What Debts Can You Discharge in Personal Bankruptcy?

Dunlap Law Insights

Bankruptcy is an area of law shrouded in mystery. The people who go through bankruptcy proceedings are often loathe to discuss it with their peers, worrying that people might judge them for experiencing financial hardship. Unfortunately, that means that many people who would likely benefit from bankruptcy are hesitant to file because they don’t really understand what bankruptcy involves.

One of the biggest concerns that many people have about bankruptcy is that it won’t address their major debts, as bankruptcy does only discharge specific kinds of debt. Familiarizing yourself with which debts are eligible to receive a discharge and which debts will likely remain due will let you know whether bankruptcy can help you regain control of your financial circumstances.

Bankruptcy mostly helps with unsecured debt

There are two primary kinds of debt that people accrue. Secured debt typically involves the financial obligation where a valuable item is held as collateral. Your mortgage, for example, is a secured debt. The bank funds the purchase of the home, but the house where you live serves as collateral for the amount that you owe. In the event that you stop paying, the bank can initiate foreclosure procedures to take your house. Vehicle loans are another common form of secured debt.

Unsecured debt, on the other hand, does not have anything held as collateral for it. Credit cards are a common form of unsecured debt. Medical debt and debt related to utilities are also typically unsecured debt, which means that the lender doesn’t have any collateral they can collect to recoup their losses if you stop paying.

Bankruptcy can allow you to discharge your unsecured debts, provided that you qualify for the bankruptcy protections you seek. However, many times student loans, which are technically unsecured debts, are not eligible for discharges in bankruptcy.

You typically can’t discharge secured debt or certain legal obligations

Your secured debts, such as your vehicle loan and your mortgage, are considerations that will complicate your bankruptcy. In certain circumstances, you may not need to do much other than continuing to pay your mortgage or car note.

Other times, the lender will expect you to reaffirm the debt by signing a new contract around the time of your bankruptcy filing. This way, they can prove that the debt is valid even though you have gone through bankruptcy. It may be possible to end your financial obligation for secured debts in the bankruptcy, but in that scenario, the lender will most likely retain your collateral.

Certain other legal debts also remain due and payable after a bankruptcy. Examples of debts you can’t discharge include past-due child support, spousal maintenance or tax debt. These debts receive special consideration in bankruptcy and are typically treated like priority debts in Chapter 13 proceedings.