If you're overwhelmed by debt, bankruptcy may be the only alternative for dealing with your bills. If you owe a large amount of unsecured debt, have few assets and no way of repaying what you owe, you'd typically consider Chapter 7 bankruptcy. If you want to keep your assets and repay your debts over time, Chapter 13 may be the right choice. Before you file, however, it's important to know what debts bankruptcy can eliminate.
In a Chapter 13 bankruptcy, you agree to repay what you owe over a three or five year period, depending on your income. You must submit a repayment plan to the court, outlining the type and amount of debts you owe. Under the terms of the plan, certain debts are considered priority debts, and these must be repaid first and in full ahead of any other debts. Examples of priority debts include tax debts, unpaid child support or alimony, wage claims of employees and debts related to goods and services provided to a debtor’s estate during your bankruptcy proceeding.
A secured debt is backed by some form of collateral. Examples of secured debts that can be included in bankruptcy are mortgage loans, vehicle loans, home equity loans or lines of credit and personal loans such as payday or title loans. Secured debt has no claim limits in Chapter 7 bankruptcy. However, eliminating your liability for the debt does not prevent the creditor from repossessing the property or collateral. As of 2010, you are permitted to include a maximum of $1,081,400 in secured debt in a Chapter 13 bankruptcy. In Chapter 13, secured debts must also be repaid in full if you plan to keep the attached collateral.
An unsecured debt is one that is not attached to any type of collateral. The most common types of unsecured debt include bank-issued credit cards, medical bills, store-issued credit cards, unpaid utility or cellphone bills, lines of credit, personal loans or any unsecured debt that has gone to collections. The amount of unsecured debt that you may claim in a Chapter 7 bankruptcy has no limit. As of 2010, debtors who plan to file Chapter 13 bankruptcy are limited to $360,475 or less in total unsecured debt. In Chapter 13 cases, unsecured debts receive lowest repayment priority.
Certain types of debt are considered nondischargeable in Chapter 7 and Chapter 13 bankruptcy. These include any debts that you fail to list in your bankruptcy petition; any fines and penalties you owe for civil or criminal violations, including traffic fines, victims' compensation or restitution; condominium or cooperative housing fees; debts that arise from willful or malicious injury; outstanding judgments related to a personal injury or wrongful death lawsuit in which you are held liable; governmental fines and penalties; or debts obtained through false or fraudulent pretenses. Student loans are also typically not dischargeable through bankruptcy unless you can prove that you are experiencing a severe and persistent financial hardship that would make repayment impossible.
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