Which Debts Can Be Discharged in Chapter 7 Bankruptcy?[yoast-breadcrumb]
Which Debts Can Be Discharged in Chapter 7 Bankruptcy?
Filing for Chapter 7 bankruptcy can feel like a super confusing process. There’s a lot of legal mumbo jumbo involved. But at its core, the main goal of Chapter 7 bankruptcy is to wipe out (discharge) a lot of your debts and give you a fresh start.
I want to walk through the ins and outs of which debts can actually be discharged in Chapter 7 bankruptcy. I’ll try to explain things in simple terms that anyone can understand!
What is Chapter 7 Bankruptcy?
First, a quick overview of what Chapter 7 bankruptcy actually is. Chapter 7 is sometimes called “liquidation” bankruptcy. Basically, a court-appointed trustee sells off some of your assets and uses that money to pay back as much debt as possible.
Once that process is done, most of your remaining debts are discharged – meaning you are no longer legally required to pay them back. It’s like those debts are wiped from your record.
Chapter 7 bankruptcy is available to both individuals and businesses. For individuals like you and me, the main benefit is being able to discharge credit card debt, medical debt, personal loans, and other unsecured debts we can’t pay back. It’s like being able to start over financially.
The Discharge Process
Discharging debts is one of the key parts of filing Chapter 7 bankruptcy. The discharge order from the bankruptcy court prevents creditors from coming after you to collect on those old debts.
Sounds great right! But there are some downsides. First, not all debts can be discharged. We’ll get into the specifics in a minute. Second, filing for bankruptcy hurts your credit score – discharging debts comes with consequences.
Also, you can only receive a Chapter 7 discharge once every 8 years. So if you file again within 8 years of your last Chapter 7 case, you usually can’t discharge debts.
Debts That Can Be Discharged
Now let’s talk about which debts specifically can be discharged if you file Chapter 7 bankruptcy. Here are some of the most common dischargeable debts:
- Credit card debt – This is usually the biggest debt most people want to discharge. Any outstanding balances you owe to credit card companies can be discharged.
- Medical debt – Doctor’s visits, hospital bills, dental expenses. All of that can potentially be discharged.
- Personal loans – Money you borrowed from banks, payday lenders, or relatives.
- Past utility bills
- Old cell phone contracts
- Most judgments against you from lawsuits
The main thing these debts have in common is that they are unsecured. That means the creditor doesn’t have collateral or assets they can seize if you don’t pay. Mortgages and car loans are secured debt, which we’ll talk about next.
Debts That Can’t Be Discharged
Some types of debts cannot be discharged in Chapter 7 bankruptcy. Here are some of the most common non-dischargeable debts:
- Recent taxes – Federal income and payroll taxes from the past 3 years can’t be discharged. Older tax debt can be discharged.
- Child support and alimony
- Student loans – These are notoriously difficult to discharge in bankruptcy.
- Mortgages and car loans – Secured debt usually can’t be discharged.
- Government fines – Parking tickets, etc.
- DUI-related debts
- Luxury goods – If you purchased expensive jewelry right before filing, that debt may not be discharged.
The main takeaway is that secured debts and debts related to criminal actions or fraud are usually not dischargeable. Also, the timing of when you incurred the debt matters – recent debts are sometimes non-dischargeable.
Can the Court Deny a Discharge?
Yes, in some cases the bankruptcy court can deny your request for a discharge, meaning none of your debts would be wiped out. This is pretty rare, but can happen if:
- You commit fraud or perjury during the bankruptcy process
- You destroy or hide your financial records
- You can’t adequately explain the loss of any assets
- You’ve already received a recent discharge in a Chapter 12 or 13 bankruptcy case
The court wants to make sure you are filing bankruptcy in good faith. So any shady business can cause them to deny the discharge.
The Power of the Discharge Order
Once you receive your discharge order from the bankruptcy court, it’s important to understand how powerful it is. This legal order prohibits creditors from taking any actions to try and collect discharged debts, such as:
- Calling you to demand payment
- Suing you in court for the discharged debts
- Garnishing your wages
- Putting liens on your property
You also don’t have to pay taxes on discharged debt. And discharged debts can’t appear on your credit report.
If a creditor violates the discharge order, you can report them to the court. But it’s still a good idea to be proactive and inform the creditors about your bankruptcy filing.
The Means Test
One more thing that can impact your ability to discharge debts in Chapter 7 bankruptcy – the means test. This is a formula that looks at your income, living expenses, debt payments, and other factors.
If the means test determines you have enough disposable income to repay some debts, you may be required to file Chapter 13 instead of Chapter 7. In Chapter 13 you have to repay debts over a 3-5 year repayment plan.
An experienced bankruptcy attorney can help you understand if you’re likely to pass the Chapter 7 means test based on your specific financial situation.
Should You File for Chapter 7 Bankruptcy?
If you have a lot of credit card, medical, or other unsecured debt you’re struggling to pay back, Chapter 7 bankruptcy may be a good option for you. Discharging your debts can give you a fresh start.
However, it’s not a decision to take lightly. Bankruptcy hurts your credit and has other long-term impacts. Plus, not all debts can be discharged.
I’d recommend connecting with a local bankruptcy attorney in your area for tailored guidance. They can review your full financial picture and debts. Then explain whether Chapter 7 bankruptcy, Chapter 13 bankruptcy, or other debt relief options make the most sense for you.
Relief from overwhelming debts is possible! But the ins and outs of bankruptcy can be super confusing, even for smart folks like you. So get professional advice from an attorney you trust before deciding if and how to file bankruptcy.
I hope this overview gave you a good sense of which debts can be discharged in Chapter 7 bankruptcy. Let me know if you have any other bankruptcy questions! I’m always happy to chat more about this stuff.