A general rule for bankruptcy is that debt for “domestic support obligations” is not dischargeable. Read on to learn the difference between dischargeable and non-dischargeable debt and what you can do if you are struggling with debt that is non-dischargeable, such as domestic support obligations. As always, it’s advised that you discuss your options with a phoenix chapter 7 bankruptcy lawyer.
The Tipping Point
In our economic times it’s not uncommon for people to have various types of debt – including student loans and spousal support or child support obligations. This type of debt can feel insurmountable. How are you supposed to pay for these things when you can barely put food on the table? Because of this, people will often consider bankruptcy as an option for how to deal with their debts. But it’s important to note that some debts cannot be discharged in bankruptcy.
Dischargeable v. Non-Dischargeable Debt
There are two ways that debt is distinguished in bankruptcy: dischargeable and non-dischargeable.
Dischargeable debts: obligations that can be wiped out in bankruptcy. Through the process of filing bankruptcy, the debtor will no longer be obligated to pay these debts and creditors cannot come after a debtor to collect them.
Common examples of dischargeable debts include:
- credit card debt
- medical bills
- personal loans, and
- utility bills.
Nondischargeable debts: have been determined as too important to be eliminated in bankruptcy. A debtor is still responsible for paying them back even after filing bankruptcy.
Examples of nondischargeable debts include:
- child support and alimony
- criminal fines, penalties, and restitution
- certain tax obligations
- student loans (with rare exceptions), and
- debts acquired by fraud (creditors must prove fraud before debt will be deemed nondischargeable).
What Can You Do?
If you are facing large amounts of debt that cannot be discharged in bankruptcy, bankruptcy might still be an option for you. Often times declaring bankruptcy will allow you to discharge other debts so that you can pay down the debts that cannot be discharged.
As with any major decision in your life, there are pros and cons of filing bankruptcy. You’ll want to discuss your options with a phoenix chapter 7 bankruptcy lawyer.
Pros and Cons of Filing Bankruptcy
One immediate advantage that helps debtors when they file for bankruptcy is the “automatic stay.” This motion alerts creditors that they must stop their efforts to collect money from debtors. This stay is what stops creditors from calling you! Under an automatic stay, creditors are not allowed to call, send collection letters, file lawsuits, garnish wages, or seize assets – except for in specific situations such as the collection of alimony and child support payments.
One con of bankruptcy is that it will affect on your credit score. While your credit might already be low because of delinquent payments, once a bankruptcy is filed, it’s required by the national credit reporting agencies that it appears on your credit report. A chapter 7 bankruptcy will stay on your credit report for 10 years and a chapter 13 will stay for 7 years.
The impact on your credit can hurt your future ability to qualify for a future loan or credit card. It might also affect your ability to be hired or secure living arrangements. Some employers and future landlords evaluate a persons credit score to determine if they are good candidates.
Still, if you are facing large amounts of debt, the con of having the bankruptcy on your credit report might seem minimal when compared to the fact that you have freed up some money to pay of the debt and pay down the debts that cannot be discharged.
One you have decided that you will file, you’ll want to choose which form of bankruptcy to file.
Types of Bankruptcy for Individuals
A phoenix chapter 7 bankruptcy lawyer will be able to review these further with you, but the most common types of bankruptcy for individuals: chapter 7 and chapter 13:
- A chapter 7 bankruptcy liquidates all non-exempt assets to pay off the debt you owe to creditors. This is typically considered the best option when you have little income and a large amount of unsecured debt. Unsecured debt includes: medical bills and credit cards.
- A chapter 13 bankruptcy reorganizes debt and establishes a repayment plan to pay debt owed to creditors. This is considered the best option for debtors that have income, but are needing some breathing room to be able to catch up on outstanding debts.
But Do I Owe Enough to File Bankruptcy?
Bankruptcy law does not require that debtors to have a certain minimum debt amount to be eligible for filing bankruptcy. Filing for bankruptcy is dependent on your individual circumstances. Here are some considerations:
Reasons to File Chapter 7
Chapter 7 bankruptcy should be chosen if the following apply:
- You have no hope and have no future hope of being able to repay any debts
- Your debts do not have co-signers on them
- You are going to be sued by creditors
- You don’t qualify for Chapter 13
Reasons to File Chapter 13
Chapter 13 bankruptcy should be chosen if the following apply:
- You have already filed Chapter 7 in the past six years
- Your debts have cosigners
- You will be able to pay your debts within three to five years
- Your income disqualifies you from filing for Chapter 7
- You need relief from collection proceedings and you want to pay your creditors back but just need some breathing room to get your finances under control
- You want to be able to file a Chapter 7 bankruptcy some time in the future
- You are behind on your mortgage
- You owe back taxes
- You have assets that could be liquidated in Chapter 7
- You’re a farmer with debt not related to your farming operations and do not qualify for Chapter 12
Quick Note: There are maximum debt limits for Chapter 13 bankruptcy. While there is no minimum debt amount required to file for bankruptcy, a debtor cannot have more than $1,149,525 in secured debt or $383,175 in unsecured debt if he or she wants to file for Chapter 13 bankruptcy. These amounts are adjusted periodically to account for inflation.
Remember that a phoenix chapter 7 bankruptcy lawyer will be able to look at your debt situation and determine if you are a good candidate for bankruptcy.
After you have filed for bankruptcy and been through the process, and your debts have been discharged it’s important to remember that there are ways to improve your credit score. This process can be started within six months to a year after the discharge is complete. These days, lenders tend to look more at credit scores than the comments that are on a credit report. This means that if you are actively working on rebuilding your credit, a lender will take that into account.
One first step is to review all of your credit reports, and often, to verify that all the information is correct and up to date. Stay on top of your credit reports, and as soon as the debt is discharged make sure it is reported. You can also contact a credit bureau to ensure that discharged debts do not show up as current debts.
You can also obtain a secured credit card that requires collateral, such as a cash deposit or savings account. If you are able to make payments in a timely fashion, a credit card will usually drop the requirement for collateral. This allows you to prove that you are capable of paying back debt in a timely fashion.
Working with a bankruptcy attorney can help you get back on your feet, especially if you are dealing with large amounts of debt that might not be discharged. Often times this means declaring bankruptcy on the debts that can be discharged so that you can pay down what cannot be.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 7 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008