When an individual decides to file bankruptcy, it should be because there are no alternative solutions to the debt problem. Bankruptcy is highly damaging to one’s credit, so filing is a last resort for individuals who cannot pay down their debts with a less drastic option. Unfortunately, for the person in difficult financial circumstances, filing bankruptcy might not relieve all liability for one’s debts anyway.
Chapter 7 is the most popular type of bankruptcy filing for those who are eligible, because it results in a general forgiveness of debt once non-exempt property is liquidated and used to pay off some portion of it. However, even with this type of filing and result, filers still may owe large amounts of money on some debt(s). Debts that cannot be discharged through bankruptcy, and therefore must still be repaid, are known as obligatory debts.
Obligatory debts probably are much more common than you might assume; in fact, some of the most ordinary (and substantial) debts are expenses that cannot be eradicated through legal means. Such debts include student loans, tax debt, child support, spousal support, court orders against the filer, and debts that are deemed fraudulent by the bankruptcy court.
Student Loans -- Educational loans from both the federal government and private institutions are almost never dischargeable, but you may be able to have portions forgiven by the lender in very special circumstances. Alternatively, if your financial hardship is temporary, then you may be able to postpone payment.
Tax Debt -- Federal, state, and local taxes that have been due within the past three years all are obligatory (no matter what you may hear to the contrary), and beyond this it remains difficult to discharge tax debt. In addition, if the IRS has a lien or wage garnishment on your account, then the affected debts cannot be discharged.
Child/Spousal Support -- Support that legally is due to a child or spouse, and that is accurate and legitimate, cannot be discharged.
Other Court Orders -- Costs that one has been ordered to pay through a lawsuit are not dischargeable.
Fraudulent Debts -- If the bankruptcy court believes that you transferred obligatory debt to non-exempt debt with the intention of having it discharged, then the non-exempt debt will be treated as obligatory.
What is a debtor to do?
If a person’s debt is made up largely of obligatory debts that cannot be afforded, then what can he or she do to alleviate the situation?
Your first step in handling unaffordable obligatory debts depends on the specific type of debt with which you are dealing. If student loans are included in your debt, then you should contact the lender(s) directly to explain the situation and try to work out a payment plan. Similarly, if tax debt is a problem for you, then you should contact the IRS (or state or local agency) directly to try to work out an installment agreement, or a modified agreement.
If your debt is comprised of costs that have been mandated by court, on the other hand, then working out a payment agreement will not be so easy. You will need to file a formal motion to prove that you cannot afford your payments. Speak to a trusted attorney if this is your situation.
If ever you are uncertain about your obligatory debt payments or your options to make such payments more affordable, then you might wish to consult a credit counselor. A credit counselor will help you to make sense of your situation and plan for the future.
As a last resort, if it truly is not possible to work out a method a payment for your obligatory debts, then you might consider filing bankruptcy after all -- but through chapter 13 instead of chapter 7. Filing chapter 13 bankruptcy does not result in a forgiveness of debts; rather it results in court-overseen payment plans that make it possible for filers to pay down their debts slowly but surely.
Chapter 7 is the most popular type of bankruptcy filing for those who are eligible, because it results in a general forgiveness of debt once non-exempt property is liquidated and used to pay off some portion of it. However, even with this type of filing and result, filers still may owe large amounts of money on some debt(s). Debts that cannot be discharged through bankruptcy, and therefore must still be repaid, are known as obligatory debts.
Obligatory debts probably are much more common than you might assume; in fact, some of the most ordinary (and substantial) debts are expenses that cannot be eradicated through legal means. Such debts include student loans, tax debt, child support, spousal support, court orders against the filer, and debts that are deemed fraudulent by the bankruptcy court.
Student Loans -- Educational loans from both the federal government and private institutions are almost never dischargeable, but you may be able to have portions forgiven by the lender in very special circumstances. Alternatively, if your financial hardship is temporary, then you may be able to postpone payment.
Tax Debt -- Federal, state, and local taxes that have been due within the past three years all are obligatory (no matter what you may hear to the contrary), and beyond this it remains difficult to discharge tax debt. In addition, if the IRS has a lien or wage garnishment on your account, then the affected debts cannot be discharged.
Child/Spousal Support -- Support that legally is due to a child or spouse, and that is accurate and legitimate, cannot be discharged.
Other Court Orders -- Costs that one has been ordered to pay through a lawsuit are not dischargeable.
Fraudulent Debts -- If the bankruptcy court believes that you transferred obligatory debt to non-exempt debt with the intention of having it discharged, then the non-exempt debt will be treated as obligatory.
What is a debtor to do?
If a person’s debt is made up largely of obligatory debts that cannot be afforded, then what can he or she do to alleviate the situation?
Your first step in handling unaffordable obligatory debts depends on the specific type of debt with which you are dealing. If student loans are included in your debt, then you should contact the lender(s) directly to explain the situation and try to work out a payment plan. Similarly, if tax debt is a problem for you, then you should contact the IRS (or state or local agency) directly to try to work out an installment agreement, or a modified agreement.
If your debt is comprised of costs that have been mandated by court, on the other hand, then working out a payment agreement will not be so easy. You will need to file a formal motion to prove that you cannot afford your payments. Speak to a trusted attorney if this is your situation.
If ever you are uncertain about your obligatory debt payments or your options to make such payments more affordable, then you might wish to consult a credit counselor. A credit counselor will help you to make sense of your situation and plan for the future.
As a last resort, if it truly is not possible to work out a method a payment for your obligatory debts, then you might consider filing bankruptcy after all -- but through chapter 13 instead of chapter 7. Filing chapter 13 bankruptcy does not result in a forgiveness of debts; rather it results in court-overseen payment plans that make it possible for filers to pay down their debts slowly but surely.
Consolidate My Student Loan: Is it the Answer to Financial Woes?
Manage multiple payments and multiple lenders by consolidating your student loans. Find out how.
Top 10 Reasons to Check Your Credit ReportsKnowing your credit score is important for achieving and maintaining your financial goals, but credit scoring can impact your employment prospects and the cost of goods and services.
Chapter 7 Bankruptcy: Understanding the "Means Test"Filing a Chapter 7 Bankruptcy is quite popular because it is considered liquidation. But before filing a Chapter 7 Bankruptcy, a Means test will first determine your eligibility.
Self-Employment: Taxing Your Profits, Taxing Your PatienceNavigating Self-employment Taxes
Seven Steps to a Manageable MortgageTaking a systematic approach to mortgage refinance increases the chance of success.
Guide to No Cosigner Student Loans
Are you a would-be student who would like to attend college, graduate school, or professional school, but are hesitant because you…
The advantages of using your local credit union to refinance your mortgageLocal credit unions increasingly are popular alternatives to traditional banks. While banks are privately owned,…
Debt Consolidation for Senior CitizensFew people have more financial choices, yet more opportunities to be overwhelmed by those choices, than senior citizens. Seniors…
What is the Best Loan and Debt Repayment Program?Incurring debt sometimes is necessary in order to meet one’s financial and personal goals, or to make payments for necessary…
Bad Credit Student Loans for High Risk StudentsCollege costs nowadays are through the roof and are only expected to rise in the future. Most students and/or their parents…
