Debts That Remain After A Chapter 7 Discharge
By FindLaw Staff | Reviewed by Bridget Molitor, JD | Last updated April 07, 2021
If you file a bankruptcy case under Chapter 7, not all debts are eliminated once the bankruptcy process is complete.
Generally speaking, in a Chapter 7 proceeding, the following types of debts are not discharged:
- Debts that were not listed at the start of the case . These lists are called “schedules.” They must be filed with the courts.
- Most student loans
- Recent federal, state, and local taxes
- Child support and spousal maintenance
- Government-imposed restitution, fines, and penalties
- Court fees
- Debts resulting from personal injury or wrongful death damages from drunk driving cases
- Debts that were non-dischargeable in a prior bankruptcy
- Debts owed to certain pension plans
- Certain debts owed for condominium dues and fees
- Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud
What Is Chapter 7 How Does It Work
In a Chapter 7 bankruptcy, youâll fill out forms about what you earn, spend, own, and owe and submit these forms to the bankruptcy court. Youâll also submit recent tax returns and pay stubs, if youâre employed.
A trustee, who is an official assigned to your case, will review your forms and documents. Youâll have a brief meeting with them, where theyâll ask you basic questions about whatâs in your forms.
A couple of months later, youâll get a notice in the mail from the court making your bankruptcy discharge official. The vast majority of people who are honest, fully fill out their bankruptcy forms, and complete the required steps get their bankruptcy accepted by the court.
How Can Redemption Help Me Keep My Car In Chapter 7 Bankruptcy
If you owe money on your car when you file Chapter 7 bankruptcy, you have three choices with regard to your car loan. You can choose to:
- surrender the car ,
- reaffirm the car loan debt , or
- redeem the car .
To successfully redeem your vehicle, you must:
- propose the amount you will pay
- get the creditor to agree to the value or go to court for a judge to decide, and
- pay the amount within a specified period.
Once you have the car’s value, you must come up with the money to pay the full value in one payment. The creditor must release its lien, and you will own the car free and clear.
Example. Jacob files Chapter 7 bankruptcy. He owes $10,000 on his car, but he knows Kelley Blue Book lists the retail value of the car at $6,000. Jacob indicates in his bankruptcy paperwork that he intends to redeem the vehicle and offers the lender $6,000 for the car. The lender argues that the car is worth more, and they go to court. The judge decides that the retail value is $7,000. Jacob pays $7,000 to the creditor, keeps his car, and receives title.
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Tax Debts In Each Chapter
Tax debts are typically priority debts in all chapter filings. They’re addressed and paid first when assets are liquidated in Chapter 7, and they must be included and paid in full in Chapter 12 and 13 payment plans.
Priority tax debts are not dischargeable in Chapters 11, 12, or 13.
You can receive tax refunds while under bankruptcy protection, but they will most likely be directed toward paying your tax debts.
What Will Happen To My Car In Chapter 7 Bankruptcy If I Dont Have A Car Loan
It depends. You can keep any property that you can protect with a bankruptcy exemption. Most states exemption schemes allow a filer to keep a certain amount of equity in a vehicle. Youll need to determine:
- the amount of equity in your car, and
- whether the equity is fully exempt.
If the exemptions cover the vehicle , youre in luckyou can keep it. If, however, you can protect only a portion of the equity, the bankruptcy trustee will sell the vehicle, give you the exemption amount, and use any balance to pay creditors. Some trustees, however, will let you keep the car if you pay the amount theyd net after a sale.
Example 1. Ethans car is worth $5,000. His state has a $7,000 motor vehicle exemption. Since Ethans car is worth less than $7,000, he can fully exempt the entire value of the car.
Example 2. Avery has a $10,000 car, but her state only offers a $5,000 motor vehicle exemption. However, her state also has a $5,000 wildcard exemption. Avery can exempt $5,000 with her motor vehicle exemption and use the wildcard exemption to exempt the remaining $5,000 to keep her car.
Example 3. Scarletts car is worth $13,000 but the motor vehicle exemption is $3,000. After the car gets sold, Scarlett would receive $3,000, and the remaining portion would be used to pay creditors and the trustees fee.
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What Bankruptcy Typically Looks Like
If you do end up filing for bankruptcy, there are generally two types that individuals file: Chapter 7 and Chapter 13.;
A Chapter 7 bankruptcy is all about selling anything valuable you own a second vehicle, a vacation home, collectibles, stocks, bonds to pay off your debts. Generally, this type of bankruptcy wipes out all of your outstanding debts once a judge approves your filing in court. The whole process typically takes about three to five months. Chapter 7 bankruptcies are best suited for those who cannot pay back all, or a significant portion, of their balances. Tadross says that he typically recommends clients file for Chapter 7 bankruptcy if they have an unmanageable amount of unsecured debt, such as medical or credit card.;
A Chapter 13 bankruptcy, referred to as a reorganization bankruptcy, is designed for those with a regular income to create a plan to repay all, or part, of their debts in installments. It works well if you are so far behind on your home mortgage payments that you may be facing foreclosure or eviction. With this type of bankruptcy, you generally don’t have to sell off your property to pay your lenders, but instead work to pay off your debts through a court-approved consolidated repayment plan that runs for a set period of time, typically three to five years. At the end of that period, any remaining unpaid debts are discharged.
Your Car Loan If You Want To Keep Your Car
If you are paying off your car, the loan is secured by your car. When you file for bankruptcy, under the new bankruptcy rules, you can reaffirm your car loan.
The good news is that if you agree with your car loan creditor to repay all or part of your loan, the creditor wont take your car.
Of course, you must make payments according to the reaffirmed car loan.
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Bankruptcy Is Not The End Of Your Financial Life
If you can no longer afford to pay your bills and you haven’t been able to negotiate better terms with your lender, then it may be time to consider bankruptcy. Don’t beat yourself up over it too much, Rao says.;
Filing for bankruptcy is often seen as this admission that “I’m a failure,” but that’s not usually the case, he says. And while it’s a step most people don’t want to take, bankruptcy can provide a lot of relief if done right.;
“It really does provide that fresh start,” Tadross says, adding that once your Chapter 7 bankruptcy is approved, or you receive a discharge in your Chapter 13 case, you’re completely debt-free.
Chapter 13 bankruptcies can stay on your credit report for three years, while Chapter 7 cases disappear after 10 years. But that won’t prevent you from getting approved for credit.;
Quite the opposite, Tadross says, adding he usually advises clients that they will likely receive dozen pre-approved credit card offers within a week of completing their bankruptcy. Why? Because creditors know you’re debt-free and that you’re not going to be able to file for another bankruptcy for several years.;
Debt can feel like an albatross around your neck, Tadross says, but you shouldn’t feel humiliated that you’re taking steps to rectify it through bankruptcy. “You’re just making arrangements to catch up on what you owe it’s not the end of the world,” he adds.
Chapter 7 Debt Discharge 101
A bankruptcy discharge releases individual people from personal liability for most debts. It prevents the creditors owed those debts from taking any collection actions against you.
Because a Chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing. It is important to discuss the scope of the discharge.
Generally , individual debtors receive a discharge in more than 99% of Chapter 7 cases.
Unless a creditor files a complaint objecting to the discharge, or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case. This typically happens 60 to 90 days after the date first set for the meeting of creditors.
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Your House In Chapter 13 Bankruptcy
When youre behind on your mortgage payments but want to keep your home, Chapter 13 bankruptcy might give you the time you need to catch up. Under this type of bankruptcy, the court approves a plan for you to repay the past-due mortgage amounts over three to five years, while continuing to make your current mortgage payments. As long you keep up with both of those payments, your lender cant foreclose on the house.
How often do Chapter 13 filers succeed in completing their repayment plans? Many of the readers we surveyed were still making their plan payments, but of the others, nearly half had their case dismissed before they were able to complete the plan, which usually happens when a debtor cant keep up with the payments. It was likely that these readers didnt have enough income to cover their living expenses as well as the monthly plan payments. Bottom line: Despite good intentions, not all Chapter 13 bankruptcy filers are able to keep their houses.
What Are Some Specifics On How Chapter 7 Or 13 Would Affect Me
Always keep in mind that no two bankruptcy cases are the same, and your lawyer and you will only decide whats best after all the details of your case have been analyzed.
Some of the main differences between types of bankruptcy filings are:
In Chapter 7 bankruptcy:
- The Trustee can sell all non-exempt property to pay your debts.
- Does not usually allow the removal of junior liens from real property .
- Does not usually reduce the principal loan balance on secured debts.
- The largest benefit is that Chapter 7 allows you to discharge most debt and get a fresh financial start.
In Chapter 13 :
- Your debts are reorganized by the courts and your creditors.
- Usually only applies to you as an individual .
- There are debt limits for unsecured debt and secured debt, which your lawyer will explain.
- Also, 3-5 years to complete, or until all plan payments are made.
- You usually may keep all your property but must pay unsecured creditors. Does allow removal of junior liens with certain requirements being made.
- May have principal loan balances to be reduced if certain requirements are met.
There are many rules and court-mandated guidelines to follow, and only after all your debts are analyzed by your bankruptcy lawyer should your decision be made.
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Frivolous Spending After You File Could Put Your Case In Jeopardy
Spending money willy-nilly after you file for bankruptcy could appear like fraud and upend your court ruling. Courts view spending large sums of money within 90 days of filing for bankruptcy as acting in bad faith or potential fraud, says Matthew L. Alden, a bankruptcy and debt relief attorney at the Columbus, Ohio-based firm Luftman, Heck & Associates LLP.
This increased suspicion always has a negative impact on the bankruptcy process and could result in additional legal penalties, he says. Its not worth it on your journey back to financial health.
The Creditor Mailing List
Your Creditor Mailing List, also sometimes called a mailing matrix, must include all of your creditors and their contact information. That includes debts that wont be handled through the bankruptcy process, such as student loan debts. The court uses that list to send your creditors a notice that youre filing a bankruptcy. Thats important for creditors because they may want to be involved in the process.
Depending on the type of bankruptcy you file, your creditors may need to be involved in the reaffirmation of your debts, the payout of any liquidated assets, or the approval of a payment plan. In order to get their portion of the repayment, a creditor needs to file a proof of claim. If they dont get notice, they have no way of filing a proof of claim and get shut out of your bankruptcy.
Not only is the creditor mailing list important to your creditors, its important to your case. When you file, you get the protection of the automatic stay. That means all collection efforts have to stop. Creditors cant follow the automatic stay if they dont know youve filed. In addition, leaving a creditor off your list can affect the outcome of your bankruptcy.
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How Do Bankruptcy Exemptions Work
Most of the Chapter 7 bankruptcy exemptions have a limit. This means that anyone fiing bankruptcy can protect certain types of property up to a certain amount.
For example, say your car is worth $3,500, and the exemption for motor vehicles in your area is up to $6,000. In this case, you would be allowed to keep your vehicle.
Say, however, that your vehicle is worth $9,000. In this situation, your trustee can sell your vehicle for $9,000. They would then give you $6,000 of the profits, and divide the remaining $3,000 amongst your creditors.
Bankruptcy Is A Powerful Tool For Debtors But Some Kinds Of Debts Can’t Be Wiped Out In Bankruptcy
By Cara O’Neill, Attorney
If you’re facing severe debt problems, filing for bankruptcy can be a powerful remedy. It stops most collection actions, including telephone calls, wage garnishments, and lawsuits . It also eliminates many types of debt, including credit card balances, medical bills, personal loans, and more.
But it doesn’t stop all creditors, and it doesn’t wipe out all obligations. For instance, you’ll still have to pay your student loans and arrearages for child support, alimony, and most tax debts. Read on to learn more about:
- what you can expect in both Chapter 7 and Chapter 13
- the benefits offered by Chapter 13 alone, and
- things that can’t be accomplished by filing for bankruptcy.
If you’d like step-by-step guidance through the bankruptcy process, read What You Need to Know to File for Bankruptcy in 2021.
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Reasons To File For Bankruptcy
Here are some good things that might happen if you file for bankruptcy:
- In Chapter 7, most debts are discharged , giving you a fresh start;
- In Chapter 13, you can save some of your property like a house or car;
- Bankruptcy stops wage garnishment and harassment by collection agencies;
- Foreclosures and repossessions are stopped and cannot move forward unless the court allows;
- You can keep exempt property;
- You can stop utility shut-offs, or restore service after paying a reasonable deposit, then pay only for current service;
- Employers and public agencies cannot retaliate against you for filing bankruptcy; and
- If your driver’s license was suspended for not paying a debt that is dischargeable in bankruptcy, you can get your license reinstated.
Your Income And The Means Test
When determining whether you qualify for Chapter 7 bankruptcy, the means test compares your average gross monthly income for the six-month period before filing to the median income of similar households in your state. Here is how it works.
You’ll automatically pass if your income is below the state median . The means test presumes that low-income debtors can’t pay back creditors and therefore, aren’t abusing the system by filing for Chapter 7 bankruptcy.
However, if your income is above the median, you don’t automatically fail, either. You’ll complete the rest of the means test and subtract allowed expenses from your gross income. If the amount that remains isn’t enough to make a meaningful payment to your creditors, you’ll still qualify for a Chapter 7 discharge.
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Compare Your Income To The Median
Find the complete list on the UST website or work with your lawyer to identify the number. Does your income fall below the median for your state and home size? Then, you qualify for Chapter 7! Proceed with the rest of your case and follow the rest of the steps outlined below.
If you do not fall under that number, you need to do some extra work to qualify. Many people who do not pass the means test receive Chapter 7 every year. They must prove that they don’t have enough disposable income to pay for at least 25% of their debts over five years. These debts include all unsecured and non-priority debts, including credit card payments.
Performing part two of the means test takes much more work. It proves that you do not qualify for Chapter 13 with its five-year payment plan. As a result, the necessary information includes a more in-depth examination of your financial situation. You’ll need to work with your lawyer to ensure you qualify. The court will also examine these factors when approving your case.
