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What kinds of debts are eligible for discharge in bankruptcy?

On Behalf of | Feb 15, 2023 | Bankruptcy

The biggest benefit of filing for bankruptcy is typically the discharge of an individual’s or business’s debts. After the successful completion of bankruptcy proceedings, the courts will grant a discharge to the filer. This discharge absolves the filer of any legal obligation to repay the unsecured debts affected by the process.

The more unmanaged unsecured debt that you have, the more you may benefit from filing for bankruptcy. However, not all debts are eligible for discharge in bankruptcy proceedings, so it is important to consider your own debts carefully before committing to a plan of action.

Most unsecured debts are eligible for discharge

You can generally classify your financial obligations into two primary categories. There are secured debts, like mortgages, that have valuable collateral property attached to them. Lenders can make a claim against those assets if someone breaks their payment arrangements. You will usually need to reaffirm such loans if you want to keep the collateral property after filing for bankruptcy. Although, you could also potentially renegotiate the terms of your loan while the automatic stay remains in effect.

Unsecured debts, on the other hand, are not attached to any property that serves as collateral. Credit cards and hospital debts are examples of unsecured debts that you can discharge through bankruptcy. However, there are certain kinds of unsecured debts that are not eligible for discharge. Student loans are only dischargeable in very specific situations involving long-term hardship and inability to repay the loan, for example.

You also typically can’t get rid of tax debt in bankruptcy, although there are certain exceptions made for older tax debts. You also will not be able to discharge past-due payments related to child support or alimony. If you have judgments against you due to criminal activity, like fraud, those debts likely won’t be included as part of your bankruptcy at all. Finally, any debts you fail to include in your bankruptcy paperwork won’t be eligible for discharge.

Bankruptcy still helps even when it doesn’t clear all debts

Although filing for bankruptcy won’t automatically absolve you of all debt-related obligations, it can help you reduce your total debt and rework your budget. You may have an easier time making payments on the debts you can’t discharge after eliminating some of the other pressures on your budget.

Evaluating your personal circumstances to determine if the discharge from a bankruptcy filing will fully resolve and/or restructure your most significant debts can help you determine whether a personal bankruptcy filing is the right solution for your circumstances.