If you are struggling with debt in the Dallas area, you may be considering bankruptcy as a potential solution. One of the most common questions we hear from potential clients is, “Which types of debt can actually be eliminated or reduced in a bankruptcy case?” The answer depends on your specific situation, the type of bankruptcy you file, and the nature of your debt.
In this post, we will break down the types of debt typically covered in a bankruptcy case, explain the difference between dischargeable and non-dischargeable debt, and help you understand your options.
Understanding Chapter 7 and Chapter 13 bankruptcy
Before diving into the specifics of which debts are covered, it is important to understand the two primary types of consumer bankruptcy:
Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy. It is designed for individuals or families who cannot afford to repay their debts. In Chapter 7, many unsecured debts can be discharged completely, though some assets may be sold to repay creditors. Most people filing for Chapter 7 keep all of their property, especially in Texas, thanks to generous exemption laws.
Chapter 13 bankruptcy is a “reorganization” plan. It is typically used by individuals with a steady income stream who want to catch up on missed payments and repay debts over a three to five-year period. Chapter 13 is often a better fit for higher-income families or those with significant non-exempt assets they wish to retain.
Common types of debt covered in bankruptcy
Whether you file Chapter 7 or Chapter 13, certain debts are commonly addressed in bankruptcy. These typically fall into two categories:
Unsecured debts (often dischargeable):
Unsecured debts are not tied to a physical asset. These are usually the easiest types of debt to discharge in a bankruptcy case. Examples would be:
- Credit card debt
- Medical bills
- Personal loans
- Utility bills (past due amounts)
- Some old income taxes (depending on age and filing status)
- Payday loans
- Repossessed car deficiencies
- Broken leases
In Chapter 7, these debts are usually wiped out completely. In Chapter 13, you may only have to repay a portion of these debts through your repayment plan, depending on your income and assets.
Secured debts (may be reaffirmed or restructured)
Secured debts are tied to a specific piece of property, such as a home or vehicle. While these debts are not automatically eliminated, bankruptcy can help manage or restructure them. Examples of secured debts are:
- Mortgage loans
- Car loans
- Home equity lines of credit
In Chapter 7, you must either reaffirm the debt and continue paying (to keep the property), surrender the property, or redeem it for a lump sum payment. In Chapter 13, you can often catch up on missed payments over time while keeping your home or vehicle.
Debts that are not dischargeable in most bankruptcy cases
Not all debts can be eliminated through bankruptcy. It is critical to understand which debts will remain even after your case is resolved:
- Student loans:
Student loans are not dischargeable in most cases unless you can prove “undue hardship,” which is a high legal standard. However, if your financial situation qualifies, we can evaluate whether an adversary proceeding may be appropriate to seek a discharge. - Most tax debts:
While some older income tax debts may be discharged, most recent tax obligations, payroll taxes, and penalties are not dischargeable. In Chapter 13, you can often set up a payment plan to resolve tax debts over time. - Domestic support obligations:
Child support and alimony (spousal support) cannot be eliminated in bankruptcy and must be paid in full. - Criminal fines and restitution:
Any fines, penalties, or restitution ordered by a court in connection with a criminal offense cannot be discharged. - Debts arising from fraud or willful misconduct:
If a creditor proves that the debt was obtained through fraud, embezzlement, or intentional wrongdoing, the court may declare that debt non-dischargeable. This can include situations such as lying on a loan application or incurring large charges immediately before filing.
What about cosigned or joint debts?
Bankruptcy only discharges the responsibility of the person filing. If a family member or spouse cosigned your loan or credit card, they may still be responsible for the balance. In Chapter 13, there are some protections for cosigners, but in Chapter 7, they remain liable unless they also file.
Tailoring the strategy to your financial situation
Every family’s financial picture is different. A higher-income household may not qualify for Chapter 7 due to the means test, or it may be more advantageous to file Chapter 13 to protect valuable assets. Additionally, families with complex financial structures—such as self-employment income, investment properties, or multiple streams of income—require a tailored approach.
At Rubin & Associates, we specialize in working with higher-earning individuals and families in the Dallas area. We understand that financial hardship looks different when you have more at stake, and we take the time to craft a strategy that aligns with your goals.
Call today for a free consultation
Bankruptcy can be a powerful tool for resolving debt, but it is not a one-size-fits-all solution. The type of debt you have plays a critical role in determining your options. Our experienced team is here to help you make sense of it all.
Call Rubin & Associates today at 214-760-7777 to schedule a free consultation. Our experienced bankruptcy attorneys will review your finances in detail, explain which debts can and cannot be discharged, and walk you through the best path forward for your situation.