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DEBTS AND BANKRUPTCY
What happens to debt when you file bankruptcy?
Most debts are discharged in a bankruptcy, meaning they are wiped out. How the debts are discharged and which types of debts that can be discharged depend on which chapter you file.
Chapter 7 debts are erased and you are no longer obligated to pay them when your case is discharged. Unsecured debts like credit cards, medical bills, repossession deficiencies, past-due utilities, payday loans, and business debts.
In a Chapter 13 bankruptcy, your debts are reorganized and you will make monthly payments for 3-5 years until your case is discharged. Remaining debts that qualify will be discharged at the end of your payment plan. A Chapter 13 allows you to include past-due mortgage and vehicle payments in your plan, stopping repossession and giving you time to catch up your payments.
Debts that AREN’T Dischargeable in Bankruptcy
While garnishments on non-dischargeable debts will be stopped temporarily during your bankruptcy, certain debts will remain after your case is completed.
Domestic obligations, such as alimony and child support, aren’t dischargeable in bankruptcy. Except for in extraordinary circumstances, student loans are also ineligible for bankruptcy discharge. Some debts that may be dischargeable in bankruptcy, such as taxes or bad checks, can’t be discharged if the transaction was determined to be fraudulent.
Secured vs. Unsecured Debt
If a debt is secured, that means it is attached to a property. A mortgage is secured to your home, your vehicle loan is attached to your car, etc. Secured debts typically can’t be discharged without surrendering the attached property.
Unsecured Debts: Priority vs. Non-Priority
Some debts that are unsecured are still considered priority debts, meaning they won’t be discharged in a Chapter 7 Bankruptcy, and you may make payments towards them in a Chapter 13 but the remaining balance won’t be discharged at the end of your payment plan. Domestic obligations and tax debts are common examples of unsecured non-priority debts. The entire balance on priority debts must be paid in a Chapter 13. Student loans are an unsecured nonpriority debt, but are treated exceptionally because they can’t be discharged, and you don’t have to pay the full balance in a Chapter 13.
Consequences of Bankruptcy
If you file bankruptcy on a debt for a service you may use in the future, while you won’t legally have to pay the debt, the creditor may choose to decline providing you service in the future. Doctors, lawyers, and other professionals will be disinclined to work with you until your debt is paid. Utility and phone companies can be more difficult to replace, since you may not have a choice in provider based on your area.
Bankruptcy may affect your ability to get new loans. You will be ineligible for a home loan for 2 years after filing. In a Chapter 7, you won’t receive new lines of credit until your case is discharged. In a Chapter 13, you need permission from the court to incur new debts.
What is Assuming a Lease?
If you are renting or making payments on an asset or property, bankruptcy gives you the option to assume or reject the lease. Common leases are for apartments, vehicles, cell phones, and furniture. If you assume the lease, you will continue payment on the property as usual. If you reject the lease, you will surrender the property, but any charges for breaking your contract will be discharged in the bankruptcy.