The bankruptcy discharge is an extremely powerful court injunction that prohibits creditors and collectors from attempting to collect on a discharged debt. So what is included in your Chapter 7 discharge? The typical answer is “all debts incurred prior to the bankruptcy that are not excepted from discharge,” but that answer does not really explain what debts are included in the discharge. Let’s take a look at some categories of debts and how these debts are affected by the Chapter 7 discharge:
Unsecured debts are the easiest type to discharge during a Chapter 7 bankruptcy. Unsecured debts are not backed by collateral and include signature loans, credit cards, payday loans, medical bills, utility bills, old cell phone bills, and deficiency balances from repossessed cars and foreclosed homes. Identify all of your unsecured creditors during your bankruptcy case to ensure that all of your unsecured debts are discharged.
Secured debts are also discharged during Chapter 7 bankruptcy. Common secured debts are auto loans, mortgages, and personal loans backed by collateral. While a secured debt may be discharged by the Chapter 7 case, the secured creditor may still repossess the collateral. The general rule is that secured items must be either paid or the collateral surrendered back to the secured creditor. The most common method to keep secured property is to execute a reaffirmation agreement during the bankruptcy case. In this agreement, you keep the property and remain obligated to pay the monthly bill, and the creditor agrees to not repossess the collateral. If you do not desire to keep the collateral, you may surrender the property back to the creditor and discharge the debt.
The Bankruptcy Code lists 19 categories of special status debts that are automatically excepted from the bankruptcy discharge. Some of the more common of these debts are:
- certain tax debts
- debts not identified in the bankruptcy
- alimony, maintenance, or child support
- debts for willful and malicious injury to a person or property
- government fines and penalties
- student loans
- debts caused by DWI
In some cases the debts in the above categories can be discharged. If you have a special status debt, be sure to discuss your options with your bankruptcy attorney. Additionally, a debt may be excepted from the bankruptcy discharge if the creditor can show that the debt was incurred by fraud. A creditor is required to make the fraud complaint to the court within a certain time or the debt will be discharged.
A Chapter 7 bankruptcy discharge is a powerful legal tool that provides a financial fresh start. It is important to discuss the details of the bankruptcy discharge with your attorney before you file your bankruptcy to ensure that you understand how the Chapter 7 discharge will affect all of your debts. While most debts are discharged at the end of the Chapter 7 case, knowing which survive will allow you to plan your financial future.