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.

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.

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.

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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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