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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What is a Notice of Dismissal of Bankruptcy?
 

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Legitimate Reasons for Bankruptcy

If you're experiencing financial hardship and considering filing for bankruptcy, you'll need to have a legitimate reason. Individuals usually file under Chapter 7 bankruptcy proceedings -- sometimes called "debt wipeout," or under Chapter 13, which offers a repayment plan with creditors while the debtor is under court protection. Before you file for bankruptcy, consider your financial circumstances, your debt level and your reasons for doing so -- bankruptcy will impact your finances beyond your immediate debts.

Laws on Debt Forgiveness Through Chapter 13

When debt piles up, individual debtors may need the structure of a bankruptcy case to get back on their feet again. If you qualify, bankruptcy offers protection from collection efforts and a chance to partially erase some debts while paying others. An online legal services provider can help you file your bankruptcy case.

How Much Cash Is Exempt in a Bankruptcy?

When debts become overwhelming, debtors may turn to bankruptcy to give them a fresh start. Depending on the type of bankruptcy case filed, a debtor could lose some of his assets because they are sold to pay his creditors. However, many assets, including cash and future income, may be exempt under state or federal laws.

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