How to File Bankruptcy With Unsecured Debt

By Heather Frances J.D.

Many people who file for bankruptcy do so because they seek a financial clean slate and relief from a heavy debt burden. Whether you file under Chapter 7 or Chapter 13, the court can discharge – or erase – many of your unsecured debts at the end of your case. Your eligibility to file bankruptcy is not affected by whether your debt is secured or unsecured.

Many people who file for bankruptcy do so because they seek a financial clean slate and relief from a heavy debt burden. Whether you file under Chapter 7 or Chapter 13, the court can discharge – or erase – many of your unsecured debts at the end of your case. Your eligibility to file bankruptcy is not affected by whether your debt is secured or unsecured.

Unsecured Vs. Secured Debt

Secured and unsecured debts are treated differently in bankruptcy. Secured debt is debt that is secured – or backed – by collateral. For example, a car loan is typically secured debt because the car stands as collateral for the loan. Similarly, mortgages are secured debt. If you fail to pay a secured debt, your lender can seize your collateral, such as repossessing your car. Unsecured debt is debt that has no collateral, such as credit card charges, tax debt, student loans and medical bills.

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Dischargeable Debts

Once you successfully complete the required steps of your bankruptcy case, such as attending financial counseling, you may qualify for a discharge of your remaining unsecured debts. A discharge eliminates your obligation to repay the debt. However, some unsecured debts cannot be discharged, including many tax debts, student loans and child support.

Chapter 7 Discharge

Under Chapter 7, the debtor’s non-exempt assets are sold, and the funds from the sale are used to pay his debts. Chapter 7 cases generally discharge unsecured debts. Secured creditors can seize the debt’s collateral even if a discharge is granted. A debtor can reaffirm his secured debts, thereby re-establishing his obligation to pay the debt in exchange for a promise not to repossess his property.

Chapter 13 Discharge

Under Chapter 13, the debtor establishes a repayment plan under which he makes payments to his creditors over three or five years. Sometimes, the debtor’s unsecured debts are fully paid by the repayment plan, but any unsecured debts remaining at the end of the plan may be discharged once the repayment period is complete.

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Laws on Debt Forgiveness Through Chapter 13

References

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Schedule F Bankruptcy Discharge

Bankruptcy means a fresh start – a court order protects you from collections and lawsuits, and eventually, the court discharges (cancels) some of your debts. You must report your assets and liabilities, and you will be required to sell your non-exempt property to repay creditors (in Chapter 7) or set up a repayment schedule (in Chapter 13). As your bankruptcy case begins, you'll complete a Schedule F, and it's vital to know the difference between a secured and unsecured debt when preparing this form.

Provisions of Chapter 13 of the Federal Bankruptcy Laws

Chapter 13 bankruptcy is a form of personal bankruptcy that allows an individual’s debt to be adjusted if he has a regular income. Unlike Chapter 7 bankruptcy, a Chapter 13 proceeding allows the debtor to keep property and pay debts over time rather than liquidating assets to pay creditors. One advantage of Chapter 13 bankruptcy is the opportunity for the debtor to save his home from foreclosure and even stop a foreclosure already in progress.

What Does a Discharge in a Chapter 13 Bankruptcy Mean to Debtors?

Bankruptcy allows a debtor to obtain relief from his creditors if he meets certain legal requirements. Chapter 7 bankruptcy is a liquidation of assets, while Chapter 13 bankruptcy involves repayment of some, or all, of the debt owed. If a debtor’s income is above the state median income and he has enough disposable income to repay his debt, Chapter 7 is not an option. In both types of bankruptcy, there eventually is a discharge of debt.

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