Does Bankruptcy Clear All Debt?
It depends on the types of debt you have and the kind of bankruptcy you file for, but in many cases, the answer is no. Some debts simply cannot be cleared by bankruptcy. Let’s take a look at different situations in which debt may remain post-bankruptcy.
What Is Bankruptcy and What Debts Are Not Discharged in Bankruptcy?
Bankruptcy is simply the process of declaring yourself unable to pay your debts and seeking the court’s help in rebooting your financial situation. We’ll start with a quick primer on the two main kinds of bankruptcy for most individuals, Chapter 7 and Chapter 13:
In Chapter 7 bankruptcy, the goal is to eliminate all debt if possible, but some kinds of debt will remain and need to be paid. (We’ll talk more about those later.) Because most debt is discharged, the filer’s non-exempt assets will be liquidated. However, most people do not have much in the way of non-exempt assets. Exempt assets include necessary items like a home or vehicle or retirement funds.
In Chapter 13 bankruptcy, the goal is to restructure debt and create a sustainable payment plan. Most assets are retained, but the filer needs to continue making payments for three to five years, or they may lose the assets they still carry debt on. In this type of bankruptcy, some debts may be discharged but most are not. The court will decide what the filer can reasonably pay based on their income and other factors, and some debt may be eliminated, but the rest will need to be paid back. For example, the court may dismiss 60 percent of your debt and expect you to pay the other 40 percent over five years. If you owe money on assets like your home or car, you will need to continue paying those bills to keep the assets. So in this situation, debts that can be erased through bankruptcy still may not be.
Now, let’s consider specific types of debt that are not dismissed in most cases:
Does Bankruptcy Clear Tax Debt? Can You File Bankruptcy on IRS Debt?
Generally, no. Most government debts, including those to the IRS or state tax agencies, are not discharged in bankruptcy. There can be exceptions to older tax debt when the tax returns were properly filed. You will need to continue making payments on them after your bankruptcy. Your Albuquerque bankruptcy lawyer can advise you on whether you have a chance at wiping out your tax debt, but in general, this is very unlikely. However, if you have a very high amount of tax debt, your attorney may be able to negotiate a more reasonable payment plan for you.
No. Federal legislation passed in 2005 added to existing laws from 1976 to put private loans on the list of educational loans that couldn’t be discharged in bankruptcy. Essentially any loan “for educational purposes” is exempted from bankruptcy filings, with a few exceptions (such as the loan exceeding the borrower’s cost of attendance, or the school not participating in a federal student aid program). However, if you can show that you are permanently disabled and unable to work, or that repaying the loan would cause undue hardship to you and your dependents, you can make a case for the loan balance to be dismissed. But there are fairly high requirements for both of these arguments, so in most cases, borrowers must pay back student loans even after bankruptcy.
Does Bankruptcy Clear Medical Debt?
Yes, most medical debt will be resolved with bankruptcy. In a Chapter 7 filing, medical debt is added to other unsecured debt and cleared. If the filer has any assets that can be liquidated, medical institutions will receive their share along with other creditors, and any remaining debt is erased. If you file for Chapter 13, your medical debt will be lumped with the other debts you need to pay back over time. However, if you have a large amount of medical debt, some of it may be dismissed due to your inability to pay.
What Debts Are Not Discharged in Bankruptcy Aside From Those Listed Above?
Child support and alimony are excepted from bankruptcy. Essentially, the law states that a person can’t avoid their responsibility to support their children or dependents simply by declaring bankruptcy. Any outstanding child support or alimony will still need to be repaid. Additionally, any legal fees or debt you were required to pay in a divorce judgment will remain as well. This requirement is designed to prevent a situation where a person dislikes a judgment in their divorce case, so they decide to declare bankruptcy to get out of paying what the court ordered.
The last kind of debt to survive bankruptcy is court-ordered restitution. If you were required to pay restitution to the court for any kind of crime, you will need to continue paying it.
New Mexico Financial & Family Law: Get Help From a Bankruptcy Attorney
Many people have questions about how bankruptcies work, how to get out of debt, and what the options are in their particular situation. You may be wondering if bankruptcy is the only solution or the best one for your circumstances. In many instances, there are other options, such as arranging a payment plan with creditors, but these can be difficult to carry out on your own. It’s hard to know what to say or do when a bill collector is on the line, or you get new mail threatening legal action over your debts every day. In these cases, a skilled bankruptcy attorney will have the knowledge and experience to navigate your unique challenges if you want to consolidate debt or negotiate a repayment plan.
At New Mexico Financial and Family Law, we know how stressful dealing with debt can be, and we want to help you find a solution. We’re happy to answer questions, explain the possibilities, and assist you with legal filings or other next steps once you’ve decided on the best course of action. Please contact us at (505) 503-1637 for a free consultation so you can start taking control of your finances again.