Bankruptcy will get rid of many types of debt, but not necessarily all debt. Whether it will effectively wipe out your bills will depend on the kind of debt that you have and whether you file a Chapter 7 bankruptcy or Chapter 13 bankruptcy.
Bankruptcy’s Order of Discharge
While there are multiple reasons someone might file for bankruptcy, most people do so to get rid of, or “discharge,” qualifying debt, and it’s understandable that you’d want to know whether you’ll be able to get rid of enough bills to make filing for bankruptcy worthwhile.
Debt that goes away in bankruptcy is called dischargeable debt. The debt you’ll remain responsible for paying after your case is over (or that you’ll have to pay in full in a Chapter 13 repayment plan) is called nondischargeable debt.
Once you’ve completed your bankruptcy case, you’ll receive an order of discharge—paperwork that tells you and your creditors that you’re no longer responsible for paying for the discharged debt. Many people are surprised to learn that the order of discharge doesn’t set forth the particular debts wiped out in your bankruptcy case. Instead, it generally informs your creditors that all qualifying dischargeable debts are, in fact, discharged and that you’re no longer responsible for paying those debts.
Dischargeable Debts Get Wiped Out in Bankruptcy
In a Chapter 7 bankruptcy, you don’t pay into a repayment plan. Instead, if you qualify for relief, all of your dischargeable debts go away after three to four months. You’re able to keep (exempt) necessary property. The remainder gets sold for the benefit of your creditors.
Debts that will be discharged include:
- car loans and mortgages (if you give the vehicle or home back to the lender)
- most credit card debt
- doctor bills
- many collection accounts
- personal loans
- utility bills
- outstanding contracts and leases, and
- some taxes.
A few additional types of debt can be discharged in a Chapter 13 bankruptcy (find out in Debt That's Wiped out in Chapter 13 Bankruptcy but Not in Chapter 7 Bankruptcy). First, however, you must pay all of your discretionary income into a three- to five-year repayment plan. Once complete, any remaining qualifying debt balances get wiped out by the discharge.
Nondischargeable Debts Don’t Go Away
The Chapter 7 order of discharge doesn’t indicate which debts get wiped out. You’ll find that it states that most debts get discharged, but not the following:
- some unlisted debts
- domestic support obligations
- most student loans
- most taxes (see Does Bankruptcy Wipe Out Tax Debt?)
- debts declared nondischargeable by the court
- most fines, penalties, forfeitures, or criminal restitution obligations
- some loans owed to a pension, profit sharing, stock bonus, or retirement plan, and
- debts for death or personal injury caused by operating a vehicle while intoxicated.
Also, if you’ve reaffirmed a debt in a Chapter 7 case (agreed to remain responsible for it), that debt won’t be discharged. Most people reaffirm a debt associated with collateral, such as a car loan or a mortgage, when it’s important to keep the property.
To do so, you agree to keep paying the debt after the bankruptcy by entering into a new contract called a reaffirmation agreement. The agreement gets filed with the bankruptcy court, and you remain responsible for the new obligation. Because the purpose of bankruptcy is to get rid of debt—not keep it—you should talk to your attorney about whether it’s prudent to reaffirm a particular obligation.
(For more information about debts that don’t go away in bankruptcy, read Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)
Questions for Your Attorney
- Is my debt dischargeable?
- Can I get rid of my debt in a Chapter 7 bankruptcy?
- Does it make more sense for me to file a Chapter 13 bankruptcy?