What Can Bankruptcy Do For You And What Can It Not Do?

Bankruptcy is an effective tool for thousands of Americans who are struggling with all kinds of debts. However, it is important to know what type of debts bankruptcy can discharge you from (in other words what types of debts it can ‘free’ you from) and what type of debts are NOT discharged through bankruptcy. Bankruptcy is known for its ability to eliminate credit card debt & medical debts; however it cannot eliminate some types of debts including child support payments, tax liens & debts and other types of secured debts such as a mortgage loan.

What Can Bankruptcy Do For You?

Here is a list of things that bankruptcy can do for you, or the types of debts that it can eliminate.

i) Credit card debt & other unsecured debts

Bankruptcy is a very powerful tool for eliminating credit card debt simply because the creditor does not have a lien on any of your property and cannot repossess back any items if you fail to pay the credit card bills. In fact, bankruptcy was designed for this precise reason; to eliminate credit card debt for eligible candidates. Apart from credit card debts, you may also have other unsecured debts that can be discharged through bankruptcy. These typically include:

a. Cell/telephone bills
b. Collection agency dues
c. Department store credit cards
d. Health Club Memberships
e. Legal bills & lawyer fees
f. Magazine/Record Clubs Fees
g. Personal/payday loans
h. Unsecured lines of credit

ii) Stop Creditor & Collection Agency Calls & Harassment

Bankruptcy can stop creditor harassment such as disturbing or threatening phone calls or letters. Bankruptcy can also stop a creditor from repossessing your car or force foreclosure on your home. This is because as soon as you file for bankruptcy, your creditors will receive a letter from your bankruptcy trustee informing them of your bankruptcy filing and that if they want to try recovering some of their debts owed, they should contact the bankruptcy trustee directly.

iii) Eliminate Certain Types of Liens

A lien is the creditor’s right to snatch away some of your property by putting a lien or the ‘first right’ on the asset. For instance if you declare bankruptcy on your car loan, the manufacturer or dealership might put a lien on your car so as to have the right to repossess it; a bankruptcy filing can erase this lien.

What Bankruptcy Cannot Do For You

i) Prevent a Secured Creditor from Repossessing Your Property

Bankruptcy protection eliminates the unsecured debts mentioned above, however, debts that have put a lien on your property such as a mortgage lender putting a lien on your house cannot be discharged through bankruptcy. For other types of secured debts such as a line of credit, bankruptcy can erase the line of credit debt however cannot prevent the lender from recovering the money from you.

ii) Get Rid of Child Support & Alimony Payments

If you have obligations such as child support payments or alimony payments owing, you cannot get rid of such obligations by filing for bankruptcy; you will continue to owe these debts even after receiving your bankruptcy discharge. Also, it doesn’t matter whether you file chapter 7 or chapter 13 bankruptcy, you will still have a repayment plan made under Chapter 13 bankruptcy to repay this debt.

iii) Erase Student Loan Debts

Bankruptcy filing cannot erase student loans except in very rare cases. The only time bankruptcy can erase student loan debts is if repaying such a loan would cause the debtor ‘undue hardship.’ Experts suggest it is very difficult to show undue hardship when making student loan payments as usually the interest rates on these types of loans are very low and monthly payments are more affordable, as opposed to the interest rates charged on credit cards. To file bankruptcy on student loans, you must be able to show you simply cannot afford to pay the loan and that there is very little chance you would be able to pay in the future.

iv) Get Rid of Tax Obligations & Debts

The only way you can eliminate tax obligations through bankruptcy is by filing for chapter 7 bankruptcy, passing the ‘means test’ if your income is greater than the standard state median income and by meeting ALL of the below requirements:

a. `The taxes should be income taxes – Taxes other than income e.g. payroll taxes, tax penalties, unemployment insurance dues or pension plan dues cannot be discharged under bankruptcy.

b. You did not do fraud or tax evasion – If you filed a fraudulent tax return or tried to hide your incomes that would have forced you to pay taxes such as using a fake Social Security Number then your bankruptcy is disqualified.

c. The tax debt is at least 3 years old – To eliminate a tax debt, the tax return must have been due at least three years before you filed for bankruptcy.

d. You must file a tax return – You must have filed a tax return for the debt you would like to discharge at least 2 years before filing bankruptcy.

e. You must pass the 240 day rule – The income tax debt must have been assessed by the IRS at least 240 days before you file for bankruptcy. Or if this is not the case, then your tax return must not have been assessed yet.

By: Hashim Sumar

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Ahmed is a publisher at Chapter 7 bankruptcy. This site provides information on filing for chapter 7 bankruptcy, adversary proceedings & bankruptcy discharge, means test, who is eligible to file & lots more.