Attorney John Mlnarik
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What Bankruptcy Can and Cannot Do
Millions of underwater debtors including individuals and businesses have turned to bankruptcy for relief. While bankruptcy is a powerful way to shield debtors from further debt collection efforts, it does not solve all financial problems. Additionally, there are different things that bankruptcy can accomplish based on the type of bankruptcy that is filed.
Bankruptcy can do a lot for debtors, including:
Eliminate Unsecured Debt
Both Chapter 7 and Chapter 13 bankruptcy fillings can help wipe out unsecured debt, such as credit card debt. Other debts may include personal loans, medical debt and unsecured business debt. These debts are those that the creditor does not have a lien against the property and does not have the right to repossess the item purchased if the debtor does not pay off the debt.
Although Chapter 13 bankruptcy can also eliminate unsecured debt, it does not have as great a capacity to eliminate it as Chapter 7. Chapter 13 bankruptcy requires the debtor to agree on a debt repayment plan and make continued payments for the number of years detailed in the plan. While secured debts usually have priority, most debtors have to pay back some portion of their unsecured debts. Any debts remaining after the repayment plan expires is generally discharged.
Place an Automatic Stay
Bankruptcy provides debt relief through an automatic stay. Once bankruptcy is filed, an automatic stay prevents further collection efforts from creditors, including phone calls, letters, repossession attempts or foreclosure actions.
Keep Certain Assets
Debtors can keep certain assets during a Chapter 7 filing, which are their exempt property. Federal and state-specific laws determine which property is considered exempt and free from liquidation during the bankruptcy process. Bankruptcy does not eliminate liens, so property can still be taken by debtors that do have a lien against certain property.
A Chapter 13 bankruptcy filing can help prevent a foreclosure action and require the lender to accept a plan that allows the debtor to reimburse the lender for missed payments. A bankruptcy lawyer is often needed during this process who can help show that the debtor will have sufficient income to provide for such payments while staying current on the existing debt.
Additionally, Chapter 13 bankruptcy does not require the sale of the debtor’s assets, so he or she can also keep non-exempt property.
Reduce Secured Debt
In many cases, debtors find themselves underwater on their secured debts by owing more money to pay off the property than the property is actually worth. Chapter 13 bankruptcy may allow the debtor to reduce the debt of secured property and then pay off this reduced amount of debt. There are special rules that prohibit reducing secured debt of debts that were acquired within a certain time period near the bankruptcy filing.
Although bankruptcy can accomplish many things, some things that it cannot accomplish includes:
Eliminate Tax Debt
Usually a Chapter 7 filing does not permit a debtor to discharge state or federal income tax debts. A debtor may be able to wipe out some of this debt in a Chapter 13 filing, depending on the type, amount and timing of the debt.
Eliminate Support Obligations
Generally, obligations to pay child support or spousal support survive bankruptcy. With a Chapter 13 filing, the debtor is usually required to show how back payments will be paid in full within the repayment plan period.
Eliminate Student Loan Debt
Most student loans cannot be discharged in bankruptcy. There are some exceptions, such as if the person is permanently disabled and can demonstrate that repaying the loan would cause undue hardship.
Eliminate All Debt
In Chapter 13, the debtor has to repay much of the debt. Under both types of bankruptcies, the debtor may not be able to eliminate all types of debt, including the debts that the debtor forgot to list in the bankruptcy filing, fines and penalties for criminal action, criminal restitution and certain other debts prohibited by law. Additionally, a creditor may be able to convince a judge not to discharge a certain debt in the interest of fairness, such as not discharging a debt off a recent purchase or one that was made due to fraud.
Bankruptcy is a complex area of law and usually requires the assistance of a lawyer who is knowledgeable in this area of the law. A bankruptcy lawyer can explain the process of bankruptcy and provide information specific to the debtor regarding how bankruptcy can and cannot accomplish certain goals.