What debts can a Chapter 7 bankruptcy discharge? This is a question pondered by many who are struggling with mountains of debt. In other words, what debts go away and what debts stay with you?
First things first: what is a discharge? A discharge is the court order that “gets rid” of your debt—it releases the debtor from personal liability for certain debts. At the end of your Chapter 7 case, you will receive a court order relieving you of any obligation to the debts included in the discharge. This means that you are no longer legally responsible for paying these specific debts, and that creditors cannot take any action against you for the discharged debts. It’s important to note that if you incur any debts after you file your bankruptcy case, you will still be responsible for them. These debts are called post-petition (after bankruptcy petition) debts.
So, what debts can you get rid of in a Chapter 7? Typically, these include credit card debt and medical debt, such as bills from doctors, hospitals, and other health providers. The kinds of debts that you can’t get rid of in a Chapter 7 are student loans (unless you can show a severe hardship), new tax debt, child support, and secured debts.
Before trying to file a Chapter 7, make sure to let your attorney know if you are behind on your home loan, car loan, or other secured debt. If you are behind, Chapter 7 may not be your best choice. Those secured creditors may not want to allow you to catch up on the payments you’ve missed. Instead, the creditors may want to foreclose on your house or repossess your car. A Chapter 7 case cannot stop them from taking back their collateral for the loan, but they do have to file a motion with the bankruptcy court before they proceed to foreclose or repossess. To have a much better chance of keeping your car and house, your attorney may work with you to file a Chapter 13 instead of a Chapter 7.
Filing a Chapter 13 case will allow you to create a five-year bankruptcy plan to give you a chance to catch up on payments that you have missed. The secured creditor can still file a motion to foreclose or repossess, but the bankruptcy court is more likely to side with you, allowing you to keep the house and car and make payments over time to catch up on what you’ve missed, while still paying the monthly mortgage and car notes. Chapter 13 allows you to reorganize your debts, but it’s important to note that you will also have to pay your unsecured creditors (although not usually 100% of the debt owed).
Chapter 7 is sometimes called a straight bankruptcy, while a Chapter 13 is called wage earner—although you don’t have to be earning “wages” to file a Chapter 13, as any form of income (i.e., social security payments) will be sufficient.
In summary, a Chapter 7 bankruptcy can discharge unsecured debt, such as credit cards and medical debt. Chapter 7 cannot discharge debts that are secured by liens, such as cars and houses, unless the creditor agrees to be discharged. To address secured debts, you may need to ask your attorney about a Chapter 13.