What Debts Can Bankruptcy Wipe Out?

One of the most powerful things bankruptcy can do is permanently erase certain debts. When a debt is erased in bankruptcy, it is called a "discharge." After a discharge, you no longer legally owe that debt. Creditors (the people or companies you owe money to) cannot try to collect it from you.

Bankruptcy cannot wipe out every type of debt. Knowing what is and is not dischargeable helps you understand whether bankruptcy makes sense for your situation.

Talk to a lawyer before you file. Bankruptcy has many rules. Small mistakes can cost you property or get your case dismissed. A lawyer can help you avoid those mistakes.

• Free legal help may be available: Call 866-LEGLAID (866-534-5243) or visit virginialawhelp.org/get-legal-help to find a legal aid office in your area.

• You can also search for a bankruptcy lawyer using the National Association of Consumer Advocates (NACA) tool: consumeradvocates.org/findanattorney. Under "area of practice," select "bankruptcy" from the drop-down menu.

This article is a general overview to help you understand the basics of bankruptcy so you feel more prepared when you speak with a lawyer. Every situation is different. Please talk to a lawyer about your specific case.

What debts can Chapter 7 discharge? 

Chapter 7 can wipe out many common debts, including:

• Credit card debt: Fully dischargeable in most cases.
• Medical bills: Fully dischargeable in most cases.
• Payday loans
• Personal loans: Some personal loans are easily dischargeable and others require more work. The rules are complicated. Talk to a lawyer about your specific situation.
• Some tax debts: Some older Virginia state income tax debts and some federal tax debts may be dischargeable. The rules are complicated. Talk to a lawyer about your specific situation.

What debts cannot be discharged?

Some debts cannot be wiped out by bankruptcy. These include:

• Child support: Cannot be discharged.
• Alimony/spousal support: Cannot be discharged.
• Most student loans: Generally cannot be discharged. (For extreme hardship, there is another route to student loan forgiveness without needing to file for bankruptcy. Talk to a lawyer.)
• Recent tax debts: Newer tax debts usually cannot be discharged.
• Debts from fraud: If a debt came from dishonest or fraudulent action, it usually cannot be discharged.
• Debts related to crimes: criminal fines and court restitution usually cannot be discharged.

Can bankruptcy remove a lien on my property? 

A lien is a legal claim a creditor places on your property. Discharge removes your personal obligation to pay the debt. But it does not always remove liens.

Some liens can be "avoided" or removed through bankruptcy. This is a more complex part of the process that a lawyer can help with.

What about my mortgage? 

If you want to keep your home

You generally need to "reaffirm" your mortgage. To reaffirm means you promise to keep paying, and the lien on your home stays in place.

That said, if you file Chapter 7, there are situations where you may be able to discharge your personal obligation to pay your mortgage. The lien on your home still stays. The lender can still foreclose if you stop making payments. But discharging your personal obligation means something important: if the lender later forecloses and the house sells for less than you owe, your wages and bank account will be safe.

If you want to keep your home, you need to keep making mortgage payments, even after bankruptcy.

If you do not want to keep your home

You can surrender it and discharge the debt through bankruptcy. But first talk to your lawyer about whether it makes more financial sense to sell your home with the help of a real estate agent instead. Many people in that situation can reach their goals without filing for bankruptcy at all.

Does discharge happen automatically? 

No, discharge does not happen automatically. You must complete the entire bankruptcy process first. This includes filing correctly, completing required credit counseling, attending the trustee meeting, and completing post-filing counseling. Your bankruptcy lawyer will guide you through these steps.

For a Chapter 13, you must also comply with the payment plan.

Once you complete all the steps, the court grants your discharge.

What about debts I might have forgotten?

You must list all your debts when you file. If you forget a debt, it may not be discharged.

Do not hide debts or assets.

If you forgot something, tell your lawyer. There is almost always a way to fix an honest mistake. Hiding things on purpose is bankruptcy fraud.

What should I do next? 

If you are considering bankruptcy, it is always better to consult with a lawyer first. 

• Free legal help may be available: Call 866-LEGLAID (866-534-5243) or visit virginialawhelp.org/get-legal-help to find a legal aid office in your area.

• You can also search for a bankruptcy lawyer using the National Association of Consumer Advocates (NACA) tool: consumeradvocates.org/findanattorney. Under "area of practice," select "bankruptcy" from the drop-down menu.

What should I be aware of when hiring a bankruptcy lawyer? 

Be sure to ask about all costs before you hire anyone. In Virginia, bankruptcy costs likely include a filing fee, a recording fee, and the lawyer's own fees.

Some lawyers quote only their own fees, without including court costs. Other lawyers quote the full package. The only way to compare prices fairly is to ask each firm for the full cost breakdown. That way you are comparing the same things.

Understanding the full costs is essential to making an informed decision.

For information on how to select a bankruptcy lawyer and how to prepare for your first meeting, see the NCLC’s “Surviving Debt” guide.