Bankruptcy Tools Available to You

Bankruptcy discharges most debts but some debts will survive bankruptcy. Bankruptcy is a powerful tool that can be used to wipe out credit card debts and other debts but debts such as tax debts, secured debts, student loans, spousal support and child support will survive bankruptcy. These debts cannot be discharged in bankruptcy.

How Bankruptcy Can Help You

Before you file for bankruptcy you must understand what bankruptcy can do for you.

Debts

Bankruptcy will discharge your unsecured debts including credit card debts. Most credit card debt is unsecured. Sometimes you may have a secured credit card. In such cases, the creditor can repossess the collateral and sell it to recover the debt. However in the case of an unsecured debt, the creditor cannot repossess any of your assets to recover the debt. Bankruptcy is a great way to discharge credit card debts. Besides credit card debts, bankruptcy can help you discharge other unsecured debts.

If you opt for a Chapter 13, you must pay at least a portion of the unsecured debt to receive a discharge. In a Chapter 7 on the other hand, you need not pay anything. The unsecured creditors in a Chapter 7 bankruptcy will receive payments only if there is any money left after all the secured creditors are paid.

Automatic Stay

Once you file a bankruptcy petition, an automatic stay comes into operation by law. Your creditors and debt collectors cannot contact you. If they do, they will be violating the law. All collection activities including lawsuits against you will come to a stand still.

Liens

If a creditor has a lien on any of your property, then that creditor can repossess the property or properties on which he or she has a lien. However bankruptcy has certain provisions which enables you to discharge some or all of the liens.

Things That Bankruptcy Can’t Do For You

Secured Debts

Bankruptcy cannot prevent your creditors from repossessing the assets on which they have a lien. You may succeed in eliminating the debt by filing for bankruptcy but the filing will not prevent the creditor from repossessing the secured asset or collateral.

Spousal and Child Support Payments: Bankruptcy will not discharge your spousal and child support payments. You must continue to make the payments. If you have opted for a Chapter 13 bankruptcy, these payments must be included in your payment plan.

Student Loans

Student loans generally cannot be discharged in bankruptcy. However if you can demonstrate that paying back the student loan will result in undue hardship, you may get a discharge. Proving undue hardship can be a problem. Generally you must show that you cannot pay the student loan currently and there is little or no chance of you being in a position to repay the student loan in the future.

Tax Debts

Tax debts will generally survive bankruptcy. However if these debts are from years ago, you may be able to discharge them in bankruptcy if you meet certain requirements (that are generally hard to meet).

Other debts that survive bankruptcy: If you have not included any debts in your bankruptcy petition and the creditor does not become aware of your bankruptcy before it is over, these debts will not be discharged. Court ordered payments including judgments for injury or wrongful death, unpaid fines, traffic tickets and criminal fines are also not discharged in bankruptcy.

In a Chapter 7 bankruptcy, these debts will not be discharged and you will continue to be liable for them. In a Chapter 13 bankruptcy, you must pay them in full as part of your payment plan or else you will continue to be liable for them.

Even if a debt is generally dischargeable in bankruptcy, but the creditor manages to convince the judge that the debt should not be discharged, then that debt will survive bankruptcy.

Chapter 13

Chapter 13 has certain advantages over a Chapter 7.

Foreclosure

While Chapter 7 cannot stop foreclosure, Chapter 13 can stop foreclosure. If you included the mortgage payments in your payment plan and make the payments, you can stop the foreclosure and save your home.

Non-exempt property

The trustee will seize all your non-exempt property in a Chapter 7 proceeding. If you file a Chapter 13 bankruptcy, you continue to retain possession of your non-exempt property.

Lien stripping

Lien stripping is the reduction in the value of a secured claim to less than the value of the collateral. The lien is divided into secured and unsecured parts. The secured part is equal to the fair market value of the property. The other part is considered as unsecured. So the secured lien is worth $5000 but the market value of the collateral is $3000, then the secured lien is reduced to $3000 while $2000 will be unsecured and can be easily discharged.

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