How to Handle Bankruptcy

What Types of Debt Get Wiped Out in Bankruptcy?

Before you decide to file, you need to know what types of debt get wiped out in bankruptcy and what debts will remain. Too many people mistakenly believe that bankruptcy will give them a completely clean slate but that isn’t true. Here is what you need to know.

Debt Wiped Out in Bankruptcy

The leading cause of personal bankruptcy in America is medical debt, it’s the cause in 62% of cases and 78% of people who filed did have medical insurance. Luckily, medical debt is discharged when filing for Chapter 7 bankruptcy. There is no cap on the dollar amount of medical debt that can be discharged.

Credit card debt is another big factor in filing for bankruptcy. While some people spent irresponsibly, for many, credit card debt accumulated during a period of unemployment. Once the high interest rates start to kick in, the debt becomes unmanageable even when they find a new job. Credit card debt is unsecured debt and will be eliminated in bankruptcy.

There is sometimes an exception to this; if the creditor sees huge credit card bills incurred soon before the filing, they may object. This is a measure to prevent people from going on crazy shopping sprees or expensive vacations with the expectation that they’ll never be held responsible for the debt.

Overdue utility bills and rent payments are eliminated in bankruptcy. Keep in mind that past bills for both categories being discharged does not prevent utilities being shut off if payments are not kept current after the filing nor does it protect you from being evicted from your apartment.

If you have a mortgage, bankruptcy does eliminate personal liability for the loan but does not eliminate your lender’s right to foreclose. If you want to keep your house, you must continue to pay the mortgage.

Many people think that tax debt can’t be discharged during bankruptcy but that’s not true. Income tax, both state and federal are eligible but they must be from returns that were due at least three years prior to the bankruptcy filing. Tax liens however will remain attached to your property and will have to be paid from any profit made when the property is sold.

Debt Not Wiped Out in Bankruptcy

You’ll notice one big source of debt missing from the section above; student loan debt. This seems like a great oversite given that there is currently $1.2 trillion in outstanding student loan debt in America. The rules about discharging student loan debt have been tightening since the 1970’s, but in 2005 Congress passed an act which made it nearly impossible to wipe out through bankruptcy. There are some exceptions but they are very stringent. So you will most likely have to pay off your student loans but there are a few ways to do it fast.

If you owe child or spousal support, you are still required to pay them and any arrears. Fines and penalties for things like traffic and parking tickets will also not be discharged. If you caused injury or death due to drunk driving, any debt as a result will not be eliminated.

Not Quite a Clean Slate

While bankruptcy doesn’t eliminate all debt, it does alleviate the kind of debt that most people struggle with. The exception being student loan debt but fortunately, there are programs, like income driven repayment plans, that can help make it manageable.

Bankruptcy will provide most people with the breathing room they need to take back control of their finances and start the process of rebuilding their credit and their lives.

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