable legal guidance

What Is Bankruptcy?

Bankruptcy is the legal process that allows you to pay back or discharge debts. Bankruptcy is handled by federal courts, and the laws for bankruptcy are found in the U.S. Bankruptcy Code. 

Bankruptcy is often the most viable option for individuals and businesses facing a financial crisis. If you’re unable to repay your debts, bankruptcy can help ease some of the financial pressure.

Type of Debts

Before beginning the bankruptcy process, it is helpful to understand the different types of debts. Bankruptcy debts are typically separated into two categories: secured and unsecured. 

Secured debt is debt secured by collateral. If you fail to pay these debts, the creditor can repossess the collateral. Some examples of secured debts include:

  • Mortgages on homes
  • Car loans
  • Personal loans secured by collateral

Unsecured debts are not protected by any collateral. Some of the most common types of unsecured debt include:

  • Credit cards
  • Store cards
  • Medical bills

How your debt is handled in a bankruptcy depends on the chapter of bankruptcy you file.

What Happens to Debts Depends on the Type of Bankruptcy You File

There are different forms of bankruptcy. Choosing the right form depends on certain factors, including:

  • Whether you’re filing for yourself or your business
  • How much money you make
  • Your ultimate goals for your bankruptcy

What you can expect for your bankruptcy depends on the bankruptcy chapter you choose. There are many pros and cons to each. A bankruptcy attorney can help you decide which you qualify for and which best suits your needs and desired outcome. 

The different chapters of bankruptcy are as follows.

Chapter 7

Chapter 7 bankruptcy is one of the most common types of bankruptcy for individuals. This chapter of bankruptcy usually results in the repayment of some debts and the discharge of others. 

When you file a Chapter 7 bankruptcy, a court-appointed trustee oversees the sale, or liquidation, of your assets to help pay off your secured debts.

Because Chapter 7 involves liquidating assets, many individuals fear they’ll lose some of their most important and necessary assets. However, depending on your state’s bankruptcy laws, there are certain exceptions to what the court will force you to sell to repay your debts. For example, many individuals can keep their home or car.

To file for Chapter 7 bankruptcy, you must meet the requirements, which include making below a certain amount.

Chapter 13 

Chapter 13 is another common chapter of bankruptcy. While Chapter 7 allows for the discharge of some debts and liquidation to repay creditors, Chapter 13 allows you to create a repayment plan.

When you file for Chapter 13 bankruptcy, you must create a repayment plan and submit it to the court for approval. Unlike Chapter 7, Chapter 13 allows you to keep your assets. 

Chapter 13 is often the best option for individuals who make too much money to file for Chapter 7 bankruptcy. To qualify for Chapter 13 bankruptcy, your unsecured debts must be less than $465,275 and your secured debts must be less than $1,395,875.

Typically, the courts give individuals three to five years to complete their payment plans. This chapter of bankruptcy gives you some breathing room and a chance to slowly repay your debts to get back into good financial standing. 

Chapter 11

A Chapter 11 bankruptcy, also known as reorganization bankruptcy, is usually used for businesses. It is similar to a Chapter 13 bankruptcy, but there are no limits regarding the amount owed by the debtor.

When businesses file for Chapter 11 bankruptcy, they come up with a plan to repay their debts while still operating the business. Like Chapter 13, the bank must approve the plan. 

Chapter 15

Chapter 15 bankruptcy allows foreign debtors to file for bankruptcy in the United States. A Chapter 15 case is ancillary to a proceeding brought in another country, typically the debtor’s home country.

Chapter 9

Chapter 9 is neither for individuals nor businesses and is used for municipalities facing financial distress. It gives the municipality protection from credits while creating a plan to negotiate and repay debts. 

Chapter 12

Chapter 12 bankruptcy was created for family farmers and fishermen. This chapter allows these individuals to file for bankruptcy and create a repayment plan without having to sell their assets or face foreclosure. It is similar to Chapter 13 but allows for more debt limits and flexibility. 

Initiating Your Bankruptcy Case

The bankruptcy process depends on the chapter of bankruptcy you file, but every chapter of bankruptcy involves initiating the court process.

To begin your case, you’ll need to draft and file a petition with the court. You may also have to file additional supporting documents, depending on what the court or your chapter of bankruptcy requires. 

Once your case has begun, the court can appoint a bankruptcy trustee. Your trustee is the individual overseeing your case. You will usually need to attend a meeting with your trustee to review your documentation and ensure the information provided is accurate. 

The bankruptcy trustee’s responsibilities ultimately depend on the case. For example, in a Chapter 7 bankruptcy, your trustee manages the sale of your assets and distributes the proceeds to creditors. In a Chapter 13 case, the trustee receives the debtor’s payments and distributes them to creditors according to the established payment plan.

Additionally, many individuals are relieved to discover that filing for bankruptcy takes away a creditor’s right to come after you.

Immediately after filing for bankruptcy, an injunction called an automatic stay, is imposed against creditors. This automatic stay takes away a creditor’s right to contact you or harass you. If a creditor has started taking action against you, the injunction stops them from proceeding. 

So What Happens to Debts During Bankruptcy?

Your circumstances and chapter of bankruptcy will determine what happens to your debts during bankruptcy.

For example, in a Chapter 7 bankruptcy, some unsecured debts can be discharged. When a debt is discharged, it means you’re no longer responsible for it and need not repay it. 

For all other debts that cannot be discharged, the debts remain, and you’ll be responsible for repayment. Still, bankruptcy helps you with repayment in one way or another. You can create repayment plans giving you more time to repay your debts, or your court trustee can help you liquidate your assets to repay creditors and finish paying off your debts.

To better understand what bankruptcy will do with your debts, discuss your situation with a skilled bankruptcy attorney in your area.

A Bankruptcy Attorney Can Help

While you are not legally required to have a bankruptcy attorney represent you, having one on your side can give you invaluable peace of mind.

When a bankruptcy attorney helps you handle your case, you can count on them for the most important parts of your case, including:

  • Helping you decide the right chapter of bankruptcy for you
  • Drafting your petition
  • Filing your petition and supporting documents with the court
  • Representing you throughout your case

The bankruptcy process can intimidate and confuse. Having a bankruptcy attorney helps ensure your case is handled properly, giving you a better chance of achieving a favorable outcome. 

Consider Working with an Unbundled Lawyer

When you hire an unbundled lawyer, you can feel confident knowing you have a lawyer to helping you manage your case and keeping your costs to a minimum.

Unlike traditional bankruptcy lawyers, an unbundled lawyer does not charge you to handle your case from beginning to end. If you’re comfortable taking on certain portions of your case, your unbundled bankruptcy lawyer can step in to tackle the most critical parts. Your unbundled lawyer will only charge you for services rendered.

Don’t take on your bankruptcy case alone. Contact us today to get started.

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