The ultimate goal of any bankruptcy filing—whether a Chapter 7, Chapter 11, or Chapter 13—is to legally discharge valid debts that a debtor owes to creditors. This discharge frees the debtor of any legal obligation to pay the debt. To achieve this discharge, however, debtors must establish eligibility for it. To determine your eligibility for a discharge of certain debts in bankruptcy, consult an experienced Las Vegas bankruptcy lawyer today.
How to Legally Discharge Debt
The bankruptcy process begins by filing a bankruptcy petition, supplemented with documentation about the debtor’s assets and liabilities, with the appropriate federal bankruptcy court. A trustee of the court then reviews the documentation and meets with the debtor at a Meeting of Creditors. Creditors with valid grounds for disputing the discharge of their debts may attend this meeting to present the trustee with objections.
More often, however, this meeting is an opportunity for the trustee to ask the debtor questions. If the trustee determines that both the debt and the debtor are eligible for the requested bankruptcy, the trustee will recommend that the court discharge the debt identified in the bankruptcy petition. If the court has no further questions or legal objections, it will order the legal discharge of the debt—and the debtor no longer has any legal obligation to pay it.
One potential complication to the discharge of debt is the nature of the debtor’s assets. A bankruptcy court has the authority to liquidate a debtor’s assets. Both the United States Code and state laws, however, provide exemptions for many common assets that debtors own. These exemptions can protect specified amounts of equity in real estate, vehicles, retirement accounts, and other assets. Because established laws set forth these exemptions, debtors may strategically plan for the protection of specific assets before filing bankruptcy petitions. A bankruptcy attorney will help a debtor review any assets and find applicable exemptions to reduce the likelihood of unexpected liquidations.
In a Chapter 13 bankruptcy, debtors must meet an additional requirement before a court will legally discharge their debts—the completion of a repayment plan during a period of three to five years. The applicant will submit the proposed plan to the bankruptcy court along with the initial petition and financial documentation. A Chapter 13 repayment plan typically provides for some (if not all) payment to some (if not all) identified creditors. The court must then approve the length and amount of the repayment plan. Once the court accepts the plan, the debtor will make agreed-upon payments to the trustee, who in turn distributes payments to the identified creditors. After a debtor has successfully completed the repayment plan and met all other eligibility requirements, the court will order the legal discharge of the remaining debt.
The Benefits of Discharging Debt
A successful bankruptcy leads to a legal discharge of debts. This improves a person’s debt-to-income ratio, which is made more favorable by the reduction in debt. Debt-to-income ratio is an important part of many credit ratings and financing decisions. Chapter 7 bankruptcies are reported to the credit bureaus for ten years, while Chapter 13 bankruptcies are reported for seven years. This does not mean, however, that the debtor’s credit history or credit score cannot improve during that time period. Many debtors will ultimately generate improved credit scores and credit ratings after successful bankruptcies. This is largely due to the improved debt-to-income ratio, lowered credit use percentage, and a new history of timely payments.
According to the Fair Isaac Corporation (FICO), a person’s credit payment history determines 35 percent of a FICO score—more than any of the other four categories of information. (Debt is 30 percent, length of payment history is 15 percent, new credit is 10 percent, and credit mix is 10 percent.) The payment history metric includes payments on credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. In determining the FICO score, evaluators consider:
- How late were payments?
- How much did someone owe?
- How recently did late or missed payments take place?
- How many missed or late payments took place?
Older items and smaller amounts weigh less than newer items and larger amounts. Bankruptcy cannot erase an old history of untimely payments, but it can allow a debtor to begin establishing a new history of timely ones. By discharging old debts, a debtor can focus on paying recurring debts such as utilities, car payments, mortgage payments, and other necessary costs of living.
Other Debt Relief Options
Bankruptcy is not appropriate for every financial situation. An experienced bankruptcy attorney can help debtors explore other options for legally relieving themselves of debt. Debt consolidation allows a debtor to make a single payment to a single creditor, who in turn pays other creditors to satisfy outstanding debts. Debtors should keep those single payments manageable, amounts they can afford to pay on ongoing bases, before consolidation. The debtor’s credit history then shows a history of successful and timely payments to a single creditor, rather than a series of overdue accounts.
In other cases, creditors may accept less than the full amount rather than losing it all to bankruptcy. Negotiating a debt in this manner relieves the debtor of the obligation to pay the full amount. This strategy, however, may not apply to a particular debt. Its success is wholly dependent on the creditor’s willingness to accept less than what you owe.
Experienced Legal Advice from a Las Vegas Bankruptcy Attorney
When debt becomes overwhelming, a legal discharge is often the best way to reestablish good credit. Contact the Bankruptcy Law Firm today to learn more about the various options for legally discharging your debt. You can schedule an appointment on our website, or call (702) 997-4149. You can also email our bankruptcy law office. Instead of struggling against onerous interest rates, start fresh to begin rebuilding your financial future.