The Fresh Start Guide: Which Debts Can You Actually Wipe Out in Bankruptcy?

If you feel like you’re drowning in a sea of monthly statements, you’ve likely asked the “million-dollar question”: What can I actually get rid of?

Bankruptcy isn’t a “one-size-fits-all” eraser, but for many, it is the most powerful financial tool available to reset their lives. Depending on whether you file Chapter 7 (Liquidation) or Chapter 13 (Repayment), the results can be life-changing.

Here is a breakdown of the debts you can discharge and how the process works.

1. The “Unsecured” Essentials: Credit Cards & Personal Loans

The most common reason people file for bankruptcy is to eliminate unsecured debt—money borrowed without collateral.

• Credit Cards: Whether you owe $5,000 or $50,000, credit card debt is typically discharged 100% in a Chapter 7 filing. In Chapter 13, you may pay back a small percentage over time, with the remaining balance vanished at the end of your plan.
• Personal & Payday Loans: High-interest “quick cash” loans are designed to keep you in a cycle of debt. Bankruptcy breaks that cycle by treating these as unsecured claims, often wiping them out entirely.

NOTE: Unsecured Loans vs. Secured Title Loans It is vital to distinguish between unsecured and secured personal loans.

• Unsecured Loans: Payday loans and signature loans are based on your promise to pay. In bankruptcy, these are “low priority,” meaning they are often wiped out completely.
• Secured (Title) Loans: If you used your car title as collateral, the lender has a lien on your vehicle. While bankruptcy can discharge your personal liability to pay the money, it does not automatically remove the lien. If you want to keep the car, you generally still have to pay the title loan. However, in a Chapter 13 filing, your attorney may be able to “cram down” the interest rate or the loan balance to the actual value of the car.

2. Medical Bills: The Silent Financial Killer

Medical emergencies are the leading cause of bankruptcy in the United States. A single surgery or unexpected diagnosis can lead to hundreds of thousands of dollars in debt.

• The Good News: Medical debt is almost always dischargeable. Bankruptcy can wipe away hospital bills, doctor fees, and lab costs, allowing you to focus on your health instead of your balance.
• The Bad News: While the debt is gone, the relationship might be, too. Private medical providers are generally not legally required to continue treating a patient who has discharged a debt to them. While a hospital emergency room must treat you in a crisis, a private doctor or specialist may “fire” you as a patient, requiring you to find a new provider for future non-emergency care.

3. Real Estate & Vehicles: To Keep or To Let Go?

With “secured” debt, the creditor has a claim on your property (your house or car). You have two main options:

• The “Walk Away” Strategy: If your mortgage or car payment is too high, you can surrender the property. Bankruptcy will discharge the “deficiency balance”—meaning the bank can’t sue you for the difference if they sell the asset for less than you owe.
• The “Keep It” Strategy: If you are current on payments and want to keep your home or car, you can “reaffirm” the debt. Bankruptcy helps here by wiping out other debts (like credit cards), making it much easier to afford your monthly house or car payment.
• The Chapter 13 Advantage (Lien Stripping): If you have a secondary mortgage or a home equity line of credit (HELOC) and your home is worth less than what you owe on your first mortgage, Chapter 13 bankruptcy may allow you to “strip” that secondary lien. This reclassifies the second mortgage as unsecured debt, allowing it to be discharged at the end of your plan.

4. Understanding the Limitations: What Stays?

While bankruptcy is powerful, it isn’t magic. Certain debts are generally non-dischargeable, including:

• Most Student Loans (though there are rare exceptions for “undue hardship”).
• Recent Tax Debts.
• Child Support and Alimony.
• Fines or Restitution resulting from criminal activity.

Chapter 7 vs. Chapter 13: Which Path is Yours?

Choosing between Chapter 7 and Chapter 13 often depends on two critical gatekeepers: how much you earn and what you own.

1. Income Eligibility (The “Means Test”)

To file for Chapter 7 bankruptcy, you must pass the Means Test, which determines if you have enough disposable income to pay back creditors.

• The Automatic Pass: If your household income is below the Arizona median for a family of your size, you generally qualify automatically.

• The Detailed Test: If your income is above the median, you may still qualify after deducting “allowable expenses” (like housing and taxes). If you still have significant disposable income, you will likely be required to file Chapter 13.

Arizona Median Income Limits (Cases filed after Nov 1, 2025):

• 1 Person: $72,039

• 2 People: $86,745

• 3 People: $102,274

• 4 People: $118,067 (Add $11,100 for each additional household member.)

Unlike Chapter 7, there is no maximum income for Chapter 13. In fact, the court’s primary concern is that you make enough money.

• Regular Income Requirement: You must demonstrate a “stable and regular” source of income. This isn’t limited to traditional wages—it can include self-employment, Social Security, pensions, rental income, or even regular contributions from a family member.

• The Disposable Income Test: After paying for your “reasonable and necessary” monthly living expenses, you must have enough money left over to fund a monthly repayment plan that satisfies the law.
• Debt Limits (2025–2028): You cannot file Chapter 13 if your debts exceed specific statutory limits. As of April 1, 2025, those limits are:
  • Unsecured Debt: Less than $526,700 (credit cards, medical bills, etc.).
  • Secured Debt: Less than $1,580,125 (mortgages, car loans, tax liens).
• Plan Length: Your income relative to the state median determines how long you’ll be in the plan.
  • Below Median: Usually a 3-year repayment plan.
  • Above Median: Usually a 5-year repayment plan.

2. Protecting Assets (Exemptions)

Arizona is an “opt-out” state, meaning you must use Arizona State Exemptions to protect your property. In most cases, filers keep everything they own.

• In Chapter 7: If an asset is “exempt,” you keep it. If it is “non-exempt” (like a boat or luxury item), the trustee can sell it to pay creditors.
• In Chapter 13: You keep all property, but you must pay the equivalent value of your “non-exempt” assets over the life of your 3–5 year plan.
• Key Arizona Exemptions (Current for 2026):
• Homestead: Up to $425,200 of equity in your primary residence.
• Motor Vehicle: Up to $16,000 in equity ($26,700 if disabled). Married couples can double this for two separate vehicles.
• Household Goods: Up to $16,000 for furniture, electronics, and appliances.
• Bank Deposits: Up to $300 in a single account is typically protected.
• Retirement: Most 401(k)s, IRAs, and pensions are 100% exempt.

Is Today the Day for Your Fresh Start?

The weight of debt doesn’t just affect your bank account; it affects your sleep, your health, and your relationships.

Don’t guess about your future. At My AZ Lawyers, we specialize in helping Arizonans navigate the complexities of the bankruptcy code to find the fastest path to financial freedom.

Contact us today for a Free Consultation. Let’s look at your specific situation and see exactly how much you can save.

Phoenix: (480) 470-1504 | Tucson: (520) 231-2822 | Web: MyAZLawyers.com