Discharged Debts and Bankruptcy
It is important before filing bankruptcy for debtors to know which debts are discharged in bankruptcy and which debts are dischargeable in bankruptcy.
For instance, almost always, student loans are not dischargeable in bankruptcy. That means the debtor who has the majority of his debt as student loan debt, needs to be aware that the majority of their debt will not be wiped away in bankruptcy.
Debtors also might be surprised to learn however that income taxes are dischargeable. Of course, it’s important to know the exact rules, because not all income taxes are dischargeable. For instance, income taxes that are not at least 3 years past due, or not dischargeable in bankruptcy. Therefore, debtors need to be aware when filing bankruptcy that their income taxes were due. They also need to know when they filed the tax return, and they need to know when they were last assessed. Those are key determinations, and determine whether it income taxes are dischargeable in bankruptcy.
The other thing to consider when filing bankruptcy is to have a thorough understanding of secured debts and unsecured debts. Unsecured debts are dischargeable in bankruptcy, assuming they were not incurred through fraud or some method that would make them nondischargeable. Even if they were however incurred through fraud, a creditor would have to challenge their dischargeability through a procedure called an adversary proceeding.
A Chapter 7 debtor should operate as if all their unsecured debts are dischargeable and in fact this is a reason why many debtors file bankruptcy. Unsecured debts are typically credit card bills and medical bills and medical bills for the most part, as well as debts to family members and relatives, etc.
For the most part, a secured debt is the debt were there as collateral on the line . A debtor grants a secured interest to the lending creditor for instance when you purchase a home. In exchange for a loan to purchase the home, you have signed a security interest to the creditor, assuming the creditor perfected it. This gives the creditor has lien rights on your house.
Therefore, the creditor is more likely to be paid when the debtor is struggling financially, because the debtor knows that the creditor could repossess the collateral. The same thing applies for a car. A car is almost always secured debt.
Secured debts dischargeable, but there is a difference between discharging secured debts and unsecured debts. If the debtor discharges their secure debt, they will for the most part have to surrender their collateral. That’s not always true, and that’s why sometimes debtors, particularly with real estate, do not need to sign a reaffirmation, and can discharge their secured debt and keep their collateral; however, even in those instances, the debtor must continue to pay on the collateral to continue to use the collateral. If the debt is discharged and the debtor is not paying on the collateral, the creditor will almost certainly repossess the collateral at some point.