- Though both Chapter 7 and Chapter 13 bankruptcies help eliminate your unsecured liabilities, some unsecured debts do not qualify for discharge in bankruptcy. For example, according to section 523(a) of the U.S. Bankruptcy Code, your court-ordered fees and payments remain your responsibility after bankruptcy regardless of your financial situation. This includes child support, alimony and legal fines. Additionally, bankruptcy courts will not discharge any unpaid federal and state taxes, nor will the court wipe out your student loans.
- U.S. bankruptcy courts overlook secured debts during bankruptcy. These include installment loans and mortgages against your home. If you default on an installment loan, the lender has the authority to repossess the collateral used to secure your debt or foreclose on your home if you fall behind on your mortgage. However, if after you liquidate the collateral and find that you still have a balance on your installment loan, the remaining debt will be deemed unsecured by bankruptcy courts and is eligible for discharge.
- If your mortgage company is foreclosing on your home at the time you file for Chapter 13 bankruptcy, the courts will place an automatic stay on your primary residence to halt foreclosure proceedings. Once you finalize your bankruptcy, you will have the option to resume your monthly mortgage payments and remain in your home. However, if you default on your mortgage after bankruptcy, your lender may foreclose on the property.
- If you fail to repay unsecured debts that are ineligible for bankruptcy discharge, you may face strict consequences. Federal and state governments regulate many of these debts, including student loans, unpaid taxes and court-ordered payments. You could face an interception of your tax refund, wage garnishments and penalties on your federal benefits, such as your Social Security income.
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