Understand the capabilities and boundaries of bankruptcy as a financial tool.
Bankruptcy can be an effective legal resource for individuals overwhelmed by debt, but it’s important to recognize its limitations when it comes to certain types of obligations.
Bankruptcy excels in clearing unsecured credit card debt; however, it may not provide a solution for debts such as child support, alimony, the majority of tax liabilities, student loans, and secured obligations.
For those grappling with severe debt challenges, bankruptcy can offer a significant remedy. Here’s what bankruptcy can achieve:
Eradicate credit card debt and other unsecured liabilities: Bankruptcy is adept at canceling credit card debt. Without a “secured” status, your credit card balance is unsecured, which means creditors lack collateral to claim if debts go unpaid. Such debts are the prime targets for elimination via bankruptcy. Furthermore, bankruptcy can dissolve additional unsecured debts.
Diminish or regulate creditor contact and collection efforts: Cessation of creditor harassment can result from bankruptcy. While stopping phone calls and letters may be achieved by simpler means, bankruptcy can be a shield against more serious actions, such as repossession or foreclosure, buying critical time to address a temporary financial setback.
Remove certain kinds of liens: Although a bankruptcy discharge clears direct debt obligations, liens on property may persist. Certain procedures in bankruptcy proceedings may allow for removing judgment liens on your property.
There are particular debts and obligations that bankruptcy cannot alleviate:
Preservation of property without payment fulfillment: While a bankruptcy discharge can terminate debts, liens remain unaffected. If a piece of property is under a secured debt, bankruptcy can relieve the debt, but it won’t stop property repossession. However, following the repossession, creditors cannot pursue further compensation.
Exemption from child support and alimony: These obligations are not affected by bankruptcy; they must be paid in full.
Elimination of student loans, except in rare circumstances: Only under extreme hardship can student loans be discharged through bankruptcy, which is exceptionally challenging to prove.
Discharge of most tax debts: Some tax debts can be eliminated in bankruptcy, but the qualifications are stringent and complex.
Non-dischargeable debts in bankruptcy: Certain debts will remain even after bankruptcy, such as debts not listed in your bankruptcy papers, damages from driving under the influence, fines and penalties for law violations, recent tax debts, and others.
While Chapter 7 has its uses, it cannot assist with the following scenarios where Chapter 13 can be useful:
Prevent mortgage foreclosure: Chapter 13 bankruptcy allows for the creation of a repayment plan to catch up on missed mortgage payments over a set period, thus averting foreclosure as long as you can demonstrate future income to support the plan.
Retention of nonexempt property: Choose Chapter 13 to keep valued nonexempt property by using income to fund a repayment plan rather than liquidating it.
Reduction of “cram down” secured debts: Chapter 13 can diminish a debt to the value of the property securing it, and the rest can be discharged as part of the plan. Limitations apply, especially for recently acquired properties or vehicles.
For additional support and legal guidance, reach out to James H. Wilson Law Firm at 804.740.6464. We’re here to clarify the potentials and limits of bankruptcy relative to your unique financial situation.