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What Is the Bankruptcy Definition of Consumer Debt?

Sarah Edwards | November 22, 2022

Summary: Consumers debt, as defined by bankruptcy laws, includes unsecured debts like credit cards and medical bills, accounts in collections, legal judgments against you, unpaid rent, payday loans, utility bills, tax debts that are more than three years old. They also involve secured debts like a mortgage or a car. Some debts cannot be discharged through filing bankruptcy, including alimony or child support, current tax liens within the past three years, debts from a successful lawsuit resulting in physical injury or property damage, personal injury claims created by driving while intoxicated, and debts not included in your bankruptcy listing.

If you’re considering bankruptcy to eliminate your debts and rebuild your financial health, you’ll want to understand how it works. There are two types of bankruptcies that individuals typically may file: Chapter 7 and Chapter 13. Both have different requirements that consumers must meet, and both can erase specific types of debt.

What is bankruptcy?

Bankruptcy is the legal procedure of restoring an individual’s finances by eliminating debt. The process begins with hiring a bankruptcy attorney who examines your financial situation to determine which type of bankruptcy you qualify for—a Chapter 7 or Chapter 13.

Once you choose the appropriate type of bankruptcy, you’ll list your qualifying debts, including their current balances and account information. The attorney will handle all the legal aspects, including your court filings, motions, and communication with creditors.

You’ll appear in federal court before the judge, who may ask specific questions about your finances.

When the judge approves your case, one of two things will happen, depending on the type of bankruptcy you file. You may have most unsecured debts eliminated, or you may begin a court-ordered repayment plan to pay off some of your obligations.

How does a Chapter 7 bankruptcy work?

In a Chapter 7 bankruptcy, you’ll need to meet specific requirements to file. The requirements include the following:

  • Not having a previous Chapter 7 bankruptcy in the past eight years
  • Not having a Chapter 13 bankruptcy in the past 13 years
  • Undergoing a credit counseling course within the prior 180 days of filing
  • Proving you meet the means test requirements for your state
  • Showing you don’t have adequate disposable income to pay your creditors

The means test varies from state to state and compares your total income to the median for your state. Living in a more costly state, like New York, will have a higher income ceiling than living in a location with lower median wages, like West Virginia.

You will prove your disposable income through various legal documents that subtract necessary expenses, like rent and food, from your current income.

Individuals who qualify for Chapter 7 bankruptcy can eliminate most unsecured consumer debts, like:

  • Credit cards and medical bills
  • Accounts in collections
  • Legal judgments against you
  • Unpaid rent
  • Payday loans
  • Utility bills
  • Tax debts that are more than three years old

If you have any secured debts, like a mortgage or a car, a Chapter 7 bankruptcy can discharge them. However, you will lose your home and your vehicle.

It is possible to keep your home and vehicle if you file for Chapter 7 bankruptcy. A lawyer can advise you of the appropriate steps to take.

How does a Chapter 13 bankruptcy work?

A Chapter 13 bankruptcy doesn’t have the stringent requirements of a Chapter 7 bankruptcy. You won’t need to meet a means test, so higher-income individuals can apply. Some of the other conditions include the following:

  • Undergo a credit counseling class within 180 days before filing for bankruptcy
  • Agree to a payment plan calculated using your available disposable income
  • Make your monthly payments according to the plan approved by the court

If you maintain your regular payments, the court will discharge any of your remaining debt once the payment plan ends.

Chapter 13 bankruptcy is advantageous to people with significant equity in their homes or vehicles since they’ll be able to keep their property even though they’ve declared bankruptcy.

Individuals who declare Chapter 13 bankruptcy can eliminate some portions of their unsecured debts, including:

  • Credit cards or medical bills
  • Payday loans
  • Personal loans
  • Utility bills
  • Tax debts older than three years
  • Judgments

An attorney can help you determine which debts are dischargeable and what your repayment plan may consist of.

What debts aren’t eligible for bankruptcy?

Some debts can’t be discharged through bankruptcy, no matter how dire your financial situation is. The federal bankruptcy code exempts these debts from both Chapter 7 and Chapter 13 bankruptcies:

  • Alimony or child support
  • Current tax liens within the past three years
  • Debts from a successful lawsuit resulting in physical injury or property damage
  • Personal injury claims created by driving while intoxicated
  • Debts not included in your bankruptcy listing

Other debts may be dischargeable, but you’ll need to take extra steps to remove them, including:

  • Student loan debts
  • Federal and state income tax debts

Working with an attorney can help you determine which debts qualify for a potential discharge in your case.

Remember that bankruptcy is a very serious matter. If you declare it, you will damage your credit for years. However, in some cases, bankruptcy is the only solution for escaping from the confines of an adverse financial situation.

Fight debt collectors and find debt relief

When debt collectors start contacting you nonstop, it’s normal to feel overwhelmed. If you get sued for a debt you owe, that overwhelming feeling will probably only escalate.

Luckily, you have resources that can help you fight off debt collectors and find the relief you need. SoloSuit is one of those resources. Here are some of our services that can help you beat debt collectors in and out of court.

Debt Validation Letter

To avoid a debt collection lawsuit, try sending a Debt Validation Letter to the debt collector within 30 days of their first communication. This forces them to validate the debt, including all records and documentation of it. If they can’t, they’ll most likely leave you alone.

Debt lawsuit Answer document

If you’ve been sued for a debt, the most important thing to do is respond to the lawsuit with a written Answer. Most debt collectors hope you don’t respond to the case so they can request a default judgment against you. If granted, a default judgment gives collectors the right to garnish your wages and seize your property.

You can increase the chances of winning your debt collection lawsuit by 7x by using SoloSuit to respond to the case.

Check out this video to learn more:

Debt Lawsuit Settlement Letter

After you’ve responded to a debt collection lawsuit, you can reach out to the collector at any stage and make an offer to settle the debt. You may have the funds to pay off a portion of the debt. Most collectors are willing to settle for a percentage of what you originally owed.

You can make an initial offer and start the debt settlement negotiation process with a Debt Lawsuit Settle Letter.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

Respond with SoloSuit

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