Filing for bankruptcy can be a powerful tool to help you reclaim your financial independence after unmanageable debts have gotten the better of you. The Chapter 7 process provides individuals with a way to walk away from certain types of debt without suffering any serious consequences. This can allow them to regain their financial footing and helps in eventually reestablishing credit.
Bankruptcy allows you to “discharge” these unpaid debts, which means that the bankruptcy process eliminates your legal obligation to repay them. Afterwards, creditors cannot begin or continue any action to collect these debts, including phone calls, letters, statements or lawsuits.
A Chapter 7 bankruptcy discharge can create a new financial reality for you, but it is not a magic bullet. Many people mistakenly look at bankruptcy as a way to walk away from every single debt. Unfortunately, Chapter 7 does not discharge all debts, and some debts you must repay, even if you do file Chapter 7 bankruptcy.
Student loans are generally nondischargeable. The only way to avoid paying off your student loans is to demonstrate that paying them off would create an undue hardship. This is a difficult standard to meet, as it involves showing that you are unable to pay the loan and that this situation is likely to persist for a significant portion of the repayment time.
When you buy property and borrow money to pay for the purchase and the lender takes the property as collateral, the loan is a secured loan. You can also have a secured loan if you borrow money and pledge something you own as collateral, such as when you obtain a second mortgage or a home equity line of credit. Common secured loans are home mortgage loans or car loans. Because the creditor may repossess the property, you cannot discharge these debts in a bankruptcy proceeding unless you surrender the property. If you want to keep the property that secures the loan, you must repay the loan. If you want to discharge a secured loan, you must give up the house, car or other property that secures it.
Money that you owe for back taxes from the previous three years is nondischargable. This applies to local, state and federal taxes.
The following are always nondischargeable, and Chapter 7 bankruptcy will never erase them. This is not an exhaustive list, and you may have debts not included here that you cannot discharge:
- Criminal restitution
- Child support payments
- Alimony and spousal support payments
- Court fees
- Government-imposed restitution, fines, and penalties
- Debts obtained using fraud
These exceptions to discharge are sometimes confusing, and not every example applies directly to your individual circumstances. Consulting a Maryland bankruptcy attorney before initiating a bankruptcy is essential to understanding the types of debt you can and cannot discharge.