Bankruptcy eliminates some debt, but it isn’t a cure-all. That’s because it doesn’t eliminate all debt or give consumers way to wipe the books clean. If you are considering bankruptcy, first consider which debts are erased and which remain on the books. Credit card debt is addressed by Chapter 7 and Chapter 13 bankruptcy, but child support, taxes, student loan debts and other secured debts are not included.
What Bankruptcy Can Erase
If you have extreme debt, here is what bankruptcy can actually erase:
Credit Cards and Unsecured Debt
Bankruptcy is a good tool for eliminating credit card debt. Why? Because credit cards are unsecured debts, meaning a creditor cannot get a lien on your property or repossess your car. This is the debt that bankruptcy was designed to help. Chapter 13 bankruptcy usually means you’ll need to pay back a portion of the debt. But unsecured debts that remain once you have a repayment plan will be discharged.
Stop Collection Activities
If you are getting harassed by creditor calls and collection activities, bankruptcy will stop the activities. Don’t file for bankruptcy just to stop calls and letters, however, since there are other options for ceasing the activity.
Stop Repossession or Foreclosure
If a creditor has started proceedings foreclose on your house or repossess your car, bankruptcy can help stop the process.
Eliminate Some Liens
If a creditor has a right to take your property, that lien will survive bankruptcy unless you initiate certain processes during Chapter 7 bankruptcy proceedings.
What Bankruptcy Can’t Erase
Here’s what bankruptcy can’t do for a consumer facing a debt crisis:
Stop Repossession by a Secured Creditor
Secured debts are debts where the creditor has a lien on the property. Bankruptcy does not eliminate the repossession. It can stop the lien, but the creditor can then get the property.
Stop Support and Alimony
Alimony and child support obligations survive bankruptcy. You will have to pay these debts in full, no matter which bankruptcy you choose. If you use Chapter 13, the plan must account for how the debts will be repaid in full.
Eliminate Student Loans
Unfortunately, student loans will not be included in bankruptcy. The only time you may see these debts erased is if you can show that the debt is an undue hardship. The standard for showing undue hardship is strict, meaning you’ll need to show you will never be able to afford to repay the debts now or in the future. If you think this can worsen your financial stability, you should consider refinancing alternatives that can ease your situation. Citizens Bank student loan refinance programs can help you save money by qualifying for a lower interest rate on different types of loans.
Erase Tax Debts
With few exceptions, tax debt is not erased by bankruptcy. If there are old debts for unpaid income taxes, this can occasionally be done, but there are many hurdles to overcome before this is possible.
Erase Other Non-dischargeable Debts
Here is a list of debts that are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy: • Debts you forget to list • Debts for personal injuries cause by your drunk driving • Penalties for violating the law (tickets and restitution payments) With Chapter 7, these debts remain. With Chapter 13, the will be paid in full during the repayment plan.