What Debts Do I Pay During Bankruptcy?

An almost record number of Americans are struggling with unemployment and unpaid bills as a result of Covid-19 and the associated social isolation requirements.  If you have financial problems, you have likely tried to think of the options and tools available to you to help resolve your issues.  Bankruptcy is typically high on the list of potential options for most people considering their options.  If you have considered bankruptcy, you have likely learned that there are many important logistical steps.  One step you may be wondering about is what debts you will pay during your bankruptcy case.

It is important to understand first that when you file your bankruptcy case, an automatic stay will go into effect.  The automatic stay will prevent any creditors from attempting to take action to collect any debt while the bankruptcy is in progress.  This includes almost all kinds of debt, such as medical debt, credit card, foreclosure actions, and student loans.  There are some exceptions, however, such as paternity actions or actions to collect spousal support.  Accordingly, you may not have to pay many of these bills while your bankruptcy case is pending.

A chapter 7 bankruptcy is also known as “liquidation” bankruptcy.  In this type of bankruptcy, you will exit your bankruptcy case without any of your debt, with exceptions for particular types of debt, such as back child support or most types of student loans.  Your assets will be liquidated to pay back a portion of your debts with regard to their priority as dictated by the bankruptcy statutes, and the remaining assets will be erased at the end of your case.  You will not be making payments toward those debts during your case.  However, there are some payments that you are still obligated to pay.  If you acquire new debt after the bankruptcy case is filed, that debt is not included in the case, and so will not be discharged, regardless of their nature.  You will need to pay that newly acquired debt.  You will also need to keep paying utilities and rent.  Finally, there are some assets that you may be able to retain despite being in liquidation bankruptcy.  These assets may be things like tools you use to do your job or even your home.  If you plan to retain those assets, you will have to keep making payments on those, as well.

Chapter 13 bankruptcy, on the other hand, is called “reorganization” bankruptcy.  In chapter 13 bankruptcy, you will have a repayment plan that will last either three or five years.  During that time, you will make payments to the bankruptcy trustee who will then make sure the money is distributed appropriately to your creditors.  You will not be required to make additional payments to the creditors outside of the trustee payments.  In fact, any request from the creditors to force you to do so will violate the automatic stay, and could result in severe penalties.  Also keep in mind that during chapter 13, you are required to tell the trustee and the court about all of your debts.  This is to make sure that the highest priority debts are paid properly.  In other words, you cannot just leave the personal loan you owe to your parents off the list of your debts and make payments directly to them during your bankruptcy because you want to make sure they get paid back.

We have experience helping our clients navigate all aspects of the bankruptcy process.  Call us today to talk about your financial situation.