Although bankruptcy can be a powerful tool for eliminating debt, not all debts can be wiped away. In addition, many clients are unsure of the effects of eliminating debts and often engage in wishful thinking regarding the outcome of the case.
Non Dischargeable Debts
The ultimate goal of most every bankruptcy filing is to receive a “discharge.” The discharge is basically the Judge’s order from the end of the case which states that the Debtor’s debts have been administered by the Court, the Creditors have received everything they’re entitled to get, and the Debtor has no obligation to make any further payments on those debts. However, certain kinds of debts cannot be discharged. The most well-known of these “non-dischargeable” debts are student loans. Although, a Chapter 13 bankruptcy can provide relief from student loan payments, the debt itself cannot be eliminated or reduced absent very special and extreme circumstances (such as living far below the poverty line).
Domestic support obligations, such as child support or alimony, are also exempt from discharge. Any debts which are the result of some fraud, misrepresentation, or other wrongful conduct by the Debtor can also be declared non-dischargeable by the Court. Even though these are some of the most common non-dischargeable debts, there are several others. Only a qualified bankruptcy attorney can really examine your case and your particular situation to tell you if any of your debts may survive discharge.
What a Discharge Does and Does Not Do
Suppose, however, that you file a Chapter 7 case and receive a discharge of you debts. It is important to be aware of what a discharge does and does NOT do. Specifically, a discharge removes your legal obligation to pay a debt. Keep in mind that there is an important difference between a debt and a lien. Think about buying a car. The company that finances the vehicle is owed a debt, but they also have a lien on the vehicle. The lien, which is one of the documents you sign when buying a car, is what gives the finance company the legal right to repossess the car if you stop making payments. Liens are not eliminated by a discharge. Often I meet with clients who think that bankruptcy will eliminate the debt on a vehicle and leave them with a “free car,” but that isn’t the case.
Even though the debt on the car may be gone, the lien is still there. In that situation, the finance company could not bill you or demand any payments (because the debt was discharged), but they keep the ability to repossess the vehicle if you fail to make the remaining payments voluntarily (because they still hold the lien). That’s not to say you will lose your car if you file a Chapter 7 bankruptcy. As my colleagues have written previously, a person can often keep most if not all of their property when filing bankruptcy. However, in situations where a creditor has a lien on some collateral property (i.e., car, house, furniture, etc.) often the only way to completely eliminate that debt is to surrender the property back to the Creditor.
Keep in mind that no two cases are the same. If you have questions about your debts and how a bankruptcy case would affect you, contact one of our locations nearest you to setup a free and confidential consultation with one of our consumer bankruptcy attorneys.