What Does Bankruptcy Cover?
A consumer bankruptcy comes in the form of Chapter 7 or Chapter 13. The goal of both bankruptcy filings is to obtain a Discharge. The discharge is your confirmation that the debts included in the bankruptcy filing are no longer your responsibility, and that creditors can no longer pursue you or your assets to try to collect on those obligations.
There are several types of debt which receive specific treatment in bankruptcy. Below, we will cover a few broad categories in hopes of giving you and understanding of what is covered when you choose to file bankruptcy.
Unsecured Debt – Unsecured debt is generally credit card debt, medical bills, and personal loans. Essentially, it is debt which is not secured by a specific piece of property. Unsecured debt is discharged in a Chapter 7. In Chapter 13, you may pay a small percentage to your unsecured creditors by way of your Chapter 13 plan. Then, when you make your final payment in Chapter 13, the remainder of that unsecured debt will be discharged.
Secured Debt – Secured debt is debt which is secured by property. Generally, this means that if you stop paying on the debt the creditor has the right to take the property. An example would be a home or a vehicle. In North Carolina, a home can be foreclosed upon if you stop paying debt. A vehicle can be repossessed. Again, this just means the lender’s loan is secured by property. In a Chapter 7, you can keep your secured property, but the debt comes with it. For example, if you have a vehicle with a loan balance and you file Chapter 7, you will get a chance to indicate if you want to keep the car (and the debt), or if you want to surrender the car to the lender. If you surrender the car to the lender, the debt goes with it. Your bankruptcy attorney will help you decide which decision is best for you. The terms of your loan will not change if you decide to keep the car and the debt associated with it.
In Chapter 13, you have the same options. There are many instances where your car payment will lower in Chapter 13 because Chapter 13 spreads your car payment out over the 60-month repayment period (Your Chapter 13 Plan). This can provide great financial relief as you enter Chapter 13.
Secured Debt Arrears – If you owe or are ‘behind’ on payments to secured creditors, you cannot use a Chapter 7 to cure the arrears. You will need to get caught up on payments when filing your Chapter 7. However, a Chapter 13 is specifically designed to force your lender to allow you some time to get caught up on late payments. In fact, the amount you are behind on the day you file your Chapter 13 will be divided over the 60-month length of the plan. This gives you time to make your normal payment each month, while slowing getting caught up. When you finish your Chapter 13 plan, you will be caught up on your payments to the mortgage lender or vehicle lender.
Priority Debt – Some debt like tax debt or child support is categorized as priority debt. While there are exceptions, generally tax debt and child support debt are not discharged by Chapter 7. One exception relates to taxes which were filed at least 240 days before the bankruptcy, and which are at least 3 years old at the time of the filing.
In Chapter 13, priority debt like taxes or child support, must be paid in full over the life of the Chapter 13 plan. Assume you are behind $6,000 on taxes when you file your Chapter 13. Further assume the tax debt is less than 3 years old, which means it needs to be paid in full during the Chapter 13. With some exception, the tax debt will come to $100/month in your Chapter 13 plan. This can be a very manageable amount compared to what the IRS or NC DOR will offer you outside of bankruptcy.
You can still file a successful Chapter7 with priority debt; however, when you receive your discharge, the priority debt (except taxes older than 3 years old, etc.) will still exist. Some clients find that to be an OK solution—without the other unsecured debt burden, those clients can make payments on the priority debt which survives the bankruptcy.
Student Loans –Unfortunately, student loans are not discharged in bankruptcy except in the most limited circumstances. We are hopeful the rules on discharging student loans will change; however, our firm has litigated student loan issues in the past and the law is relatively settled now. We are happy to discuss it with you before you move forward with bankruptcy. The great news is that our clients with a good bit of student loan debt choose to move forward with bankruptcy despite the rules around student loans. Those clients find that once the bankruptcy closes out and the burden from their pre-bankruptcy debt is relieved, they are easily able to make their student loan payments, apply for income-based repayment, or use a forbearance.
Speak With A Bankruptcy Lawyer Today
If you would like more information about what is covered in bankruptcy, reach out to us. We love to help educate consumers, and we can help you understand your options. You can reach us at 704.749.7747 or click HERE to request a consultation via email. We are here to help.