The Chapter 7 Bankruptcy Discharge
You’ve probably heard that Chapter 7 bankruptcy can eliminate debts completely. For many debts, that’s true: when you receive a Chapter 7 bankruptcy discharge, the creditor or debt collector is forever prohibited from trying to collect that debt from you. But, not all debts can be discharged in Chapter 7.
The Different Types of Debts
Dischargeable Unsecured Debts
Most unsecured debt can be discharged in bankruptcy. Some examples of unsecured debts that are dischargeable in bankruptcy include:
- Credit card debts
- Payday loans
- Personal loans that don’t use collateral
- Medical bills
- Old bills for cable, phone service, utilities and other services
- Some (but not all) tax debt
This type of debt may typically be discharged no matter where in the collection process you are. For example, if you are current on your credit card debt or just slightly behind and you are still making payments directly to the credit card company, that debt is generally dischargeable. If dischargeable debt has been passed on to a collection agency, it’s still dischargeable. If the creditor has obtained a judgment against you in court on a dischargeable debt, it’s still dischargeable. If your wages are already being garnished to collect on the judgment, the debt is still dischargeable and bankruptcy will stop the wage garnishment
In fact, bankruptcy stops most collection action immediately, through a court order called the “automatic stay.” That means you don’t even have to wait for discharge to get relief from your debts. Most creditors are prohibited from calling, sending collection notices, or proceeding with collection activity as soon as you file.
Secured debts are debts with collateral. The most common example is an automobile loan. The lender typically has a lien on the vehicle, which serves as security to make sure the lender is repaid. If you don’t make payments on your car loan, the lender can repossess (take back) the vehicle and sell it to make up some of its losses. Typically, you’ll be responsible for any remaining balance after the sale.
In Chapter 7 bankruptcy, the debtor’s personal responsibility to make payment on a secured debt is wiped out, just like credit card debt and medical bills. But, that doesn’t make that lien go away. So, if you want to keep the car (or other property that serves as collateral for a debt), you’ll have to settle up with the lender in one way or another. The most common way to do this is to “reaffirm” the loan, which simply means that you enter into a new agreement with the lender saying the debt won’t be discharged in bankruptcy and you will continue to be responsible for payments. The other option is to “redeem” the vehicle, which means to make a lump-sum payment to the lender that will typically be lower than the balance on the loan.
If you don’t want to keep the collateral or recognize that you won’t be able to keep up payments, then you can surrender the item through the bankruptcy case. That means you give the car or other collateral back to the lender. If you surrender your car or other property that serves as security for a loan in a Chapter 7 bankruptcy case, you won’t be responsible for any balance remaining after the sale.
Non-dischargeable Unsecured Debts
Certain types of debt, though they are unsecured, are not dischargeable in bankruptcy. Others are dischargeable only under special circumstances. Some examples include:
- Domestic support obligations, such as child support
- Certain tax debts
- Student loan debt
- Fines and restitution assessed in criminal court proceedings
While there is a hardship exception for student loan debt, the bar is very high and it is extremely rare for student loan debt to be discharged in a bankruptcy case.
What Happens after Debt is Wiped out in Bankruptcy?
The bankruptcy discharge is a court order that tells creditors and debt collectors that you are not legally responsible for paying the discharged debts and they cannot pursue collection action. The discharge applies to the obligation itself, not just the creditor, so you are protected even if the creditor sells your discharged debt to a debt buyer or it is passed to a different collection agency.
If a creditor or debt collector contacts you about a discharged debt, you can usually stop the collection activity by sending a copy of your discharge order. If a creditor or debt collector continues to attempt to collect a discharged debt after notice of the bankruptcy discharge, that creditor is violating a court order and can be subject to sanctions.
Talk to an Experienced Tucson Bankruptcy Attorney
For specific information about which of your debts are likely to be discharged in a Chapter 7 bankruptcy case, your best option is to speak with an attorney who is knowledgeable about the Chapter 7 bankruptcy process.
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