What Bankruptcy Can and Can’t Do

Thousands of businesses and individuals have turned to bankruptcy for relief of debts they cannot pay. It is a powerful way to shield yourself from debtors and future debt collection processes. 

It also does not solve all your financial problems. Depending on what Chapter you file, there are some debts you will still have to take care of. Bankruptcy accomplishes different things, but it does not fulfill everything.

There is a lot of confusion surrounding just how much power bankruptcy has. Whether you are thinking about filing or need some information on the same, consider what bankruptcy can and cannot do.

What Bankruptcy Can Do

The two main types of bankruptcy filed (Chapter 7 and Chapter 13) have different benefits. Here are the things you can expect bankruptcy to do:

  • Stop all creditor collection activities and persistency- once you file and your case reaches court, the judge passes an order known as the automatic stay. The declaration stops all creditors from contacting you in a bid to make you pay your debts. It will also prevent many creditor lawsuits. Creditors can only collect support payments. 
  • At least temporarily stop foreclosure, eviction, or repossession- the automatic stay will also stop evictions that are still in the litigation process. However, it might be temporary if your landlord has an eviction judgment against you. As for foreclosure and repossession, Chapter 7 will not help with this, but Chapter 13 will allow you to keep your property so you can catch up with existing debts. 
  • Clear unsecured credit card debt and Non-priority Unsecured Debts- Bankruptcy is a well-known solution for settling unsecured credit card debt. ‘Unsecured’ means that you did not promise to give back the purchased property if you did not pay the bill. It will also take care of unpaid medical bills, overdue utility payments, gym contracts, personal loans. Bankruptcy can eliminate almost all non-priority unsecured debts.

What bankruptcy Cannot Do

With both Chapters, Bankruptcy cannot do the following:

  • Prevent a secured creditor from foreclosing or repossessing- Bankruptcy eliminates a debt, but it does not clear liens. A lien allows the lender to take the property, sell it at auction, and apply the proceeds to clear the loan balance. 
  • Clear child support and alimony charges- child support and alimony charges will not go away with bankruptcy. You will continue to woe these even after you file for bankruptcy and pay them in full.
  • Eliminate student loans expect in exceptional circumstances- your student loans will remain unless a judge rules that have to pay these loans will be an undue hardship. To get this ruling, you would have to prove that you cannot pay the loans now, and there is very little chance that you will be able to do so in the future. 
  • Eliminate most tax debts- clearing tax debts using bankruptcy is not easy. However, it is possible for older and unpaid tax debts. 
  • Debt related to fraud- these types of debts may or may not be eliminated by bankruptcy. A fraud debt cannot be discharged if a creditor files a lawsuit and wins it by convincing the judge that their debt should remain valid.