What Happens to Your Debt When You File for Bankruptcy

If you are considering filing for bankruptcy, it's important to understand how your debt will be affected. Depending on the type of bankruptcy you file and the nature of your debt, you may see your debts discharged or restructured. Let's explore the different scenarios.

Chapter 7: Debt Discharge

In Chapter 7 bankruptcy, the primary purpose is to discharge unsecured debts, such as credit card balances and medical bills. Unsecured debts are those that do not involve any collateral. Once these debts are discharged, you are no longer legally obligated to repay them. While most of your unsecured debts may be discharged, there are certain exceptions:

Student loans: While these are typically not dischargeable, there are limited exceptions, such as proving undue hardship. Child support obligations: These cannot be discharged, even in Chapter 7. Taxes: Taxes owed to the government may or may not be dischargeable, depending on the circumstances. Certain luxury expenses: Travel expenses within the last six months before filing bankruptcy may not be discharged. Contact with Attorney:

It's worth noting that even in Chapter 7, there are scenarios in which you might be able to reaffirm certain debts, meaning you agree to continue paying them post-discharge. For instance, if you have a car loan and want to keep the vehicle, you can reaffirm it under Chapter 7.

Chapter 13: Repayment Plan

Chapter 13 bankruptcy involves entering a repayment plan to pay off some or all of your debts over a period of 3 to 5 years. This option is suitable for individuals who have a steady income and can afford to make regular payments towards their debts. Here’s a brief overview of how it works:

Automatic stay: Once you file, an automatic stay immediately goes into effect, providing you with a temporary reprieve from your creditors. Repayment Plan: You create a repayment plan approved by the court, which includes monthly payments to creditors over three to five years. Discharge: If you follow the terms of your plan, you will eventually receive a discharge of your remaining unsecured debts.

Prior to filing Chapter 13 bankruptcy, it’s crucial to understand that only some of your debts will be restructured, and others will remain unpaid. Here are some debts that are generally not dischargeable:

Government student loans: You must have been out of school for at least 7 years at the time of filing bankruptcy. Unpaid spousal and child support obligations: These must be paid regardless of the type of bankruptcy you file. Fines or penalties for an offense: This includes traffic tickets and other legal penalties. Civil liability for bodily harm, sexual assault, or wrongful death. Liabilities arising from fraud, embezzlement, or misappropriation.

Secured debts, such as car loans and mortgages, can be affected. If you want to keep the property securing the loan, you need to continue making the payments. However, if you do not want to keep the property, you can surrender it and the remaining debt may be discharged during the bankruptcy process.

Exceptions and Special Cases

There are several situations where debts may not be discharged, even in the bankruptcy process:

1. Court Fines and Taxes: Fines and unpaid taxes are generally non-dischargeable. However, the complexity of this varies based on the nature of the taxes and fines.

2. Recent Transfer of Property: If you transfer property, such as a ski cottage in Aspen, to a relative within 18 months of filing bankruptcy, the bankruptcy trustee has the power to avoid or reverse these transfers. It is advisable to avoid such actions before filing for bankruptcy.

3. Proving Undue Hardship for Student Loans: While most student loans are not dischargeable, some limited exceptions may apply if you can prove undue financial hardship. This can be a very complex process and requires meticulous documentation.

4. Bankruptcy Court Examples:

One particular case that stands out is the scenario involving an attorney who was convicted of embezzlement and ordered to pay restitution. His client, who needed to file Chapter 13, was seeking to pay only 39 cents on the dollar. The court surprisingly allowed this theoretical scenario in Chapter 13, but such an agreement is typically more feasible in Chapter 13 than Chapter 7.

The case also highlights the trustee's power to avoid or reverse transfers made within 18 months prior to filing bankruptcy. For anyone considering filing for bankruptcy, it is crucial to consider their financial activity and avoid unwise decisions that could complicate the bankruptcy process.