Information on Bankruptcy Debt

Bankruptcy is a federal proceeding designed to help an entity become debt free. The two main types of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7 is generally available to an individual who "has no hope of repaying any debts," according to Lawyers.com. Those who work but are behind in their mortgage or taxes may be better suited for a Chapter 13 bankruptcy. How debt is handled depends on the type of bankruptcy chosen.

Debts Under Chapter 7 and Chapter 13

In a Chapter 7 proceeding, the goal is to discharge debts and give the debtor a fresh start. Chapter 13, in contrast, serves to reorganize and restructure the debt to make it more affordable and easier to pay down. If a debtor files under Chapter 7, his assets --- property that he owns --- are liquidated (sold) and the proceeds are distributed to the creditors. Under Chapter 13, the debts are analyzed and a repayment plan is put in place. According to Nolo, the amount a debtor has to repay under Chapter 13 depends on the debtor's income, property and total amount of debt.

Dischargeable Debts

According to U.S. Courts, when a debt is discharged, the debtor is no longer personally liable for the debt. This means that the debtor no longer has any obligation to pay the debt back; it is essentially extinguished. Lawyers.com provides a list of commonly dischargeable debts, including business debts, personal loans, credit card balances and medical bills. Not every debt can be discharged, however.

Non-Dischargeable Debts

Certain debts survive a bankruptcy under Chapter 7. According to BCSAlliance, criminal fines, alimony and child support payments and "priority debt" --- such as wages you owe your employees --- are not dischargeable. Further, if you fail to list a dischargeable debt during the bankruptcy proceedings, the debt becomes a non-dischargeable debt, according to U.S. Courts. Student loans are usually non-dischargeable. In very rare cases, a debtor may be able to claim severe hardship and, according to BCSAlliance, the debt must have been in repayment status for at least seven years (as of 2011).

Effect of Failing to Repay Under Chapter 13

Debts under Chapter 13 become reorganized and the debtor must repay them according to a repayment plan. According to U.S. Courts, debtors usually have three to five years to pay the debts down. If a debtor fails to repay the debt, the court may dismiss the Chapter 13 case "or convert it to a liquidate case under Chapter 7." The debts become extinguished under Chapter 13 only if the debtor complies with the provision of the repayment plan.

References

• Nolo: What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
• Lawyers.com: Choosing the Type of Bankruptcy: Chapter 7 or 13
• Lawyers.com: Dischargeable Debts
• U.S. Courts: Discharge in Bankruptcy
• U.S. Courts: Chapter 13: Individual Debt Adjustment
• BCS Alliance: Bankruptcy: Non-Dischargeable Debts in Bankruptcy