Updated: March 28, 2019
Filing for bankruptcy is a major life decision that can affect your financial and personal life for many years, and it’s important to understand what Chapter 7 can and cannot do for you. If you’re eligible, Chapter 7 bankruptcy can provide you with relief from most of your unsecured debts, and even your secured debts in certain cases. Here's a rundown of what can be discharged (wiped out) in Chapter 7 bankruptcy.
For a list of debts that can’t be discharged in Chapter 7, see Debts that Survive Chapter 7 Bankruptcy.
Unsecured debt is an obligation that isn’t backed by collateral. For instance, if you didn’t agree that the creditor could take the property purchased on credit when you entered the credit contract, the debt is unsecured.
By contrast, if you have a mortgage or car payment, you likely agreed that the creditor could attach a lien to the property and take your house or car if you failed to make the payment, sell it, and use the proceeds to pay the note. This type of debt is a secured debt. Payment of the debt is secured by collateral.
Common examples of unsecured consumer debts include medical bills, utility bills, back rent, personal loans, some government benefit overpayments, and credit card charges. These unsecured debts are dischargeable in Chapter 7 bankruptcy.
Any secured debt can be discharged. However, the attached lien won’t go away. The creditor will retain the right to recover the property as long as the debt remains unpaid. For instance, you can discharge a mortgage or car loan, but you’ll need to give up the house or vehicle.
If you don't want or need the secured property, it can be to your advantage to let the creditor take it back. You’ll do this by indicating your intent to surrender the property when you fill out your bankruptcy paperwork. You don't have to deliver the property to the creditor, but you must cooperate with the creditor’s repossession. Sometimes creditors won’t bother to repossess small items because it’s not worth the expense of picking it up.
If, however, the creditor failed to take a security interest in the property, you might be able to keep the property. An example would be if a car dealer forgot to place a lien on your car and the value of your car is within the exemption for motor vehicles. The dealer's claim would be unsecured, and you could keep the car as exempt property.
But don’t count on this because it’s rare and you’d have to be able to protect the entire car value with a bankruptcy exemption. Otherwise, the Chapter 7 trustee appointed to your case will sell the car, return your exemption amount to you, and use the remaining funds to repay creditors.
Not all unsecured debt is dischargeable, however. Here are the types of debt you should watch out for.
A student loan is unsecured, but you’ll remain responsible for paying it unless you can demonstrate that you won’t be able to repay the loan in the future. Find out the specifics of student loans and bankruptcy.
Money, property, or services obtained under fraud or false pretenses aren’t dischargeable. Fraud can be as simple as purchasing items on credit with no intention of repaying the debt. A false pretense can be a misrepresentation to a creditor to obtain credit. For instance, overstating your income on a loan application to reach the minimum to qualify for the loan would likely fall within the false pretenses doctrine.
If you’re concerned about fraud, you should be especially wary of filing for bankruptcy. The ramifications can extend from being denied a discharge of a single debt to the entire case—even fines and prison time.
In some cases, an otherwise dischargeable debt might not be discharged in Chapter 7 if you incurred the debt soon before your bankruptcy filing. Here are the rules:
Debts incurred within 90 days of your bankruptcy filing for luxury goods or services owed to a single creditor in excess of $725 (as of April 1, 2019) are presumed nondischargeable. The same goes for cash advances of $1,000 or more (as of April 1, 2019) if made within 70 days of your filing.
These debts aren’t dischargeable because it’s presumed that you had no intent to repay them given the proximity to the bankruptcy filing. If the creditor objects to the charge, you’ll need to prove that the purchase was reasonable given the circumstances. When faced with this situation, many debtors choose to enter into a settlement agreement with the creditor to pay for the charge given the high cost of litigation.
Money judgments are dischargeable, with a few exceptions. However, it’s usually prudent to file for bankruptcy before getting a lawsuit judgment. Why? A money judgment allows a creditor to put a lien against your real estate and personal property, and many liens won’t go away in the bankruptcy case.
Although the creditor won’t be able to force you to make payments on the debt, the creditor can take steps to acquire and sell the encumbered property, or wait for you to sell it and take what is owed out of the proceeds. Find out more about releasing liens in bankruptcy.
Income taxes may be discharged if: