Filing for bankruptcy can help families with overwhelming financial burdens reset their finances. And, yes, that means discharging a significant amount of debt. However, it’s important to know what debts can and can’t be discharged so families can set realistic expectations during the process. This post will highlight what debts you can or can’t remove and how a bankruptcy lawyer can help you understand your legal rights and discharge your debts.
What falls under Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, also known as straight bankruptcy, entails the sale of a debtor’s asset, payment to creditors, and freedom from debt. The assets include cash, bonds, stocks, and property collected and distributed to the creditors to settle the debt. The main purpose of a chapter 7 bankruptcy is to liquidate your non-exempt assets while maximizing the return to your unsecured creditors.
Under chapter 7 bankruptcy, debts are broadly classified as unsecured and secured debts. You can easily get rid of unsecured debts when you file bankruptcy as they don’t have any collateral attached to them and you won’t have any legal obligations to pay them going forward. Debts like most credit cards, medical bills, and personal loans fall under this category. However, secured debts have property or collateral attached which makes it difficult to get discharged. Some common types of secured debts are mortgages, deeds of trust, vehicle loans, purchase money security interests, and non-purchase money security interests.
Unsecured debts you can discharge
Unsecured debts include debts not tied to any collateral. Below we discuss some examples of unsecured debts that you can wipe out in chapter 7 bankruptcy.
Medical bills are a debt that’s easily discharged as they fall under the unsecured general non-priority creditor category. If you owe money to a doctor, bankruptcy can wipe that away too. However, chapter 7 bankruptcy only discharges medical services or debts incurred prior to filing for bankruptcy.
Credit card debt
There are a few restrictions to keep in mind while using a credit card if you know you’re going to file for bankruptcy. If you’ve no intention of paying the debt and continue using the credit card, the court may deem that to be fraud. So, refrain from making any luxury purchases 90 days before filing for bankruptcy.
Select secured debts
Under certain conditions, you can also get rid of select secured debts, such as car loans and home mortgages. In those cases, you’ll need to surrender the property to the lender to discharge those debts. Subsequently, you’ll no longer be legally obligated for any secured loans.
Old utility bills
This covers utilities and essential services, such as electricity, water, gas, sewage, and internet that are critical for survival. On filing chapter 7 bankruptcy, all past due bills up to the filing date are taken into consideration and are discharged without payment. This guarantees that none of the utility services gets disconnected.
Personal unsecured loans
Any loan from friends, family, or close employees is considered part of an unsecured personal loan and can be easily wiped out under chapter 7 bankruptcy. However, you shouldn’t commit the mistake of repaying those loans within 12 months before filing for bankruptcy. Doing that makes those lenders insiders and shows you’re preferring them over other creditors, which the court may see as fraud.
Taxes satisfying certain conditions can be forgiven in bankruptcy:
- at least three years old;
- the return was filed at least two years ago;
- those that meet the 240-day rule (this implies the Internal Revenue Service (IRS) must have assessed the tax against you at least 240 days before you filed for bankruptcy).
Secured debts you can’t discharge
Section 523 of the Bankruptcy Code provides a list of debts that aren’t dischargeable. It covers secured debts that have collateral or property attached to them, such as home loans, car loans, etc.
Below are some examples of unsecured debts.
Child support and alimony
As per chapter 7 bankruptcy, you can’t get rid of domestic support obligations such as child support and alimony. These are often given priority status as they provide future support to the child and spouse. For alimony, a general guideline for figuring out whether it qualifies as support is if the recipient spouse needs the money to sustain basic needs.
Debts related to the divorce settlement agreement
Depending on when the divorce settlement is finalized, bankruptcy may have different effects. Filing for a chapter 7 bankruptcy while a divorce case is still pending stops the ongoing proceedings pertaining to property division. An automatic stay on the property division comes into effect in bankruptcy, and almost all your property becomes part of the bankruptcy estate.
Non-dischargeable debt from a prior bankruptcy
If you previously received a discharge under chapter 7 within eight years of the second petition, the court won’t grant another one. Additionally, the court may refuse a chapter 7 release in specific circumstances if you already earned a chapter 12 or chapter 13 discharge in a case filed within six years of the second bankruptcy filing.
Debts for willful injury or wrongful death
In a chapter 7 bankruptcy case, debts related to a debtor’s actions that wilfully and maliciously injured or killed another person aren’t eligible for discharge. This covers injuries caused by acts violent such as assault, rape, murder, theft, vandalism, etc. that were carried out with the objective that they’d cause injury or with the real intent to do so.
Many government-guaranteed student loans
A student loan isn’t discharged under bankruptcy and rides through. You get your discharge and you’re still obligated to pay all the student loan money. However, if you pass the hardship test, the court may discharge a portion of your student debt. Here, you’ll need to provide evidence that loan repayment will result in unjustified burdens and can get some of the student loans discharged.
Judgments for DUIs/DWIs
Fines or penalties imposed in a DUI/DWI (driving under the influence/driving while intoxicated) prosecution can’t be wiped out by filing for bankruptcy under chapter 7. This is because driving while intoxicated or impaired is one of the most common criminal offenses and can have a significant financial impact.
Speak to a bankruptcy attorney
Deciding whether or not to file chapter 7 bankruptcy can be a tough decision. The legal rights and procedures involved are complex to understand. Besides, even a slight mistake of not revealing little details can make you pay heavily and result in criminal charges.
Put an end to searching “bankruptcy lawyers near me” and contact LegalASAP for an experienced bankruptcy lawyer. Expert bankruptcy lawyers can help you figure out if chapter 7 bankruptcy is right for you, and help you navigate the cumbersome legal formalities. Ready to see if you may qualify? Take the free online bankruptcy case evaluation now.