Understanding The Debts Which Can Be Erased Through Chapter 7 Bankruptcy
Not all debts are erased
Despite what someone may have told you, bankruptcy is not a process that sees every single debt wiped out. While it will help you with a fair few debts, but it will not clear out every single debt. You should also remember that chapter 7 bankruptcy and chapter 13 bankruptcy do not cover the same things or work the same way.
A chapter 7 bankruptcy filing does so much to help you get a fresh start with your life, and it does this through helping you wipe out your debts. Credit card debt is a common problem that many face, though thankfully, it is something that can be cleared out. However, while in most circumstances you do not have to worry about a dispute, disputes are still possible. For example, a credit card company or bank may argue that the debt should not be cleared.
One argument that they may make in support of this is that you provided false information on your credit report, which may wind up canceling out the debt clearance if it is found to be true. A good way to keep this from happening is to stop using your credit cards altogether. This may have a negative impact on your credit score for the short-term, but in the long-term, it is better to deal with that than it is to deal with an objection to your discharge attempt.
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Chapter 13 or 7 Bankruptcy â which is better?
Find Out Which Debts Can Be Canceled In Chapter 7 Bankruptcy
Updated By Cara O’Neill, Attorney
Filing for bankruptcy is a major life decision that can affect your financial and personal life for many years, and it’s important to understand what Chapter 7 can and cannot do for you. If you’re eligible, Chapter 7 bankruptcy can provide you with relief from most of your unsecured debts, and even your secured debts in certain cases. Here’s a rundown of what can be discharged in Chapter 7 bankruptcy.
For a list of debts that can’t be discharged in Chapter 7, see Debts that Survive Chapter 7 Bankruptcy.
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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When Is A Discharge Challenged
A bankrupt’s discharge may be opposed by creditors, the LIT or the BIA if the bankrupt has failed to meet his/her obligations or has committed an act of misconduct under the Bankruptcy and Insolvency Act of the BIA). The Court will then review the opposition and render a decision.
There are four types of discharge:
- Absolute dischargeThe bankrupt is released from the legal obligation to repay debts that existed on the day the bankruptcy was filed, with the exception of certain types of debt.
- Conditional dischargeThe bankrupt must meet certain conditions to obtain an absolute discharge. Generally, the bankrupt will be required to pay a certain amount of money over a specific period. However, the Court may also impose other conditions. Once all conditions have been met, an absolute discharge will be granted.
- Suspended dischargeAn absolute discharge that will take effect at a later date.
- Refused dischargeThe Court has the right to refuse a discharge.
Debt Settlement And Debt Elimination Scams
Some companies offering debt settlement programs may not deliver on their promises, like their guarantees to settle all your credit card debts for 30 to 60 percent of the amount you owe. Other companies may try to collect their fees from you before they settle any of your debts. The FTCs Telemarketing Sales Rule prohibits companies that sell debt settlement and other debt relief services on the phone from charging a fee before they settle or reduce your debt. Some companies may not explain the risks associated with their programs, including that many of their clients drop out without settling their debts, that their clients credit reports may suffer, or that debt collectors may continue to call them.
Before you enroll in a debt settlement program, do your homework. Youre making a big decision that involves spending a lot of your money that could go toward paying down your debt. Enter the name of the company name with the word “complaints” into a search engine. Read what others have said about the companies youre considering, including whether they are involved in a lawsuit with any state or federal regulators for engaging in deceptive or unfair practices.
Before you sign up for the service, the debt relief company must give you information about the program:
- Price and terms. The company must explain its fees and any conditions on its services.
The debt relief company also must tell you:
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What Happens When You File For Bankruptcy
Filing for bankruptcy will have major repercussions on the rest of your finances. It will discharge you from unsecured debts, which includes credit cards, payday loans, amounts owing to utility companies, student loans under certain circumstances, and tax debt.
The downside is that you will have to sell any non-exempt assets you own to pay off your creditors, as well as 50% of any surplus income over a certain threshold.
Bankruptcy will provide CRA debt relief, but it will come at a cost. Some of the assets that could be liquidated if you declare bankruptcy include:
- Vacation and investment properties that are not your primary residence
- Secondary vehicles
- Non-RRSP investments, including TFSAs, as well as RRSP contributions made in the 12 months before filing
- Jewelry, artwork, collectibles, and other valuables.
In addition to surrendering assets, you will also have to make surplus income payments for 21 months until you are finally discharged from your debts. Surplus income payments are 50% of any net income earned above a certain threshold that depends on the size of your family. It should give you enough to live, but the payments can be considerable depending on your income.
If you owe money to the CRA, bankruptcy will eliminate those debts, but these are all factors to consider. Talk to an insolvency trustee about your options.
Dealing With Debt Collectors
Federal law dictates how and when a debt collector may contact you: not before 8 a.m., after 9 p.m., or while youre at work if the collector knows that your employer doesnt approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from you to stop further contact.
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Debts Not Dischargeable If A Creditor Objects
Some debts aren’t automatically excepted from discharge. Creditors must ask the court to determine if they are dischargeable or not. If the creditor doesn’t raise the dischargeability issue or the creditor raises the issue but the court doesn’t agree, these debts will be discharged.
- When owed to a single creditor and aggregating to more than $725 and incurred within 90 days of filing for bankruptcy, these debts are presumed fraudulent and nondischargeable. The creditor must present the facts to the court in an adversary proceedinga type of lawsuit. If you prove that you intended to pay the charges back or that the goods aren’t “luxury” items then the debt will be discharged.
- Cash advances. When a debtor obtains more than $1,000 from one creditor within 70 days of filing for bankruptcy, the debt is presumed fraudulent and nondischargeable. Again, if you can prove that you intended to pay this money back, then the debt will be discharged. Learn more about luxury debts and cash advances.
- Debts obtained by fraud or false pretenses. These types of cases tend to stem from misrepresenting income on credit applications or purchasing goods and services on credit with no intent to pay. Find out more in What Is Bankruptcy Fraud?
- Debts incurred due to willful and malicious injury. You won’t be able to discharge a debt arising from intentionally injuring someone or someone’s property.
How Can I See My Credit Reports
Here is the best and only source where you can pull complete copies of all three of your credit reports:
A complete and free copy of all three of your credit reports can be pulled from the Annual Credit Reporting Service or call 877-322-8228. If you would like assistance reviewing your credit profile, professional help is available online or by calling 855-368-3538.
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Amy Myers From Ovation Credit Services Responds
First of all, congratulations on putting this difficult legal and financial event behind you. I hope youve seen better days since you went through what was likely a very stressful process!
Filing bankruptcy can impact your ability to qualify for loans, find a new apartment or even get certain types of jobs, so it makes sense that youd want your record completely cleared.
Fortunately, bankruptcy does not stay on your forever. A Chapter 13 bankruptcy should automatically be removed from your credit history seven years after the date you filed.
With that said, lets take a look at each of your individual questions, along with a few other common questions that may come up for you:
A Licensed Insolvency Trustee Can Advise You
Does bankruptcy clear all debts? Not in all cases, but it does provide a new starting point and relief for most unsecured debts. Bankruptcy can be a complicated topic, but help is available. For more information on whether bankruptcy is a good solution for your situation, contact a Licensed Insolvency Trustee for a no-charge consultation.
It doesnt matter if you live in Toronto, Ottawa, Quebec, or anywhere else. We have licensed trustees that can help you!
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Is A Judgment A Dischargeable Debt In Bankruptcy
The manner in which a judgment is obtained has no bearing on whether bankruptcy can eliminate it. What matters is if the debt or obligation underlying the judgment is subject to discharge through bankruptcy.
- Overdue rent or bill payments
- Private debts to friends or family members
The attachment of a judgment to a debt does not change the debt’s eligibility for discharge through bankruptcy, and judgments associated with debts such as these are typically eliminated in the bankruptcy process.
Debts are discharged in a Chapter 7 proceeding following the debtor’s forfeiture of assets . Debts are discharged in a Chapter 13 bankruptcy after the debtor completes the repayment plan imposed by the bankruptcy court.
Neither Chapter 7 nor Chapter 13 bankruptcy can discharge all debts, however. Obligations that cannot be eliminated through bankruptcy include:
- Child support and alimony
- Obligations incurred through negligence, fraud or other criminal acts
- Chapter 7 bankruptcy cannot discharge car loans, obligations to pay court costs or fees, or debts secured by liens .
- Chapter 13 specifically cannot discharge certain tax debts.
Mortgages And Debts Secured On Your Home
Youll need to keep paying your mortgage and any other debts secured on your home – for example, debts secured with a charging order. If you fall behind with the payments, bankruptcy won’t stop your mortgage lender from taking steps to repossess your home.
If you have an income payment agreement or income payment order , tell the official receiver you need to keep paying a secured debt. Ask them if you can pay less under the IPA or IPO so you can keep paying the secured debt as well.
If your home is repossessed and sold, but doesn’t raise enough money to pay off your outstanding mortgage or any other debt secured on it, the remaining debt known as ‘mortgage shortfall’ will no longer be secured. This means you’ll be released from it at the end of your bankruptcy. You’ll also be released from a mortgage shortfall if your home is sold at any time, even after your bankruptcy has ended.
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Debts Included Or Not Included In The Bankruptcy
Most debts can be included in a bankruptcy. They might include these debts:
- unpaid credit card balances
- debts owed to collection agencies
- student loans, in some cases
However, some debts cannot be included in the bankruptcy. This means that the creditors could claim this money even though you are going bankrupt. This is the case for these amounts:
- support payments to a former spouse or for children
- fines, penalties, restitution orders or other similar orders imposed by a court
- debts flowing from a civil court decision t ordering payment of money for sexual assault or assault causing physical injury or death
- debts arising from fraud, misrepresentations or illegal acts
- money that a creditor could not get back because you did not tell the trustee that you owed the money
- student loans, if the bankruptcy happened within seven years of the date you stopped being a full or part-time student. In certain rare cases, a judge can reduce that period to five years if she is satisfied that you made an effort to pay and that you will be unable to pay the debt in the future.
Revocation Of Debt Discharge
The court may also revoke a Chapter 7 discharge during the bankruptcy if:
- The bankruptcy trustee, creditor, or U.S. trustee requests a revocation
- You acquire property that is property of the estate
- You knowingly and fraudulently failed to report the acquisition of such property
- You fail to surrender the property to the trustee
- You make a material misstatement or fail to provide documents or other information in connection with an audit of your case
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Where Bankruptcy Doesnt Help
Bankruptcy does not necessarily erase all financial responsibilities.
It does not discharge the following types of debts and obligations:
- Loans obtained fraudulently
- Debts from personal injury while driving intoxicated
It also does not protect those who co-signed your debts. Your co-signer agreed to pay your loan if you didnt, or couldnt pay. When you declare bankruptcy, your co-signer still may be legally obligated to pay all or part of your loan.
Is Chapter 7 Bankruptcy Right For You
Make sure you know the difference between Chapter 7 bankruptcy vs Chapter 13 bankruptcy. Chapter 7 makes sense when:
You dont have many assets.
Your problem debts total more than 50% of your annual income.
Your problem debts can be discharged, or forgiven, by Chapter 7. These include debts such as medical bills, credit card debt and personal or payday loans.
It would take five years or more to pay off your debt, even if you took extreme measures.
Some debts typically cant be erased in bankruptcy, including recent taxes, child support and student loans. Bankruptcy still may be an option for you, though, if erasing other kinds of debt would free up enough money to pay the debts that cant be erased.
The other common form of consumer bankruptcy, Chapter 13, may be better if you have more assets or secured debts, and can repay some or all of what you owe.
Other debt relief options are available, too, such as a debt management plan through a agency. Take advantage of the free initial advice that credit counselors and many bankruptcy attorneys offer before deciding on a path.
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A Quick Note About Secured Debt
Secured debt is sometimes listed as a debt that canât be discharged in a Chapter 7 bankruptcy. This is not technically true. The filerâs personal obligation to pay the secured debt – usually in the form of a car loan or mortgage – is discharged. But, the only way to keep the property that is securing the debt is by paying for it.
So, it may feel like the secured debt was not discharged because you still have to make the monthly payments. When you file bankruptcy, youâre able to choose what you want to do with your car loan.
You can have the secured creditor go through with a repossession after filing secure in the knowledge that the car loan has been eliminated. Only if a reaffirmation agreement has been signed and, if needed, approved by the bankruptcy court judge, does a car loan survive the bankruptcy.
How Do You File Chapter 7 Bankruptcy
You can probably complete the process within six months. You’ll have to follow several steps.
You must complete pre-file bankruptcy counseling from a qualified nonprofit credit counseling agency within 180 days before filing.
Find an attorney:Before diving into the various forms required to file Chapter 7, find a qualified bankruptcy attorney to help. Its hard to find money for a lawyer when you need debt relief, but this is not a DIY situation. Missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
File paperwork: Your attorney will help with filing your petition and other paperwork. But its on you to gather all relevant documentation of your assets, income and debts. An automatic stay goes into effect at this point, meaning that most creditors cannot sue you, garnish your wages or contact you for payment.
Trustee takes over: Once your petition is filed, a court-appointed bankruptcy trustee will begin managing the process.
Meeting of creditors: The trustee will arrange a meeting between you, your lawyer and your creditors. Youll have to answer questions from the trustee and creditors about your bankruptcy forms and finances.
Your eligibility is determined: After reviewing your paperwork, the trustee will confirm whether youre eligible for Chapter 7.
Education course: Before your case is discharged, youll have to take a financial education course from a qualified nonprofit credit counseling agency.
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