If you're considering bankruptcy, you're likely feeling overwhelmed with financial stress, and the thought of wiping the slate clean might feel like your only path forward. Understanding what debt bankruptcy can and cannot clear is an essential step before making this life-altering decision. Let's take a closer look at how filing for bankruptcy works and what types of debt it addresses.
Understanding Bankruptcy
Bankruptcy is a legal process designed to help individuals or businesses who cannot pay their debts. It provides an opportunity to either eliminate certain debts entirely (Chapter 7) or reorganize and repay them over time (Chapter 13). The ultimate goal is to give people a fresh financial start while ensuring creditors receive fair treatment.
However, bankruptcy is not a one-size-fits-all solution, and it does not clear all debts. Knowing which debts could be cleared and which might remain is crucial to setting realistic expectations.
Debts That Bankruptcy Can Clear
When you file for bankruptcy, several types of debts can typically be discharged, meaning you are no longer legally obligated to pay them. These include:
- Credit Card Debt - One of the most common types of debt discharged in bankruptcy is unsecured credit card debt.
- Medical Bills - Bankruptcy can help erase overwhelming medical expenses, alleviating financial strain.
- Personal Loans - Unsecured personal loans may also qualify for discharge.
- Utility Bills - Past-due utility payments, such as water, electricity, or gas, may be erased in bankruptcy.
- Certain Lawsuit Judgments - Debts resulting from specific lawsuit judgments, except those involving fraud or malicious behavior, may be forgiven.
If these sound like the debts you're struggling with, bankruptcy could help provide much-needed relief.
Debts That Bankruptcy Cannot Clear
While bankruptcy effectively eliminates many forms of debt, some obligations remain even after the process is complete. These include:
- Student Loans - Generally, student loans are not discharged in bankruptcy unless you can prove undue hardship, which is a difficult standard to meet.
- Child Support and Alimony - Domestic support obligations like child support and alimony cannot be eliminated.
- Most Tax Debts - Certain tax debts, especially recent ones, are not dischargeable.
- Debts from Fraudulent Activity - Debts incurred through fraud or malicious acts, such as certain court-ordered damages, cannot be discharged.
- Fines and Penalties - Government-imposed fines or penalties, including criminal restitution, must be paid.
- Secured Debts You Want to Retain - If you want to keep secured assets like your home or car, you’ll need to continue making payments on those debts.
Understanding which debts will remain can help you prepare and determine if bankruptcy is the right choice for you.
Types of Bankruptcy and Their Impact on Debt
Chapter 7 Bankruptcy
Often referred to as “liquidation bankruptcy,” Chapter 7 involves selling certain non-exempt assets to repay creditors. Once this process is complete, eligible debts are discharged. It’s a quick and effective way to resolve unsecured debts, but you may risk losing some property.
Chapter 13 Bankruptcy
This is also known as “reorganization bankruptcy.” Instead of erasing debts outright, Chapter 13 allows you to create a repayment plan based on your income. This type is ideal for individuals who want to keep their assets, such as a home or car, while making manageable payments over three to five years. At the end of the repayment period, qualifying remaining debts can be discharged.
Is Bankruptcy Right for You?
Filing for bankruptcy can be a powerful tool if you're drowning in debt, but it’s not a decision to be taken lightly. Before proceeding, ask yourself:
- Do most of my debts qualify for discharge under bankruptcy?
- Am I willing to part with non-exempt property through Chapter 7?
- Do I have enough income to commit to a Chapter 13 repayment plan?
You may also want to consult a bankruptcy attorney to discuss your options and understand how bankruptcy laws in Colorado will impact your case.
Moving Toward Financial Freedom
Filing for bankruptcy is a personal and often emotional decision, but it can also mark the beginning of a hopeful new chapter. By understanding what debts bankruptcy clears and how the process works, you can move forward with clarity and confidence.
Need guidance? Wagner Law Office, P.C. in Colorado is here to help you take that first step. Our experienced team offers personalized support, empowering you with the knowledge to reclaim control over your financial future.
Contact us today to learn more about Chapter 7 bankruptcy. We're here to help you explore your options and take the next steps with confidence.
Take the first step toward a brighter financial future. Reach out to us at (303) 536-5124 today.