Before making the decision to file for bankruptcy protection, it's important that you have all of the information you need to make an educated decision. Bankruptcy has the ability to give much-needed relief to individuals, couples, and families that are suffering from the burden of overwhelming debt, but it's more important to understand what bankruptcy cannot do for your financial future.
There are many benefits to filing for bankruptcy, and after you receive your discharge, you will have a fresh start for your financial future. Although bankruptcy will eliminate many types of debt, certain debts may survive the bankruptcy discharge.
What Bankruptcy May Do
Bankruptcy may wipe out credit card debt and other unsecured debts: Most unsecured debts such as credit card bills, medical bills, utility bills and personal loans are dischargeable in bankruptcy. Unless you have a special "secured" credit card, your credit card debt will usually be considered unsecured if you file for bankruptcy.
Bankruptcy may stop creditor harassment: The moment you file for bankruptcy, you'll receive a preliminary injunction called "the automatic stay" that stops most lawsuits filed against you and protects your money and assets from creditors. The automatic stay also stops almost all collection lawsuits that have been filed against you and protect your property from creditors, collection agencies and government entities.
What Bankruptcy Cannot Do
Bankruptcy cannot wipe out student loans, except in very limited circumstances: In most cases, student loan debt cannot be discharged in bankruptcy. Student loans can only be discharged if you can show that repaying the loan would cause you "undue hardship." To show undue hardship, you must be able to show that you cannot afford to pay back your loans now but also that there's very little likelihood of you being able to pay back your loans in the future. This standard is very difficult to meet. It would be best to speak with an experienced bankruptcy attorney before trying this on your own.
Bankruptcy cannot eliminate child support and alimony obligations: Bankruptcy does not automatically eliminate the legal obligation to pay child support or alimony. Anything that you owe at the time of filing may still remain after the case is over.
Bankruptcy cannot wipe out secured debt: If you purchased a new car, valuable jewelry or spend a significant amount of money on luxury items within a certain time frame of filing for bankruptcy, you may have to surrender the item back to the creditor or continue to pay the creditor for the item(s) you purchased.
Bankruptcy cannot eliminate all tax debts: It's very difficult to eliminate tax debt in a bankruptcy proceeding. There are circumstances where you may be able to eliminate older debts for unpaid income taxes. Your bankruptcy attorney will be able to look over your case and let you know whether your tax debts will be discharged in bankruptcy.
The following debts also will not be discharged in Chapter 7 or Chapter 13 bankruptcy:
- Debts for personal injury or death caused by intoxicated or reckless driving
- Fines and penalties imposed for violating the law, such as traffic tickets
Bankruptcy can be a powerful financial planning tool for people who are under a pile of debt and feel like there's no way out, but it's important to understand that some types of debts cannot be discharged in bankruptcy. If you're thinking about filing for bankruptcy, the best thing you can do is to speak with an experienced bankruptcy attorney. They'll be able to review your case with you and explain which types of debt can and cannot be discharged in bankruptcy.