What Happens to Your Debts After Bankruptcy?
It’s the burning question more and more millennials want to know: what happens to your debts after filing for bankruptcy?
Many individuals view bankruptcy as a method by which all of an individual’s debts are wiped away, and that they will be able to start anew without the threat of collections or liens hanging over their heads.
However, it is important to remember that bankruptcy, while certainly helpful, does not completely eliminate all of an individual’s debts.
What happens to the debts depends on several different factors, and even those debts that are wiped out can carry some unexpected consequences.
How Does the Type of Bankruptcy Affect Debts?
First and foremost, you need to be aware that there is more than one type of bankruptcy.
The United State Bankruptcy Code outlines several different types of bankruptcies, each of which has its own rules and outcomes as it relates to debts. For individuals that have regular monthly income but simply have too much debt to successfully pay all their obligations as required, Chapter 13 may be the individual’s best option.
Chapter 13 Bankruptcy is designed to allow a debtor to restructure his or her outstanding debts and pay them down over a period of time set by the court.
Under a Chapter 13 Bankruptcy Plan, the debtor asks the court to allow him or her to consolidate their debts and pay them over time. The repayment periods are normally three to five years, with the shorter periods normally applying only to individuals that have higher incomes. If an individual can show to the court a lower income than the amount set by law, he or she is entitled to a longer repayment.
Get Ed Anderson’s stories in your inbox
Join Medium for free to get updates from this writer.
Here are some of the most important points regarding the debts of an individual in Chapter 13 bankruptcy:
- Filing Puts a Halt to Collections
The filing of a Chapter 13 Bankruptcy petition puts a hold on collection proceedings, and halts foreclosure proceedings on real property, until a repayment plan is submitted and approved by the court.
- Mortgage Payments Must Continue
Even though it halts foreclosure, in order for a individual to keep his or her home, they must still continue to make mortgage payments during the time that the repayment plan is pending approval. If you’re currently going through the divorce process and have questions about how filing for bankruptcy may impact it, visit the website Divorce Magazine. They have an amazing article about this very topic — it’s worth the read!
- Repayment Plan Covers All Debts
The repayment plan covers all of the obligations owed by an individual, not just some of them.
- Priority Claims Must (Generally) Be Paid in Full
The repayment plan must provide for the repayment of all of a debtor’s priority claims — normally things like unpaid taxes or child support or alimony payments — unless the creditor agrees to accept a lower amount or the debtor can show that even contributing all of his disposable income over five years does not result in full repayment of the obligations.
- Secured Creditors Can Still Move to Repossess or Foreclose on Property if Payments Are Inadequate
Even though the filing of the Chapter 13 petition can halt foreclosure, it does not eliminate those debts, nor does it eliminate the creditor’s right to recovery the property if the proposed payments will not at least give the creditor the value of the underlying property.
If the repayment proposed by the debtor results in the creditor getting LESS than present value for the secured asset, the creditor can still move forward with foreclosure or repossession.
- Unsecured Creditors Face Prospect of No Repayment
If a repayment plan provides that the debtor will pay over all of his or her disposable income for five years to creditors, but priority and secured creditors end up receiving all of that under the plan, unsecured creditors will receive nothing.
Creditors cannot continue to request repayment or file claims for unpaid amounts following the filing and approval of a repayment plan. If the creditor does not get paid under the plan, it gets nothing.
Approval of a Repayment Plan Where a Creditor Receives Little or No Money Does Not Eliminate the Debt
When a bankruptcy court enters an order stating that certain debts are discharged, that only means that the creditor cannot seek to obtain and enforce a judgment against the debtor. It does not eliminate the debt itself. The debt continues to exist until the creditor writes off or forgives the debt, or until the debtor is able to pay the obligation at a later date (an uncommon but possible result).
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
What do you think of my list? Is there anything I missed about Chapter 13 bankruptcy that you’d like to see included on the next #financialblog?
Be sure to let me know in the comments!
