What Happens to Your Unsecured Debt After Declaring Bankruptcy?

Bankruptcy happens to millionaires and fresh out-of-college millennials alike. Nobody begins their financial pursuits with the intention of declaring bankruptcy down the road. However, it is a reality that some people are faced with. Consumer debt in March of 2019 stood at more than $4 trillion. Are you one of the many Americans facing debts that are over your head? You probably have a lot of questions if you’re in the beginning stages of filing for bankruptcy or you’re considering bankruptcy as an option. One of the big questions that people have is what happens to unsecured debt after you declare bankruptcy. Take a minute today to learn what you can expect.

What Is and Isn’t Wiped Away with Bankruptcy

Declaring bankruptcy isn’t like snapping your fingers and making everything go away. It’s important to know that bankruptcy only covers certain types of debt. Here are the types of debt that can be erased via bankruptcy:

  • Lawsuit judgments.
  • Personal loans.
  • Car loans.
  • Obligations from car leases.
  • Medical debt.
  • Obligations related to apartment leases.
  • Utility bills.

These types of obligations may not be erased via bankruptcy in every case. However, it may be possible to create a way to pay down these debts that’s more realistic than what you’re dealing with at the moment. Of course, some debts simply won’t be erased by bankruptcy. Here’s a look at them:

  • Student loans.
  • Owed income taxes.
  • Debts that are owned the government.
  • Child support.
  • Court fines, traffic tickets and other legal penalties.
  • Debts stemming from personal injury claims or deaths caused by drunk driving.

Another important thing to keep in mind is that any debts you fail to list in your bankruptcy papers when you file will not be forgiven. That’s why it is important to be accurate and thorough when filing your paperwork. Working with a bankruptcy attorney is highly advised if bankruptcy is on the table.

A Closer Look at Unsecured Debt

Where does unsecured debt fit into all of this? The answer is that it’s a bit of a mixed bag. It’s important to first make sure that you know exactly what unsecured debt is. Unsecured debt is debt that doesn’t have any sort of property or asset attached to it as collateral. That means that there is nothing for a creditor to take away if you end up defaulting on your debt. The good news is that many types of unsecured debt fall under the category of what can be erased through bankruptcy. This includes credit card debt, medical debt, lease obligations and utility bills. The one type of unsecured debt that will not be forgiven is student loan debt.

Unsecured debt is actually broken down into one of two categories during the bankruptcy process. It can either be categorized as priority debt or non-priority debt. How each type of debt is handled will depend on whether you’re filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy. However, debts that are categorized as priority debts need to be paid first in both cases. Most non-priority debt is discharged in the case of Chapter 7 bankruptcy. Debtors are typically asked to pay pennies on the dollar when it comes to non-priority debt in Chapter 13 filings.

What’s the Final Word on Unsecured Debt?

The bottom line is that how your unsecured debt is handled will ultimately depend on the specifics of your case. However, it can generally be expected that non-priority debts that fall under the category of being unsecured will be erased if you’re filing for Chapter 7 bankruptcy. It is also very likely that only a small percentage of non-priority debt will need to be paid if you’re filing for Chapter 13 bankruptcy. Of course, all of this is just a general overview of what to expect and it should not be viewed as legal advice. You should consult with a bankruptcy attorney right away if you’re considering bankruptcy and you’d like to explore your options.

SOURCES:

https://www.thebankruptcysite.org/resources/bankruptcy/filing-bankruptcy/unsecured-debt-priority-vs-non-priority

https://www.nolo.com/legal-encyclopedia/how-much-unsecured-debt-repaid-chapter-13-bankrutpcy.html

 

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