4 Types of Debt Bankruptcy Can Erase

Very little debt is actually erased in bankruptcy unless it is deemed unenforceable. However, a number of debts can be reduced or consolidated to lower the total debt burden of a person who qualifies for bankruptcy legally. This can result in what is called "debt forgiveness," even if the borrower pays some of the principal of a large debt. Examples of debt forgiveness include mortgage debt, medical debt and student debt forgiveness. 

Unenforceable Debt

Debt that is unenforceable is usually expired. This means the debt has gone past the statute of limitations of time that it could have been called in. It is important to know your rights with unenforceable debt. Many collections agencies try to pick up old debt from lenders in order to recover payments and make a profit. They will begin holding that debt over your head and dropping your credit score if it is not paid. If they do not have a right to the debt, though, this is not legal. You should always ask for verification of the debt prior to paying a collections agency. Debt that has gone to collections is often erased in bankruptcy because the agency has no legal claim on the payments.

Recourse Mortgage Debt

If you default on your mortgage, the lender has two options. The first option is to accept the collateral, the home, as complete payment on the remaining debt. The second option is to liquidate the asset for a fee, reduce this fee from the remaining sum, and then hold you accountable for the difference. This is called a recourse mortgage, and it is the more common form. In bankruptcy, a court typically erases the debt associated with a recourse mortgage after foreclosure. The remaining sum is technically forgiven, not erased, which means you may still have to pay taxes on the debt.

Medical Debt

Medical debts cause a number of bankruptcies each year. This is particularly true when a person has an extended illness requiring multiple expensive treatments. It is not possible for the entirety of medical debt to be forgiven in most cases. Someone must pay for the actual supplies required to treat a medical condition. However, some doctor's fees, facility fees and finance charges may be forgiven in a bankruptcy case. The court will closely look at a medical bill and trim anything it considers to be a non-essential expense in order to reduce the total burden you will have to repay.

Student Debt

Student debt is very hard to erase in bankruptcy. However, if the court determines paying the debt will prevent you from meeting daily living expenses, the debt may be reduced or restructured in your favor. You will typically need to repay the principal amount plus a compensation for inflation. Finance and interest charges, though, can be forgiven. This is possible if you made an honest effort to repay the debt but can no longer meet the obligation due to extenuating circumstances. Borrowers who simply have bad financial habits are less likely to receive student debt assistance in a bankruptcy case.


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