How are debts classified in bankruptcy?

When you declare bankruptcy, your debts are broadly grouped into two main categories in the process of debt classification: dischargeable debts, which can be included in the bankruptcy, and debts that aren't generally considered dischargeable. You will still be responsible for paying non-dischargeable debts after the bankruptcy.

Some additional types of debts, called secured debts, may be either eliminated or reaffirmed, depending on how you opt to deal with those debts. 

Dischargeable vs. Non-Dischargeable Debt

As you think about how your debt will be handled during bankruptcy, you will need to determine whether or not the debt is considered to be dischargeable. If the debt is dischargeable:

  • In a Chapter 7 bankruptcy, the debt will no longer be owed once the bankruptcy has been completed. The creditor may get some money from the liquidation of your assets (the sale of your non-exempt property) but will not be able to collect the remaining balance of the debt. 
  • In a Chapter 13 bankruptcy, the debt will become part of your bankruptcy repayment plan and will be repaid in part over a three to five year period of time. 

If the debt is not dischargeable, then it will not be affected by the bankruptcy. Examples of non-dischargeable debts include student loan debt, some types of unpaid tax debt, and unpaid child support payments. Examples of dischargeable debts that can be dealt with include medical bills, credit cards and personal loans. 

Secured Debt in Bankruptcy

When you have a secured debt (a debt with collateral), the bankruptcy court will not allow you to discharge it or include it in a Chapter 13 plan if you want to keep the asset that secures it (like the house, in the case of a mortgage, or the car in the case of a car loan). So, you will usually have the option of turning over the asset, or reaffirming the debt and continuing to make payments on it despite the bankruptcy. 

It is important to understand how your debts are classified, because you don't want to file bankruptcy only to find that it won't actually help with most of your debts because of debt classification issues. To determine how your debt will be affected, consult with a lawyer as soon as possible.