If you have debt you feel you cannot hope to repay, you are not alone. Due to the pandemic and resulting economic crisis and job losses, many people are in your position.
This article will explore six ways that federal bankruptcy law might help you out of your untenable debt situation.
Of course, this is general information, not legal advice. Everyone’s financial situation and financial goals are unique to them. Be sure to consult with a bankruptcy attorney before you file bankruptcy to ensure that filing will help you attain your goals and that there are not unintended consequences of filing.
1. Bankruptcy Can Discharge Your Unsecured Debt.
This is the primary reason people file Chapter 7 or Chapter 13 bankruptcy – to have unsecured debt discharged, meaning you are no longer responsible for paying it. The types of debt that can be discharged include:
- Credit card debt
- Personal loans
- Medical debt
- Some past-due income taxes
- Some government fines or fees
If you wish to surrender any collateral you still owe money on to the creditor, such as a car or real property, the underlying debt will be discharged as unsecured.
What Debt Can’t Be Discharged in Bankruptcy?
Secured debt is debt such as a mortgage, home equity line of credit, car loan or lease, and perhaps any debt you incurred to purchase other high-value collateral such as jewelry, recreational vehicles, or appliances, depending upon the loan or credit card contract. If you retain the collateral, the underlying debt will not be discharged.
Priority unsecured debt cannot be discharged in bankruptcy, and you will still owe it after you receive a discharge of other unsecured debt and your case closes. Nondischargeable unsecured debt can include:
- Spousal support or alimony
- Child support
- Money owed “in the nature of” spousal or child support
- Student loans (usually)
- Some Income Tax
- Most government fines and fees
- Sales tax
Most people file bankruptcy under Chapter 7 of the federal bankruptcy code. A Chapter 7 filing is a 4-6 month process during which you disclose your income, expenses, assets, and debts to the bankruptcy court and the Chapter 7 Trustee. Barring any problems, such as creditor objections to discharge, you receive your discharge and are no longer responsible for paying discharged debt.
2. You Can Reorganize Your Secured Debt Through Chapter 13 Bankruptcy
In some cases, people need to file Chapter 13 instead of Chapter 7. Chapter 13 differs in that it involves a three or five-year repayment plan whereby you repay any past-due debt that is not dischargeable because it is secured by collateral you wish to keep. Debt commonly repaid through a Chapter 13 plan includes:
- Past-due mortgage payments
- Past-due rent
- Past-due car loan payments
- Past-due car lease payments
- Past-due payments on any other secured debt
If you have an income stream sufficient to pay your current expenses and repay the debt you owe over three or five years, you will qualify to file Chapter 13. At the end of your plan, you are caught up with arrears and discharged of any unsecured debt.
Chapter 13 is a popular way to stop foreclosure, eviction, or repossession and then catch up with payments so that you can keep your home, apartment, car, or other collateral despite having fallen behind in the past.
Car Lease Balloon Payments in Chapter 13
If you are leasing a car that you want to keep but cannot afford to pay the end-of-lease balloon payment, Chapter 13 can help. Depending upon how much disposable income you have, you can pay that balloon payment off over three or five years, and there is nothing the lender can do about it. At the completion of the plan, you own the car.
3. You Can Catch Up with Nondischargeable Debt Arrears Through Chapter 13
Just as you can catch up paying your secured debt, you can also catch up with payments on nondischargeable unsecured debt, such as:
- Past-due child or spousal support
- Past-due student loan payments
- Past-due government fines or fees
- Past-due income tax
- Past-due sales tax
You pay the Chapter 13 Trustee each month, and in turn, the Trustee sends payments to your creditors. When your plan is complete, you are all caught up with your debt, and you are discharged of other dischargeable unsecured debt such as credit cards and medical bills.
4. Filing Bankruptcy Will Stay All Collection Actions, Including Lawsuits
When you file either Chapter 7 or Chapter 13 bankruptcy, a powerful tool called the “automatic stay” is in immediate effect. The automatic stay “stays” or stops all collection efforts against you. This includes harassing phone calls and collection letters as well as collection lawsuits, foreclosures, and repossessions.
All creditor action against you is stayed until your bankruptcy case is over. This allows you to regroup financially and make decisions about how to improve your financial future.
Once you receive your discharge order, your creditors cannot attempt to collect discharged debt. If they do, they are subject to strict financial sanctions by the court.
5. You Can Get Some Types of Secured Debt Discharged Through Chapter 13 Bankruptcy
If you file Chapter 13 bankruptcy, there are two powerful ways to overcome debt secured by oversecured collateral. What is oversecured collateral? It is any collateral that is worth less than the amount of money owed on it.
“Cramming Down” a Car Loan
Due to depreciation and high car loan interest rates, many borrowers find that they owe much more on their car than the car is worth. In this case, if they file Chapter 13 bankruptcy they can “cram down” the car loan to the retail value as of the date of filing, and pay it off through the Chapter 13 plan at “Till” interest, which is prime plus 1-3%. At the end of your plan, you own your car.
Between the reduced loan balance and greatly reduced interest rate, imagine how much money you could save!
“Stripping Off” a Second Mortgage or HELOC
Due to a dip in home prices, many borrowers find that their home is worth less than the amount they owe on their first mortgage, and they also have a second mortgage or a home equity line of credit (HELOC). In this case, by filing a Chapter 13 petition the borrower can “strip off” the second mortgage or HELOC as unsecured debt and have it discharged.
6. If You Own a Business You May Be Able to Use Bankruptcy to Deal with Both Personal and Business Debt.
Business owners who are sole proprietors or single-member LLCs, or who are married and the spouses formed a partnership, can file bankruptcy and deal with both personal and business debt, as well as any personal guarantees on business debt.
Finances can be complicated, so be sure to discuss your situation with a bankruptcy attorney prior to taking any action. Federal bankruptcy law is nuanced and there may be less – or more! – you can do about your particular situation by filing bankruptcy. Best of luck!
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy bankruptcy lawyer in Abington, PA.