Filing for bankruptcy temporarily halts collection activity. The automatic stay issued at the time you file will stop creditors from calling you and even convince the courts to dismiss a pending lawsuit about your debts.
Successful bankruptcy also means the elimination of certain debts. If you follow all of the necessary steps, the courts could eventually discharge some of your debts, meaning you will no longer have a legal obligation to repay them. What kind of debts can you typically discharge during a bankruptcy?
Bankruptcy helps you move on from unsecured debt
Typically, the biggest impact of bankruptcy will be the discharge of some of your unsecured debts. Unsecured debts do not have collateral property attached to them. The most common form that people carry is probably credit card debt. Medical debt is another form of unsecured debt that people can discharge in bankruptcy.
Personal debt between individuals can also be part of a discharge unless there is a judgment associated with the debt. Some kinds of unsecured debt, like student loans, are generally not eligible for discharge except in unusual circumstances. The same is true of debts related to court orders, like child support.
What about secured debts?
Your vehicle or your home could serve as collateral for the loan that financed the purchase of that asset. You can’t retain the collateral property without paying off the loan or reaffirming the debt. However, bankruptcy sometimes gives you the ability to renegotiate those debts.
Understanding what happens to your different debts when you file for bankruptcy and help you determine if it’s the right solution for your current financial situation.