What Debts Can Be Discharged in Chapter 7 Bankruptcy?

Filing for Chapter 7 bankruptcy can provide much-needed relief for individuals struggling with overwhelming debt. It allows eligible debtors to eliminate certain financial obligations and get a fresh start. However, not all debts are dischargeable under this bankruptcy chapter. Understanding which debts can be discharged is crucial before filing. In this guide, we will explore the types of debts that can be eliminated, those that cannot, and the overall impact of Chapter 7 bankruptcy on your financial future.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” is a legal process that helps individuals discharge most of their unsecured debts. Unlike Chapter 13 bankruptcy, which involves a repayment plan, Chapter 7 allows debtors to eliminate eligible debts without making further payments. A bankruptcy trustee may sell non-exempt assets to repay creditors, but many filers can keep most or all of their property under state or federal exemptions.

Debts That Can Be Discharged in Chapter 7 Bankruptcy

One of the biggest benefits of filing for Chapter 7 bankruptcy is the ability to discharge many types of unsecured debts. Below are the most common debts that can be eliminated:

1. Credit Card Debt

Unsecured credit card debt is fully dischargeable under Chapter 7 bankruptcy. If you have accumulated high-interest credit card balances, filing for bankruptcy can eliminate these debts and provide financial relief.

2. Medical Bills

Medical debt is one of the leading causes of bankruptcy in the U.S. Fortunately, Chapter 7 bankruptcy can discharge unpaid medical bills, making it easier for individuals to recover financially.

3. Personal Loans

Unsecured personal loans from banks, credit unions, or online lenders can be wiped out through Chapter 7 bankruptcy. However, loans secured by collateral, such as auto loans or mortgages, are treated differently.

4. Utility Bills

If you have past-due electricity, water, or gas bills, these can be discharged in Chapter 7 bankruptcy. However, utility companies may require a deposit before reconnecting or continuing service.

5. Payday Loans

Short-term payday loans often carry extremely high interest rates. Luckily, they are considered unsecured debts and can be discharged through bankruptcy.

6. Lease and Rental Agreement Obligations

If you have unpaid rent from a previous lease, Chapter 7 bankruptcy can discharge this debt. However, if you are still living in the rental property, the landlord may have grounds to evict you.

7. Certain Tax Debts

While most tax debts are non-dischargeable, some income tax obligations can be eliminated if they meet specific criteria, including:

• The tax debt is at least three years old.
• A tax return was filed on time or at least two years before filing for bankruptcy.
• The IRS has not assessed the tax debt within the last 240 days.

Debts That Cannot Be Discharged in Chapter 7 Bankruptcy

While Chapter 7 bankruptcy provides relief from many debts, some obligations cannot be discharged, including:

1. Student Loans

Student loans are generally non-dischargeable unless the debtor can prove undue hardship in a separate legal proceeding. Courts use the Brunner test to determine if repayment would cause extreme financial distress.

2. Child Support and Alimony

Domestic support obligations, such as child support and alimony, cannot be eliminated through Chapter 7 bankruptcy. These payments must continue as required by court orders.

3. Certain Tax Debts

Payroll taxes, fraud-related tax debts, and most recent income tax liabilities are non-dischargeable.

4. Secured Debts (If You Want to Keep the Collateral)

Mortgages and car loans are secured debts. If you want to keep your house or car, you must continue making payments or risk repossession.

5. Court Fines and Criminal Restitution

Fines associated with criminal convictions, such as DUI penalties, traffic tickets, and restitution payments, cannot be discharged in bankruptcy.

Table: Dischargeable vs. Non-Dischargeable Debts in Chapter 7 Bankruptcy

How to File for Chapter 7 Bankruptcy

If you are considering filing for Chapter 7 bankruptcy, follow these steps:

1. Determine Eligibility – You must pass the means test, which compares your income to your state’s median income.
2. Gather Financial Documents – Collect bank statements, tax returns, debt statements, and other financial records.
3. Complete Credit Counseling – You must complete a court-approved credit counseling session before filing.
4. File Bankruptcy Forms – Submit the necessary paperwork to the bankruptcy court.
5. Attend the 341 Meeting – You must attend a meeting with creditors and a trustee to review your case.
6. Receive Discharge – If approved, your debts will be discharged within a few months.

Impact of Chapter 7 Bankruptcy on Your Credit

Filing for Chapter 7 bankruptcy will negatively impact your credit score, and it remains on your credit report for up to 10 years. However, many filers see an improvement in their credit score within a few years as they rebuild their financial standing.

Tips for improving your credit after bankruptcy:

• Pay bills on time.
• Use a secured credit card.
• Monitor your credit report regularly.
• Avoid taking on new debt you cannot afford.

Is Chapter 7 Bankruptcy Right for You?

If you are struggling with overwhelming debt and need a fresh start, Chapter 7 bankruptcy may be a viable solution. However, it is essential to understand which debts can be discharged and which obligations will remain. Consulting with a qualified bankruptcy attorney can help you make an informed decision.

Contact Us

At Padgett & Robertson, we are committed to helping individuals navigate the complexities of Chapter 7 bankruptcy and debt relief. If you have questions about your eligibility or need guidance on the bankruptcy process, contact us today.

📞 Call Us: (251) 336-3695

Let us help you regain financial stability and move toward a debt-free future!