What Are Canceled Debts in Bankruptcy?

Debt Discharge Basics

Debt cancellation is also commonly called debt discharge or debt forgiveness. Debt discharge is the primary reason many individuals file for bankruptcy. When a debt is discharged in bankruptcy, the borrower no longer has any liability to the creditor, meaning the borrower owes no money for the discharged debt and the lender cannot attempt to collect on discharged debts. Canceled debts can essentially give bankruptcy filers a second chance by eliminating crushing debt.

There are many types of debts that may be canceled as the result of bankruptcy. In general, unsecured debts such as credit card debt, medical debts and personal loans may be discharged in bankruptcy. Unsecured debts are those that do not use property as collateral, as mortgages and car loans do. According to the U.S. Courts website, lenders with a lien against your property may still be able to enforce the lien after bankruptcy to take ownership of your property. For instance, even if bankruptcy frees you of liability for an auto loan, the lender may be able to enforce a lien on the car to take the car back.

While many personal debts can be canceled through bankruptcy, there are exceptions for certain types of debt. U.S. Courts states that certain debts related to fines and fees owed to the government, harm caused to others, taxes, education (student loans) and child support and alimony cannot be discharged. It is important to determine which of your debts can be discharged before filing bankruptcy.

Bankruptcy filings under Chapter 11 and 13 of the Bankruptcy Code typically involve both debt discharge and debt restructuring. Debt restructuring can alter the terms of debts, such as the amount of debt owed, the interest rates and the duration of loans, which can significantly reduce the size of debts even if debts are not completely canceled.