Discharge of Debt by Bankruptcy
The most appealing aspect to filing for bankruptcy is the potential for a discharge of all or part of one’s debt. Obviously, whether a debt is dischargeable in full or in part depends largely on what type of bankruptcy the debtor files for. Some of the most common types of debts that can be discharged in bankruptcy are as follows:
Credit cards are the most common examples of unsecured debt. Generally, credit card debts incurred prior to the filing of bankruptcy is at least partially dischargeable under Chapter 13 bankruptcy and totally dischargeable under Chapter 7 Bankruptcy. However, credit card companies may file an objection to the full or partial discharge if there is evidence that the card was obtained by fraud or if it appears that the cardholder never intended to reduce credit card debt that has accumulated.
As the cost of healthcare in the United States continues to skyrocket, exorbitant medical bills are one of the most common reasons debtors file for bankruptcy. Like all unsecured debt, medical bills are completely dischargeable in bankruptcy. Those debtors who file under Chapter 13, however, may have to pay at least a portion of their outstanding medical bills under a payment plan.
In a Chapter 7 Bankruptcy, a mortgage debt is completely dischargeable. However, the debtor will not be able to keep the home, as the collateral will revert to the bank or mortgage company as compensation for the deficiency owed by the debtor. In a Chapter 13 Bankruptcy, the automatic stay entered by the Bankruptcy Court can prevent a foreclosure until the debtor can negotiate a payment plan with the bank and resume paying his regular mortgage.
Judgments resulting from lawsuits are completely dischargeable under Chapter 7 Bankruptcy and at least partially dischargeable in Chapter 13 bankruptcy, unless the judgment arises out of criminal activity or accidents that occur while intoxicated. In both Chapter 7 and Chapter 13 bankruptcies, the judgment must be listed as a debt to be discharged and the judgment creditor must be notified. The judgment creditor then has a chance to object to the debt.
Debts arising out of leaseholds and other property contracts are dischargeable in bankruptcy, but the debtor most likely will have to vacate the premises. Though filing for bankruptcy may temporarily halt an eviction based on the failure to pay rent, a court will ultimately not impose a tenant who does not pay rent on a landlord.
Outside of student loans, which are almost never able to be canceled, unsecured personal loans are completely dischargeable in Chapter 7 Bankruptcy and at least partially dischargeable in Chapter 13 Bankruptcies. Personal loans that are not reduced to writing are extremely difficult for creditors to enforce in Bankruptcy Court.
Non-Dischargeable Debts Under Chapter 7 and Chapter 13
As a general rule, unsecured debts are totally dischargeable under Chapter 7 and at least partially, if not totally, dischargeable under Chapter 13. However, there are some unsecured debts that are not dischargeable in bankruptcy. Typically, the following debts are not dischargeable:
- Child Support Obligations
- Spousal Support Obligations
- Tax Debts
- ebts owed to the government other than tax debts
- Student Loans
- Criminal Restitution
- Debts arising out of accidents involving intoxication
Many debts, particular secured debts, involve co-debtors. But how is joint liability affected by bankruptcy, and vice versa?
A filing of bankruptcy by one spouse does not automatically drag the other spouse into Bankruptcy Court, though it is likely that the bankruptcy will be noted on the non-filing spouse’s credit report. Nor does the mere fact that two people are married make one liable for the other’s individual debt. However, where spouses are co-debtors, creditors may seek to recover from the non-filing spouse when debt is discharged or reduced as to the filing spouse.
Much in the same manner as marriage does not make one spouse liable for the other’s individual debt, the mere fact that two parties are business partners does not automatically make one liable to the other’s creditors. However, this may not always be the case in a partnership. Where business partners are co-debtors, creditors may seek to recover from the non-filing co-debtor.