Can Bankruptcy Eliminate All of Your Debts?

Bankruptcy is often seen as a last resort for those struggling with overwhelming debt, but many people wonder whether it can truly wipe out all of their financial obligations. The reality is that while bankruptcy can provide significant relief, not all debts are eligible for discharge. Understanding which debts can and cannot be eliminated is crucial before making a decision about filing for bankruptcy.

Debts That Bankruptcy Can Discharge

Bankruptcy can eliminate many types of unsecured debts, including:

1. Credit Card Debt – Most credit card balances can be discharged through bankruptcy, whether they stem from regular purchases, cash advances, or balance transfers. This is especially beneficial for individuals who have accumulated high-interest credit card debt that has become unmanageable. However, any recent luxury purchases or fraudulent charges may not be dischargeable.

2. Medical Bills – Bankruptcy can wipe out outstanding medical bills, making it a viable option for those burdened by high healthcare costs. Many Americans face financial hardship due to medical emergencies, long-term illnesses, or surgeries that result in overwhelming medical expenses. Since medical debt is unsecured, it is fully dischargeable in both Chapter 7 and Chapter 13 bankruptcy.

3. Personal Loans – Unsecured personal loans from banks, credit unions, or payday lenders can typically be discharged. This includes loans taken out for emergencies, home improvements, or other personal expenses. However, loans obtained through fraudulent means, such as providing false information on applications, may not be eliminated.

4. Utility Bills – Past-due utility bills, including electricity, gas, water, and phone bills, can also be eliminated in bankruptcy. If you are struggling to keep up with these payments, bankruptcy can help prevent disconnections and give you a fresh start. However, utility companies may require a security deposit before continuing service after a bankruptcy filing.

5. Some Tax Debts – Certain income tax debts may be discharged, but they must meet specific criteria. The tax debt must be at least three years old, filed on time, and assessed at least 240 days before filing for bankruptcy. However, payroll taxes, tax liens, and recent income tax debts are generally non-dischargeable.

6. Lease and Contract Obligations – If you owe money on a lease or contract that you can no longer afford, bankruptcy can help relieve you of that obligation. This includes apartment leases, car leases, and service contracts. While you may be able to break the contract without further financial liability, the property may need to be returned if it’s a lease agreement.

Debts That Cannot Be Eliminated in Bankruptcy

While bankruptcy can offer relief, some debts remain non-dischargeable, including:

1. Student Loans – Federal and private student loans are rarely discharged unless you can prove undue hardship. This requires showing that repaying the loan would cause extreme financial distress, often through a separate legal process called an adversary proceeding. Most bankruptcy filers do not meet the strict criteria, making student loans difficult to eliminate.

2. Child Support and Alimony – These obligations cannot be eliminated through bankruptcy because they are considered essential financial responsibilities. Courts prioritize the well-being of children and ex-spouses, so bankruptcy laws ensure that these payments remain in place. Failure to pay child support or alimony can result in wage garnishment and other legal actions.

3. Certain Tax Debts – While some income tax debts may be dischargeable, recent tax liabilities and payroll taxes generally are not. Taxes owed to the IRS or state agencies within the past three years are usually considered priority debts and must be repaid. Additionally, any tax liens placed on your property before filing for bankruptcy will remain even if the underlying tax debt is discharged.

4.Court Fines and Criminal Restitution – Fines and penalties resulting from criminal activity, including traffic tickets and restitution orders, must still be paid. Bankruptcy laws do not allow individuals to escape legal consequences or financial penalties imposed by the court. This includes parking tickets, DUI-related fines, and other court-ordered fees.

5. Debts from Fraud – If you incurred debt through fraudulent means, the court may decide that it cannot be discharged. This includes obtaining loans or credit cards using false information, misrepresenting income, or making large purchases shortly before filing for bankruptcy with no intention of repayment. Creditors can challenge the discharge of such debts through an adversary proceeding.

6. Debts from Personal Injury Cases Involving DUI – If you caused injury or death due to driving under the influence, those debts cannot be discharged. Courts hold individuals accountable for reckless actions, and victims of DUI-related accidents must be compensated as determined by legal judgments.

Types of Bankruptcy and Their Impact on Debt Discharge

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common form. It can eliminate many unsecured debts quickly, often within a few months. However, it does not protect assets from being sold to repay creditors. If you have significant non-exempt assets, such as a second home, valuable collectibles, or investments, they may be sold to satisfy outstanding debts. Additionally, some debts, such as student loans and tax obligations, remain even after a Chapter 7 discharge.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy restructures debts into a repayment plan lasting three to five years. Some debts that cannot be discharged under Chapter 7 may still be reduced or made more manageable under Chapter 13. This option is often preferable for those who want to keep their assets while repaying a portion of what they owe. Chapter 13 can also help prevent foreclosure, catch up on missed mortgage payments, and reduce certain secured debts.

Is Bankruptcy the Right Choice for You?

Filing for bankruptcy is a significant decision that should not be taken lightly. While it can provide relief from many debts, it does not guarantee complete financial freedom. Before filing, consult a qualified bankruptcy attorney to discuss your options and determine the best path forward. A lawyer can assess your financial situation, explain which debts can be discharged, and help you choose between Chapter 7 and Chapter 13 bankruptcy.

Conclusion

Bankruptcy can be a powerful tool for eliminating certain debts and helping individuals regain financial stability. However, not all debts can be discharged, and filing for bankruptcy has long-term consequences. Understanding the types of debts that can be eliminated, the differences between Chapter 7 and Chapter 13, and the legal requirements involved is essential before making a decision. Consulting with an experienced bankruptcy attorney can provide clarity and ensure that you take the best course of action for your financial future.

At Padgett & Robertson, we help individuals navigate the complexities of bankruptcy to find the best solution for their financial future. If you’re struggling with debt and unsure whether bankruptcy is right for you, contact us today for a free consultation (251) 336-3695.