How to Refinance Credit Card Debt (and Pay It Off Faster)
Choosing to declare bankruptcy can be an enormous financial decision, so you should consider the bankruptcy pros and cons. If you’re wondering how to pay off debt and are looking to take this step, learn the differences in bankruptcy declarations and find out which debts will stick around once it’s over. Don’t assume all debts go away if you declare bankruptcy.
Both Chapter 7 and Chapter 13 are open to individuals who need to declare bankruptcy to get out of debt, but they’re handled differently.
At a glance: Chapter 7 and Chapter 13 bankruptcy
Chapter 7 liquidates your assets — your properties are sold to pay off your debt. For Chapter 13, your property isn’t sold off, but you agree to a court-mandated repayment plan. While Chapter 7 takes three to five months to complete, Chapter 13 can take three to five years, depending on your agreement.
Another difference between Chapter 7 and 13 is: Chapter 7 allows you to discharge debt quickly, helping you restart as fast as possible. But Chapter 13 lets you to keep your property while still paying back what you can afford.
While some debts don’t go away when you declare bankruptcy, there are a few that will.
Debt that’s discharged when declaring bankruptcy
There are some debts that will drop off depending on which filing you choose. Sometimes the debt will go away in either case.
Credit card debt
Americans are suffering from $1.02 trillion in credit card debt, which can explain why it’s a major cause of bankruptcy. Credit card debt is usually unsecured and can be discharged in either a Chapter 7 or Chapter 13 bankruptcy filing. How they’re handled depends on which type of bankruptcy you file.
For Chapter 7, your debt is removed when the court approves your bankruptcy filing. This may take a few months, depending on the type of debt you have, how much you owe, and scheduling of the courts.
For Chapter 13, you’ll agree to repay your credit card debt according to the plan outlined by the court. Once your plan is complete, the remaining debt is forgiven. Keep in mind that you’re still eligible to pay for your debt in some form depending on your court-ordered agreement. But that number may be significantly less than what you owed before bankruptcy.
Not paying your medical bills causes your credit score to drop and collections agencies to come after you for payment. The Commonwealth Fund found that 79 million Americans have trouble paying medical bills or dealing with their unpaid medical debt — that includes 41% of working-aged people.
Medical bills are considered unsecured debt just like credit cards, which gets discharged in either type of filing. Whether they’re discharged depends on which filing you declare.
If you declare Chapter 7 bankruptcy, the medical bill debt will be removed when the court approves your filing. If you declare Chapter 13, some of the debt may be removed after you complete your repayment plan.
Personal loans are also unsecured, which means they would be wiped out in bankruptcy as well.
Small claims court judgment
A small claims judgment is when you get sued by a creditor to pay a debt you owe. If the creditor wins the judgment, you’re required to pay the debt.
When you file a Chapter 7 bankruptcy, you’re released from your obligation to pay the debt you were originally forced to. That’s because a Chapter 7 bankruptcy proves you don’t have enough money or assets to pay the debt off.
If you file a Chapter 13 bankruptcy, you may need to pay some of this judgment based on your repayment plan.
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Temporarily stop a mortgage foreclosure
If you’ve fallen behind on mortgage payments, your home may soon be foreclosed on. But when you file bankruptcy, you could stop that foreclosure, at least for a short time.
Chapter 13 bankruptcy allows you to stay in your home while completing a repayment plan crafted by the courts. If you complete the repayment plan, you’ll be able to stop the foreclosure. But if you don’t complete the plan by the end date, you may still lose your home.
If you file a Chapter 7 bankruptcy as a homeowner, you’ll be granted an automatic stay, which makes creditors stop attempting to collect a debt from you. If your home hasn’t been foreclosed on yet and is up for a foreclosure sale, the stay will postpone that sale while your bankruptcy is being processed. It will only last a few months.
How creditors handle your debt when you declare bankruptcy
Declaring bankruptcy legally tells creditors to leave you alone about the debt you owe them.
Once the bankruptcy has completed its process, creditors can’t contact you about a debt that was discharged during bankruptcy. According to the Consumer Financial Protection Bureau (CFPB), “the discharge permanently bars the creditor or debt collector from collection of the debt.”
Debt that’s NOT discharged in bankruptcy
While declaring bankruptcy doesn’t clear all debts, it removes some major ones that could be financially draining you. Here are the debts you’re still obligated to pay.
Your student loans won’t be discharged during a bankruptcy filing. But if they’re a burden, you can file an adversary proceeding. This would request your student loans be discharged if you can prove repayment would cause major hardship on you and your family.
Auto loans are secured debt, which means in the event you can’t pay your car loan, your vehicle can be taken away. In Chapter 7 bankruptcy, your lender can’t repossess your car unless an automatic stay is lifted. But after your bankruptcy is processed, your lender may still have a right to repossess your car if the debt goes unpaid.
Child support and alimony
Neither child support nor alimony is discharged during bankruptcy. But having other debt removed in bankruptcy may allow you to make up past due payments elsewhere, including child support or alimony payments.
You’re still responsible for your home mortgage and other property liens during and after bankruptcy. Filing for Chapter 13 bankruptcy and starting a repayment plan could put you in a better position to keep your home.
Ex-spouse legal fees
Like other domestic obligations, you’re still required to pay legal fees from divorce. These types of legal fees can’t be discharged in bankruptcy. If you file for Chapter 13 bankruptcy, you may be eligible to have those outstanding fees rolled into your new court-ordered payment plan.
While bankruptcy doesn’t discharge restitution payments, you may be able to have them restructured in a Chapter 13 bankruptcy filing. Keep in mind that if you’ve committed a crime and served prison time, you’re still eligible to file for bankruptcy.
Income tax liability
Declaring bankruptcy won’t immediately get your tax bill wiped out. You’ll need to meet some preliminary criteria set by the IRS to qualify. For one, the taxes must be income taxes, and you can’t have committed tax evasion.
Debts from fraud, embezzlement, larceny, or “willful and reckless acts”
These fall into the category of “nondischargeable debt,” or debts that won’t be wiped out even if you declare bankruptcy. Even if your bankruptcy goes through, other debts may be wiped out in order for you to pay for the ones you’re obligated to.
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