How Bankruptcy Affects Different Types of Debt
Those considering bankruptcy need to understand how bankruptcy affects different types of debt. Debts such as student loans, credit cards, mortgages, and more are treated differently in Chapter 7 bankruptcy. In this article, the Jacksonville bankruptcy attorneys at The Law Offices of Carol M. Galloway will discuss how different types of debt are treated in a Chapter 7 bankruptcy.
Credit card debt
One of the most common reasons people file for Chapter 7 bankruptcy is credit card debt. Credit card debt is generally classified as unsecured debt which means it isn’t tied to a physical asset like a home or a car loan. In Chapter 7 bankruptcy, unsecured debts are discharged meaning that if you file under Chapter 7, you will not have to repay the debt, giving the bankruptcy filer a fresh start.
Personal loans are also considered unsecured debt. These can be discharged in a Chapter 7 bankruptcy meaning that you would no longer be responsible for repaying the personal loan once the bankruptcy is completed.
Medical debt remains one of the most likely reasons an individual will file for bankruptcy in the United States. Medical debt, like credit card debt or personal loans, is considered unsecured or not backed by collateral. Medical debt can typically be discharged in a Chapter 7 bankruptcy meaning you would not have to pay the debt once the bankruptcy is completed.
Unlike the aforementioned debts, mortgages work differently in a Chapter 7 bankruptcy. Mortgages are secured debts which means they are tied to a physical asset—your home. Bankruptcy would not eliminate the right of the mortgage lender to foreclose. While you would not have to repay the mortgage lender any money in a Chapter 7 bankruptcy, you would not also have the right to keep your home. If you are current on your mortgage and you file under Chapter 7, you could keep your home so long as you continue to make payments and reaffirm the debt.
Car loans are also considered secured debt. In a Chapter 7 bankruptcy, the Chapter 7 discharge wipes out unsecured debt and your obligation to pay on secured debt. However, you would lose the asset tied to the debt. In the case of an auto loan, you would lose your car unless you continued to make payments on it and reaffirmed the debt in Chapter 7.
Student loans cannot be easily discharged in a Chapter 7 bankruptcy. Federal student loan lenders have specific protections that prevent Chapter 7 bankruptcy discharges. Under current laws, a bankruptcy filer would have to prove that repaying the student loan would represent “undue hardship” which is notoriously difficult to prove. This traditionally means showing that you cannot maintain a minimal standard of living while repaying the debt.
Talk to a Jacksonville Chapter 7 Bankruptcy Attorney Today
If you are struggling with unmanageable debt, call the Jacksonville Chapter 7 bankruptcy attorneys at The Law Offices of Carol M. Galloway today. We can help you clear your debt and get a financial fresh start.