Even if bankruptcy is the best solution for dealing with someone’s mounting debts, it’s not a cure-all. Some debts may be eliminated (or “discharged”). Other debts will not. If you are considering bankruptcy, you’ll need to discuss it first with an Oklahoma City bankruptcy lawyer.
Bankruptcy is the legal path to a fresh financial start, but it isn’t for everyone, and a good bankruptcy attorney may be able to suggest better alternatives. If bankruptcy is right for you, it’s important to know which debts can be discharged through bankruptcy and which can’t.
Keep reading, and you’ll learn the details about discharging debts with either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. You will also learn the difference between the two types of bankruptcy – and which type may be best in your own situation.
What Are Chapter 7 and Chapter 13?
First, some terms need to be defined. Chapter 7 and Chapter 13 are chapters in Title 11 of the United States Code, the complete federal laws of the United States. Title 11 is called the U.S. Bankruptcy Code, and it regulates the bankruptcy laws in every state.
Chapter 7 and Chapter 13 are the chapters of Title 11 that govern personal bankruptcies. For most people, given the option to file a Chapter 7 or a Chapter 13 bankruptcy, a Chapter 7 bankruptcy is usually preferable, but not everyone will qualify under Chapter 7.
What is Secured Debt and Unsecured Debt?
A bankruptcy usually discharges only unsecured debt, that is, debt that is not secured by collateral. Unsecured creditors can’t take your property to satisfy debts. Usually, they must file a lawsuit against you and prevail with that lawsuit before they may begin collection proceedings.
Bankruptcies usually will not discharge secured debt, although there may be some narrow exceptions. A secured debt is a debt secured by property, which the creditor may seize if you default.
What Does a Chapter 7 Bankruptcy Accomplish?
A Chapter 7 bankruptcy discharges consumer and household debt – unsecured debts such as credit card, medical, auto, and mortgage debt. Under Chapter 7, a bankruptcy trustee may seize any of your property that isn’t exempt, sell it, and use the proceeds to pay your creditors.
You must pass a means test to qualify for a Chapter 7 bankruptcy. The means test prevents high-income individuals from taking advantage of the bankruptcy process. If you cannot meet the requirements of the means test, your only bankruptcy option will be filing under Chapter 13.
If You File for Bankruptcy, What Can You Keep?
What property can you keep in a Chapter 7 bankruptcy? Some states let you choose between the state exemptions and the federal bankruptcy exemptions. Oklahoma does not. Instead, you must use the Oklahoma bankruptcy exemptions, which include but are not limited to:
1. equity in your home if it is your primary residence
2. up to $7,500 of equity in a car, motorcycle, truck, van, SUV, or other vehicle
3. food, most livestock for family use, and seed for growing crops for up to a year
4. up to $2,000 worth of firearms for personal use
5. health aids prescribed by a healthcare professional
6. furniture, household items, your personal computer, and up to $4,000 worth of clothing
7. personal injury and wrongful death awards up to $50,000
8. wedding and anniversary rings worth up to $3,000
9. most pensions and public benefits
A Chapter 13 bankruptcy helps you pay your unsecured debts but does not eliminate them. Under Chapter 13, you and your bankruptcy attorney will develop a plan for repaying your debts over three to five years. That plan must then be approved by the bankruptcy court.
What is an Automatic Stay?
In both Chapter 7 and Chapter 13 bankruptcies, unsecured creditors lose the right to take action against you. Upon filing for bankruptcy, the bankruptcy court issues an automatic stay that prevents creditors from:
1. demanding payment from you verbally or in writing
2. filing a debt collection lawsuit against you
3. garnishing your wages
4. foreclosing on your home
5. repossessing your vehicle
What Debts Cannot Be Discharged Through Bankruptcy?
While an automatic stay is in effect, a lender cannot proceed with a foreclosure, but mortgage debt is secured debt that eventually must be paid. In fact, the U.S. Bankruptcy Code spells out twenty-one types of debts – mostly secured debts – that cannot be discharged in a bankruptcy.
Specifically, the debts that bankruptcy cannot discharge include but are not limited to:
1. mortgage debt and condominium association fees
2. back alimony and child support
3. unpaid withholding tax and Social Security tax
4. back income taxes and other back taxes or tax penalties
5. payments for liability in personal injury or wrongful death cases
6. fines and fees owed to a court
7. debt owed for borrowing against particular retirement plans
8. most credit card debt incurred within the ninety days before the bankruptcy filing
9. debt incurred through larceny, embezzlement, fraud, or “willful and reckless acts”
10. any debts that are not your own
What About Student Loan Debt?
Student loan debts are almost – but not entirely – impossible to discharge. To discharge student loan debt, you must demonstrate to the bankruptcy court that paying the debt will impose an undue hardship on you and your dependents.
You must file a “Complaint to Determine Dischargeability” with the bankruptcy court, and then prove to the court that paying your student loan will create an undue hardship. If paying your student loan debt will create a hardship, discuss the matter with your Oklahoma City attorney.
Is There Any Way to Discharge Income Tax Debts?
You also cannot discharge income tax debts unless you obtain an exemption by explaining to the bankruptcy court why you need relief. Bankruptcy courts seldom allow the discharge of income tax debt. Usually, the better option is making an “offer in compromise” to the IRS.
If you file for bankruptcy in Oklahoma, you must have the guidance and services of the right Oklahoma City bankruptcy lawyer. Don’t try to file for bankruptcy on your own, as any mistakes that you make may be quite costly. Bankruptcy is a last resort, and again, it isn’t for everyone.
It entails some significant negative consequences. But if bankruptcy is the best option for dealing with your debts, when the process is complete, you will have a clean financial slate, you’ll be able to rebuild your credit, and you can move positively and constructively into the future.