When facing financial distress, bankruptcy can be a way out of mounting debts. By working closely with a bankruptcy lawyer, you can formulate a debt restructuring or reorganization strategy for financial recovery.
In fact, over 445,000 bankruptcies were filed for the year ending in December 2023 in the US. According to Reuters, it marked an 18% increase in bankruptcy filings compared to 2022.
With professional guidance from a bankruptcy attorney, you can prevent irreparable financial damage and get a fresh start with considerable debt relief. But, does filing for bankruptcy eliminate all your debts? Let’s answer that in more detail.
Considering Bankruptcy
When facing mounting debt where you’re unable to repay all your credits, bankruptcy can appear as a feasible solution to regain financial stability. Crushing debt can make finance management difficult, leaving you with little or insufficient funds for other necessities or obligations.
Filing for bankruptcy to restructure or discharge your debts is a legal process where you will work accordingly with a court. Before filing, it is advisable to seek credit counseling along with guidance from a reputable debt settlement lawyer to weigh the pros and cons.
Does Bankruptcy Clear All Debt?
Firstly, bankruptcy offers different types of debt relief. While each option has its set of pros and cons, the most common one is debt discharge.
As a debtor, you can have certain debts eliminated through debt discharge. In turn, it might give you a fresh start to recovery financially. However, even debt discharge as a debt relief option won’t eliminate all your debts entirely.
So, does bankruptcy clear all debt? No, you will still have to pay secured debts and other court-ordered obligations through a monthly repayment plan, which is also reviewed and approved by the bankruptcy court.
It’s worth mentioning that in debt repayment plans, you could qualify for interest rate reduction to repay creditors over a fixed period. Meanwhile, debt reorganization involves debt restructuring to create more manageable repayment plans.
Types of Debt Relief
As mentioned earlier, there are different types of debt relief available to you when filing for bankruptcy. While debt discharge is the most sought-after debt relief strategy, there are other options as well. These include Chapter 7 (liquidation bankruptcy) and Chapter 13 (reorganization bankruptcy), which are discussed in more detail below:
- Chapter 7 – Bankruptcy
It is also called liquidation bankruptcy, mainly because it covers the sale of assets (non-exempt as well) to back creditors. The bankruptcy court appoints a trustee to liquidate a debtor’s qualified (i.e., non-exempt) assets to repay creditors.
This process can last several months. But in the end, you will receive a discharge on you remaining unsecured debts. These typically include medical bills and credit card debts. Chapter 7 Bankruptcy will most likely benefit debtors with minimal non-exempt assets
and significant unsecured debts or as advised by a bankruptcy lawyer.
- Chapter 13 – Bankruptcy
It is also known reorganization bankruptcy. Chapter 13 involves a legal process where a debtor’s outstanding debts are restructured into feasible, court-approved monthly repayment plans. The plan typically lasts 3 to 5 years, but the duration may vary depending on factors like debtor’s income, expense obligations, and total debts.
Through this debt relief strategy, debtors can keep their assets and prevent foreclosure, repossession, or liquidation by repaying creditors with reduced or no interest rates. It is ideal for you if you have a regular income, in which case, you can’t qualify for Chapter 7 bankruptcy.
Note, that your debt attorney should inform you that Chapter 13 can hurt your credit scores.
- Debt Settlement
In debt settlement, you will negotiate with creditors to reduce your total amount of unsecured debts. It is recommended to hire a debt settlement attorney to negotiate with creditors on your behalf.
As a result, you can get debt relief in the form of interest rate reduction, lowered principal balances, or certain fee waivers. Your bankruptcy attorney will negotiate monthly payments with creditors on your behalf. These payments will continue until you reach the negotiated settlement amount.
Following that, you might get a discharge. However, this strategy will also impact your credit scores and might lead to tax consequences on forgiven debts.
What Does Discharging Debt Do?
Discharge from a debt refers to a debtor’s release from the financial obligation of paying back their respective creditor. In simple words, it means that you don’t have to repay a creditor if that specific debt is discharged.
It can be a lifeline for individuals who are drowning in overwhelming debt with unmanageable repayment plans. Moreover, debt discharging reduces the stress of repaying debts while expanding the room for financial recovery.
However, it is always advisable to consult a professional debt settlement attorney to understand the consequences of such a strategy on your financial record.
Impact of Debt Discharge
- Fresh Start: Debt discharge offers a clean slate to debtors, releasing them from repayment obligations. It offers a fresh start and the chance to recover financially.
- Improved Cashflow: With discharge from past financial obligations (debts), debtors are left with more financial resources than before. It leads to a better cash flow that can go to savings and investments.
- Protection Against Collection: When court-approved debt discharge occurs, creditors are legally restricted from pursuing the debtor for collection purposes.
Debts That Can’t Be Eliminated in Bankruptcy
Although filing for bankruptcy with a debt attorney can offer debt relief, certain obligations will remain due to exemption regulations. A debtor will still have to repay certain debts as they are exempt from discharge under the ruling of bankruptcy courts. These include:
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Domestic Obligations (Child Support and Alimony)
If the court has ordered alimony and child support payments, they will remain non-exempt during a debt discharge for the financial stability of dependents.
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Debts Due to Fraudulent Activities
If debts arose from debtor misconduct due to fraudulent activities, embezzlement, or malicious or intentional damage to property, they will be non-exempt during a discharge.
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Debts Due to Intentional Harm
If debts arose from DUI accidents, intentional personal injury, or harm incidents, they will also be non-dischargeable during bankruptcy proceedings.
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Court-Ordered Restitution
If the court has ordered restitution in the form of penalties and fines for loss or damage to property, criminal convictions, or civil lawsuits, such debts will also be non-dischargeable.
Debts That Are Difficult to Eliminate in Bankruptcy
We discussed some debts that can’t be eliminated during bankruptcy proceedings. However, you can receive debt relief for others but with more difficulty. It could be due to state regulations, bankruptcy laws, compliance regulations, or stringent eligibility criteria. Here are a few:
Student Loans
The discharge surrounding student loans is a formidable challenge, as you will hear from even the most experienced bankruptcy lawyer. There’s a strict legal threshold that you must meet to qualify for a student loan discharge.
Income Tax Liability
If you’re seeking debt relief for income tax liabilities through bankruptcy proceedings, you will also face serious hardships in the process. You can seek help from an experienced bankruptcy attorney to navigate the complex eligibility criteria and legal restrictions to have income tax debts waived.
Impact on Credit Score
Although you will get debt relief with the discharge of certain debts, the process of filing bankruptcy itself can lower your credit scores.
In fact, certain non-dischargeable debts such as income tax liabilities, child support, domestic obligations, and student loans can continue to adversely impact your creditworthiness.
As a result, it becomes increasingly difficult for the debtor to secure favorable interest rates or access credit in the future.
Conclusion
In a nutshell, filing for bankruptcy can serve as a powerful strategy to eliminate rising debts while creating room for financial stability. However, the different structured approaches and debt relief options come with a set of limitations of their own.
By acknowledging the limitations and benefits of various debt relief options with the help of a bankruptcy attorney, you can make an informed decision for your financial life. Although filing for bankruptcy will not eliminate your debts entirely, it can make repayment more manageable.
So, don’t hesitate to reach out to a certified bankruptcy lawyer near you. You can consult professionals at Attorney Debt Fighters for further assistance.
