Bankruptcy is seen as a last resort for many people, but it can also provide a chance to start over financially if you're in a tough economic situation. Chapter 7 bankruptcy will erase or "discharge" certain debts.
However, people often confuse exactly what Chapter 7 bankruptcy entails, and what types of debt are dischargeable and not dischargeable. Before you decide whether bankruptcy would be right for you, it's important to understand what relief you can and can't obtain through the process.
Below is a detailed explanation of this topic to help you better understand your options under Chapter 7 bankruptcy.
What are the Different Types of Debt?
There are a few different types of debt, and Chapter 7 bankruptcy will handle these in different ways.
Secured debts include any loan that is given to purchase an asset where the lender has a right to sell the asset if the loan is not paid. This could include a mortgage for your home, a car loan, or anything else that is secured by collateral.
Unsecured debts, by contrast, are more general loans that are taken to pay for any number of things. These could include credit cards and personal loans, for example.
There are other types of debt, and Chapter 7 bankruptcy will handle them in different ways. These include business debts, a judgment handed down in civil court, medical bills, utility bills, student loans, and income taxes.
What Debt Does Bankruptcy Clear?
Bankruptcy will nullify almost all debts that you owe. This includes any accounts you have with a collection agency, any credit card balances including late fees that you may owe, past due medical bills, utility bills that are past due, rent and lease agreements, judgments from civil courts, and more.
There are cases in which some of these debts may not be discharged through bankruptcy (debts incurred through fraud, for example). It's always best to check with your bankruptcy lawyer and discuss with them what debts will be discharged through the process, and which ones you will still be responsible for.
There are also some types of debts that you may choose to not discharge during the bankruptcy proceeding because you want to maintain possession of the asset that the debt financing. This is accomplished through a reaffirmation agreement.
Is Credit Card Debt Discharged in Chapter 7?
Credit card debt is typically discharged in Chapter 7 bankruptcy. In fact, outstanding credit card debt is one of the main reasons why people find themselves in a challenging financial position that pushes them to file for bankruptcy.
Most credit cards are classified as unsecured debt. This means you did not have to put up any collateral in order to qualify for the credit card and the ensuing credit line you were offered. The financial institution that extended you the terms of the credit did so on the basis of your credit score and financial situation.
There are some credit cards, however, that are secured. This means you were forced to put up collateral in exchange for the credit line. In these cases, the debt won't typically be discharged during Chapter 7 bankruptcy because of how the loan was arranged in the first place.
Are Personal Loans Dischargeable?
Personal loans are generally treated the same as credit cards in Chapter 7 bankruptcy. Most are considered unsecured loans at the time of signing, and are therefore discharged at bankruptcy.
This doesn't just apply to personal loans that you take with a financial institution, though. It also applies to any person that you owe money to, including family, friends, and employers.
What is Not Dischargeable in Chapter 7?
There are some debts that won't be discharged through Chapter 7 bankruptcy. Because they aren't discharged, you will still be required to pay them after your bankruptcy proceedings have been completed, or else surrender the collateral.
Two of the most common things that aren't discharged through Chapter 7 are mortgages and car loans. Bankruptcy won't discharge these debts so that you still have a place to live and a car to drive you around should you choose to keep the debts and you are current on your payments.
However, you will still be responsible for paying the outstanding debt on these after bankruptcy. If you don't, the lender can proceed with repossessing the asset from you.
Are Student Loans Dischargeable in Bankruptcy?
Student loans won't be automatically discharged in bankruptcy. This means you'll have to continue paying your student loan after Chapter 7 bankruptcy has been completed.
You can attempt to get student loan debt wiped out via bankruptcy, but you'll need to file a separate adversary proceeding to do so. This will require you to prove that repaying the student loan would cause "undue hardship." The Bankruptcy Court will then consider your filing along with your other debt claims in the proceeding.
What Other Types of Debts are Not Forgiven by Bankruptcy?
There are some other types of debts that are not forgiven by bankruptcy. This includes debts that are considered "priority," such as recent income taxes. While some older tax obligations may be dischargeable through bankruptcy, recent charges that have occurred within the last three years are not.
In addition, Chapter 7 bankruptcy won't forgive child or spousal support that you owe. Moreover, any debts that you incurred due to a criminal or fraudulent act are not forgiven. If the court finds that you defrauded one of your creditors, then it could rule that the debt is not forgivable through bankruptcy.
If you have a debt obligation due to a criminal act -- such as a judgment handed down if you injured or killed someone while you were driving under the influence -- then that debt won't be wiped out by bankruptcy either.
How Do I Know What Debts Were Discharged?
When bankruptcy proceedings are completed, the court will send out a discharge order. This is a generic document that states the types of debts that are typically discharged and which ones are not. There is no specific list of which of your debts were discharged.
Generally speaking, all of your debts will be considered discharge unless they are specifically mentioned as not applicable. The language in discharge orders can be confusing at times. This is why it's important to have an experienced bankruptcy attorney to help you through the process. Your attorney can help you understand exactly what was discharged through your bankruptcy and which debts you'll be required to continue paying.
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