One of the most common reasons to file for bankruptcy is to discharge your overwhelming debt and start your finances over on a clean slate. But just because you file for bankruptcy doesn’t mean that your responsibility for every single type of debt suddenly disappears.
In fact, only certain types of debt qualify for discharge. Perhaps the biggest factor is what type of bankruptcy you choose, Chapter 7 or Chapter 13. Continue reading to find out exactly what types of debts qualify for each type of bankruptcy and how to determine which route is best for you and your financial situation.
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Which Debts Qualify for Bankruptcy?
Essentially, almost any legal debts are debts that qualify for you to declare bankruptcy as long as you can prove your overall financial situation makes it impossible for you to repay 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, though they can be for Chapter 13. Understanding the debt vocabulary and the different types of debts surrounding bankruptcy will help you understand the process better so you can make a smart and informed decision about your financial future.
What Are the Different Types of Debts?
The two main types to be aware of are secured debt and unsecured debt. Secured debt refers to debt that has collateral, or a 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.
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 are 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.
Another common distinction made between types of debt is consumer versus non-consumer. While this language is frequently used to talk about debts, it can be a little vague. Generally speaking, consumer debt refers to unsecured loans and outstanding bills for things bought with disposable income. On the other hand, non-consumer debt would be debt related to the essential things like taxes, education, and housing.
If you’re unsure which is which, your attorney can help. The third debt distinction is between installment debt and revolving debt. Installment debt refers to any loan where you make regular, fixed payments on. Revolving debt concerns debt that fluctuates, such as credit card debt, payday loans, and home equity lines of credit. Rather than having a set amount that you pay for a predetermined period of time, your monthly amount changes based on how much of your credit you’ve used.
Which Debts Qualify for a Chapter 7 Discharge?
Chapter 7 quickly discharges most of your debts (though not all of them); however, there are several qualifications you must personally meet in order to file for this type of bankruptcy. Most importantly, you must pass a “means test.” You can’t earn over a certain amount of money, which varies depending on the state you live in and how large your family is.
You also can’t have enough disposable income to cover at least part your monthly debt payments for five years. A Chapter 7 bankruptcy is truly designed for people facing financial hardships. If you do end up qualifying, there are some restrictions on which of your debts may be discharged.
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 under a Chapter 7 bankruptcy.
Which Debts are Elgible for a Chapter 13 Discharge?
Filing for Chapter 13 bankruptcy entails undergoing a payment period that lasts between three and five years. Depending on your income and other financial obligations, you put your remaining discretionary income towards your outstanding debt. The payments are then distributed to the qualifying creditors. At the end of the payment period, those debts are considered settled; however, you typically can’t take on any additional debt and you must live on a fixed budget.
So what types of debts qualify? First, your unsecured debts must not exceed $383,175 and your secured debts may not exceed $1,149,525. Qualifying debts include general unsecured claims, such as credit card debt, personal loans, medical bills, or overdue utilities. You’ll only end up paying a percentage of what you owe these types of creditors; the exact amount depends on how much you owe and how much you earn.
There are certain debts that must be paid in full, even when you file for Chapter 13 bankruptcy. Unsecured priority claims must be paid in full and include debts such as income tax debts, overdue child or spousal support, and any relevant legal fees. Secured debts such as a mortgage don’t have to be paid in full during your repayment plan period, but you do have to keep up with your monthly payments.
If you are behind on your mortgage and facing foreclosure, you can use the repayment period to catch up on your payments and save your house. If you don’t continue making payments, however, you still run the risk of losing your home through foreclosure.
How Do I Know If My Debts Qualify?
If you’re still having trouble determining if your debts qualify, keep in mind that you’ll be required to talk to a credit counselor 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. While researching the process is a good way to get started exploring debt discharges, it’s wise to ask a professional to look at your personal financial situation to find out what you actually qualify for. Take advantage of your own knowledge plus advice from the experts to make an informed decision about filing for bankruptcy.