Understanding Debt Types: What Gets Eliminated in Bankruptcy

Almost all consumer debt can be eliminated through bankruptcy. You can wipe out credit card bills, medical debt, personal loans, and more. Chapter 7 bankruptcy offers a true fresh start for people drowning in debt.

Some debts require special handling. Understanding how bankruptcy treats different debt types helps you make informed decisions about your financial future.

Unsecured vs. Secured Debt in Bankruptcy

What Is Unsecured Debt?

Unsecured debt isn’t tied to collateral. You borrow money without pledging property as security. Credit cards, medical bills, and personal loans fall into this category.

Lenders can’t automatically seize your belongings if you fall behind. But they can sue you, garnish wages, or damage your credit. Speak with a bankruptcy attorney for free to understand your options.

Chapter 7 bankruptcy eliminates most unsecured debt completely. The discharge gives you freedom from collection calls and lawsuits.

How Secured Debt Works

Secured debt uses collateral as backup. Your house secures your mortgage. Your car backs your auto loan.

Lenders can repossess property if you default. Secured loans offer easier approval and lower interest rates because of reduced lender risk.

In bankruptcy, you must choose. Keep the property and continue payments, or surrender it to the lender. The debt itself can be discharged, but the lien remains on the property.

Common Debts Eliminated in Bankruptcy

Credit Card Debt

Credit card debt qualifies for discharge in Chapter 7. Stop making payments once you decide to file. Your attorney can guide you on timing.

Many people file bankruptcy specifically for credit card relief. The discharge wipes out balances, interest, and fees completely.

Medical Bills

Medical debt overwhelms millions of Americans each year. Even with insurance, deductibles and copays add up fast.

Chapter 7 bankruptcy eliminates medical bills entirely. You can stop collection agencies from harassing you about healthcare costs.

Personal Loans and Payday Loans

Personal loans and payday loans both qualify for discharge. Payday loans trap borrowers with extremely high costs and aggressive collection tactics.

Bankruptcy stops collections permanently. You can eliminate these predatory debts and break free from the cycle.

Debts That Survive Bankruptcy

Priority Debts

Some unsecured debts get special treatment in bankruptcy. Priority debts include recent income taxes, child support, and alimony.

You can’t discharge these obligations. Chapter 13 lets you repay them through a structured payment plan.

Student Loans

Student loan debt is harder to eliminate than other debts. You must prove undue hardship through an adversary proceeding.

Courts examine your financial situation carefully. You need to show good faith repayment efforts before filing.

The process works like a lawsuit within your bankruptcy case. Many people hire attorneys for student loan discharge attempts.

Debts From Illegal Acts

Bankruptcy won’t erase debt from embezzlement or larceny. Courts protect creditors when fraud or theft created the debt.

Recent tax debt also survives bankruptcy. You must wait several years before older tax obligations become dischargeable.

The Automatic Stay: Immediate Relief From Creditors

The automatic stay activates the moment you file bankruptcy. Creditors must stop all collection activities immediately.

No more phone calls. No more letters. No wage garnishment or lawsuits.

The stay protects you until your case ends. Courts can lift it in certain situations, but most filers get complete protection.

Filing Bankruptcy After Debt Collection Lawsuits

When You’re Already Being Sued

You can file bankruptcy even with an upcoming court date. The automatic stay stops the lawsuit immediately.

Timing matters. File before your court date if possible. If you can’t, attend the hearing and inform the judge about your bankruptcy.

Contact the court clerk to explain your situation. They can advise you on proper procedures for your county.

Handling Judgments

Creditors can get court judgments against you for unpaid debt. Judgments allow wage garnishment and bank account levies.

Bankruptcy eliminates most judgments. The discharge wipes out your personal liability for the debt.

Judgment liens on property require extra steps. You may need to file a motion to avoid the lien.

Dealing With Debt Collectors

Your Rights Under Federal Law

The Fair Debt Collection Practices Act protects you from harassment. Collectors can’t threaten, deceive, or abuse you.

You have the right to validate any debt. Collectors must prove you owe the money before you pay.

Send a debt validation letter within 30 days of first contact. Collectors must stop collection until they verify the debt.

Negotiating Debt Settlement

You can settle debt for less than you owe. Collectors often accept partial payment to close accounts.

Negotiate over the phone first. Get any agreement in writing before paying.

Never give collectors bank account access. Send payments through methods you control.

Alternatives to Bankruptcy

Debt Management Plans

Debt management plans combine multiple debts into one monthly payment. Credit counselors negotiate lower interest rates with creditors.

Plans typically take 3-5 years to complete. Only unsecured debts like credit cards qualify.

A DMP won’t help if you have significant secured debt. Consider Chapter 13 bankruptcy instead.

Debt Consolidation

Debt consolidation rolls multiple debts into one loan. You get a single payment with potentially lower interest.

Balance transfer credit cards and consolidation loans are common options. Both work best with good credit.

Consolidation doesn’t eliminate debt. You still owe the full amount, just under different terms.

Credit Counseling

Credit counseling helps you understand your options. Nonprofit counselors review your income and debt situation.

They create personalized repayment plans. Services include budgeting help and debt management plan setup.

Counseling is required before filing bankruptcy. Choose an approved agency from the Justice Department website.

Rebuilding Credit After Bankruptcy

Understanding Your Credit Score

Your credit score reflects how you’ve used credit in the past. Scores drop after bankruptcy but recover over time.

Payment history carries the most weight. Credit usage, account age, and recent activity also matter.

You can rebuild credit within months after discharge. Small, consistent steps lead to improvement.

Using Secured Credit Cards

Secured credit cards require a cash deposit as collateral. The deposit becomes your credit limit.

You can keep secured cards through bankruptcy. They’re excellent tools for rebuilding credit after discharge.

Make small purchases and pay the balance in full monthly. Responsible use rebuilds your credit history quickly.

Regular, unsecured credit cards get canceled in bankruptcy. Start with secured options and graduate to better cards later.

Avoiding Common Mistakes

Don’t open too many accounts at once. Multiple applications hurt your credit score.

Avoid relying on credit for emergencies. Build a savings cushion instead.

Monitor your credit reports regularly. Dispute errors immediately to keep your reports accurate.

Special Considerations for Different Debt Types

Mortgage and Housing Debt

You can keep your home through bankruptcy if you continue mortgage payments. State exemptions protect equity in most cases.

Mortgage deferral helps if you’re experiencing temporary hardship. Lenders may waive late fees to help you catch up.

Second mortgages create complications. Lenders can foreclose, though it’s rare when homes are underwater.

Car Leases

Car leases aren’t debts in bankruptcy. They’re contracts to use property temporarily.

Continue payments if you’re current and want to keep the car. Give it back if you can’t afford payments.

Chapter 13 offers more flexibility for keeping vehicles. You can include lease payments in your repayment plan.

Attorney Fees

Most attorney fees qualify as unsecured debt. Bankruptcy discharges them like credit card bills.

Family court attorney fees are exceptions. Child custody and support case fees may not be dischargeable.

Your bankruptcy attorney’s fees work differently. You must pay them before filing in most cases.

Finding Affordable Legal Help

Bankruptcy Attorneys

You don’t need a lawyer to file bankruptcy. But legal help makes the process smoother for complex cases.

Many bankruptcy attorneys offer free consultations. You can get advice and learn about fees during this meeting.

State bar associations provide referrals to qualified attorneys. The National Association of Consumer Bankruptcy Attorneys also maintains directories.

Legal Aid Organizations

Legal aid provides free or low-cost help to qualifying individuals. Eligibility usually depends on income level.

Not all legal aid offices handle bankruptcy cases. Many have limited capacity and waiting lists.

Other factors like age or disability may affect eligibility. Contact your local office to learn about their requirements.

State-Specific Debt Collection Rules

Statute of Limitations

Each state sets time limits for debt collection lawsuits. The statute of limitations varies by debt type and location.

Credit card debt has a three-year limit in Alabama. Washington and Tennessee allow six years.

Debt doesn’t disappear after the statute expires. But creditors lose the right to sue you for payment.

Protected Income Sources

Social Security Disability Income generally can’t be garnished. Federal law protects these benefits from most creditors.

Exceptions exist for child support, alimony, and federal debts. Student loans and taxes can reach SSDI benefits.

Community property states handle debt differently. Creditors may pursue both spouses even if only one signed for the debt.

Taking Control of Your Financial Future

Bankruptcy isn’t right for everyone. But it provides powerful relief for people overwhelmed by debt.

Understanding your options empowers you to make smart decisions. You can eliminate most debts and start fresh.

Take action today. Speak with a bankruptcy attorney for free to explore your path to financial freedom.

The fresh start you need is within reach. Don’t let debt control your life any longer.