You may already know that you can eliminate much of your debt by going through a Chapter 7 bankruptcy, but perhaps you don’t know what types of debt the bankruptcy court will be able to discharge.
Secured and unsecured debts
Before filing for bankruptcy protection, it is important to understand the distinction between secured and unsecured debt.
A secured debt is backed by real estate or personal property. In other words, if the debtor is unable to pay the debt, the creditor has the right to repossess the item. This applies to most home loans and car loans.
An unsecured debt is not backed by collateral. For instance, if you hired someone to build a new garage for your house, and then you are unable to pay them, they cannot repossess the new garage to collect on the debt. Credit card debt, medical debt, school loans and many other types of consumer debt are unsecured.
Bankruptcy can help with discharging most–but not all–types of unsecured debt.
Debts that cannot be discharged through bankruptcy
Certain types of debt cannot be discharged through bankruptcy. These include debts for child support or alimony. If you have been found liable for willful or malicious damage to another person or property, you cannot discharge that debt through bankruptcy.
Some types of tax debt cannot be discharged. Others can be, although the process may be difficult.
Student loans are ordinarily not dischargeable through bankruptcy, although it is possible to do so in some situations.
In bankruptcy, there are some debts that must be repaid first. Unpaid wages that you owe to someone else will be counted as priority debts. In the above example of the new garage, the builder will take priority before other creditors.