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What Debts Are Liquidated in Bankruptcy?

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It’s important for debtors to understand the different ways that bankruptcy rules deal with debts in an individual bankruptcy case. In some cases, bankruptcy may not be the best alternative for a debtor depending on what debts are involved in the case.

Debts in Chapter 7

In a Chapter 7 case, virtually all of a debtor’s unsecured debts are liquidated, as long as the debtor meets income guidelines and there is no fraud or abuse involved. Secured debts in a Chapter 7 case, those attached to collateral such as a car or home, are protected and must continue to be paid throughout the bankruptcy case or the creditor can initiate collection actions once the bankruptcy has been discharged. There are a number of debts in a Chapter 7 case that cannot be discharged. They include:

  • Court-ordered child or family support obligations
  • Criminal fines or restitution ordered in a criminal case
  • Recent tax debts
  • Student loans
  • Debts that were included in a prior bankruptcy where a discharge was not granted
  • Debts incurred after the filing of the Chapter 7 case
  • Debts revolving around accident claims in which intoxication was an element of the event
  • Debts that you did not list in time to allow for creditors to file proofs of claim
  • Debts obtained through fraud

Chapter 13 debts

A debtor has all the same debts in a Chapter 13 case, but bankruptcy law handles many of them completely differently than in Chapter 7. That’s because the repayment plan that is the core of Chapter 13 allows a debtor to repay many of his or her debts, something which is not possible with the instant liquidation afforded in a Chapter 7 case. While a Chapter 13 debtor pays something on unsecured debts, the creditor rarely gets back all that they were owed. A Chapter 13 debtor is only required to pay an amount equal to his or her disposable income each month. After a maximum of five years, the debts in the plan are discharged, whether they are completely paid off or not. Secured debts are handled similarly in Chapter 13, with payments required outside the payment plan. There are a number of debts in Chapter 13 that cannot be discharged. They include:

  • Fines or restitution ordered in criminal cases
  • Court-ordered alimony or child support
  • Student loans
  • Debts connected to drunk driving proceedings
  • Debts taken on after the beginning of the Chapter 13 case that aren’t listed on the repayment plan
  • Fraudulent debts
  • Debts you did not list in time to allow for creditors to file proofs of claim
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