Bankruptcy Guide: What Debt Can You Discharge?

 February 22, 2021
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What can you file bankruptcy

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Can you file bankruptcy on personal loans? What about student loans or auto loans? When you’re unable to pay back your debts, what can you file bankruptcy on?

While these are simple questions, the answers are not so straightforward. For one thing, there are two main types of bankruptcy for consumers, Chapter 7 and Chapter 13 bankruptcy. And for another, some loans are easier to discharge in bankruptcy than others.

Let’s answer the following questions about the rules surrounding bankruptcy so you can see what types of debt can be discharged — and what types can’t:

What’s the difference? Chapter 7 vs. Chapter 13 bankruptcy

Although both types of bankruptcy, Chapter 7 and Chapter 13, 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:

  • Personal loans
  • Credit card debt
  • Medical bills
  • 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.

Can you file bankruptcy on personal loans?

While you can typically file bankruptcy on personal loans, there’s a key difference to be aware of if you have an unsecured personal loan with a cosigner.

Under Chapter 13 bankruptcy, creditors usually can’t call your cosigner during your bankruptcy period. Under Chapter 7, creditors can continue to contact your cosigner for payment.

In other words, your cosigner has greater protections under Chapter 13 bankruptcy than under Chapter 7.

What debt can’t be discharged in bankruptcy?

Although you can file for bankruptcy on most unsecured 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

How do student loans discharge in bankruptcy?

What can you file bankruptcy on when it comes to student loans? Well, 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, consumer protection attorney Don 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.

Should you consult a bankruptcy lawyer?

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.