Different types of debt in bankruptcy
Bankruptcy law does not treat all debt equally. The point of filing for bankruptcy is to contain all types of debt to manageable levels. That means different things for different types of debt, however. Common types of debt that people look to discharge in bankruptcy include home loans, student loans, credit card debt, medical bills and tax debt. All of these debts are treated differently in bankruptcy.
An important factor in lowering debt through bankruptcy is what chapter the debtor files under. Under Chapter 7 bankruptcy, the filer gathers assets and sells them off in order to pay creditors. Once the assets are distributed, the remaining debt is forgiven, with a few exceptions. Under Chapter 13 bankruptcy, the filer creates a manageable repayment plan, one that often includes lowering interest rates and possibly some debt forgiveness.
Perhaps fewer things are more devastating than the potential loss of a home. Bankruptcy can resolve a debtor’s home obligation in various ways. In Chapter 7 bankruptcy, a home is sold off to pay creditors, but the remaining debt is forgiven. A Chapter 13 bankruptcy allows the debtor to keep the home provided the homeowner makes regularly monthly payments. Even after a Chapter 13 bankruptcy, the loan on the home is secured, meaning that the mortgage holder still has the right to foreclose on the home if the filer does not continue to make monthly payments. Chapter 13 will free up other debt in order to make home payments feasible.
Federal student loans, with rare exceptions, cannot be discharged through bankruptcy. In order for a federal student loan to be discharged the filer must prove undue hardship, such as a disabling medical condition, that can be a tough burden to meet. The good news is that there are forbearance options that may be useful to a bankruptcy filer and federal student loans generally have a lower interest rate than other types of debt. Private student loans can be discharged depending on the type of school the filer attended and the type of loan received.
Medical bills and credit card debt
Medical bills and credit cards are unsecured debt. That means nothing is attached to the debt that a creditor can take away, which is one of the reasons why credit card and medical debt often have high interest rates. Unmanageable credit card debt and unpaid medical bills are one of the most often cited reasons for bankruptcy.
Tax debt is not dischargeable through bankruptcy. However, the IRS will potentially work with a taxpayer on payment options, including low interest rates and low penalty fees. In some cases the IRS will agree to forgive a portion of the taxpayer’s debt if he or she agrees to pay the rest.
Contact a bankruptcy attorney
Bankruptcy is a complicated area of the law, and much more could be said about each type of debt involved in a bankruptcy proceeding. People considering bankruptcy should contact an experienced bankruptcy attorney to discuss their financial obligations and if pursuing bankruptcy is right for them.