Will Bankruptcy Wipe Out All My Debts?[yoast-breadcrumb]
Will Bankruptcy Wipe Out All My Debts?
Filing for bankruptcy can seem like a scary thing. But for folks struggling under mountains of debt, it can be a real lifesaver. This article looks at whether bankruptcy wipes out all debts so you can decide if it’s the right path for you.
The Basics of Bankruptcy
There are two main types of personal bankruptcy – Chapter 7 and Chapter 13. Chapter 7 bankruptcy completely wipes out (discharges) many of your debts. The court appoints a trustee who takes over your assets, sells them, and uses the money to pay back as much debt as possible. The remaining debts are discharged. Chapter 13 bankruptcy sets up a 3-5 year repayment plan to pay back debts. At the end, the remaining debts are discharged.
Both types have pros and cons. Chapter 7 gets it over quicker but you lose assets. Chapter 13 lets you keep assets but takes longer. Your lawyer can help pick the best type for your unique situation.
What Debts Are Discharged in Bankruptcy?
The key question is – what debts can actually be wiped out thru bankruptcy? Let’s take a look:
- Credit card debt – This unsecured debt is almost always discharged in Chapter 7 or 13 bankruptcy. That’s a huge relief for folks drowning in high-interest credit card balances.
- Medical debt – Outrageous hospital or doctor bills are usually discharged in bankruptcy. Just make sure it’s not related to a personal injury case.
- Personal loans – Unsecured personal loans from banks, payday lenders, or online lenders are generally discharged.
- Past-due utilities – Overdue electric, gas, water, cable, or phone bills are often discharged.
- Rent – Past-due rent can be discharged in bankruptcy. But you still need to stay current on rent going forward.
- Car loans – Your auto loan balance can be reduced or eliminated in Chapter 13 bankruptcy. In Chapter 7 the lender may repossess the car.
- Mortgages – Chapter 13 bankruptcy can help catch up on missed payments and avoid foreclosure. In Chapter 7, the home may be sold to pay debts.
As you can see, bankruptcy wipes out a ton of problematic debt. For many folks, this gives them the fresh start they desperately need.
What Debts Are Not Discharged in Bankruptcy?
Now let’s look at some debts that can’t be wiped out through bankruptcy:
- Student loans – These are very hard to discharge in bankruptcy except in special circumstances.
- Child support – You still owe child support even after filing for bankruptcy.
- Alimony – Alimony and other divorce-related debts generally can’t be discharged.
- Government fines – Parking tickets, traffic fines, and other penalties aren’t wiped out.
- Recent taxes – Income taxes from the past 2-3 years must still be paid.
- HOA fees – Homeowners association dues aren’t discharged in bankruptcy.
- Criminal restitution – Court-ordered payments to victims of crimes can’t be discharged.
As you can see, not all debts can be eliminated in bankruptcy. Student loans, child support, recent taxes, and other obligations remain due. But for most filers, wiping out credit cards, medical bills, and other debt still provides major relief.
The Power of the “Automatic Stay”
One of the best parts of filing for bankruptcy is something called the “automatic stay.” This is a court order that immediately stops any collection activities against you. No more harassing phone calls or threatening letters from creditors. The stay provides breathing room to sort out your debts under bankruptcy protection.
The Downsides of Bankruptcy
While bankruptcy provides many benefits, it also comes with downsides to consider:
- Your credit score will drop significantly after filing and take years to fully recover.
- Any assets liquidated in Chapter 7 like a home or car are lost forever.
- Bankruptcy stays on your credit report for 7-10 years.
- You may still have to repay some debts like student loans and recent taxes.
- There are legal fees, court costs, and trustee expenses to file for bankruptcy.
- You can only file Chapter 7 bankruptcy once every 8 years.
While bankruptcy wipes out many burdensome debts, it comes at a heavy cost. Make sure you explore all your options before taking this major step.
Alternatives to Bankruptcy
Other options beyond bankruptcy to deal with debt include:
- Debt consolidation loans – Roll multiple debts into one lower monthly payment.
- Debt management plans – Work with a credit counselor to negotiate lower interest rates and payments.
- Debt settlement – Lump sum settlements for a fraction of what you owe.
- Credit counseling – Get guidance from a nonprofit credit counseling agency.
Be sure to fully research any debt relief program or service before signing up. There are many predatory companies out there looking to take advantage of desperate borrowers.
The Bottom Line
Bankruptcy can be a powerful tool to wipe out credit card balances, medical bills, personal loans, and other problematic debt you can’t afford. However, some obligations like student loans and child support remain due. Be sure to weigh the pros and cons carefully before filing.
If you decide bankruptcy is your best path forward, be sure to work with an experienced bankruptcy attorney. They can help ensure your case goes smoothly and maximize the financial relief you receive. With the burden of oppressive debts lifted, you can start fresh and begin rebuilding your financial life.