Navigating the complexities of bankruptcy can be a daunting task, especially when it comes to understanding which debts will be discharged and which will remain. In this blog post, we’ll explore the various types of “what debt doesn’t go away after bankruptcy” and provide valuable information to help you make informed decisions about your financial future.
Key Takeaways
- Understanding bankruptcy and debt discharge is essential for making an informed decision.
- Certain types of debts, such as child support, alimony, student loans & tax debts cannot be discharged in bankruptcy.
- Consult a lawyer to learn the best course of action and explore alternatives like credit counseling or debt negotiation before filing for bankruptcy.
Understanding Bankruptcy and Debt Discharge
While bankruptcy may appear as a rapid response to staggering debt, bear in mind that it does not absolve all debts. The objective of filing bankruptcy is to alleviate specific debt types, enabling individuals to make a fresh start unencumbered by outstanding obligations. When you file for bankruptcy, you’re released from personal liability for specific discharged debts, meaning you’re no longer legally required to pay them back.
However, comprehending the distinctions between various bankruptcy filings remains pivotal. There are two main types of bankruptcy for individuals: Chapter 7, which aims to eliminate unsecured debt such as credit card debt, medical bills, and personal loans; and Chapter 13, which allows individuals to keep their property while repaying their debt over a 3-5 year period. Understanding the differences between these two types of bankruptcy is vital in determining which path is best for your financial situation.
Types of Bankruptcy
Chapter 7 bankruptcy, or straight bankruptcy, provides a swift method for individuals to eliminate certain unsecured debts by liquidating nonexempt assets for creditor repayment. This bankruptcy type proves advantageous for those primarily dealing with consumer debt, but bear in mind that it doesn’t eliminate all debts.
Contrarily, Chapter 13 bankruptcy establishes a repayment plan, permitting individuals to retain their property while gradually repaying debts. This can be a more attractive option for those who do not qualify for Chapter 7 or have assets they want to protect. One key difference between the two types of bankruptcy is the treatment of secured debts, such as car loans and mortgages, which will be addressed later in this blog post.
Debts That Survive Bankruptcy
While bankruptcy can provide relief from many types of debt, not all debts are eliminated after filing. Some examples include:
- Child support
- Alimony
- Student loans
- Specific tax debts
These debts are often considered non-dischargeable because Congress has determined that discharged debt should not be eliminated for public policy reasons.
Awareness of these debt types proves integral when contemplating bankruptcy, as they remain your responsibility even post-bankruptcy process. In subsequent sections, we will delve deeper into these non-dischargeable debts and explain their unique treatment in bankruptcy.
Child Support and Alimony
Child support and alimony, also known as spousal support, are considered priority debts in bankruptcy and are not discharged. This means that even after filing for bankruptcy, these obligations must still be paid in full. The reason behind this treatment is that child support and alimony are considered vital for the well-being of children and former spouses, and therefore, their interests are prioritized over other creditors.
Failing to pay child support and alimony can result in severe consequences, such as wage garnishment, property seizure, and even incarceration. Therefore, understanding that bankruptcy does not relieve these obligations and planning accordingly to fulfill these financial responsibilities is paramount.
Student Loans
Student loans are another type of debt that is notoriously difficult to discharge in bankruptcy. In most cases, student loans, whether federal student loans or private, cannot be eliminated through Chapter 7 bankruptcy. Proving undue hardship is the only way to discharge student loan debt. This hardship must include consequences for both you and your financial dependents. This is an exceptionally high standard to meet, and courts rarely grant such discharges.
There are, however, rare exceptions to this rule. For example, if you can demonstrate a disability that prevents you from working or establish undue hardship while showing that you’ve made every effort to repay the loans, you may qualify for a discharge through an “adversary proceeding”. Nonetheless, recognizing that student loan discharge in bankruptcy is more an exception than a norm is crucial.
Tax Debts
Tax debts, particularly those resulting from unpaid income taxes, can be another challenge when it comes to bankruptcy. While some tax debts can be eliminated in bankruptcy, there are specific qualifications that must be met. For example, federal or state income taxes can be discharged in a Chapter 7 case if the taxes relate to a return that was due at least three years before your bankruptcy case was filed.
Recognizing that not all tax debt situations are dischargeable, and that your situation’s specifics will dictate your ability to find relief through bankruptcy, is vital. Consulting with a bankruptcy attorney can help you navigate the complexities of tax debts and determine the best course of action for your financial circumstances.
Non-Dischargeable Debts Based on Creditor Objections
In some cases, debts may become non-dischargeable due to creditor objections. This typically occurs when a creditor believes that the debt in question should not be eliminated through bankruptcy due to specific circumstances, such as fraudulent debts and personal injury debts.
In subsequent sections, we will delve deeper into these debt types and expound upon why they may face creditor objections.
Fraudulent Debts
Debts incurred through fraudulent means, such as obtaining credit through false statements or knowingly hiding assets during bankruptcy, are considered non-dischargeable. This means that even after filing for bankruptcy, you may still be responsible for repaying these debts, as they were obtained through deceptive or illegal actions.
If a creditor suspects a debt to be fraudulent, they must substantiate their claim with evidence, such as proving the debtor knowingly and fraudulently misrepresented a material fact or perjured. Awareness of these potential repercussions and maintaining honesty and transparency throughout the bankruptcy process is critical.
Personal Injury Debts
Personal injury debts resulting from actions like drunk driving or intentional harm to another person are also not dischargeable in bankruptcy. These debts are considered “willful and malicious injury” exceptions, meaning that they were caused by intentional or malicious acts that led to personal injury.
However, debts for injuries that result from reckless and negligent behavior may still be dischargeable, depending on the specific circumstances of the case. It’s essential to consult with a bankruptcy lawyer to determine how personal injury debts may be impacted in your bankruptcy case.
Secured Debts and Bankruptcy
Secured debts, such as car loans and mortgages, are treated differently in bankruptcy compared to unsecured debts like credit card debt or personal loans. While secured debts may not be entirely eliminated through bankruptcy, the process can provide some relief and options for individuals struggling with these types of debts.
In the forthcoming sections, we will examine the treatment of secured debts such as car loans and mortgages during bankruptcy, the role of a bankruptcy trustee, the potential alternatives available to debtors, and the impact on unsecured creditors.
Car Loans
When it comes to car loans during bankruptcy, there are provisions in both Chapter 7 and Chapter 13 bankruptcy that allow individuals to keep a car purchased with a secured loan. However, it’s crucial to understand that bankruptcy does not eliminate your responsibility to continue making payments on the car loan.
One option to keep your car during bankruptcy is to reaffirm the loan, essentially entering into a new contract with the lender promising to continue making payments on the loan. By doing so, you can maintain possession of your vehicle while rebuilding your credit after bankruptcy. However, careful consideration of this option is crucial as reaffirming a car loan implies a waiver of the bankruptcy discharge protection for that specific debt.
Mortgages
Mortgages are another type of secured debt that can be impacted by bankruptcy. While bankruptcy may not eliminate your mortgage debt, it can provide some relief and options for homeowners struggling to make payments. For example, filing for Chapter 13 bankruptcy can stop foreclosure proceedings and give homeowners the opportunity to catch up on delinquent payments or even reduce their home loan debt by eliminating junior liens.
However, remember that if mortgage payments are not continued during the bankruptcy, the lender might seek permission for property foreclosure. Therefore, it’s crucial to carefully consider your options and work with a bankruptcy attorney to determine the best course of action for your specific circumstances.
Navigating Bankruptcy with Legal Help
Although navigating bankruptcy independently is feasible, enlisting the aid of a versed bankruptcy attorney can guarantee the most favorable outcome for your case. An experienced attorney can help you with:
- Understanding the various types of debts and exemptions
- Working out debt settlements
- Assisting with claiming exemptions
- Providing valuable legal advice throughout the entire bankruptcy process
Rebuilding Credit After Bankruptcy
Though reconstructing your credit post-bankruptcy may appear intimidating, it is achievable with patience and persistence. It can take anywhere from one to two years to start seeing improvements in your credit after bankruptcy, but the impact of bankruptcy on your credit score will fade over time. To begin rebuilding your credit, focus on paying bills on time, keeping credit utilization low, and applying for a secured credit card.
Additionally, it’s essential to monitor your credit report regularly and dispute any errors you find. By demonstrating responsible financial behavior and carefully managing your credit, you can gradually improve your credit score and work towards a brighter financial future.
Alternatives to Bankruptcy
Before considering bankruptcy, it’s worth exploring other alternatives that may help you regain control of your finances without the negative effects of filing for bankruptcy. Some options include:
- Working with a credit counselor to create a debt management plan
- Making budget adjustments to free up more money to pay off debts
- Engaging in debt negotiation to lower interest rates or settle debts for a reduced amount
By exploring these bankruptcy alternatives, you may:
- Circumvent the detrimental effect on your credit score
- Save money by lowering your debt amount
- Reclaim control of your financial situation without resorting to bankruptcy.
Bankruptcy Laws Specific to Arkansas
Bankruptcy laws can vary by state, and it’s essential to be aware of any specific regulations that may apply in your area. In Arkansas, individuals can file for either Chapter 7 or Chapter 13 bankruptcy and have the option to use either federal or Arkansas state law exemptions. The homestead exemption in Arkansas allows you to exempt all of your home equity if your lot is a certain size, which may differ from federal exemption limits.
Note that bankruptcy cases cannot be filed in Arkansas state court, as they must be lodged in federal bankruptcy court. Understanding the specific bankruptcy laws and regulations in your state can help you make informed decisions and navigate the complexities of the bankruptcy process, including the crucial step of bankruptcy filing.
Example
Alex, a Bryant resident, had excessive credit card debt that he could no longer afford after losing his job. Collection agencies kept calling about past-due medical bills too. Deeply distressed, Alex considered bankruptcy but wasn’t sure if it would really give him a fresh start.
Alex found wh Law’s website online and reached out to us. At a free consultation, one of our bankruptcy lawyers reviewed his debts and finances. We explained that while bankruptcy would eliminate his credit card balances, some debts like student loans and back taxes would remain.
Our attorney described how Chapter 7 bankruptcy immediately discharges qualifying debts, while Chapter 13 establishes a 3-5 year repayment plan. Considering Alex’s circumstances, we recommended Chapter 7 to wipe out his credit cards and unsecured medical debts.
While Alex was nervous about the impact on his credit score, he was relieved to learn bankruptcy could free him from his crushing debt burden. By explaining which debts would and would not be eliminated, we helped empower Alex to make an informed decision about the best path forward.
Within a few months, Alex’s qualifying debts were discharged through bankruptcy. He worked hard to rebuild his credit and savings. While it took time, Alex eventually achieved financial freedom.
Summary
Navigating bankruptcy can be complex, but understanding the different types of debts that do not go away after bankruptcy is crucial in making informed decisions about your financial future. By exploring the various types of non-dischargeable debts, considering alternatives to bankruptcy, and seeking legal help, you can regain control of your finances and work towards a brighter financial future.
Frequently Asked Questions
What debts Cannot be discharged in Chapter 13?
Debts not discharged in Chapter 13 include long term obligations, alimony/child support, certain taxes, educational loans or benefit overpayments and debts arising from death/personal injury caused by driving while intoxicated.
Is debt still showing after bankruptcy?
Yes, debt can still show up on your credit report after bankruptcy, depending on the type of bankruptcy you file and how long ago your debts were past due. Accounts discharged through bankruptcy can stay in your credit history for up to seven years from their original delinquency date.
Does bankruptcy clear future debt?
Bankruptcy can clear most forms of unsecured consumer debt, but won’t wipe out all obligations like student loans or child support payments. Certain debts are not dischargeable, so it’s important to talk to a qualified attorney before proceeding with bankruptcy.
What do you lose when you file bankruptcy?
When you file bankruptcy, it’s possible to lose non-exempt assets and properties like your home, car, and other valuable items. These may be sold by the trustee to repay creditors.
What happens to my mortgage if I file for bankruptcy?
Filing for bankruptcy can provide relief from mortgage payments and give you options, depending on the type of bankruptcy and your specific situation.
