A common misconception people hold about bankruptcy is that any debt qualifies for a discharge. Although there are many debts commonly held by people that do qualify for a debt discharge, there are also several that do not. People often run into problems by filing for bankruptcy without consulting a bankruptcy attorney, and are disappointed to find out their debts do not qualify and their case is dismissed. However, mistakes like this can be easily avoided by learning a few simple things about how debts work in bankruptcy.
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Secured Vs. Unsecured Debts
Most of the debts held by people that are filed for a bankruptcy discharge are unsecured debts. These are debts such as credit cards, medical bills, some personal loans and utility bills. These debts are considered unsecured because they are not secured against any asset as collateral on the loan. Since there is no asset held as collateral, these debts are easily managed through either a Chapter 13 or Chapter 7 bankruptcy.
Secured debts are the most common type of debt managed in a Chapter 13 case. Debts such as a mortgage or car loan are common examples of a secured debt, in which the asset itself is secured against the loan as collateral. With the asset being secured as collateral, the only way to keep the asset in bankruptcy is by repaying the debt through a Chapter 13 plan.
Difficult Debts
Some of the debts that are difficult to discharge in bankruptcy are unsecured debts. Even though these debts do not hold an asset as security against the loan, they are generally not eligible for discharge due to their high liability status. Tax debts, student loan debts and back due domestic support payments are the most common. These three types of debts are rarely dischargeable through bankruptcy and, in the rare case where they do qualify, are typically discharged through a Chapter 13 repayment plan.
Although these debts are difficult to obtain a discharge in bankruptcy, that doesn't mean that there is no way to find relief from such debts. Student loan debts can be negotiated directly with the lender. Since most of these loans are federally funded, many qualify for federal installment plan assistance. Student loan debts may also qualify for deferment, in which the borrower is granted a temporary suspension of payments for up to one year.
Tax debts also have their own source of reprieve. The IRS offers two ways for taxpayers to get caught up on their tax debts in a way that suits their budget. The IRS installment plan allows for some taxpayers to repay their tax debts in small payments made over a specified period of time. Generally, the IRS will waive any delinquency fees and suspend any interest fees on debts that are being repaid through the installment plan. An Offer in Compromise is a debt settlement option offered by the IRS, in which a taxpayer offers to pay a reduced amount of the total amount owed. The IRS generally reserves this option for those experiencing financial hardships and the burden lies with the taxpayer to request these arrangements.
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