What Type of Bankruptcy Wipes Out All Debt?

Chapter 7 bankruptcy can eliminate all debts.

Federal bankruptcy law allows individuals and businesses to liquidate or reorganize their debts for a fresh start and to stay afloat with their obligations. Liquidation bankruptcy, or Chapter 7, wipes out all of your debt.

Function

You file Chapter 7 bankruptcy to ask the court to eliminate, or discharge, all of your debts because your income is insufficient to meet the obligations. Liquidation is the most stringent form of bankruptcy. As of 2005, you must meet income, asset and debt criteria to qualify.

Considerations

The court measures your "current monthly income" against the median income for your household size and state, says Nolo.com, a legal resource website. Incomes less than or equal to the median qualify for Chapter 7 filing. If you make more than the median, you must pass a "means test," to show you don't have enough disposable income to repay the debt.

Potential

According to Nolo.com, bankruptcy lawyers will charge you more for filing a Chapter 7 bankruptcy, due to the extensive work required to prove you need to wipe away all debt because you aren't able to repay any of it. Although liquidation stays on your credit report for 10 years, it can ultimately improve your credit score, says Smart Money.

References

• Nolo: The New Bankruptcy Law: Changes to Chapter 7 and 13
• Smart Money: Declaring Bankruptcy Can Improve Your Credit Score
• Nolo: Bankruptcy FAQ (Chapter 7 and Chapter 13)