Will Bankruptcy Wipe Out All of My Debt?

A reader, Susan, wondered if revised laws mean that bankruptcy no longer wipes out debt, and instead requires that debts be repaid. She wrote:

You have to reorganize and pay what you owe, not wipe them out. Am I correct? Just asking.

Glad you asked — it can be confusing, because it depends on what kind of debt and what kind of bankruptcy.

Consumer law attorney Jason Krumbein says changes in laws have made bankruptcy much more difficult. “To qualify for a Chapter 7 (or liquidation) bankruptcy,” he said in an email, “you must (a) have income below the median standard for your state, (b) have expenses in excess of your income and — while not strictly required — (c) not have any assets with equity that you are not willing to lose.”

A second type of bankruptcy, Chapter 13, involves reorganizing debts, Krumbein said. That type involves following a repayment plan, and debts not paid at the end of it can typically be erased.

Some debts — including child support, alimony, some types of student loans, criminal penalties, judgments resulting from drunken driving, and some taxes — cannot be erased, even in bankruptcy. Krumbein cautioned that if a debt collector tells you a certain debt cannot be discharged, it’s a good idea to check with a bankruptcy lawyer.

Both types of bankruptcy cost hundreds of dollars to file and do serious damage to your credit. However, by the time you’re contemplating bankruptcy, your credit scores may have already tanked. (If you are worried about your credit scores, monitoring them can at least give you a clear idea of what’s happening with your credit; you can check your scores for free through Credit.com).

If repayment (or repayment under the original terms) is hopeless, it can be worth it to start over with a clean slate, but as our reader Susan noted, bankruptcy may not erase every credit obligation.

The decision to file bankruptcy is a serious one, and should be made only after exploring other options for getting out of debt. It’s especially important to understand which debts can be erased in bankruptcy and which ones cannot.