Many people believe bankruptcy will eliminate all of their debts. For those with credit card debt or medical debt, this would be true. However, you cannot discharge certain debts through bankruptcy. Furthermore, while Chapter 13 allows you to place arrears, or overdue payments, into your repayment plan, the underlying debt itself will not be discharged when the bankruptcy is complete.
Let’s take a closer look at these issues. In a Chapter 13, you cannot discharge the following:
- Current or future child and spousal support payments
- Home mortgages or other long-term secured obligations extending beyond plan terms
- Restitution requirements and other criminal fines
- Student loan debt or debt payments
- Debts secured by collateral such as a car or your home
Despite these restrictions, you may still benefit from filing Chapter 13. Here’s why.
Secured debt vs. unsecured debt
In bankruptcy, you’ll quickly discover that there are many ways to classify debt. Secured debts are those where a material asset, like your car or your home, “guarantees” the loan. This means that if you fall behind on your payments, the lender can repossess your car or foreclose your property for nonpayment.
Unsecured debts are those where you have simply borrowed money without any sort of collateral exchange. Most credit card balances and medical bills are unsecured debts. Any unsecured debts included in a Chapter 13 plan will be discharged once the plan period is complete.
So what can you do with Chapter 13?
One of the benefits of a Chapter 13 plan is that you can place your arrears on secured debts within your repayment plan, as long as you pay them all back by the time the plan ends. For example, most car loans are considered secured debt. When you file Chapter 13, the creditor cannot repossess your car and you could place the overdue payments within your repayment plan. Therefore, you get caught up on your payments and get to keep your car.
You will have to keep up with the car payments once your plan ends. However, now that any unsecured debts will have been discharged, you can continue making those payments on time and in full, without the constant worry of multiple debts hanging over you.
Once you make the decision to file bankruptcy, it’s critical that you contact an experienced bankruptcy attorney to determine if Chapter 7 or Chapter 13 is the right option for you. Your attorney will look at your entire financial picture and help you create a short- and long-term strategy for how to take back control of your finances.