What can you file bankruptcy on?
It’s a simple question, but the answer is not so simple. Before we discuss which types of debt can typically be discharged in bankruptcy, we must examine which type of bankruptcy you plan to file.
As a consumer, you’d most likely file Chapter 7 or Chapter 13 bankruptcy. Let’s take a look at the differences between the two types so you have a better understanding of what kind of debt can be discharged through bankruptcy and what types can’t.
Chapter 7 vs. Chapter 13 bankruptcy: Here’s the difference
Although both types of bankruptcy will help release you from debt, they do so in different ways.
In Chapter 7 bankruptcy, your nonexempt assets are liquidated, and the funds are distributed among creditors to satisfy some of your debt. Assets exempt from liquidation include items considered necessary for your everyday life, such as vehicles or tools you use for your job, up to a certain value.
Any remaining qualifying debt is fully discharged. Creditors, furthermore, will have to stop calling you to collect.
Only low-income earners typically qualify for Chapter 7 bankruptcy. If your income exceeds the state median income, you’ll have trouble qualifying. You’re also not eligible if you’ve declared Chapter 7 bankruptcy in the past eight years.
Chapter 13 bankruptcy restructures your debt but doesn’t discharge it right away. With this approach, you enter a new repayment plan on your debt for a period. If you still owe money at the end of this period, your debt might be wiped out.
Note that either type of bankruptcy could remain on your credit report for up to 10 years.
What can you file bankruptcy on?
There are several kinds of debt in which bankruptcy can be filed, though some might be treated differently under Chapter 7 versus Chapter 13. Some types of debt that are typically eligible for both include:
- Auto loans
- Personal loans
- Credit card debt
- Medical bills
- Unpaid rent
- Unpaid utility bills
Although these types of debt can be erased, you might lose your assets if you have secured debt, which requires you to offer collateral, such as a car or house.
“Almost all unsecured debt is dischargeable,” explained attorney Arnold Hernandez. “Secured debt is dischargeable, but there is almost always a lien on the property, so even if the debt is discharged, the property can be recovered by the creditor.”
Under Chapter 7 bankruptcy, creditors could seize both your home and car. Under Chapter 13, you have a greater chance of holding on to these assets if you can keep up with your new repayment plan.
Another key difference involves unsecured personal loans in which there’s a cosigner who agreed to help repay if you can’t.
Under Chapter 13 bankruptcy, creditors can’t call your cosigner during your bankruptcy period. Under Chapter 7, creditors can continue to contact your cosigner for payment.
According to consumer protection attorney Don Petersen, two types of debt are more commonly discharged under Chapter 13 than under Chapter 7.
“The most common example of debts [that] are dischargeable in Chapter 13 but not Chapter 7 arise from marital property settlements and certain federal income taxes,” said Petersen.
What debt can’t be discharged in bankruptcy?
Although you can file for bankruptcy on most unsecured loans, as well as on mortgages and car loans, you usually won’t find much luck with other types of debt.
“Most debt owed to the government is not dischargeable,” said Hernandez. “HOA [homeowners association] dues are not dischargeable, taxes are not dischargeable, [and] student debt is not dischargeable.”
Or at least that’s usually the case. Bankruptcy is a complex process, and few types of debt have hard and fast rules. For instance, there are certain instances when HOA dues, taxes, and even student loans can be discharged, though they typically don’t qualify.
Here are a few types of debt where discharge through bankruptcy is difficult, if not impossible:
- Student loans
- Money owed with certain kinds of taxes
- Child support or alimony payments
- Fines you owe for breaking the law
Discharging student loans in bankruptcy is not impossible, but it’s rare. Under current law, you’ll need to pass the “Brunner test” by showing that your student debt makes it impossible to maintain a minimum standard of living and that your finances aren’t going to change soon. You also have to show you’ve made a good faith effort to keep up with your student loan bills.
In fact, Petersen said, “Some debts are dischargeable in Chapter 7 as well as Chapter 13, but only if the debtor files an adversary proceeding,” which is a sort of lawsuit within a lawsuit, challenging whether a certain liability can be discharged.
In many student loan cases, switching to an income-driven repayment plan or applying for deferment or forbearance is a better option. Filing for bankruptcy can be a long and expensive process with no guarantee of success. Plus, it damages your credit for years to come.
Consult a bankruptcy lawyer for more information
You now have a general answer to the question “What can you file bankruptcy on?” But it’s still a good idea to check with an attorney for information on your specific situation.
“Debtors who believe they may owe debts which may or may not be dischargeable should consult with an experienced bankruptcy attorney who routinely practices in the court where their case would be filed,” advised Petersen. He said you should avoid representing yourself in court.
If you can’t afford a lawyer, you might be able to find free help through a local legal clinic or society. With their expertise, you can determine the best course of action for your finances.
You can find options for restructuring and paying off debt, even if bankruptcy doesn’t turn out to be one of them.
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