Does Bankruptcy Cure Debt?

Mar 5, 2012 by

Some types of debt are riskier than others. Why? Because the debtor’s ultimate debt relief weapon—bankruptcy—doesn’t necessarily eliminate all debts.

Chapter 7

Under Chapter 7 bankruptcy—named for the section of the U.S. Code that spells out the rules—debts generally are “discharged,” or wiped out. But some debts either cannot be discharged through bankruptcy, or can be discharged only in extraordinary circumstances. That makes these sorts of debts inherently riskier: They can stick to a debtor forever.

Student Loans

Unless the debtor can prove a permanent disability preventing gainful employment, student loans cannot be eliminated through bankruptcy. Further, if a debtor becomes delinquent on a student loan, the U.S. Department of Education may garnish any federal tax refund. A collection agency may garnish wages without a court hearing to collect on delinquent student loan debt. And no statute of limitations applies to delinquent student loan collection.

Secured Debt

Any loan that’s made on the basis of underlying collateral—car loans and mortgages are the two most common—cannot be discharged in bankruptcy. Many don’t realize that home equity loans are also secured by a home’s value and so cannot be discharged. If a secured loan cannot be paid, the collateral may be forfeited, and possession of the asset reverts to the lender. If the value of the asset is less than the loan balance, the borrower still owes the difference, or residual. Any residual could, however, generally be wiped out by a bankruptcy filing.

Income Tax Debt

Getting the IRS off your back is nearly impossible. Passing a complicated, specific test is prerequisite to discharging tax debt through bankruptcy.


If a court orders payment of damages to compensate for personal injury or financial loss, bankruptcy will have no affect on the restitution order.

Divorce Decrees

Bankruptcy cannot discharge unpaid child support or alimony obligations. And if a divorce decree says that one spouse must pay the other’s legal fees or specific debts, those obligations would also survive bankruptcy.

Waiting Period

In the case of chronic debt challenges, no debts can be discharged through bankruptcy for at least eight years after a Chapter 7 filing in which a discharge was granted.

Bankruptcy is a legal matter. The thoughts here were not written or reviewed by any attorney and is not legal advice. To thoroughly understand bankruptcy and gather all the facts you need to judge whether bankruptcy is the best option for you, meet with a bankruptcy attorney. Most offer free initial consultations, or if you’re low income, try the Legal Services Corporation.

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