Debt Management In Bankruptcy

Bankruptcy can be a great tool to help alleviate large debt burdens, but there are cases in which people do not find it as useful as they originally thought. The reason is because most people don't know very much about the process and make assumptions as to how the process can help. No two people's financial situation is the same, and neither is the risks or potential benefits associated if the decide to file for bankruptcy. Much confusion can be avoided by learning a few things about the bankruptcy process.

Types of Debt

A common problem people run into when they file for bankruptcy is finding out that a particular debt is not eligible for discharge. Not all debts are the same and different types of debts are handled very differently in the bankruptcy process. For example, there are two main types of debts that are managed in bankruptcy: secured and unsecured. A secured debt is one that is secured against an asset as collateral. These are debts such as a mortgage or car loan, in which the house and car are put up as collateral against the loan in the event of default. An unsecured debt is one that is not secured against any collateral. These are debts such as credit cards, medical bills and other loans, in which are only given in return for the promise of repaying the debt.

A secured debt is more difficult to have discharged in a bankruptcy than an unsecured debt. This is because the creditor maintains the legal right to repossess the asset if the borrower defaults on the loan. To have a secured debt discharged in a Chapter 7 bankruptcy, the borrower is generally required to turn over the asset to the creditor in exchange for being relieved of the debt liability. However, if the borrower intends to keep the asset, they would only be able to have the debt discharged under a Chapter 13 bankruptcy. The borrower would be required to repay the debts in the Chapter 13 case if they are to be eligible to keep the asset.

Unsecured debts are the most common type of debt filed for discharge in bankruptcy. In general, unsecured debts can be easily discharged under either a Chapter 7 or Chapter 13 bankruptcy. The difference being whether or not the filer qualifies for Chapter 7 debt elimination or is required to file for Chapter 13 instead.

Debt Discharge Exceptions

There are a few types of debts that are difficult to manage in bankruptcy and may not even be eligible for a discharge. Tax debts, student loan debts and domestic support payment debts can greatly complicate the bankruptcy process. However, a good rule of thumb is that the only type of discharge these debts would qualify for is a Chapter 13 repayment plan. There are bankruptcy laws that prohibit these types of debts from being discharged under Chapter 7 and are usually required to be repaid, at least in portion.