Which Debts Are Discharged In Chapter 7 Bankruptcy
Updated By Cara O’Neill, Attorney
Most people file for Chapter 7 bankruptcy to discharge debt. Although some debts are “nondischargeable” and don’t go away in bankruptcy, Chapter 7 will erase many obligations, the most common being medical and .
In this article, you’ll learn:
- how a Chapter 7 discharge will eliminate bills
- what you can expect to erase in Chapter 7, and
- how to classify debt in bankruptcy paperwork.
Learn more about what bankruptcy can and cannot do.
Debts That Can Be Discharged In A Chapter 7 Or Chapter 13 Bankruptcy
Most people use Chapter 7 of the U.S. bankruptcy code to deal with their debt. Under Chapter 7, many of your assets like your home will be liquidated to cover your debts. Chapter 13 is known as reorganization, and if you have enough income to qualify, you can retain certain assets that would be lost in a Chapter 7 bankruptcy while you pay off your debt. While there are some debts you will still be responsible for after declaring bankruptcy, Chapter 7 and Chapter 13 can discharge any of the following:
- Financial Obligations Under Leases and Contracts
Getting A Lawyer To Help You With Your Bankruptcy
Bankruptcy is a specialized area of law that is very complex. And the issues are not always apparent or simple. The bankruptcy laws changed in October 2005 to discourage many people from filing for bankruptcy. So the law became more complicated. And there are more situations where a mistake can result in your case getting dismissed. If your case is dismissed, the bankruptcy court often imposes a penalty of 180 days before you can refile, and in this time period a lot can happen. This is why it is so important to have a lawyer advise you and help you with your bankruptcy.
Find a lawyer who can help you work through the issues, alternatives you may have, and consequences of your choices.
- Pick a lawyer with whom you are comfortable, one who will allow you to ask questions and give you responses that you can understand.
- Pick a lawyer who either specializes in bankruptcy or does a large part of his or her practice in the field.
- Ask questions until you understand what your choices are.
- Don’t be afraid to interview a lawyer and leave without hiring him or her.
If you decide to represent yourself in bankruptcy court, read a guide for Filing for Bankruptcy Without an Attorney.
To find a good bankruptcy lawyer:
- Check state bar groups and specialization/certification programs for bankruptcy lawyers in your community.
- Ask other lawyers or tax preparers you know for recommendations.
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Can Credit Card Debt Be Discharged
Like all debt, when it comes to bankruptcy it depends on which chapter you file under. Chapter 7 will discharge almost immediately. Chapter 13 will reorganize your debts , so that at least a portion of that debt will be repaid over time. Once you have repaid the portion of your debts required by the court and based on your income and expenses, the remainder is discharged.
In addition to credit card debt, other debts that can be discharged through a chapter 7 filing include medical debt, personal loans and promissory notes. You should also know that some debts can only be discharged through a chapter 13 filing, which as noted above, will reorganize those debts . These include court fees, condo, co-op or HOA fees, loans from retirement plans, debt from non-dischargeable tax debt and debts that could not be discharged in a previous bankruptcy.
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What Happens To Student Loan Debt
Student loans are technically unsecured loans, but because they are loans guaranteed by the government, they arent treated the same way as any other personal loan.
You can discharge student loan debt through bankruptcy, but only if you left school at least seven years ago.
In other words, you cant declare bankruptcy immediately after graduation. The law requires you to make every reasonable effort to pay down your loans before you can ask for them to be discharged.
Who Qualifies For Chapter 7 Bankruptcy
There are a few requirements you’ll need to meet to file for a Chapter 7 bankruptcy:
- You generally must complete an individual or group credit counseling course from an approved credit counseling agency within 180 days before filing.
- Either the average of your monthly income during the previous six months must be less than the median income for the same-sized household in your state or you must pass a means test, which determines if your disposable income is high enough to make partial payments to unsecured creditors. If you don’t pass the means test, you may still be able to file a Chapter 13 bankruptcy.
- You can’t have filed a Chapter 7 bankruptcy during the past eight years.
- You can’t have filed a Chapter 13 bankruptcy during the past six years.
- If you tried to file a Chapter 7 or 13 bankruptcy and your case was dismissed, you have to wait at least 181 days before trying again.
- You may be eligible to file, but a court could dismiss your case if it determines you’re trying to defraud your creditors. For example, if you take out a loan or use credit cards with the intent of then declaring bankruptcy to avoid repaying the debt.
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Can You File Bankruptcy On Personal Loans
While you can typically file bankruptcy on personal loans, theres a key difference to be aware of if you have an unsecured personal loan with a cosigner.
Under Chapter 13 bankruptcy, creditors usually cant call your cosigner during your bankruptcy period. Under Chapter 7, creditors can continue to contact your cosigner for payment.
In other words, your cosigner has greater protections under Chapter 13 bankruptcy than under Chapter 7.
Grounds For Denial Of A Debt Discharge
The grounds for denying an individual debtor a discharge in a Chapter 7 case are narrow. They are construed against the moving party .
Among other reasons, the court may deny the debtor a discharge if it finds that the debtor:
- Failed to keep or produce adequate books or financial records
- Failed to explain any loss of assets
- Committed a bankruptcy crime such as perjury
- Failed to obey a lawful order of the bankruptcy court
- Fraudulently transferred, concealed, or destroyed property that would have become the property of the estate
- Failed to complete an approved instructional course concerning financial management
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How A Bankruptcy Discharge Works
A copy of the discharge order will be mailed to all your creditors, as well as to the U.S. Bankruptcy Trustee, the trustee who is personally handling your bankruptcy case, and the trustees attorney. This order includes notice that creditors should take no further actions to collect on the debts or they’ll face punishment for contempt.
Keep a copy of your order of discharge along with all your other bankruptcy paperwork. You can use a copy of these papers to correct credit report issues or to deal with creditors who try to collect from you after the bankruptcy discharge.
You can file a motion with the bankruptcy court to have your case reopened if any creditor tries to collect a discharged debt from you. The creditor can be fined if the court determines that it violated the discharge injunction. You can try simply sending a copy of your order of discharge to stop any collection activity, then talk to a bankruptcy attorney about taking legal action if that doesn’t work.
Most Unsecured Debts Are Dischargeable In Chapter 7
Unsecured debt is an obligation that isn’t backed by collateral. For instance, if you didn’t agree that the creditor could take the property purchased on credit when you entered the credit contract, the debt is unsecured.
Common examples of unsecured consumer debts include medical bills, utility bills, back rent, personal loans, some government benefit overpayments, and credit card charges. These unsecured debts are dischargeable in Chapter 7 bankruptcy.
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Types Of Debts You Cant Kick Out In Bankruptcy
Please welcome Stacy Barbee from Oak View Law Group for todays guest post on debts you cant discharge in bankruptcy.
Today, certain people file for bankruptcy, business and individuals, and it no longer has the stigma it once had. Now its almost considered wise, a way to regroup and come back again. David Dinkins, former mayor of New York City
Bankruptcy, a popular debt solution, allows you to pay most debts and make a fresh financial start. But, there are a few kinds of debts that arent dischargeable. This means you cant get rid of a few kinds of debts in bankruptcy. If youre planning to file bankruptcy , then its important to know about the debts that arent dischargeable. Otherwise, you might apply for bankruptcy unnecessarily and end up wasting time and money.
How Do Student Loans Discharge In Bankruptcy
What can you file bankruptcy on when it comes to student loans? Well, discharging student loans in bankruptcy is not impossible, but its rare.
Under current law, youll need to pass the Brunner test by showing that your student debt makes it impossible to maintain a minimum standard of living, and that your finances arent going to change soon. You also have to show youve made a good faith effort to keep up with your student loan bills.
In fact, consumer protection attorney Don Petersen said, Some debts are dischargeable in Chapter 7 as well as Chapter 13, but only if the debtor files an adversary proceeding, which is a sort of lawsuit within a lawsuit, challenging whether a certain liability can be discharged.
In many student loan cases, switching to an income-driven repayment plan or applying for deferment or forbearance is a better option. Filing for bankruptcy can be a long and expensive process with no guarantee of success. Plus, it damages your credit for years.
Does The Debtor Have The Right To A Discharge Or Can Creditors Object To The Discharge
In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor’s discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an “adversary proceeding.”
The court may deny a chapter 7 discharge for any of the reasons described in section 727 of the Bankruptcy Code, including failure to provide requested tax documents failure to complete a course on personal financial management transfer or concealment of property with intent to hinder, delay, or defraud creditors destruction or concealment of books or records perjury and other fraudulent acts failure to account for the loss of assets violation of a court order or an earlier discharge in an earlier case commenced within certain time frames before the date the petition was filed. If the issue of the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.
Stop A Foreclosure Repossession Or Eviction
The automatic stay will stop these actions as long as they’re still pending. Once complete, bankruptcy won’t help.
- Evictions. An eviction that’s still in the litigation process will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord already has an eviction judgment against you, bankruptcy won’t help in the majority of states. Learn more about evictions and the automatic stay.
- Foreclosure and repossession. Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. If you can’t bring the account current, you’ll lose the house or car once the stay lifts. By contrast, Chapter 13 has a mechanism that will allow you to catch up on past payments so you can keep the asset. Find out more about bankruptcy’s automatic stay and foreclosure and car repossession and bankruptcy.
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Debt Relief Alternatives To Bankruptcy
Bankruptcy has serious consequences. A Chapter 7 bankruptcy will remain on your for 10 years, and a Chapter 13 will remain for seven years. That can make it more expensive or even impossible to borrow money in the future, such as for a mortgage or car loan, or to obtain a credit card. It can also affect your insurance rates.
So itâs worth exploring other types of debt relief before filing for bankruptcy. Debt relief typically involves negotiating with your creditors to make your debts more manageable, such as reducing the interest rates, canceling some portion of the debt, or giving you longer to repay. Debt relief often works to the creditorâs advantage, too, as they are likely to get more money out of the arrangement than if you were to declare bankruptcy.
You can negotiate on your own or hire a reputable debt relief company to help you. As with , there are scam artists who pose as debt relief experts, so be sure to check out any company that youâre considering. Investopedia publishes a regularly updated list of the best debt relief companies.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 and 13 each offer unique solutions to debt problems. The two bankruptcy types work very differently. For instance, how quickly your debt will get wiped out will depend on the chapter you file:
- Chapter 7 bankruptcy. This chapter takes an average of three to four months to complete. Learn more about erasing your debt in Chapter 7 bankruptcy.
- Chapter 13 bankruptcy. If you file for Chapter 13 rather than Chapter 7, you’ll likely have to pay back some portion of your unsecured debts through a three- to five-year repayment plan. However, any unsecured debt balance that remains after completing your repayment plan will be discharged. Find out how to pay off or discharge your debts in Chapter 13 bankruptcy.
Chapter 7 is primarily for low-income filers, and therefore, it won’t help you keep property if you’re behind on payments. But, if you have enough income to pay at least something to creditors, then you’ll be able to take advantage of the additional benefits offered by Chapter 13.
Here are some of the things that Chapter 13 can do.
Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan that will allow you to make up the missed payments over time. To make this plan work, you must demonstrate that you have enough income to pay back payments and remain current on future payments. Learn more about your home and mortgage in Chapter 13 bankruptcy.
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Tax Liability And Bankruptcy: What Tax Debts Can Be Discharged
One frequent misunderstanding about bankruptcy is that tax debt is not dischargeable. It is true that many types of tax debts will survive bankruptcy. However, some tax debts can be discharged, but in order to do so, certain specific rules must be met. This article provides a brief summary of some general rules you can use to determine whether tax obligations might be discharged in a bankruptcy proceeding.
In order for back income taxes to be dischargeable, all aspects of the 3/2/240 rule must be met. The 3/2/240 rule states that your back income taxes must have been due more than three years before filing for bankruptcy, you must have filed your tax return two years or more prior to filing bankruptcy, and your back income taxes must have been assessed at least 240 days before filing for bankruptcy.
Can Any And All Debts Be Dischargeable In A Bankruptcy Case
When debts are discharged in a bankruptcy case, the debtor is freed of any legal obligation to pay them. Creditors can no longer take any collection action, communicate with the debtor, or pursue legal action. Your Los Angeles bankruptcy attorney will inform you of which debts are dischargeable. Whether your debt is dischargeable depends on the type of bankruptcy you file, the kind of debt in question, and numerous other factors.
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Debts Eliminated By Bankruptcy Discharge
Bankruptcy covers almost all unsecured credit and debt. Unsecured debts are those that are not tied to property or collateral.
Dischargeable debts in a bankruptcy in Canada include:
- overdue tax debts and
- certain student loans.
The debts that are included in your bankruptcy are those that you owe or are due as of the date of your bankruptcy filing. Bankruptcy also covers penalties and interest owing associated with each of your listed debts.
Once you declare bankruptcy, your Licensed Insolvency Trustee will notify your creditors. While you provide an estimate of what you owe at the time of filing, it is up to your individual creditors to file a claim in your bankruptcy and to prove the amount owing. Any creditor with a provable claim will receive a pro-rata share of any money in your bankruptcy.