Bankruptcy is a
powerful tool for debtors, but some kinds of debts
can't be wiped out in bankruptcy.
Bankruptcy is good
at wiping out credit card debt, but you may have
trouble eliminating some other kinds of debts, including
child support, alimony, most tax debts, student loans,
and secured debts.
What Bankruptcy Can Do
If you are facing
serious debt problems, bankruptcy may offer a powerful
remedy. Here are some of the things filing for bankruptcy
can do:
Wipe out credit card
debt and other unsecured debts. Bankruptcy is very
good at wiping out credit card debt. Unless you have
a special "secured" credit card, your credit card balance is an unsecured debt -- that is, the creditor
does not have a lien on any of your property and
cannot repossess any items if you fail to pay the
debt. This is precisely the kind of debt that bankruptcy
is designed to eliminate. Besides credit card debt,
you may have other unsecured debts, and bankruptcy
can wipe these out as well.
If you file for Chapter
13 rather than Chapter 7, you may have to pay back
some portion of your unsecured debts. However, any
unsecured debts that remain once your repayment plan
is complete will be discharged.
Stop creditor harassment
and collection activities. Bankruptcy can stop creditor
harassment, but if the "harassment"' is simply phone calls and letters, there are simpler ways to stop it; . If
the harassment is more serious -- for instance, if
the creditor is about to repossess your car or foreclose
your mortgage -- bankruptcy can help;.
Eliminate certain
kinds of liens. A lien is a creditor's right to take
some or all of your property and will survive bankruptcy
unless you invoke certain procedures during your
bankruptcy case. For more information, see How to
File for Chapter 7 Bankruptcy, by attorney Stephen
Elias, attorney Albin Renauer, and Robin Leonard,
J.D. (Nolo).
What Bankruptcy Can't Do
Here's what bankruptcy
cannot do for you:
Prevent a secured
creditor from repossessing property. A bankruptcy
discharge eliminates debts, but it does not eliminate
liens. So, if you have a secured debt (a debt where
the creditor has a lien on your property and can
repossess it if you don't pay the debt), bankruptcy
can eliminate the debt, but it does not prevent the
creditor from repossessing the property.
Eliminate child support
and alimony obligations. Child support and alimony
obligations survive bankruptcy -- you will continue
to owe these debts in full, just as if you had never
filed for bankruptcy. And if you use Chapter 13,
your plan will have to provide for these debts to
be repaid in full.
Wipe out student loans,
except in very limited circumstances. Student loans
can be discharged in bankruptcy only if you can show
that repaying the loan would cause you "undue hardship," a very tough standard to meet. You must be able to show not only that you cannot
afford to pay your loans now, but also that you have
very little likelihood of being able to pay your
loans in the future.
Eliminate most tax
debts. Eliminating tax debt in bankruptcy is not
easy, but it is sometimes possible for older debts
for unpaid income taxes. There are many requirements
to be met, however.
Eliminate other nondischargeable
debts. The following debts are not dischargeable
under either Chapter 7 or Chapter 13 bankruptcy:
* debts you forget
to list in your bankruptcy papers, unless the creditor
learns of your bankruptcy case
* debts for personal injury or death caused by your intoxicated
driving, and
* fines and penalties imposed for violating the law, such as traffic
tickets and criminal restitution.
If you file for Chapter
7, these debts will remain when your case is over.
If you file for Chapter 13, these debts will have
to be paid in full during your repayment plan. If
they are not repaid in full, the balance will remain
at the end of your case.
In addition, some
types of debts may not be discharged if the creditor
convinces the judge that they should survive your
bankruptcy. These include debts incurred through
fraud, such as lying on a credit application or passing
off borrowed property as your own to use as collateral
for a loan.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 can't
help you with these situations, but Chapter 13 can:
Stop a mortgage foreclosure.
Filing for Chapter 13 bankruptcy will stop a foreclosure
and force the lender to accept a plan where you make
up the missed payments over time while staying current
on your regular monthly payments. To make this plan
work, you must be able to demonstrate that you will
have enough income in the future to support such
a repayment plan.
Allow you to keep
nonexempt property. You don't have to give up any
property in Chapter 13 because you use your income
to fund your repayment plan.
"Cram down" secured
debts that are worth more than the property that
secures them. You can sometimes use Chapter 13 to
reduce a debt to the replacement value of the property
securing it, then pay off that debt through your
plan. For example, if you owe $10,000 on a car loan
and the car is worth only $6,000, you can propose
a plan that pays the creditor $6,000 and have the
rest of the loan discharged. However, under the new
bankruptcy law, you can’t cram down a car debt if
you purchased the car during the 30-month period
before you filed for bankruptcy. For other types
of personal property, you can’t cram down a secured
debt if you purchased the property within one year
of filing for bankruptcy.
For more information
on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy:
Repay Your Debts, by attorney Stephen Elias and Robin
Leonard, J.D. (Nolo).
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