Which Debts Qualify for Bankruptcy?
Essentially, almost any legal debts are debts that qualify you to declare bankruptcy as long as you can prove your overall financial situation makes it impossible for you to pay them. Financial profiles can include any combination of consumer and non-consumer debts and bankruptcy can be caused by anything from unsuccessful investments or business decisions to poor money management, illness, loss of employment, natural disasters, or an economic downturn.
Whatever the reason, it’s your overall financial status that will determine if you qualify, not the particular types of debts themselves. Nevertheless, there are several different types of debts, and which type you have can affect your eligibility for different relief. Additionally, certain types of debts can’t be discharged under Chapter 7.
Understanding the debt vocabulary and the different types of debts surrounding bankruptcy will help you understand the process better.
What Are the Different Types of Debts?
The two main types of debt are secured debt and unsecured debt. Secured debt is debt that has collateral, or an actual physical asset behind it, including homes and cars. These debts are secured by the value of the object being paid for, which provides security for the debt. If you default on the loan, the creditor can foreclose on your home or repossess your car to regain the amount that was lent and absolve the debt.
Unsecured debt is related to purely monetary loans or to debts that do not have physical collateral. This includes credit card debt and any type of cash advance or loan for a service or item that isn’t an asset. Included in unsecured debt is debt for medical bills, legal judgments, and credit accounts in collections. Student loans can also be unsecured, but often they are “guaranteed” by the government and have special rules that apply to them.
A frequent distinction made between types of debt is consumer versus non-consumer debt. While this language is frequently used to talk about debts, it can be a little vague. Generally speaking, consumer debt is mainly unsecured loans and outstanding bills for things bought with disposable income: things that are less essential. On the other hand, non-consumer debt would be debt related to more essential things like taxes, education, and housing. If you’re unsure which is which, your attorney can help.
Secured and unsecured debts are also referred to as being installment debt or revolving debt. Installment debt is usually for secured loans and things you’re making regular, fixed payments on, but it also includes medical bills and student loans. Revolving debt concerns debt that fluctuates, such as credit card debt, payday loans, and home equity lines of credit.
Which Debts Qualify for a Chapter 7 Discharge?
The debts that qualify for Chapter 7 bankruptcy discharge are mostly consumer and unsecured debts, with a number of notable exceptions. Debts that are not discharged include most secured and non-consumer debts such as your house, car, and real estate. Other debts that are not discharged include debts for certain taxes, government student loans, tax debts from the last four years, alimony, and child support. Criminal debts such as debts for death or personal injury caused by a D.U.I. are also not discharged.
How Do I Know If My Own Debts Qualify?
If you’re still having trouble determining if your own debts qualify, keep in mind that when filing for bankruptcy, you’ll be required to talk to a credit counseling agency who will be able to answer a lot of your questions. Also, you can always talk to your local courts, which can’t give you legal advice, but can answer a lot of questions. An interview with a bankruptcy attorney is also very useful.