Debts That Are Discharged in Chapter 7 Bankruptcy

Find out which debts can be cancelled in Chapter 7 bankruptcy.

Filing bankruptcy is a major life decision that can affect your financial and personal life for many years after filing. Therefore it is important to understand what Chapter 7 bankruptcy can and cannot do for you. If you are 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 cannot be discharged in Chapter 7 bankruptcy, see  Debts that Survive Chapter 7 Bankruptcy.

Most Unsecured Debts

Most unsecured consumer debts such as medical bills, utility bills, back rent (but you still might be evicted if you aren't current on your rent), personal loans, government benefit overpayments, and credit card charges are dischargeable in Chapter 7 bankruptcy.

There is an exception to discharge if the money, property, or services were obtained under false pretenses. The false pretense must have been made in writing to the creditor and the misrepresentation must have been material, which means the representation was such that the creditor would not have extended credit had the true facts been known. For example, if you overstated your income on a loan application, the overstatement would be material if it was necessary to reach the minimum to qualify for the loan; it would not be material if your true income was sufficient to qualify without the overstatement.

Lawsuit Judgments

Money judgments are almost always dischargeable, with a few exceptions (discussed in  Debts That Survive Chapter 7 Bankruptcy.)

Secured Debts if You Surrender the Property

Any secured may be discharged provided that you return the property securing the debt to the creditor.

If you don't want or need the secured property, it can be to your advantage to let the creditor take it back. To do this, indicate on the "Statement of Intentions" form that you will surrender the property and make it available for the creditor to pick up. You don't have to deliver the property to the creditor but you must cooperate with the creditor’s repossession. Sometimes creditors will not bother to repossess small items because it is not worth the expense for them to pick up the item.

Secured Debts if the Creditor Did Not Properly Take a Security Interest in the Property

You may also be able to discharge a secured loan if the creditor failed to properly take a security interest in the property. An example would be where a car dealer forgot to place a lien on your car and the value of your car is within the exemption for motor vehicles. This would mean the dealer's claim is unsecured and you can keep the car as exempt property.

Beware of Certain Debts Incurred Close to Your Bankruptcy Filing

In some cases, an otherwise dischargeable debt might not be discharged in Chapter 7 if you incurred it close in time to your bankruptcy filing. Here are the rules:

Debts incurred within 90 days of your bankruptcy filing that were for the purchase of luxury goods or services owed to a single creditor in excess of $675 (as of April 2016) are presumed to be nondischargeable. The same goes for cash advances that accumulate to $950 or more (as of April 2016) if made within 70 days of your filing.

Here the debts are presumed to have been incurred in anticipation of bankruptcy and that you had no intent to repay them. You can try to rebut the presumption by making a motion to the court. Of course, making the motion and attending a hearing on the issue can be expensive and time-consuming. If at all possible, you should postpone signing and filing your bankruptcy petition until any such purchases or cash advances are outside the 70- or 90-day window.

A creditor may claim that such debts are nondischargable even beyond the 70- or 90-day window. However, in this case, the creditor must make a motion to the court and prove that you incurred the debt in anticipation of filing bankruptcy. Going on a spending spree or taking out cash advances after consulting a bankruptcy attorney might be evidence that you did not intend to repay the debt.

Certain Tax Debts

Income taxes may be discharged if:

  • the tax return was filed more than two years before you filed your bankruptcy petition
  • there was no fraud or tax evasion involved
  • the taxes were first due at least three years before the bankruptcy petition was filed, and
  • tax liability was assessed more than 240 days before you filed bankruptcy.

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