Filing bankruptcy can get rid of debts. However, it is important to understand how types of debt in bankruptcy are handled. You can get rid of some types of debt in bankruptcy without paying another cent to the creditor. However, other types of debt do not go away when you file for bankruptcy relief.
The Types of Debt in Bankruptcy
The three basic types of debt in bankruptcy are:
Unsecured Debts Definition
Creditors holding unsecured debts do not have collateral securing the money you owe. If the creditor wants to collect an unsecured debt, the creditor must file a debt collection lawsuit. After obtaining a judgment, the creditor can take additional actions to collect the debt. Depending on the laws in your state, a creditor could garnish your wages or seize assets. Most states exempt a portion of wages and property from being subject to garnishment or seizure.
Examples of unsecured debts include:
- Credit cards
- Medical debts
- Personal loans
- Old utility bills
- Most judgment debts
- Old rent and lease payments
Most unsecured debts are dischargeable in Chapter 7 and Chapter 13. Student loans are unsecured debts, but most student loans are not eligible for discharge (debt forgiveness) in bankruptcy.
Unsecured Debts in Chapter 7 and Chapter 13
Most unsecured debts are dischargeable in Chapter 7. Creditors holding discharged unsecured debts cannot try to collect the debt.
In Chapter 13, unsecured creditors receive a portion of what you owe through the Chapter 13 plan. For example, if your Chapter 13 plan calls for a 10 percent payment to unsecured creditors, each unsecured creditor who files a valid proof of claim receives a payment equal to 10 cents per dollar.
When you complete your Chapter 13 case, the remaining amounts owed to unsecured creditors are discharged. Your legal liability for the debt is forgiven. Unsecured creditors who did not file a proof of claim cannot try to collect the debt after you receive your Chapter 13 bankruptcy discharge.
For student loans, you continue to owe the student loans after your bankruptcy case closes. During a Chapter 13 bankruptcy, you are not required to pay your student loan payments unless you choose to do so.
Priority Unsecured Debts
These types of debt in bankruptcy receive special treatment. Priority unsecured debts are not eligible for a discharge in bankruptcy. If you file a Chapter 7 case, you continue to owe unsecured priority debts even after you receive a discharge.
Examples of unsecured priority debts include:
- Back alimony or child support payments
- Most debts owed to the government
- Judgments related to DUI accidents
- Most tax debts
- Administrative costs of the bankruptcy case
- Restitution in criminal cases
You must pay these types of debt in bankruptcy in full if you file under Chapter 13. Your Chapter 13 plan must include enough money to pay unsecured priority debts in full.
Tax Debts in Chapter 7 and Chapter 13
Some old income tax debts can be discharged in bankruptcy. If the debt meets specific requirements, you can discharge the debt in full in Chapter 7. In Chapter 13, the old income tax debt is treated as a general unsecured debt. Therefore, you only pay a percentage of the debt to get rid of the entire debt.
A bankruptcy lawyer can review the tax debt to determine if it meets the requirements for a discharge in bankruptcy.
Secured debts have collateral that secures the payment of the debt. When you borrowed the money, you pledged property that the creditor could seize if you do not repay the debt. Mortgages and car loans are the most common examples of secured debts. If you do not pay the loan payments, the creditors can foreclose to take your home or repossess your vehicle.
The property is sold, and the money is applied to the loan. If the proceeds from the sale of the property do not pay the loan in full, the creditor can seek a deficiency judgment. A deficiency judgment could result in wage garnishment, depending on the laws in your state.
Secured Debts in Chapter 7
A Chapter 7 case discharges your legal liability to repay the debt. However, it does not remove the lien. Therefore, if you want to keep the property, you must pay the loan payments.
In some cases, a lender may agree to let you catch up back payments if you sign a reaffirmation agreement. However, by signing a reaffirmation agreement, you agree that the debt is not discharged. If you fail to make the payments, the creditor can seize the asset and request a deficiency judgment.
If you choose to surrender the asset through Chapter 7, the creditor cannot pursue a deficiency judgment. Therefore, if you owe more on your car or your home than it is worth, you can get rid of the debt without fear of a deficiency judgment by surrendering the property in a Chapter 7 case.
If your car is worth less than you owe on the loan, you could redeem. However, to redeem the property, you must pay an amount equal to the fair market value to the creditor in one lump sum. It can be tough to come up with a large sum of money to redeem the property.
Secured Debts in Chapter 13
Secured debts in a Chapter 13 case are handled differently depending on the type of debt. Mortgage arrearage (past due mortgage payments) is paid through the Chapter 13 plan to prevent foreclosure. If you owe more on your first mortgage than your home is worth, you might be able to value a second mortgage at zero. If so, the entire debt owed to the second mortgage holder becomes an unsecured debt.
Car loans may be paid through a Chapter 13 plan. Spreading out car loan payments over 60 months can make it affordable for you to keep your car. Depending on how long you have owned the vehicle, you might be able to lower the amount you owe on the secured portion of the loan, thereby lowering the amount you owe to pay the loan in full.
You may surrender collateral in Chapter 13, as you do in Chapter 7. Any money owing on the loan after the property is sold becomes an unsecured debt. The creditor cannot seek a deficiency judgment if you complete your Chapter 13 plan.
Are You Considering Bankruptcy to Get Out of Debt?
You can also use our free Chapter 13 calculator to estimate how much a Chapter 13 plan payment would be if you filed under Chapter 13. We can help you find a bankruptcy lawyer near you that offers free bankruptcy consultations. You can get the advice you need free of charge.
If you want to explore non-bankruptcy options for getting out of debt, try our Savvy Method or learn more about debt settlement and debt consolidation.
Do you still have questions about the types of debt in bankruptcy? Call 833-272-3631 now to speak with someone.