It's a misconception that when you file for bankruptcy, all your debts go away. If you file Chapter 7, many debts are discharged, but there are some exceptions. If you file Chapter 13, fewer exceptions exist, but that's because you repay most of your debts through a court-approved plan.
Chapter 7 Bankruptcy
Chapter 7 typically relieves you of responsibility for paying your debts without having to contribute any of your earnings. The trustee takes possession of your non-exempt property – that which exceeds the value of exemptions you can use under the law to remove certain assets from your bankruptcy estate. The trustee then sells or liquidates this property and uses the funds to pay down at least a portion of what you owe. If you have no non-exempt property, yours is a no-asset case and your debts are typically discharged without your creditors receiving anything. If some of your debts are paid off through liquidation, the balances are discharged.
Federal law prohibits the discharge of certain debts if letting you off the hook for paying them would fly in the face of public policy – it would be fundamentally wrong. For example, you can't discharge alimony or child support obligations. Debts associated with willful or malicious harm you might have done to another individual or his property are also not dischargeable. You can't get rid of student loans or debts incurred because you were driving while intoxicated, and you can’t discharge loans you took from certain retirement plans that offer tax advantages. Some condo or cooperative housing fees are also non-dischargeable. A total of 19 different types of debts are excepted from Chapter 7 discharge.
Chapter 13 Reorganization
Faced with the potential sale of your property, you might elect to file for Chapter 13 protection instead. If you do, you can get rid of some debts that would normally not have been discharged if you had filed Chapter 7. Chapter 13 is a reorganization plan. You give the trustee your disposable income each month -- what you have left after paying your necessary living expenses -- for distributribution among your creditors. You'll pay off most, although not necessarily all, your debts over three to five years.
Chapter 13 Vs. Chapter 7
Chapter 13 allows you to discharge the balances of debts that are not paid off entirely, some of which are not dischargeable in Chapter 7. For example, debts related to malicious or willful destruction to property – although not to persons – become dischargeable under Chapter 13. Child support and alimony are still non-dischargeable in Chapter 13, but you can erase debts you owe as part of a property settlement in divorce. This isn't allowed in Chapter 7. If you incurred debt to try to pay off taxes, this is not dischargeable in Chapter 7, but it is in a Chapter 13 proceeding. Most fines and penalties you owe to the government are not dischargeable in Chapter 7, but you're relieved of any balances still due after the completion of your plan if you file for Chapter 13 reorganization instead.