By Philip Tirone
People hear “bankruptcy wipes your debts” and imagine a magic eraser. Bankruptcy can be a powerful eraser, but it’s more like a smart eraser with rules. Most unsecured consumer debts are the stuff bankruptcy is built to clear. Then there’s a smaller pile that usually survives, and a third category where the answer depends on the type of case, the age of the debt, and the details. If you know which bucket your debt belongs in, the whole topic gets a lot less foggy.
Frequently Asked Questions
- Will all my debts be eliminated in bankruptcy?
- What debts are almost always eliminated in bankruptcy?
- What debts usually are not eliminated in bankruptcy?
- Can taxes be eliminated in bankruptcy?
- What’s the difference between priority and non-priority tax debt?
- Do child support and alimony go away in bankruptcy?
- If I’m behind on child support or alimony, can bankruptcy help at all?
- Can student loans be eliminated in bankruptcy?
- What happens to a car loan in bankruptcy if I owe more than the car is worth?
- What does “cramdown” mean for a car loan?
- Can bankruptcy lower my car loan interest rate?
- How is the new car loan interest rate determined in bankruptcy?
- Are government debts dischargeable?
- What should I do if I’m not sure which bucket my debt is in?
FAQ: Will all my debts be eliminated in bankruptcy?
Whether your debts will all be eliminated in bankruptcy depends on the kind of debt you have. Most consumer debts can be eliminated, but a short list of debts usually cannot.
FAQ: What debts are almost always eliminated in bankruptcy?
The debts that are almost always eliminated in bankruptcy typically include credit cards, medical bills, collections, payday loans, and many personal loans because these are usually dischargeable debts.
FAQ: What debts usually are not eliminated in bankruptcy?
Child support, alimony, many court fines and fees, restitution, many tax debts (especially recent taxes), and most student loans are usually not eliminated in bankruptcy.
FAQ: Can tax debt be eliminated in bankruptcy?
Sometimes tax debts can be eliminated in bankruptcy. Certain older income tax debts can be dischargeable if timing and filing rules are met. Recent tax debt is more likely to be treated as priority and usually must be paid.
FAQ: What’s the difference between priority and non-priority tax debt?
Priority tax debt generally has to be paid and is often more recent. Non-priority tax debt is often older and may be dischargeable if the return was filed properly and the IRS had time to assess it under the general timing rules.
FAQ: Do child support and alimony go away in bankruptcy?
Child support and alimony do not go away in bankruptcy. If they’re required under a court order, those obligations generally are not dischargeable. If you’re current, you keep paying as usual.
FAQ: If I’m behind on child support or alimony, can bankruptcy help?
Declaring bankruptcy can help you catch up on child support and alimony indirectly by clearing other dischargeable debts so your budget has room to catch up. In some cases, Chapter 13 can provide structure for getting current, but the support obligation itself doesn’t disappear.
FAQ: Can student loans be eliminated in bankruptcy?
Student loans can be eliminated in bankruptcy in some cases. To discharge student loans, you typically have to prove a hardship through an additional legal process inside the bankruptcy. That’s difficult, and policies around it have shifted in recent years.
FAQ: What happens to my car loan in bankruptcy if I owe more than the car is worth?
You generally decide whether you want to keep the car. If you want to keep it, you may have options depending on the chapter and facts. In some cases, bankruptcy can reduce what you pay down to the vehicle’s value.
FAQ: What does “cramdown” mean for a car loan?
Cramdown is when the loan balance is reduced to the value of the vehicle, so you’re not paying the full “underwater” amount, just the value (when cramdown is available in your type of case and situation).
FAQ: Can bankruptcy lower my car loan interest rate?
In some situations, yes. If the interest rate is very high, bankruptcy may allow a lower rate as part of the repayment terms.
FAQ: How is the new car loan interest rate determined in bankruptcy?
Courts often use a “prime plus” approach, meaning they start with the prime rate and add 1% to 3% (the exact add-on can vary by court).
FAQ: Are government debts dischargeable?
Some government-related debts, especially recent tax debt, often are not dischargeable. Certain older income tax debts may be dischargeable if they meet the requirements.
FAQ: What should I do if I’m not sure which bucket my debt is in?
Make a list of the debts and talk with a bankruptcy attorney in your state. The rules can be straightforward once your debts are categorized, but the correct category depends on details like the type and age of the debt.
Disclaimer: The content on this blog is for informational and educational purposes only and does not constitute legal or financial advice. Watching our videos and reading our blogs does not create an attorney-client relationship. Always consult a licensed bankruptcy attorney or financial professional about your situation.
