When you file for bankruptcy, does all of your debt disappear into thin air? Seems too good to be true, right? The answer is yes and no. For the most part, filing for bankruptcy as an individual completely erases your debts owed to creditors. There are exceptions in place, however, to protect certain types of debt from bankruptcy filings. There are also restrictions on who can file for bankruptcy and when they can do so.
So let’s start with the basics. Say you’re an individual who has never before filed for bankruptcy. You are upfront regarding the nature of your debts and the full amounts you owe, and you hide nothing from the eye of the court. If this describes your situation, then you are entitled to a discharge of your debts through bankruptcy. Bankruptcy is intended to help those who have fallen so far behind that it becomes impossible for them to recover and pay their debts back in full. Bankruptcy is meant to be a last resort option, however, as it carries with it serious consequences for your credit score and future borrowing abilities.
Even if you fit all the necessary criteria for a bankruptcy, this does not fully guarantee that all your debts will be relieved. No matter who you are and how much you owe, there are certain types of excepted debt that are very difficult and often impossible to simply write off. Most of the time, these exceptions are in place to protect those entitled to – or who rely upon – your payments to them. Some of the most common bankruptcy exceptions include unpaid taxes, missed child or spousal support payments, student loans, and court claims. If any of these applies to your situation, do not plan on getting out of these obligations. Due to their nature, discharge of such debts is rare.
There is also the matter of whether you intend to file for a Chapter 7 “straight bankruptcy” or a Chapter 13 “payment plan” bankruptcy. For more background on each, read my page about the differences between Chapter 7 and Chapter 13. For the sake of this post, the important distinction is that while Chapter 13 may give you more flexibility as to what debts you can discharge, it also takes more time to complete the bankruptcy filing. A Chapter 7 filing is completed relatively quickly because it wipes away your debt and you start fresh. A Chapter 13 bankruptcy takes between 3-5 years because it requires you do create a payment plan for some of your debts. In return, you are able to discharge several categories of debts that you cannot in Chapter 13, such as non-support obligation to a former spouse and some court-related obligations.
As you can see, bankruptcy cannot always simply discharge all your debts. As a system, bankruptcy can be very forgiving to those who simply need relief from insurmountable debt. But if your debt falls in some of the categories listed above, then bankruptcy may not be your best option. Whether or not your think your debt can be resolved through bankruptcy, you should consult a bankruptcy attorney. If you live in the Des Moines area – or anywhere in central Iowa – we’d love to meet with you and offer a free analysis of your situation. Give Marks Law Firm a call today.