There are many reasons that people may experience financial challenges that can cause debts to accumulate quickly. The unexpected loss of a job may make it difficult for a person to cover their regular expenses, which could lead them to use credit cards. A serious injury or illness can result in large medical bills that may be difficult to pay off. Other issues can lead to major expenses and financial difficulties, potentially leaving a person or family with mounting debts that may be hard to manage.

Fortunately, there are legal options available for people who are struggling with debt. Bankruptcy is one of the tools available under federal law that can help a person reorganize or eliminate certain debts. Understanding how different categories of debt are treated in bankruptcy can give consumers a clearer sense of what this process may address and what steps could be taken to eliminate debts. By understanding what debts can and cannot be cleared through bankruptcy, a person can make plans to rebuild financial stability.

Categories of Debt in Bankruptcy

Debts fall into several general categories when they are addressed during the bankruptcy process. These categories determine whether debts may be eliminated and how they may be repaid. Types of debts to address during the bankruptcy process include:

Secured Debts

Certain types of debts are tied to specific property that is used as collateral to secure the debts. Mortgages and vehicle loans are two common examples. In these cases, the lender has an interest in the property, and they may take steps to repossess collateral if debts are not paid.

Unsecured Debts

Other debts are not connected to specific property. Credit card balances, medical bills, and many personal loans fall into this category. These debts are often easier to address during the bankruptcy process because there is no collateral to repossess if debts are not paid.

Priority Debts

Certain unsecured debts are considered priority obligations. These debts are treated differently during the bankruptcy process. Examples may include some tax debts or domestic support responsibilities. Even though these debts are unsecured, they generally cannot be eliminated through bankruptcy.

Dischargeable Debts and How They Are Addressed During Bankruptcy

Bankruptcy can reduce or eliminate certain debts. The process for doing so varies somewhat depending on whether a person files a Chapter 7 or Chapter 13 case.

Common Dischargeable Debts

Many unsecured debts can be eliminated through bankruptcy. These include:

• Credit Card Debt: The balances owed on credit cards are typically dischargeable because they are not tied to property.

• Medical Bills: These debts are generally eligible for discharge when they arise from medical treatment or services.

• Personal Loans Without Collateral: Most of these debts may be eliminated without the loss of a person’s property.

• Utility Bills: Past-due amounts owed to utility providers are often included in bankruptcy filings, possibly eliminating the requirement to pay them off.

• Certain Legal Judgments: Some judgments in civil lawsuits may be dischargeable, depending on their origin.

Treatment of Debts in Chapter 7

Chapter 7 bankruptcy is often described as a liquidation process. A person’s nonexempt property may be seized and sold by a bankruptcy trustee to pay some of the debts owed to creditors. In exchange, most debts can be eliminated.

During a Chapter 7 case, dischargeable unsecured debts will typically be eliminated entirely. Secured debts can be addressed by either surrendering the collateral or continuing payments if the person wishes to keep the property. Priority debts will still need to be paid, although the bankruptcy process could temporarily pause collection efforts.

Treatment of Debts in Chapter 13

In a Chapter 13 bankruptcy, a repayment plan will be put in place, and it will generally last for three to five years. Instead of eliminating debts all at once, this type of bankruptcy allows a person to reorganize their obligations and pay them off in a structured way. This process can be beneficial for people who have a regular income and who can make ongoing payments for a few years.

During a Chapter 13 case, dischargeable unsecured debts may be paid in part, and the remaining balances could be eliminated upon the completion of the repayment plan. Secured debts can sometimes be modified, and past-due amounts can be included in the repayment plan. Priority debts usually must be paid in full through the plan.

Debts That May Not Be Discharged Through Bankruptcy

Although bankruptcy can provide significant relief for people with large debts, certain obligations may remain in place. These debts are considered nondischargeable, and they include:

• Domestic Support Obligations: Child support and spousal support payments generally cannot be eliminated. All past-due amounts must be paid in full, and continuing obligations will remain in place.

• Most Tax Debts: Some older tax debts may be addressed through bankruptcy, but most of the time, state and federal taxes that are past due will need to be paid off.

• Student Loans: These loans usually cannot be discharged unless a person meets specific criteria, including showing that they will experience extreme financial hardship due to the requirement to pay off the amounts owed.

• Debts Resulting From Certain Wrongful Acts: In general, financial obligations arising from illegal conduct may not be eliminated. These debts may include personal injury judgments from car accidents involving DUI or restitution for fraud or other criminal offenses.

• Certain Fines or Penalties: Fines or other financial penalties owed to the government will often remain in place following a bankruptcy filing.

Why It Is Important to Reduce or Eliminate Debts

A fresh financial start is one of the key benefits of bankruptcy. Rather than punishing people for experiencing financial difficulties, bankruptcy laws provide a method for resolving overwhelming debts. By addressing debts through bankruptcy, a person or family can regain control of their finances and move forward while enjoying financial stability.

Reducing or eliminating debt may allow a person to:

• Rebuild Credit Gradually: Even though bankruptcy will show up on a person’s credit report, eliminating debts can prevent issues such as missed payments that would also lower a credit score. This can create a foundation for rebuilding credit and taking advantage of opportunities in the future.

• Maintain a Workable Budget: With fewer monthly obligations, financial planning is more manageable.

• Improve Long-Term Financial Stability: Reduced debt can allow for beneficial saving habits and long-term planning.

• Reduce Stress and Uncertainty: With fewer financial obligations, the strain on a household will likely decrease significantly.

Legal Help With Eliminating Debt Through Bankruptcy

Bankruptcy is a complex legal process that involves eligibility requirements, detailed financial disclosures, and other steps that must be followed correctly. People who are considering bankruptcy can consult with an attorney to gain a better understanding of their options and determine the best steps to take to eliminate their debts. By following the correct procedures, a person or family may reduce or eliminate their financial obligations and be prepared for success in the future.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal advice. Bankruptcy laws are complex and vary by jurisdiction. If you are considering bankruptcy or have questions about how it applies to your specific situation, it is recommended that you consult with a qualified bankruptcy attorney to discuss your options and ensure that you understand the legal implications of filing for bankruptcy.