Even with what experts are calling a “financial recovery,” many debtors continue to struggle to meet their debt obligations. Whether it’s a severe medical crisis, unemployment, or simply the rising costs of goods and services, you may have debts you simply cannot pay.
Recently on our bankruptcy forum a user asked, “I have substantial debts including thousands of dollars in medical bills, a house payment, and car loan I cannot afford. Can I discharge these debts in bankruptcy, and if not, what are my other options to start over?”
Discharging debts and bankruptcy
First, it’s important to understand what bankruptcy will and will not do for you. Let’s take a closer look at secured and unsecured debt discussed by this debtor and determine whether Chapter 7 is the best option.
Unsecured debts and bankruptcy
Debts can be unsecured, which means they are not secured by assets which can be repossessed and sold to repay the debts (i.e., medical debts, credit card debts, and personal loans), or they can be secured debts (i.e., car loan and house loan), and if the debtor fails to make timely debt payments the creditor has the legal right to reclaim the asset and use the proceeds from the sale to repay the debt.
Now, what will happen if this debtor decides to file Chapter 7 bankruptcy? Most unsecured debts can be discharged in Chapter 7 bankruptcy. This includes unsecured personal loans, credit card debts, and medical bills. Therefore, this debtor could potentially discharge their credit card debts by filing Chapter 7 bankruptcy.
Unsecured debts not discharged
There are some unsecured debts, however, which are not discharged so whether or not Chapter 7 is right for another debtor will depend on the types of unsecured debts they owe. Common debts not discharged include:
- Unpaid child support obligations
- Unpaid spousal maintenance
- Recent federal and local taxes
- Student loans (unless the court determines they pose an undue hardship)
- Government-imposed restitution, fines, and penalties
- Court fees
- Debts not listed on the bankruptcy forms
- Debts not dischargeable due to debtor’s fraud
- Debts for willful and malicious injuries to person or property,
- Debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated
- Debts owed to certain tax-advantaged retirement plans
- Debts for certain condominium or cooperative housing fees
Car loan and bankruptcy
Now, back to our debtor in question. He also asked whether he could discharge secured debts such as a car loan or home mortgage. Chapter 7 bankruptcy does not discharge secured loans. If a debtor has secured debt obligations that they can no longer afford, such as a house or a car loan, the debtor needs to contact their creditor and discuss their options.
The creditor may allow them to surrender the car back to the lender, allowing the car lender to sell the car and generate sufficient money from the sale to repay the car loan. If they cannot sell the car for the full value of car loan, however, there may be a deficiency balance. The good news is this car loan deficiency judgment is an unsecured debt which may, under certain conditions, be discharged through Chapter 7 bankruptcy.
What about mortgage debt for the house?
There are different strategies which can be investigated to protect a debtor’s home in bankruptcy or to pay mortgage payments in arrears through a Chapter 13 bankruptcy repayment plan. Discuss all of your options with a bankruptcy lawyer.
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