Bankruptcy allows the person filing (debtor) to eliminate many different types of debts. However, bankruptcy cannot eliminate all debts. Therefore, before deciding to file for bankruptcy, it is important to know whether it will help you discharge your specific debts.
Bankruptcy will discharge most unsecured debt
Bankruptcy is particularly good at dealing with unsecured debt, which is debt that is not secured by a lien on property. The following unsecured debt can be discharged:
-credit card debt
Most credit card debt can be eliminated in bankruptcy. There are, however, some exceptions. If a credit card is a secured credit card, or if the credit card agreement gives the bank a lien on your other accounts with the bank, the bank may be able to apply any money on which it holds a lien to satisfy the lien. Another exception is for debts for “luxury goods” incurred on a single credit card within 90 before bankruptcy, and totaling more than $725 (as of 2020). Yet another exceptions is if there was fraud involved in obtaining the credit card or making charges on it, which is not common.
-medical bills
Medical bills are almost always dischargeable. Potential exceptions are where the debtor granted the medical provider a lien, or where there is fraud involved, but these are very uncommon.
-personal loans
Personal loans work like credit cards, and are discharged in bankruptcy. The same general exceptions apply to personal loans as do to credit cards.
-payday loans
Payday loans are generally unsecured, and are discharged in bankruptcy. Payday loans are loans guaranteed only by a post-dated check provided to the lender. If the lender also takes a registration or title to the debtor’s vehicle, then it is probably a secured loan and may not be discharged.
-taxes
Most taxes cannot be discharged. However, income taxes can be discharged in certain circumstances. The four requirements to discharge income taxes are:
- The taxes must be at least three years old,
- The related tax return must have been filed at least two years before bankruptcy,
- The taxes were assessed more than 240 days before bankruptcy, and
- The taxpayer did not engage in any type of fraud or tax evasion.
-student loans
Student loans generally cannot be discharged. However, there are exceptions to this as well. Student loans can be discharged if:
- The debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for himself and his dependents if forced to repay the loans,
- The inability to repay the student loan will continue for a substantial portion of the loan repayment period, and
- The debtor has made good faith efforts to repay the loan.
Some unsecured debts can only be discharged in Chapter 13 bankruptcy
There are several types of unsecured debt that cannot be discharged in a Chapter 7 bankruptcy, but can be discharged in a Chapter 13 bankruptcy. These include:
- Debts for willful and malicious injury to another person or entity or the property of another person or entity
- Fines, penalties, or forfeitures payable for the benefit of a governmental unit, and that are not compensation for actual pecuniary loss
- Debts arising before a prior bankruptcy in which the debtor was denied discharge
- Debts for criminal restitution under federal law
- Debts incurred in a divorce and that are not child support or alimony
- Debts incurred to pay a federal tax
- Debts incurred to pay fines or penalties under federal election law
Unsecured debts that cannot be discharged-child support and alimony
Child support and alimony are unsecured debts, but generally cannot be eliminated in bankruptcy. This is because the law gives these debts a special status.
Bankruptcy will usually not discharge secured debt
Bankruptcy will usually not eliminate secured debt, or debt which is protected by a lien on property. Such debt includes mortgages and car loans. There are some exceptions however, available in Chapter 13 bankruptcy. One such exception applies specifically to the debtor’s home. The second or subsequent mortgages on the debtor’s home can be discharged if the value of the home does not exceed the value of the prior (more senior) mortgages. Another exception applies to most other secured debt, including car loans and mortgages on investment property. In such cases, the portion of the loan that exceeds the value of the property can be discharged or eliminated.