Does Bankruptcy Clear All Debt?
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Does Bankruptcy Clear All Debt?
Bankruptcy is an area of the law riddled with many myths and misconceptions. One of the most common misconceptions is that when you file for bankruptcy, ALL your debts will be cleared. This isn't entirely false, although the answer should really be, "it depends." For many people that choose a bankruptcy filing, they will likely discharge their debt through bankruptcy, and will no longer be liable to pay them. There are, however, circumstances that make some debts not dischargeable in bankruptcy. In this article, we'll seek to answer the question: does bankruptcy clear all debt?
What is the Bankruptcy Discharge and How Does It Work?
A bankruptcy discharge comes at the end of your bankruptcy case. It is an order signed and entered by the judge that declares your debts nonenforceable. In other words, creditors are legally prohibited from attempted to collect or otherwise enforce the debt against you.
So, for all practical purposes, once the discharge order is entered, you are no longer legally obligated to pay your creditors. A bankruptcy discharge is a powerful tool that lets you start over with a fresh financial slate. The discharge is the key to your financial fresh start, since it allows you to get rid of your debt moving forward.
Generally speaking, unless a debt is declared nondischargeable (either in the bankruptcy code or by a court order), the discharge operates to discharge the debt.
Unsecured Debts vs Secured Debts: Why Does the Type of Debt Matter?
Now that you understand the power of the bankruptcy discharge, it's important to understand the difference between unsecured debts and secured debts. An unsecured debt is a debt where only your personal liability exists. In other words, the debt did not have any collateral pledged to make sure the debt is paid. For instance, credit card issuers generally make their decision to give you a credit card based on your credit application. You don't have to pledge any property to make sure you pay the account.
If you have a credit card from a department store, it's probably an unsecured credit card. That means that if you don't pay it back, their only recourse is to sue you personally. The credit card company can't take anything from you — they can't take your car or house, for example, in satisfaction of the debt. Other common types of unsecured debts include medical debt, unsecured personal loans, payday loans, and debt consolidation loans.
Secured debt, on the other hand, is a debt obligation where you did pledge some kind of property as collateral to get the credt. Common examples of secured debt include car loans (the car note is secured by the car), mortgages and home equity lines of credit (the debt is secured by a lien against the real estate). In these cases, if you default on the loan, it means that the creditor has the right to repossess the property to try and satisfy the loan (repossession in the case of a car, foreclosure in the case of real estate).
What Happens to Credit Card Debt in Bankruptcy?
Some recent data suggests that, the average household in the United States carries more than $15,000 in credit card debt. For manypeople, that debt will never disappear. It's tough enough to keep making minimum monthly payments (since often the high interest rates build up faster than people can pay).
Fortunately, most debts incurred using credit cards is unsecured debt. That means there is no property pledged that a creditor can seek to recover to satisfy the debt.
For most people, unsecured credit card debt is dischargeable in bankruptcy. One thing to keep in mind is you don't want to use any credit in the months leading up to filing bankruptcy. Stop using your credit cards or any unsecured loans as soon as you can, and maybe try to make payments to lower your credit card balances to the extent you can.
What Happens to Student Loan Debt in Bankruptcy?
Many people ask what happens to student loan debt in bankruptcy. The answer is not as simple as you may think. The short answer is "no", student loans are generally NOT dischargeable in bankruptcy, but that's not the end of the story.
The Bankruptcy Laws have contained in them a section that defines certain kinds of debts which are non-dischargeable. For one reason or another, the legislature believed that these kinds of debt should remain enforceable even after a person has filed for bankruptcy relief. One of those classes of debts is for student loan debt.
The law defines what qualifies as school loans. Student loans are generally unsecured debt. Unfortunately, for most people like you and I, school loans are defined broadly, so only a small number of student loans may be discharged in bankruptcy. In some states, however, a bankruptcy debtor may apply to the court for an undue hardship discharge of their student debt. The way this is applied varies around the country, so be sure to look into how your bankruptcy courts evaluate undue hardship of student loan debt.
What Happens to Car Payments In Bankruptcy?
A car can be a great investment, but sometimes circumstances arise that make continuing to pay for that car a challenge. Sometimes it was a bad deal. Sometimes there is a change in your circumstances. Whatever the reason, bankruptcy may be a good way to deal with unmanageable car payments.
Most car payments will fall under one of two arrangements: you are either leasing the car or you are financing the car.
If you are leasing the car, you don't have an ownership interest in the car. You are simply leasing it, pursuant to a lease contract. Fortunately, leases are really easy to deal with in bankruptcy. You can choose to reject the lease - return the car, stop payments, and you're not liable for the balance of the lease - or you can assume the lease - keep the car, and keep making the payments under the lease.
If you are financing the car, it's only a little more complex. Since you are financing the car, you have an ownership interest in it, so the car's value will come into play in a bankruptcy case. When you file bankruptcy and get the discharge, your personal liability under the loan is discharged. The car loan, however, is a secured debt - meaning you pledged the car as collateral against the car loan, and the bankruptcy discharge doesn't affect the status of that security lien against the car. So, generally, your options with car loan debt in bankruptcy will be:
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reaffirm the debt: keep the car, and enter into a reaffirmation agreement that reinstates your personal liability;
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surrender the car, and there's no further liability under the car loan; or
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redeem the car: pay off the balance you owe in one shot.
What Happens to Mortgages in Bankruptcy?
If you’re considering filing for bankruptcy, you may be wondering what will happen to your mortgage. After all, your home is likely your biggest asset, and it means a lot to you. Fortunately, filing for bankruptcy protection is an option for many homeowners.
Similar to a car, a mortgage or a home equity line of credit is a secured debt. Thus, you pledged the real estate as collateral under the loan. If you default on your mortgage, the creditor has a right to seek to foreclose on the property to collect the debt.
If you file bankruptcy, the discharge would terminate your personal liability under the note, but does not impact the creditor's rights under the security agreement. Here in NY, provided that you continue making timely monthly payments of your mortgage after bankruptcy and you're not in default, the lender will not foreclose.
If you filed bankruptcy and obtained a bankruptcy discharge, the lender may foreclose on the property, but would not be able to sue you for a deficiency judgment (a deficiency exists when the property sells at auction for less than what you owed, so there still remains a debt even after a foreclosure sale).
What Happens to Income Tax Debts in Bankruptcy?
Bankruptcy is a common approach to wiping out debts when you can't pay them off. If you run into financial trouble, you may be wondering if bankruptcy will be able to wipe out your income tax debt.
This is another type of debt where the answer is, "it depends." While the bankruptcy laws state that unpaid taxes are not dischargeable, the laws spell out a definition of which unpaid taxes qualify. There are tests that you must run your tax debts through to determine whether they may be dischargeable. If the particular debt does not fall squarely in the definition found in the law, then that tax debt will be dischargeable in bankruptcy.
It's highly recommended that if you are thinking about for unpaid incomes taxes or similar tax debts, that you consult with a bankruptcy attorney to evaluate your case.
What Happens to Domestic Support Obligations in Bankruptcy?
If you are considering filing for bankruptcy, you are probably wondering what will happen to any domestic support obligations that you may owe, such as child support or spousal maintenance. (If you live in a community property state, your spouse may also have a claim.)
WIthout beating around the bush, domestic support obligations are not dischargeable in bankruptcy. In the section of the bankruptcy laws that define the types of debt that are not dischargeable, the law states, "any debt - for a domestic support obligation." Thus, you can safely assume that any debt you owe that is a domestic support obligation (like court-ordered child support or maintenance) is not dischargeable in personal bankruptcy proceedings.
What Can Creditors Do If A Person Declares Bankruptcy?
Bankruptcy is a legal procedure that allows an individual with debts to receive a discharge of those debts, effectively making those debts unenforceable. A creditor, however, may have the right to object to the dischargeability of their respective debt. For instance, a creditor may go to court and seek a declaration that you obtained that credit under fraud, which would make the debt nondischargeable. Another more common example (such as with student loan debt), the creditor will go to court to seek an order declaring that the debt owed to them falls within the nondischargeable debt categories found in the bankruptcy laws.
As mentioned previously, the discharge in bankruptcy can be thought of to discharge all debts unless there is a law or a court order that says the discharge does not apply to that particular debt.
What to do if you are looking for a Queens Bankruptcy Lawyer That Has Experience With the Bankruptcy Laws?
Don't put it off any longer! If you're looking to hire a bankruptcy lawyer in Queens, contact the Law Office of Richard Kistnen through the contact info below, or you can click here to schedule your no-obligation consultation right now!
Law Office of Richard Kistnen, 128-22 Rockaway Boulevard, South Ozone Park, NY 11420
Tel.: (718) 738-2324
Email: [email protected]