The first point of discussion here is that filing for bankruptcy does not guarantee you a discharge of your debts. The court needs to review each case individually to prevent any form of bankruptcy fraud or preference actions.
If you file for a Chapter 7 bankruptcy this will eliminate your legal responsibility to repay unsecured debts, and creditors are prevented from contacting you again in relation to such debts.
Chapter 13 bankruptcy means that you agree to a repayment plan, over a period of several years, where your creditors will be repaid at least some of the money due to them.
Both Chapter 7 and Chapter 13 bankruptcies come with something called an automatic stay, which prevents your creditors from repossessing any of your property while you’re filing for bankruptcy. This gives you the breathing room you need to properly organize your personal finances.
Secured vs. Unsecured Debt
The next thing to discuss is that the average person will have two different forms of debt: secured and unsecured.
Put simply, a secured debt is one that is tied to a material possession such as a home by a mortgage, or your car via an auto loan. Your car or home acts as a security towards the debt in the event that you default on your payments.
Unsecured debts, on the other hand, are not backed by any material possession, so if you default on your payments your creditors will then need to pursue you for them. Credit card debt is the most typical form of unsecured debt in the United States, with the average citizen carrying a debt burden of $6,375.
The next differentiation to make is between dischargeable and non-dischargeable debts. This is usually where people filing for bankruptcy stumble, misunderstanding the key differences between them.
Non-dischargeable Debts
The most common types of non-dischargeable debt are student loans, child support, and reaffirmed debts. A reaffirmed debt is one that you have voluntarily offered to repay for the duration of that financial agreement so that you can retain possession of that item, e.g. your car. What you need to understand about a reaffirmed debt that is that if you are to default on the repayments for that – it cannot be discharged in any future bankruptcy filing.
Other non-dischargeable debts include monies owed by you to another person as part of a personal injury claim, any fines or penalties you\’ve received for breaking the law, debts incurred through fraud, or any IRS tax debts within the last three years. If you forget to list a debt on your bankruptcy filing then this will also become non-dischargeable because of your omission.
On the subject of non-dischargeable debts incurred through fraud, these will include any purchases in excess of $1000 made within 60 days of filing a petition, and this includes any form of loan or cash advance.
Please also bear in mind that if you file for Chapter 7 bankruptcy you will still need to deal with any secured debt after your bankruptcy ends, including any arrears owed to your creditors.
The reality is that there will be certain debts which remain at the end of a bankruptcy, so you need to plan in advance to tackle those when the time comes. The fact that you’ve had a large portion of your debt burden discharged will leave you with additional income with which to repay other outstanding debts, which is where your focus should be.
It is essential that you get professional legal counsel before declaring bankruptcy so that you understand the legal ramifications of the entire process.
Contact an experienced bankruptcy attorney today, and you can begin your journey to financial health again.