This article contains links to products or services from one or more of our advertisers or partners. We may receive a commission when you click or make a purchase using our site. Learn more about how we make money.

Does bankruptcy actually clear your debts?

It's not always a clean slate — consider all of your options.

Updated

Fact checked

Before declaring bankruptcy, most people want to know how bankruptcy actually works and what happens to their debts when it happens. Bankruptcy can eliminate certain types of debts, such as credit card, medical bills and personal loans. However, whether or not your debts are forgiven depends on what type of bankruptcy you file for.

Chapter 13 vs. Chapter 7 bankruptcy

There are two different types of bankruptcy you can file. Chapter 7 is what most people think of when they hear the word “bankruptcy” — it generally takes only a few months, any nonexempt assets are sold off and your remaining eligible debts are discharged. You have to make below a maximum income to qualify.

Chapter 13 bankruptcy, also known as reorganization bankruptcy, requires you to make payments according to a court-approved plan on your debts for three to five years before they’re discharged.

What debts are covered?

At the end of your bankruptcy period, you’ll be released from liability for many of your debts. However, some debts you’ll need to keep paying.

Unsecured loan debt

Debt Will the debt be cleared when my bankruptcy is finalized? Conditions
Credit card Yes None
Store card Yes None
Unsecured personal loan Yes None
Unsecured business loan Yes None
Trade creditor Yes None
Payday loan Yes None
Pawn shop loan Yes You won’t get your pawned items back
Overdrawn account Yes None

Secured loan debt

Debt Will the debt be cleared when my bankruptcy is finalized? Conditions
Mortgage Yes
  • With a Chapter 7 bankruptcy, your home may be sold off to pay for your debts. If you’re able to keep your home, personal liability for the mortgage is discharged, but the bank can still foreclose on the home if you don’t continue to pay.
  • With a Chapter 13 bankruptcy, you may be able to discharge a second or third mortgage, but you’ll have to continue to pay your original home mortgage both during and after the bankruptcy.
Car loan Yes
  • With a Chapter 7 bankruptcy, your car may be sold off to pay for your debts. If you’re able to keep your car, personal liability for the loan is discharged, but your lender can still repossess it if you don’t continue to pay. You can learn more with our guide to keeping your car during bankruptcy.
  • With a Chapter 13 bankruptcy, you’ll have to continue to pay your car loan both during and after the bankruptcy.
Secured business loan Yes
  • With a Chapter 7 bankruptcy, personal liability for the loan is discharged, but your lender can repossess the asset you used to apply for the loan if you don’t continue to make payments.
  • With a Chapter 13 bankruptcy, you’ll have to continue to pay your secured loan both during and after the bankruptcy.

Household debt

Debt Will the debt be cleared when my bankruptcy is finalized? Conditions
Utilities Yes You may have to pay a deposit to get utilities in the future
Outstanding rent where you currently live Yes Check local laws to see your tenancy rights your landlord may be able to evict you if you had past due rent when you filed.
Outstanding rent where you used to live Yes None
Debts from property you damaged as a tenant Yes None

Taxes, fines, fees and court debts

Debt Will the debt be cleared when my bankruptcy is finalized? Conditions
Legal fees Yes None
Accounting fees Yes None
Government fines

YesNo

  • Punishment fines, such as speeding or parking tickets, won’t be wiped out by Chapter 7 bankruptcy.
  • Fines not related to a criminal conviction can be cleared in Chapter 13 bankruptcy.
Court-ordered restitution No None
Taxes YesNo You can discharge federal income taxes that you non-fraudulently filed on time more than three years ago. Other conditions may apply.
Child support No None

Other debts

Debt Will the debt be cleared when my bankruptcy is finalized? Conditions
Unliquidated debts YesNo This will depend on the type of unliquidated debt, and will follow similar rules to liquidated debt.

For example, if you’re being tried in a criminal case and may have to pay restitution, that cannot be cleared when you file for bankruptcy.

If a previous landlord is suing you in civil court for damages to an apartment but the estimate isn’t completed, that can be discharged in bankruptcy.

Medical bills Yes None
Student loans YesNo Student loans are rarely discharged in a bankruptcy, but you may be able to discharge the debt if you can prove that you’re financially unable to make any sort of payment, you won’t be able to make any sort of payment in the future and you’ve tried in good faith to pay the debt.
Debts incurred after you started bankruptcy filings No None
Provable debts incurred by fraud No None

However, there are federal student loan reforms in the works that could make it easier to discharge your loans during bankruptcy.

Before you sign up with a debt relief company

Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.

Consider alternatives before signing up with a debt relief company:

  • Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
  • Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
  • Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.

Bottom line

If you file for Chapter 7 bankruptcy you can lose your house, car and any other secured loan assets. If you file for Chapter 13 bankruptcy, you’ll have to continue making payments throughout your three or five year bankruptcy plan. And with either option, there are some debts you can’t erase. However, if you can’t find a better debt relief solution that works for you, filing for bankruptcy can help you get back on your feet. Learn more and read our bankruptcy guide.

Frequently asked questions

Picture: Shutterstock

More guides on Finder

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site