What will happen to my debts if I file bankruptcy?

The type of debt you owe determines whether bankruptcy would be right for you.

If you have been struggling with debts that you cannot pay back, you may be considering bankruptcy as an option, since you have heard that it is helpful in relieving you of your debts. However, depending on the type of debts that you owe, this may or may not be the case. It is therefore helpful to have a basic understanding of how bankruptcy affects debt in order to determine whether it would be right for you.

Persons typically owe two types of debt: secured and unsecured. Secured debt is a financial obligation where you pledge collateral in return for credit. Common types of secured debt include mortgages and car loans. Because you have pledged collateral, if you fall behind on secure debts, your creditor can repossess the collateral and sell it to pay off your balance.

Unsecured debt, on the other hand, does not involve the pledge of collateral. This type of debt includes most credit cards, personal loans and medical bills. Unlike secured debt, if you fall behind on unsecured debt, your creditor may not repossess or foreclose on collateral. Instead, the creditor may sue you to collect what you owe.

What bankruptcy can do

How bankruptcy affects your secured and unsecured debts depends on the type of bankruptcy that you file. If you file Chapter 7 bankruptcy, most of your unsecured debt is discharged, meaning that you no longer must repay it.

Secured debts in Chapter 7 are treated in a different way. Although Chapter 7 discharges your obligation to repay the debt, it does not affect the right of your creditors to repossess or foreclose on the collateral. Because of this, it is necessary to continue paying your secured debts during process, if you want to keep the collateral. Fortunately, this is easier than it was before bankruptcy, as you are free of your unsecured debts.

In Chapter 13, you are required to repay certain debts over three to five years. However, under the bankruptcy laws, you are not required to repay all debts. In the majority of Chapter 13 cases, only a small percentage of unsecured debts are repaid. Any remaining balance is discharged at the end of the process.

As far as secured debts go, Chapter 13 can be especially beneficial. If you have fallen behind on your mortgage, you may repay your arrearages in monthly installments over the three to five year repayment period. During this time, your creditors are prohibited from beginning foreclosure proceedings, assuming that you continue making the installment payments.

In addition, Chapter 13 is useful for handling debts that are nondischargeable in Chapter 7, such as income taxes. Chapter 13 can prevent the IRS from garnishing your wages as your tax debt repaid over the three to five-year repayment period.

Since one type of bankruptcy may be more helpful to you than another, choosing the correct one for you is critical for successful debt relief. Because of this, it is important to seek the advice of an experienced bankruptcy attorney before filing.