What Happens to Your Debts After Filing for Bankruptcy?
Filing for bankruptcy is a significant decision. However, it’s important to remember that it’s not the end. Instead, bankruptcy serves as a fresh start. If you’re struggling with debt, bankruptcy can be a powerful tool to help you regain control of your financial future.
At Pakis, Giotes, Burleson & Deaconson, P.C., we’re here to guide you through this process with compassion and understanding. We’ve helped countless individuals and businesses in Waco, Texas, and across Central Texas handle the bankruptcy process, explaining what happens to your debts both during and after bankruptcy.
Bankruptcy is designed to provide relief and a path forward, with the outcome depending on the type of bankruptcy you file and the specific debts you owe. Let our attorneys help you take the first step toward a brighter financial future.
How Bankruptcy Impacts Your Debts
Filing for bankruptcy provides an opportunity to resolve or repay your debts while halting collection efforts, such as wage garnishment and foreclosure, from creditors through an "automatic stay." However, how your debts are treated depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Unsecured debts, such as credit card balances and medical bills, are often completely discharged, and secured debts, such as mortgages or car loans, are handled by either surrendering the property or creating a plan to continue payments.
While bankruptcy offers a fresh start, certain obligations are typically not dischargeable, including most student loans, recent taxes, and domestic support obligations such as child support or alimony.
Chapter 7 Bankruptcy and Debt Discharge
Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," involves selling certain non-exempt assets to repay creditors. Under Texas law, specific exemptions protect a significant portion of your property, including your homestead, personal belongings, and retirement accounts.
After the process is complete, most unsecured debts, like credit card debt and medical bills, are discharged, meaning you no longer owe them. However, not all debts are dischargeable under Chapter 7, including:
Secured debts: These include auto loans and mortgages that are tied to collateral. If you want to keep the collateral, you'll need to continue making payments or negotiate with your lender.
Non-dischargeable debts: Certain debts can't be eliminated in bankruptcy, such as alimony, child support, some tax debts, and most student loans.
Luxury debts: Recent purchases of luxury goods or services may also be excluded from discharge.
If you're considering filing for Chapter 7 bankruptcy, it's essential to understand how it applies to your specific situation. Consult an experienced bankruptcy attorney who can help you explore your options and take the first step toward a fresh financial start.
Chapter 13 Bankruptcy and Debt Restructuring
Unlike Chapter 7, Chapter 13 bankruptcy allows you to keep your property while reorganizing your debts into a manageable repayment plan. This plan usually lasts three to five years and prioritizes debts based on their classification.
Priority debts: These must be paid in full, including taxes and domestic support obligations such as alimony or child support.
Secured debts: You may repay the past-due amounts on secured loans over time to prevent foreclosure or repossession.
Unsecured debts: After paying priority and secured debts, any remaining disposable income is distributed to unsecured creditors. At the end of the repayment plan, any remaining unsecured debts may be discharged.
Chapter 13 is ideal for individuals with a regular income who want to protect assets like their home or car while making up missed payments.
What Happens to Co-Signers and Joint Debts?
If you have a co-signer on a loan, your bankruptcy filing could potentially impact them. Under Texas law and federal bankruptcy rules, Chapter 13 bankruptcy offers some protection for co-signers through a co-debtor stay, which temporarily halts creditors from pursuing the co-signer. However, this protection does not extend to Chapter 7 bankruptcy.
The Impact of Bankruptcy on Your Credit Score
Filing for bankruptcy will have a significant impact on your credit score and will remain on your credit report for 7 to 10 years, depending on the chapter you filed. While this may seem daunting, it's not a permanent financial death sentence. Many individuals begin rebuilding their credit relatively quickly after discharge.
The key is to understand that bankruptcy provides a clean slate, removing many negative items that were already damaging your credit. With a fresh start, you can implement new financial habits to improve your score over time.
Alternatives to Bankruptcy: Other Debt Relief Options
Bankruptcy is a powerful tool, but it's not the only solution for debt relief. Depending on your financial situation, other options might be more suitable. These can include:
Debt management plans: Offered by non-profit credit counseling agencies, these plans involve consolidating your unsecured debts into one monthly payment, often at a reduced interest rate, and paying them off over several years.
Debt consolidation loans: If you have good enough credit, you might qualify for a new loan with a lower interest rate to pay off multiple high-interest debts, simplifying your payments. However, be sure to understand your responsibilities and monthly payment amounts before pursuing debt consolidation.
Debt settlement: This involves negotiating with creditors to pay a lump sum that is less than the total amount owed. While it can reduce your existing debt, it often has a negative impact on your credit and may lead to tax implications.
If you are dealing with overwhelming debt, it's critical to explore all your available options with an experienced bankruptcy attorney to determine the best path forward.
How to Rebuild Your Financial Future After Bankruptcy
Many people believe filing for bankruptcy will ruin their finances forever. However, bankruptcy can actually serve as a first step toward a healthier financial future. With careful planning and discipline, you can often rebuild your credit after bankruptcy. Some ways you can rebuild your finances after bankruptcy include:
Create and stick to a realistic budget: Understanding your income and expenses is foundational to avoiding future debt.
Establish an emergency fund: Having savings for unexpected expenses can prevent reliance on credit cards.
Obtain a secured credit card: These cards require a deposit, but can help you demonstrate responsible credit usage.
Make all payments on time: Your payment history is a significant factor in determining your credit score.
Monitor your credit report: Regularly check for errors and track your progress.
Patience and consistency are key to demonstrating financial responsibility and rebuilding a strong credit profile.
Contact an Experienced Bankruptcy Attorney Today
Dealing with debt can be stressful, but filing for bankruptcy can often help you regain financial stability. At Pakis, Giotes, Burleson & Deaconson, P.C., we have years of experience in helping individuals and families in Waco and Central Texas understand their options under Texas and federal bankruptcy law.
We provide personalized attention to help you make informed decisions about your financial future. If you're ready to take the first step toward a brighter financial future, contact us today to schedule a consultation and discuss your debt relief options.