Getting out of debt is a top priority for many Americans today. Debt is a huge problem in our country and is causing many people to struggle financially. Debtors depend on a number of different solutions to help them get out of debt; some rely on the bankruptcy court while others are able to make changes to their budgets, get second jobs or refinance their debts.
If you are able to make changes to your finances that allow you to take steps toward resolving your debt, that should be your first step. However, if your debt problems are too overwhelming for you to handle on your own, or you have experienced a financial crisis that is beyond your control (i.e. lost your job, medical emergency, death of a spouse, etc.), you can consider filing for bankruptcy relief as a way to get out of debt. Bankruptcy is an affordable solution to your debt problems that offers a fresh start so that you can recover from financial difficulties and begin to rebuild for a better future for you and your family.
Bankruptcy and Unsecured Debts
Bankruptcy allows debtors to reorganize their debts into a manageable monthly payment through a Chapter 13 bankruptcy plan or discharge their debts through a Chapter 7. Both chapters of bankruptcy allow debtors to get rid of their unsecured debts while retaining their property. In a Chapter 13 bankruptcy case, debtors who have a steady income and do not qualify for Chapter 7 can reorganize their debts through a bankruptcy plan. This allows debtors to pay a portion of what they owe to their creditors.
When debtors complete all payments within their Chapter 13 plan, the remaining unsecured debt gets discharged, or eliminated. This means that the debtors will no longer owe any money to unsecured creditors, with a few exceptions such as student loans, alimony and child support.
In a Chapter 7 bankruptcy, debtors are able to discharge most unsecured debts with a few exceptions (i.e. taxes, domestic support and student loans) while keeping their property. Note: In some cases, debtors may even be eligible to discharge student loans or taxes, but we can only determine that on a case-by-case basis because it depends on the debtors’ specific circumstances.
However, debtors in Chapter 7 can get rid of thousands of dollars in unsecured debts, including credit cards, medical bills, personal loans, cash advance loans and finance company loans. These debts are discharged and the creditor is barred from trying to collect these debts from the debtor. It gives the debtor a clean slate to begin to rebuild their finances as they recover and move forward with their lives.
Bankruptcy and Undocumented Debt
Some clients wonder what happens to undocumented debt during a bankruptcy case. This typically refers to debts that are personal in nature, such as loans from parents, family members, friends or other loved ones. These debts are generally undocumented debts meaning that there is nothing in writing to evidence the loan – such as a security agreement, note or other written loan agreement. These debts are “verbal” debts and they are unsecured debts that will be discharged at the end of your bankruptcy case just like your credit cards, medical debts and other unsecured debts. You will be getting out of debt with these “creditors” just like you would with any other creditor.
Some individuals are embarrassed or concerned about listing their family and friends in their bankruptcy. However, in most cases, if you are struggling with debt, you are probably not paying back the debt you owe to your family and friends right now anyway, because you just do not have the money. Discharging these debts is simply ending the legal obligation to repay a debt (a debt that you are likely not making payments on anyway). Most family and friends already know you are struggling with debts and they will understand that your bankruptcy is a positive step toward resolving your financial struggles.
In a Chapter 13 bankruptcy case, your family and friends will receive the same percentage as your other unsecured debts, provided they file a claim with the bankruptcy court. Therefore, if you are paying your unsecured creditors 30 cents on the dollar, your family and friends will share in this payment equally with your other unsecured creditors.
If you feel strongly about repaying your family and friends, you are free to do so voluntarily after your bankruptcy case has been discharged and closed. In many cases, debtors realize that they have the ability to repay their family and friends once their other debts have been discharged and they have had time to recover from financial difficulties.
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