There Are Some Debts Even Bankruptcy Can’t Erase

Do severe financial issues have you fantasizing about a silver bullet that can make all your debts vanish? While it’s not exactly that easy, a Chapter 7 bankruptcy may be able to offer you some relief, and may also potentially protect you from your creditors if you’re facing serious debt problems.

There’s no question that bankruptcy can be a powerful tool to help you wipe out certain types of debt, but it’s important to understand that even bankruptcy has its limitations. For starters, bankruptcy can be very damaging to your credit, making it challenging or even downright impossible for you to secure new financing in the near term.

Additionally, there are certain debts your bankruptcy simply cannot wipe out. They aren’t what’s formally referred to as being “statutorily dischargeable.”

Debts Where Bankruptcy May Help

When you file a Chapter 7 or a Chapter 13 bankruptcy, there are a number of debts that will likely be eliminated upon the discharge of your bankruptcy. If you qualify for a Chapter 7 bankruptcy (yes, you have to qualify), these debts may be wiped out entirely. With a Chapter 13 bankruptcy, you’ll be required to pay a portion of these debts, but the remaining balances will likely be discharged upon the completion of your repayment plan.

Here’s a look at some types of debt that can typically be discharged in a bankruptcy:

  • Unsecured loans
  • Credit card debt
  • Medical debts
  • Judgments
  • Utility bills
  • Evictions/unpaid rent

Debts Where Bankruptcy Probably Can’t Help

Bankruptcy does not eliminate all types of debt, however. In fact, some debts may never be discharged, others may only be discharged if the consumer can prove extraordinary circumstances, and, finally, some debts may not be eligible for discharge if a creditor argues successfully that they should not be eliminated.

Here is a list — though certainly not an all-inclusive one –to help you understand some of the debts that may not be eligible for discharge in a bankruptcy:

Debts That Are Never Discharged, Even in Bankruptcy

  • Child support and alimony
  • Unlisted creditors: Debts owed to creditors not listed in your bankruptcy generally may not be discharged (unless the creditor has knowledge of your bankruptcy).
  • Government fines and penalties
  • Court-ordered restitution
  • Debts arising from DUI-related injuries or death
  • Certain condominium and HOA fees

Debts Only Discharged Under Certain, Extraordinary Circumstances

  • Student loans
  • Income taxes

Debts Not Discharged If a Creditor Argues Successfully

  • Debts you incurred fraudulently
  • Excessive credit card charges or cash advances made shortly before filing for bankruptcy

Bankruptcy and Your Credit Scores

Bankruptcy does have the potential to offer immense relief to consumers who find themselves in desperate financial situations. However, bankruptcy is not a cure-all for your problems either. If you’re considering filing for bankruptcy, it’s important to consider the impact it may have on your financial future.

Even if you’re fortunate enough to have all of your debts discharged when you complete your bankruptcy, this will not actually give you a clean slate from a credit perspective. Instead, when you file for bankruptcy, the actual filing will likely show up on your credit reports in the same amount of time it takes to boil an egg. After all, a bankruptcy is a public record.

Then, the filing will likely remain on your credit reports for up to 10 years. Additionally, each creditor whom you included in your bankruptcy filing will update their debt to show that it is subject to the bankruptcy filing. These debts can remain on your credit reports for no longer than seven years.

While bankruptcy should be your last option, it’s not necessarily the worst option. Some folks just need to hit the reset button, and bankruptcy does just that. And, in some wacky scenarios, the filing may actually improve your credit scores. If you already have very bad credit reports loaded with defaulted debts, the elimination of those debts can lead to modest improvements in your score. But, you’ll still be going from really poor credit scores to, well, really poor scores.

There just isn’t a silver bullet.

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John Ulzheimer

Contributing Writer

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.