This article will teach you:
- How a Chapter 7 bankruptcy can help you pay off your debts
- what you’ll be erasing in Chapter 7, and
- In bankruptcy filing, how do you classify debt?
- Find out what bankruptcy can and cannot accomplish for you.
How Does a Discharge Work?
Individual debtors are released from personal accountability for debts discharged by bankruptcy, and creditors due that debt are barred from conducting collection activities against the debtor. To put it another way, the debtor is no longer obligated to pay any discharged debts. About four months after filing the bankruptcy petition, the majority of Chapter 7 filers receive an automatic discharge.
Which Debts Can Be Forgiven?
A list of routinely dismissed debts is shown below.
- Charges on a credit card (including overdue and late fees)
- Accounts of collection agencies
- Medical expenses
- Personal loans from family, friends, and coworkers
- Bills for utilities (past due amounts only)
- Checks that have been forged (unless based on fraud)
- Loans for students (only in the rare circumstance that you can prove undue hardship)
- Deficiency balances from repossessions
- Insurance claims for automobile accidents (except those involving drunk driving)
- Debts owed by businesses
- Money owing to a landlord under a lease arrangement (includes past due rent)
- Judgements of civil courts (unless based on fraud)
- Penalties and unpaid taxes that have accumulated over a period of time
- Lawyer’s fees (except child support and alimony awards)
- Accounts with a revolving balance (except extended payment charges)
- Overpayments of social security, and
- overpayments on veterans’ assistance loans
A word regarding utility deposits and fraud. An otherwise dischargeable obligation can become non-dischargeable due to debt-related misconduct or fraud. A utility company cannot refuse to supply service due to a bankruptcy filing, but it can levy a reasonable deposit to secure future payment.
Dischargeable Debt Timing
It’s not only about the type of debt you have. When you get into debt, the obligation comes into play as well. This is how it goes.
Debt that hasn’t been filed yet. A pre-petition debt is one that you have accrued prior to filing for bankruptcy. The bankruptcy court will dismiss all qualifying pre-petition debt, such as credit card bills, personal loans, and medical debt, at the conclusion of your case.
Debt incurred after the filing of the tax return. Post-petition debt refers to the bills you accrue after filing your original bankruptcy case. You are still responsible for any outstanding balances beyond the original filing date. As a result, even if your lawsuit isn’t finished, you can go into fresh debt.
In other words, only debts incurred prior to the filing date of Chapter 7 are forgiven. Any debt you incur after filing your petition but before securing a discharge is your responsibility.
Prioritization vs. Nonprioritization Debt that isn’t secured
You must organize your debt into categories before filing for bankruptcy. If funds are available, the trustee will pay some creditors before others, depending on whether the claim is secured, priority unsecured, or nonpriority unsecured. Higher-ranking claims are paid first, followed by lower-ranking debt.
For example, “priority” debt is given special consideration and is paid first. Common examples are child support payments and tax debt. After a Chapter 7 bankruptcy, you’ll be responsible for a variety of priority debts.
Bills that you can discharge are usually classified as “nonpriority unsecured” debt. (Unsecured debt isn’t backed up by anything.) Secured debt, on the other hand, includes things like a home mortgage or a car loan.) However, a few non-priority unsecured obligations are not forgiven. For example, you won’t be able to discharge student loan debts in bankruptcy unless you file a separate lawsuit and demonstrate that you meet certain criteria.
The majority of liens will remain on the property.
Despite the fact that a debtor is no longer personally liable for discharged obligations, any legitimate lien that has not been avoided (rendered unenforceable) will remain in the bankruptcy case. For example, if you don’t sign a reaffirmation agreement to continue paying your car payment, the discharge will cancel your duty to pay the car loan; nevertheless, you won’t be able to keep the automobile. The lender will seize the vehicle using its lien rights.
After you’ve filed for bankruptcy, you can no longer receive collection calls.
If a creditor calls you after you file bankruptcy, giving them your case number and filing date will almost certainly put an end to the calls. It’s simple to find your filing date. Take a look at any bankruptcy documents that have been filed with the court. (Even if you hire a lawyer, you’ll get copies of all notices.) Next to your case number, the filing date will display at the top of the page.
A creditor can use the information to rapidly verify your bankruptcy, and if the calls don’t cease, the creditor will face consequences.
Although the majority of Chapter 7 bankruptcy filers will be able to eliminate eligible debt, such as credit card balances, medical expenses, and personal loans, there are some debts that cannot be eliminated. Chapter 7 bankruptcy does not eliminate them. Expect the following in a Chapter 7 bankruptcy.
Barriers to Discharge
The majority of debtors have little difficulty navigating the Chapter 7 process. However, obtaining a Chapter 7 discharge is not certain. Here are two impediments to debt discharge.
You violate insolvency processes and court rules. If you do not, the court may deny your Chapter 7 petition, leaving you liable for the otherwise dischargeable debt.
Your debt doesn’t qualify for a discharge. There are 19 types of non-dischargeable debt. These are debts that Congress ruled, for reasons of national policy, should not be dischargeable. Unless special circumstances materialize, the vast majority of these debts are unforgivable. When you receive your discharge at the conclusion of your lawsuit, the creditor can resume collecting efforts.
A creditor must successfully contest the discharge of a handful of the 19 categories of debt during the bankruptcy proceeding. If a creditor does not object or if it does and the court rules against the creditor, the obligation will be dismissed.
In Chapter 7 cases, the debtor’s right to a discharge is not absolute. To obtain a discharge, debtors must meet the conditions of the bankruptcy code. (11 U.S.C. § 727.)
A creditor, the bankruptcy trustee, or the U.S. trustee can object to the full Chapter 7 discharge if the debtor fails to comply with the rules or produce required information. For instance, a Chapter 7 discharge can be denied if you:
- do not give needed tax records
- don’t complete a course on personal financial management
- transfer or hide property in order to cheat or obstruct your creditors
- destroy or conceal books or documents
- commit perjury or other dishonest activities in your bankruptcy filing
- unable to account for missing assets
- transgress a court order, or
- previously filed for bankruptcy and receiving a discharge within specified timeframes
If successful, the debtor will remain accountable for all debts.
Debts That Can Never Be Discharged in Chapter 7
Some debts are ruled nondischargeable without the necessity for a hearing if they fit into one of a predetermined list of categories. The following debts are automatically non-dischargeable unless the debtor can demonstrate extraordinary circumstances.
Unscheduled debts (debts not listed on the bankruptcy petition or mailing list) are not dischargeable unless the creditor had actual notice or knowledge of the bankruptcy filing. Additionally, many jurisdictions permit the discharge of normally dischargeable debts that were omitted from the petition due to an honest error where there are no assets to distribute.
some taxes (for details, see Tax Debts in Bankruptcy)
- debts for alimony, child support, or spousal support
- Obligations owing to a former spouse or kid if they resulted from a divorce or separation.
- debts for fines and penalties owed to government agencies
- student loans (with a few rare exceptions)
- Personal harm debts caused by the drunken operation of a motor vehicle by the debtor.
- some tax-advantaged retirement plan obligations
- monetary obligations for specific condominium or cooperative housing fees (such as homeowners association fees)
- attorney expenses in custody and support proceedings, and
- Included in court fines and penalties is criminal restitution.
While all of these debts are ineligible for discharge under Chapter 7, some of them may be removed under Chapter 13. Determine which debts are eligible for discharge under Chapter 13 but not Chapter 7
Non-dischargeable Debts If a Creditor Objects
Certain debts are not necessarily exempt from discharge. Creditors must petition the court to decide whether or not they are dischargeable. If the creditor does not raise the issue of dischargeability or raises it but the court disagrees, these obligations will be dismissed.
Using a credit card to purchase fancy items. These debts are assumed fraudulent and nondischargeable when owed to a single creditor and totaling more than $800 (for cases filed between April 1, 2022 and March 31, 2025) and incurred within 90 days of filing for bankruptcy. In an adversarial proceeding, a form of lawsuit, the creditor must submit the facts to the court. If you can demonstrate that you planned to repay the charges or that the goods were not “luxury” items, the debt will be forgiven.
Cash advances are available. When a debtor receives more than $1,100 from a single creditor within 70 days of filing for bankruptcy (for cases filed between April 1, 2022 and March 31, 2025), the debt is judged fraudulent and nondischargeable. Again, if you can demonstrate that you planned to repay this money, the obligation will be forgiven. Learn additional information on luxury debts and cash advances.
Debts gained via fraud or false pretenses.
Misrepresenting income on credit applications or purchasing products or services on credit without the intent to pay are common causes of these types of cases.
Debts incurred as a result of intentional and malicious harm. You cannot repay a debt incurred by willfully harming another person or their property.
If you’re considering bankruptcy as a means of dealing with debt, you should understand more about its operation, its capabilities and limitations, and its eligibility requirements.