Will the bankruptcy filing pay off all of my debts?

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When you are under a heavy burden of debt, filing for bankruptcy can be your last resort. Many types of debts can be paid off during a bankruptcy, but it is important to understand that not all debts are eligible. Some types of debt are difficult – if not impossible – to pay off in bankruptcy.

What does a bankruptcy petition do?

There are two main avenues for individuals filing for bankruptcy: Chapter 7 and Chapter 13. Both types of bankruptcies attempt to help you restore your finances, but they do it in slightly different ways.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy pays off most of your debts, but you also have to give up personal property. There are exemptions for essential or personal property, but all non-tax-exempt property is sold. The proceeds will then be distributed to your creditors.

What is Chapter 13 Bankruptcy?

With Chapter 13 bankruptcy, you are reorganizing your existing debt instead. Working with a court-appointed trustee, review your creditors and debts and create a payment plan. Over a period of three to five years, you pay a fixed monthly amount to the court, which distributes the funds to your creditors. After this period, your remaining debts will be paid.

It is possible to file for Chapter 13 bankruptcy after previously filing Chapter 7 for bankruptcy.

What does the debt settlement do?

Once your debts are paid, the creditor will no longer be able to ask you to pay the debt. Many types of debt are forgiven under Chapter 7 bankruptcy. Chapter 13 bankruptcy will reorganize your debts and pay off any debts that remain after the payback period.

What debts cannot be eliminated in bankruptcy?

There are certain types of debt that cannot be eliminated in bankruptcy. Here some examples:

Secured Debt: When you buy a car or other good with credit, you are entering into an agreement with the lender to pay for the item against current usage. If you later file for bankruptcy, you will have to decide whether to abandon the item or keep paying the lender for it.

Child support and maintenance: You cannot cancel a legal obligation to pay child support or child support. All remaining amounts owed at the time of filing for bankruptcy remain in place even after the proceedings have been concluded.

Legal fees and debts in a divorce decree: In many divorce judgments, one spouse agrees to pay legal fees or some outstanding debts of the other spouse. These debts will outlive your bankruptcy. For example, if you agree to pay the credit card balance on your behalf and in the name of your ex-spouse, then you would not be able to file for bankruptcy to wipe out that debt or payment arrangement. Your ex-spouse could still force you to pay those bills.

Restitution: A court-ordered provision is not excusable in bankruptcy. The refund is a court-ordered amount of money that you must pay in order to cause financial loss or personal injury to another. This includes payments for injuries caused by driving under the influence of alcohol.

What Debts Are Hard To Eliminate In Bankruptcy?

With some other types of debt, it is possible to get a clean table with bankruptcy.

Student Loans: Loans taken out for college cannot, in the vast majority of cases, be abolished. All types of educational loans are considered student loans and are typically excluded from bankruptcy: federal student loans, private lenders, and loans direct from a university.

There are exceptions, however. One is to be able to demonstrate that you will never be able to go back to work due to a total and permanent disability. Another exception is undue hardship, which requires you to demonstrate that you have made good faith efforts to repay the loan. Payments do not change during the repayment period.

However, the standards for both options are very high and it is rare for either of the two exemptions to be granted.

Income tax liability: You can wipe out some of your income tax liability in a bankruptcy filing, but that requires a very specific and extensive test.

The bottom line

Paying off your debts through bankruptcy has a drastic impact on your credit score, so it should not be taken lightly. However, if you find that you cannot pay all of your creditors, it may be time to file for bankruptcy.

Two types of bankruptcy are available to most people: Chapter 7 and Chapter 13. Either way, the majority of your unpaid debts will be forgiven, although some types of debt may be difficult or impossible to eliminate through bankruptcy.

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