Bankruptcy can kill many debts, but some may survive
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While it’s true that bankruptcy is a debt relief option that can be life-changing, there are some types of debts that will stick around after your North Carolina Chapter 7 or Chapter 13 bankruptcy. There are three broad categories of debt that will play out differently under each bankruptcy chapter – secured debt, unsecured debt, and student loans. Here’s a look at how each is affected by bankruptcy and what debts will still exist after your NC bankruptcy discharge.
Unsecured debt after Chapter 13
A Chapter 13 repayment plan is designed to take care of past-due balances on secured debt and some on past-due unsecured debts. A Chapter 13 repayment plan must satisfy at least as much of your unsecured debts like medical bills and credit cards as would be paid under Chapter 7. In general, though, depending on your income, the more you earn the more you’ll have to pay on unsecured debts. Remaining balances at the end of your payment plan should be wiped out with the exception of student loans.
Unsecured debt after Chapter 7
Chapter 7 is designed to wipe out most unsecured debt including personal (signature loans), medical bills and credit cards. None of these should survive the bankruptcy. In some cases, consumers may want to satisfy an unsecured debt – such as a personal loan made to a friend or relative. In legal terms, though, unsecured debts may not be addressed selectively and all must be included in Chapter 7. No creditor can be prioritized above others. However, you can always repay the money to your loved one later after your case is done. Only student loans should survive your North Carolina Chapter 7 (and not always those - see more below).
Secured debt after Chapter 13
Secured debt is that which is associated with an asset such as a mortgage with a home or an auto loan with a vehicle. Secured debt is not dischargeable in Chapter 13. However, Chapter 13 can help you deal with past-due balances on secured debt. If you’re behind on your auto loan, the past-due amount will be paid as part of your plan. However, if your loan balance is far more than the market value of the car, the principal may be lowered and you might owe far less on it after your Chapter 13. With a mortgage, second mortgages or home equity lines of credit might be diminished if there is limited equity in your home, but the primary mortgage will survive the bankruptcy.
Secured debt after Chapter 7
If you are delinquent on auto or home loans when you enter into Chapter 7, your creditor may repossess the property unless other arrangements are made. However, once the asset is returned to the creditor, the debt associated with it will be wiped out and will NOT survive the Chapter 7. If you’re current with your auto or home loan, the debt may survive the Chapter 7. In some cases, the lender might ask you to “reaffirm” the debt which means you formally agree it’s not included in Chapter 7.
Student loans after Chapter 7 and Chapter 13
Both private and federal student loans may survive your bankruptcy. The only way to reduce or discharge student loans in bankruptcy is with an “adversary proceeding” which specifically seeks to force the lender to allow the debt to be discharged. Most people don’t even know about this part of the bankruptcy law and simply exclude their student loans from consideration. An adversary proceeding comes with an additional cost because it’s essentially a lawsuit that sues the student loan creditor to seek dismissal of some of your student loan debt. If this is not filed, all of your student loans will survive.
To find out more about North Carolina bankruptcy, contact the Law Offices of John T. Orcutt now. Call +1-919-646-2654 for a free consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.