If I File for Bankruptcy, What Happens to My Debt?

By Carron Nicks, Attorney
Bankruptcy can bring a lot of relief when you're overwhelmed with debt, but there are some debts that even bankruptcy can't eliminate.

For most people, the only reason to file a bankruptcy case is to eliminate overwhelming debt. The relief most people are looking for is called a discharge.

Understanding Your Choices in Bankruptcy

Most people choose to file one of two types of bankruptcy: a Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 bankruptcy. In this type, the debtor (the person who files for bankruptcy) can keep (exempt) a certain amount of property needed to work and live, such as clothing, household possessions, and a modest car. The bankruptcy trustee—the official tasked with overseeing the case—sells any nonexempt property and distributes the funds to creditors. Qualifying debt gets wiped out after an average of four to six months. (Learn more in Chapter 7 Bankruptcy Basics.)

Chapter 13 bankruptcy. A filer can keep all property in this chapter, as well as catch up on past due debt, such as car and house payments. The debtor pays into a repayment plan for three- to five-years. Any dischargeable debt gets wiped out on completion of the plan. (For further details, read Chapter 13 Wage Earner Bankruptcy Basics.)

What Is a Bankruptcy Discharge?

Bankruptcy professionals use the word discharge to mean “get rid of” or “wipe out” debt. At the end of a bankruptcy case, if the debtor has followed the law and cooperated with the bankruptcy court, the court will issue an order of discharge, also known as the general discharge. This order tells the world that the case successfully concluded and that dischargeable debts are no longer collectible by creditors.

The Effect of Discharge

When a debt gets discharged, your responsibility for paying for it goes away. The discharge acts as an “injunction” that stops creditors from taking any action against you to collect the debt. Once a debt gets wiped out, the creditor can’t call you, send demand letters, file a lawsuit against you, or garnish your wages (deduct money from your paycheck).

The discharge doesn’t prohibit the creditor from trying to collect against someone who is also liable for the debt (a co-signer), however. Also, a lender can repossess or foreclose on any property that you might have pledged as collateral to secure the debt, such as a car for a car loan.

Example. Before his bankruptcy, Kyle’s aunt agreed to cosign for a car loan. Kyle made regular payments until he lost his job a year later. Because he owed a significant amount of credit card debt, he decided it was best to file for bankruptcy. Kyle also owed $10,000 on the car loan. Because he was unable to make the vehicle payment, after the bankruptcy concluded, the lender repossessed the car, sold it at auction, and pursued Kyle’s aunt for the outstanding amount that remained after the sale—even though Kyle was no longer responsible for paying the debt.

Dischargeable and Nondischargeable Debt

Not all debts get wiped out in bankruptcy—but many do. Here’s what you can expect to get discharged in a typical Chapter 7 or Chapter 13 case:

  • credit card balances
  • medical bills
  • personal loans
  • promissory notes (but not security agreements)
  • overdrafts
  • unpaid utility bills
  • unpaid rent or lease payments
  • most judgments
  • most debts that arise from accidents
  • most debts that arise out of contracts, and
  • any other debt the bankruptcy code doesn't list as nondischargeable.
The law considers some obligations so important that you can’t get rid of them in bankruptcy. For instance, the following nondischargeable debts won’t go away in your bankruptcy case:
  • domestic support obligations, such as child support and alimony
  • most taxes (old income taxes might be dischargeable)
  • fines, penalties, and restitution resulting from a criminal conviction, and
  • obligations that arise if you hurt or kill someone while driving intoxicated.

Understand that while the most common debts are listed above, this isn’t a complete list. For instance, you can get rid of some debts in a Chapter 13 bankruptcy that you can’t wipe out in a Chapter 7 bankruptcy.

(For more information, read How Can Chapter 13 Help Me With Nondischargeable Debts?)

Debts That Might Be Dischargeable

Student loan debt isn’t usually dischargeable; however, sometimes it will go away in bankruptcy. The debtor must file a lawsuit called an adversary proceeding and prove certain legal requirements, including that it’s unlikely that the debtor will ever be able to pay back the loan.

The reverse can also be true. Other debts will get discharged unless the creditor files and wins an adversary proceeding in the bankruptcy case. For instance, if a creditor wins an adversary proceeding, you might remain responsible for the following:

  • debts for luxury goods or services that you bought shortly before filing for bankruptcy (or cash advances)
  • bills that you failed to list in your bankruptcy paperwork
  • obligations arising from willful or malicious injury to a person or property, and
  • a judgment resulting from fraud, embezzlement, or defalcation.

Loans for Cars, Houses, and Other Collateralized Obligations

Debt is “secured” or guaranteed when you put up valuable property as collateral that the creditor can take if you fail to pay. Examples of secured debt include car loans, home mortgages, and many debts for other big-ticket items like appliances. A bankruptcy will discharge the obligation to pay the loan, but it doesn’t wipe out the creditor’s right to repossess or foreclose on the collateral. The bottom line is that if you don’t pay a secured loan, the creditor can take back the collateral.

However, you might be allowed to keep the property if you reaffirm the debt. In essence, when you reaffirm a debt, you’re entering into a new contract in which you agree to pay for the item. The new contract remains in effect after your bankruptcy concludes. In some cases, you can redeem the property by paying just its value in a lump sum and discharging any remaining debt. Redemption isn’t available for your residential property, however.

(For more information, read What’s a Reaffirmation Agreement in Chapter 7 Bankruptcy?)

Questions for Your Attorney

  • If I don’t reaffirm a debt, can I still make payments on it to save it from repossession?
  • I forgot to list a debt on my bankruptcy paperwork. Is it discharged anyway?
  • I live in a community property state. If I discharge a debt, will my spouse have to pay it?
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