How Does Bankruptcy Wipe Out Debt?

Bankruptcy laws were enacted to give honest debtors a legal way to remove liability for certain debts that otherwise could not be repaid. These debts, when erased or “wiped out”, are said to be discharged.

When a debt liability is discharged, the record of the debt and the amount of money owed is replaced with a record stating the debt was discharged in a chapter 7 or chapter 13 bankruptcy.

Types of Debt

In general, there are three categories of debt in a bankruptcy case, and each is treated differently.

Secured Debt

Secured debts are those that are back by some type of asset or property. The most common types of secured debts are car and real estate notes (mortgages).

In a typical chapter 7 bankruptcy, these debts are not discharged, and instead, the debtor is given some options to keep the property and maintain the liability for the debt.

Priority Unsecured Debt

Unsecured debt is that which is not backed with a lien on some property. Priority unsecured debts are those unsecured debts that will also not be discharged by a bankruptcy, and the debtor will still have the legal obligation to repay them after a bankruptcy case.

The most common priority unsecured debt are as follows:

• Tax Liabilities
• Family Support Obligations (Spousal and Child Support)
• Student Loans

While most bankruptcies will not eliminate these debts, in some cases where the attorney can show that the repayment of the debt would be an undue hardship on the debtor, the bankruptcy court may reduce or eliminate the debt. However, proving an undue hardship is difficult, and usually only happens when the debtor is elderly, disabled, or otherwise unable to earn money in the future.

Non-Priority Unsecured Debt

The remaining unsecured debts are said to be non-priority and will be wiped out by the bankruptcy discharge. These include:

• Credit Card Debt
• Personal Loans
• Medical Bills/Expenses
• Unpaid Debt for Services Rendered

For most bankruptcy petitioners, the two biggest sources of debt are credit cards and medical bills, both of which are discharged in the bankruptcy, freeing the petitioner of any obligation the ever repay them.

When to Seek Legal Help

If you are facing large debts which you are struggling to repay, then you might want to set up a consultation with a bankruptcy attorney. Many of these attorneys also offer debt settlement services for those debtors whose liabilities do not warrant a bankruptcy case, so it’s a good way to get sound advice regarding options for legally eliminating many debts, and getting a financial fresh start.