Debt hassles are hard to deal with and can be truly frustrating and scary, too. When there is a reasonable income in the household it is simply a matter of debt management. But when income is lacking or dried up due to a lack of work, debt is often beyond simple management.
This is when bankruptcy may provide some relief. However, there are some debts that cannot be relieved with bankruptcy and some that can. Unsecured debt can be particularly challenging.
What Is Unsecured Debt?
Unsecured debt is defined as debts in which the lenders have no rights to any collateral for the debt and cannot take assets from the debtor. Instead the lender has alternative means to get its money:
- Hire a debt collector who essentially harasses debtors to get the payment
- Take the debtor to court to get a judgment such as wage garnishment
- Report delinquent status to credit bureau
Unsecured debt includes unsecured credit cards, student loans, payday loans, medical and utility bills, court ordered child support, and personal loans. These debts tend to have higher interest rates than secured debts.
Bankruptcy For Unsecured Debt
What can bankruptcy do for unsecured debt? The first thing it can do is stop creditor harassment, see here. Once you file bankruptcy and begin the process, creditors must leave you alone and allow the process to settle the matter. This gives the debtor time to figure out how to handle the debt without the fear and worry harassment causes.
What Bankruptcy Can’t Do For Unsecured Debt
While there is a great deal of potential debt relief with bankruptcy there are quite a few things it cannot eliminate:
- Child-support obligations
- Non-dischargeable debt such as traffic tickets and criminal retribution
- Debt for personal injury or death as a result of a DUI
- Most tax debt
- Discharge student loan debt, in most cases
How Much Is The Debtor Obligated To Pay For Unsecured Debt?
The courts will calculate your payments based on your disposable income. Your disposable income is considered to be whatever is left after paying your living expenses, secured debts, and priority claims. All disposable income is required to be used to pay your unsecured debts.
The court uses a means test to calculate your disposable income. They will add up income earned over the 6 month period prior to the month bankruptcy was filed. They will then compare that amount of income to the median income in the county or state in which the debtor lives with similar households.
If the amount is higher than the median income the means test will continue by taking deductions for certain income such as car payments and home mortgage (secured debts), and then take that monthly amount multiplied by 60 to figure the amount to be paid to unsecured creditors over the course of the case.
If the mount is lower than the median income, the means test is left incomplete and the amount paid to creditors will be based on what is left after paying actual living expenses that include:
Living expenses include these monthly expenses:
- Pet care
The debtor must file two forms called Schedule I, which is the actual monthly income from all sources and Schedule J, which is a list of the above monthly expenses. The different between Schedules I and J is then used to calculate the payment to secured debts and priority creditors, and then a percentage of the remainder is divided among the unsecured creditors.
A Means To An End
Filing bankruptcy can only help reduce debt. It is seldom that debts can be completely erased. Complete discharge of a debt usually occurs only if the debtor can show that paying any amount will cause undue hardship. Bankruptcy can help reduce debt and provide peace of mind and give one a chance at a better life on the other side when the case is finally closed.