Bankruptcy Explained: Chapter 7 vs Chapter 13 and What Gets Wiped

Bankruptcy is a legal process that can wipe out certain debts, restructure others, and stop collection activity while you get back on solid ground. Ryan explains the two types most people encounter: Chapter 7, which moves faster and can eliminate unsecured debts like credit cards and medical bills, and Chapter 13, which takes longer but helps restructure debt into a manageable payment plan for people who have income.

Ryan also covers what bankruptcy cannot touch, including most student loans, child support, alimony, and some tax debts. The overall message is that bankruptcy is not a first resort, but it is a legitimate legal option, not a personal failure. If you are weighing it, Ryan strongly recommends talking to a bankruptcy attorney before making any moves. The episode was prompted by a listener question, which keeps the conversation grounded and practical.

Find "Your Fiscal Physical" the book on Amazon

If you have suggestions or feedback, please email us at: Podcast@AlchemyWealth.com

And, as always, Stay the Course!

Transcript

Welcome And Listener Topic Prompt

SPEAKER_00 0:01

Welcome to the Fiscal Physical Podcast. Jonathan Cwee is Mr. Town with the founder of Alchemy Wealth Management and author of your Fiscal Physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:33

Welcome everybody to this week's episode of the Physical Physical Podcast. My name is Aaron. I am here with uh Ryan Nelson, founder of Alchemy Wealth Management, and uh my co-host on this podcast. Uh Ryan, how are you today on this uh beautiful day?

Ryan Nelson 0:48

I'm doing well. How are you doing?

Aaron Hoisington 0:49

Not too bad, man. Not too bad. I'm excited to uh get into this week's topic. Um but before we do that, just want to thank all the listeners out there. Quick plug, I normally do at the end, but uh want to make sure everybody uh sends us their topics. Let us know what you think of the podcast. If you got any topics you want us to cover, anything you want us to talk about, let us know. Podcast at alchemywealth.com is the email address, or just shoot Ryan myself a text, a uh um email if you guys have a you know, just if we see in person, you're like, hey, cover this. We'd love to love to get into it. But uh uh Ryan, you uh ready to get into today's topic? Let's do it.

Bankruptcy’s Stigma And Purpose

Aaron Hoisington 1:23

All right. So today we are going to talk about bankruptcy. Uh super fun topic. Uh, you know, it has kind of a negative stigma around it, I think. Um but this question actually came from a uh loyal listener, uh Jeremiah. Uh call him Jerbear. He uh he uh I was talking to him the other day and he said, You guys should do a topic on bankruptcy. And I was like, sure, why not, man? We're almost looking for it. So um no recorded question or anything, but uh uh I wanted to thank uh Jeremiah for that. And uh let's uh let's let's dive into this, Ryan. I'm curious what your thoughts are. I mean, most people think about when I say bankruptcy, they think, oh, it's an absolutely a terrible thing. Uh things have like but but I don't really know if anybody um has ever you know looks at what the process actually is or what actually goes into it or what it's used for. Um I don't know. Have you ever seen the show The Office?

Ryan Nelson 2:13

I I've seen it. I didn't follow like every episode, but yeah.

Aaron Hoisington 2:15

I was just kidding, there's an episode on this where uh uh the the main character, Steve Corell, Michael Scott, he like has a ton of debt. Like they find out that he has like a ton of credit card debt and all this stuff, and he's you know like, well, you could just declare bankruptcy. And so he just like walks through the office and just yells really loud, I declare bankruptcy. And they're like, that's not how it works. He's like, No, I declared it, it's done. And like he's like, and I was like, Okay, like thinking about this topic, I was like, I think there's a little more that goes into it. So uh I'll go ahead and turn it over to you. And uh, what are what do we got here on uh bankruptcy right here, Ryan?

Chapter 7 vs Chapter 13 Basics

Ryan Nelson 2:46

Yeah, there's probably a little more that goes into it, right? Um I would say um this would probably be a uh a topic if it's of interest or you're considering this. Um definitely I would talk to a bankruptcy attorney. Um, this is another one of those topics where I have like a little bit of knowledge on, happy to share what I do know. Um by no means do I consider myself an expert. Um, but uh yeah, let's let's let's give it a go. And like I said, um I would definitely consult a bankruptcy attorney to dive deeper if this is something that you're um maybe seriously entertaining after this conversation. I like it. And so um, you know, I like you mentioned, I think bankruptcy does have some negative connotations around it. Uh and I think sometimes people are scared or maybe nervous um to file for bankruptcy, which uh on one hand is probably good, right? We don't it's not something we should necessarily be striving for. Sure. Um, but on the other side, it's not necessarily representative of like a personal failure. Um, and it can be a nice legal um financial reset button for you. Um so it's kind of designed to stop the chaos and deal with debts in a more organized fashion and then just help you rebuild and get back to a steady financial um like a position of financial strength. So what it can do is it can wipe out some certain types of debts, not all debts, but it can wipe out certain types of debts and then restructure them. Or so it can either wipe out some debts or restructure other debts into a payment plan. And it can also um typically automatically stop um the collection activity after you file. Um so if you have a bunch of debts that are in collections already and you're getting these phone calls and this pressure and um it's overwhelming, um, by filing bankruptcy, it can automatically stop those phone calls you're getting in that negative pressure and overwhelm, maybe maybe those feelings of overwhelm. Um so there's two types of bankruptcy people might have heard chapter seven and chapter 13. So chapter seven bankruptcy is it's typically a faster bankruptcy and it can wipe out um a lot of types of unsecured debts. So we talked on a podcast previously, I think a couple podcasts now. Do you remember what unsecured debt is versus secured debt by chance?

Aaron Hoisington 4:57

Um, I'm gonna be honest.

Ryan Nelson 5:01

No worse, yeah, no worse. Yeah, no. So so an example like your

What Debts Can And Can’t Disappear

Ryan Nelson 5:05

house or your car is an example of a secured debt. So um again, if you if you don't make your house payment, uh the bank comes and takes your house. Right, right. Okay. So it's a lot less risk for the bank because if you don't make your house payment, they get your house as your house and they can liquidate your own. Exactly. Whereas again, like the example I've used in the past is if if you know, if you go to Del Taco and you order something on your credit card and you don't pay that credit card bill, they can't come back and get your Del Taco, right? Right. So um credit card debt's an example of unsecured debt because there is no collateral. Um your house or your mortgage would be an example of secure debt. They'll have collateral, right? So that's the difference. So going back to these two different types of um of bankruptcy, chapter seven and chapter thirteen. So chapter seven is the faster one that I'm talking about, and that can often wipe out a lot of types of unsecured debt. So like medical debt would be another form of unsecured debt or credit card debt. Whereas chapter 13, you'd go through this court process, it can take multiple, multiple years. Um, and then it's going to so so it can be useful if you have income, but you need more structure and you need to like effectively set up these payment plans. Um, chapter 13 can go through, it's a much longer process, but it can go through and help you restructure the debt in such a way that you can get caught up on it. Um that makes sense.

Aaron Hoisington 6:22

Yep, definitely. Yep, absolutely makes sense. Yeah, so it's chapter seven, chapter thirteen. Okay. Yep, cool. Seems like we're missing some chapters in there, but I'm sure there's other ways. Yeah, yeah.

Ryan Nelson 6:31

You know, that's a funny yeah, it would have been interesting to look that up. I wonder that does make you think uh chapter one through six and maybe eight through twelve like existed at either some point or still do exist, just aren't used or aren't as commonly used. Interesting, huh? Yeah, there'll be some research for the uh for the listeners. For the listeners, let us know. Yeah, do some research for us and then uh leave it in the comments. Yeah. Um but um yeah, so then um oftentimes the types of deaths that can get wiped out are like we said, right, secure insecure debts, so things like credit cards, medical bills, personal loans, different types of collections. Um oftentimes things that cannot be wiped out would be things like child support or alimony. Um most student loans will not be um wiped out during bankruptcy. Um some tax debts um and court fees or legal penalties are some examples of expenses or debts that wouldn't be wiped out.

Aaron Hoisington 7:24

Okay, so it's it's not just like a blank slate normally. I guess that that's always one thing that I kind of think about. Oh, it's all your debts gone if you do bankruptcy. Yeah, not necessarily not necessarily like that. There's definitely stipulations of like what can and depending on how you do it, like what's what's gonna go away, what's gonna stick with you regardless. Right.

Ryan Nelson 7:40

So especially like if a business files bankruptcy, their situation is so complex and convoluted that typically like things aren't just getting like wiped clean. Right. Everything's getting restructured. Um But again, it can still help. Again, if we kind of think of bankruptcy as this like reset

Pros, Cons, And Credit Impact

Ryan Nelson 7:55

button, it's a way to like reset things, like let you take a breath, get things restructured, and then put yourself in a position where you can kind of get caught up. So either you have things wiped out to help you get caught up or restructured to help you get caught up. But then again, the idea is when you come out of this, so let's say five, ten years later, you're now financially secure. Um that's the like that's the intent of this. But it's also not intended to be taken advantage of where you could just go, you know, splur, you know, buy whatever you want. Oh, I file for bankruptcy, whatever, and then I'm not gonna pay it back. Oh, let me go buy all this other stuff. Oh, I'll file for bankruptcy again, right? Sure. Um, so there are repercussions, and obviously that's why not everything will even just get wiped out. Definitely. Um, but so some of the pros would be if you are getting all these calls from collectors and this constant pressure, those can get stopped when you go through bankruptcy. Um, it can eliminate some debts and and it will give you this path forward, like we're talking about, to get back into a financially strong or stable position. Um, some of the negatives, the one that most people are probably familiar with is it's gonna negatively affect your credit. Sure. So take a credit hit, that's what most people probably kind of think of. Um but then to your point, yeah, not all debts are just getting wiped clean, right? Right. So so even if you file bankruptcy, you know, this would be what one of the reasons why you might want to consult a bankruptcy consultant or uh attorney to see where you stand on this. And, you know, even by filing bankruptcy, you still may the type of debt you have, you still may owe on it, just in a new restructured way. So it may be something for you to consider before filing bankruptcy if it makes sense to take the credit impact if you're still gonna have to pay this back anyways, right? Um so these are gonna be very personalized situations. Um, there's gonna be lots of paperwork that you're having to go through to go through this bankruptcy process. So definitely you'd want to consult the the specific professionals in that industry um to discuss if it makes sense for you or not. Makes sense, yeah. Um but yeah, the you know, if sometimes when you get into a position when you just can't really cover the payments, right? Like in your budget's tight and you just can't make the debt payments anymore, that may be a trigger that, yeah, I need to start exploring um bankruptcy and if the debt is growing faster than your ability or your debt's growing faster than your income or your ability to pay it down, then um you know you can see how that could spiral in a negative way where you just couldn't ever theoretically get out from under it. Right. This would be a tool to help you uh help try to assist you in getting out from under it. Um that said, there's other resources that you might want to check or look into before exploring something like bankruptcy. So um, you know, if you owe if if if you're if somebody keeps calling you from collections and you owe, you can negotiate with those

Alternatives To Filing And Negotiation

Ryan Nelson 10:40

creditors directly or ask them about if they have any hardship programs. So if you have some medical debt, um, you know, we've talked in the past where you might be able to negotiate directly with that hospital or with the if it's been passed over to collections with the collections agency um or work through a payment program directly with them and maybe not take as much of a credit hit or or you know, I've even heard stories where you can negotiate with them to have it removed from your credit altogether if you make a payment. Um so yeah, so there'd be you know steps to maybe take before just uh jumping straight into the bank bankruptcy um path. Sure.

Aaron Hoisington 11:17

I think that's a good point. And it really one thing to to to talk with the listeners about as well, too, is you know, it's probably isn't step one bankruptcy. Like it definitely seems like there's there's other options to explore potentially obviously everyone's situations personal and such too. But um this probably is gonna be a little bit of a a longer process to determine what works best for you. But um it's like you know, it's it's it's one of the options that could be on the table though, but it definitely just from going from this, it's like, oh, it's not just you declare bankruptcy and you're gone. Like there's a there's a lot of other things you maybe could consider first or even during it, like I don't know, figure figure out the best way that works best for you for sure. So definitely.

Ryan Nelson 11:58

Yeah. So even though it wouldn't be your first step and it may not be your preferred method, definitely there are some things you'd want to avoid. So like um you may not want it may not be financially um savvy of you to drain your your like 401k at work to pay off a debt, right? Sure. Good point. Um and so if you have retirement some retirement savings and you're saying a 401k at work and you have a debt and you can't get out from under the debt, um, you might want to reach out to a uh bankruptcy attorney and explore what your options are and you may be able to get out of

Avoid Costly Mistakes Like Draining 401k

Ryan Nelson 12:35

that debt um without having to drain all your retirement savings so that then when you get on the other side of this, you still actually have a chance at having a successful retirement. Um so make sure, you know, you don't necessarily want to just go drain your your 401k, for example, or you know, use go get like a high interest payday loan to cut, you know, if you if you owe this medical debt and you can't make the payment, go get a high interest payday loan to cut to to kind of put a band-aid on it, get that paid off, and then you owe this this payday mortgage company or payday loan company. Um so I'd say, you know, definitely, while it may not be your first step, um, it should be a step in this process if you can't get out from under some of these debts, and it should be something that you do consider. I think it would be it would be um maybe uh it might be ignorant to not ever consider it. Right. And it would also be ignorant to jump too too eagerly into it, right?

Aaron Hoisington 13:31

That's we well said, yeah.

Ryan Nelson 13:32

But uh then let's pretend you go through this process, you file either chapter seven or chapter thirteen bankruptcy, and now you start getting on the other side of this, right? What we really wouldn't want to see you do is not change any of your actual habits. So if you um let's say you were spending too much on your credit card, that's what got you into this problem, you file bankruptcy. And if the root cause of the problem is you were spending too much money on your credit card and you don't sh fix that, you're just gonna be in the same exact position, right? So making sure you build a budget, um, you start an emergency fund, you build your credit back up, right? Addressing those root causes can make sure that you don't fall vic you know, kind of fall victim

Resetting Habits And Root Causes

Ryan Nelson 14:10

to your same mistakes twice. Yeah. Now, what's interesting with this bankruptcy is that could be one example where the root cause is spending too much. And you could say, absolutely, like go address the root causes. The interesting with the other interesting thing with bankruptcy though is it's not always a result of something within your control. So neither you nor I plan on having a big medical bill on our way home from this podcast, right? Knock on well. But we can't control if necessarily if we do. And so sometimes there's somebody progressing down like uh, you know, their their let's say uh financial journey very uh like maturely and on track, doing the right things, and something out of their control happens. They lose a job, they get a big medical debt bill, right? Like something happens that's outside of their control, and that could trigger the need for something like filing bank for bankruptcy. Um, and how do you go back and address the root cause of that? There's not a lot of things you can do, right? Um, so just know that some things are in your control, some things are not. Certainly address the things that are in your control to try try to avoid and make sure that you, you know, when you come out of this bankruptcy situation, that you're on the right path again moving forward. Um, just knowing that also, again, some things are just out of your control. Right. Yep, that's a good, good, good caveat there for sure. Cool. So yeah, I think that um that's that's bankruptcy in a nutshell, I'd say, again, as you can tell, I I know a little bit. Um there's a lot of probably gaps in my knowledge here as well. So make sure you address that bankrupt or you know, address the your your concerns with a bankruptcy attorney. Um, but uh hopefully that at least gives you a little bit of information to get started and know if it's even something worth um digging deeper into.

Aaron Hoisington 15:44

Yeah, no, I think that was really well said there, Ryan, for sure. And I think it's it I always love it when we can kind of tie different podcasts together as well too, or different messages. And I think about like with this, it's it's different, like s but it's I always say it's like, oh, it's apples and oranges, but they're from like different trees kind of thing, but they are fruit. Um the uh like I think about the consolidation loan

When Life Events Force Hard Choices

Aaron Hoisington 16:05

we talked about like way back when it's like, hey, this could be a tool depending on your situation to look into, but you know, if if in a lot of it comes back to that like root cause of these things, like what determined this? Was this something that was in your control? Like, and I think about it like this like, oh, you know, if I rack up hundreds of thousands in credit card debt, I declare bankruptcy, and then I just do the same cycle again. Like, I mean, you're not really fixing the problem anything here, too. So I like it when those those those things kind of tie in like that. But I think this is a solid uh uh a solid way to you know, kind of just give a little bit of background there, but at the same time, like you said, talk to a qualified bankruptcy attorney, obviously, if this is something you're considering. But uh awesome, Ryan. Anything else to uh add to this one before we pause here?

Ryan Nelson 16:47

I mean, real quickly, yeah, you know, I guess you always want to sort of fix the problem yourself. Kenneth, to your point, if you rack up a bunch of credit card debt and you don't pay it off and you file bankruptcy, the system will kind of fix this for you. Yeah. So, you know, they won't offer you as much credit, your credit will be screwed, you know, not as high, right? So then it's harder to go get a bunch of credit card debt. So so it's like, you know, it's kind of like the issue may get almost fixed one way or the other. Uh huh. You want to be on the side of you fixing it uh as opposed to having the system fix it for you, so to speak. Um gives you a lot more autonomy and and you'll be in a much better position long term. Um so yeah, it's just something to think about.

Aaron Hoisington 17:23

Yeah, 100%. Awesome, man. Well, appreciate it, Ryan. Hope you guys uh learn something. We'll be uh right back on the other side of this. Uh everybody hang tight.

SPEAKER_00 17:29

And

Quick Personal Segment: Breakfast Favorites

SPEAKER_00 17:30

now to put the personal in personal finance.

Aaron Hoisington 17:36

Welcome back to this side of the fiscal physical podcast. Still here with Mr. Ryan. And uh Ryan, I got uh got a question for you today, my man. You you ready? Let's do it. All right. Hopefully you're dialing in here, listeners, after that uh that break here. Uh Ryan, what is your favorite breakfast food? Breakfast food.

Ryan Nelson 17:55

That's a tough one. Um, like I I I think I've mentioned on a previous podcast, breakfast is probably like my favorite meal. Uh I love I love all breakfast foods, really. Oh, really? Okay. Um so yeah, it's tough. I think if I oftentimes at a restaurant, I'll get uh eggs benedict. Oh um just because that's a little like more challenging to make. The holiday sauce goes bad, like it's the it's harder to poach an egg. So it's not something I like ever make for myself. Right. Um so oftentimes that's one of my go-to's at a restaurant, is uh is an eggs benedict. Um that's it. I don't know if it is my favorite. Again, I I usually order it when I'm out just because I don't get it when I'm in. Um but like if it was just a single food, I guess I would probably just say egg. Like my favorite breakfast food is egg, but God, you can't go wrong with uh like a nice uh uh French toast or some pancakes or why not all of the above. Yeah, just get it all. Yeah, some so yeah. So so I I I don't know. I guess I would say eggs. Uh my go-to probably ordering out is gonna be uh the eggs benedict, but I love all breakfast food, so I'm not very picky. Or I uh real quick, the uh uh God, what are they? The like maple maple syrup uh uh sausages. Those things are so good.

Aaron Hoisington 19:05

Oh my gosh, yeah, that like the yeah, the maple like flavored ones. Oh yeah.

Ryan Nelson 19:09

Yeah, anyways, what are you what's yours?

Aaron Hoisington 19:11

I it's so funny. I was going through this and I write these questions and I was like, and sometimes I'll just like sit and think, and I was thinking about this one for a really long time because I'm the exact same one. I go out to eat, I'm probably getting a chicken fried steak. Oh yeah. That's like if it's on the menu, I'm probably going to order that. I don't think I've ever made that at home. Right. I don't think I've ever done that. So that's one of the reasons I get it. But also at the same time, I love a good breakfast burrito. Oh yeah. If like I like making breakfast burritos at home too, and so like, but when I go out, I don't normally get that because I get something else. But man, I love waffles too. I just I love pancakes, all these different things. But I probably say chicken fried steak because I just don't eat it at home. Yeah. But if I go out for but I know it's probably gonna be filling, I'm gonna get it, I'm gonna get the side of hash browns with it too. So all these different things are just super yummy. But um, yeah, I I love breakfast. I was thinking, I was like, man, I I really do enjoy breakfast. It is people say it's all the most important meal of the day. I was like, I don't know about that, but I might be one of the ones I enjoy the most. Yeah.

Ryan Nelson 20:14

Oh yeah, I I absolutely love it. Yeah, a nice

Closing Thoughts And Resources

Ryan Nelson 20:17

uh like uh chorizo scramble or chorizo burrito.

Aaron Hoisington 20:20

Yeah. Oh yeah. All those all those different ones I might cool. Plus, it's always nice if I'm going out, like I don't have to cook it too. Like it's a big piece of it that like I think like really helps me too. So um awesome. Well, appreciate it, Ryan. Uh turn it over to listeners. Let us know what your uh favorite breakfast food is, what's your go-to. If you guys cook something up that's uh special to you, let me let me know, and uh we'll uh we'll go from there. But uh for now we'll go ahead and wrap this one up here and uh thanks everyone for tuning in. And uh, Ryan, I'll let you have the last word, my man. As always, stay the course.

SPEAKER_00 20:51

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the channel. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your fiscal physical the book on Amazon. We'd be remiss if we didn't mention the personal finances just yet. First of all, please don't take anything we say as advised. The pre-setting content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.