Bankruptcy under Chapter 7 is a lawful debt relief option. If you’ve run into financial difficulties and are having trouble keeping up with your debt payments, declaring Chapter 7 bankruptcy may be able to help you get a fresh start. For the majority of people, this implies that the bankruptcy discharge eliminates all of their debt. However, not all debts are created equal, and what a Chapter 7 bankruptcy case may and cannot achieve is limited. Continue reading to find out what types of debts can be discharged in Chapter 7 bankruptcy.
Chapter 7 Bankruptcy Discharge Wipes Out Most Debts Forever
The majority of debts incurred by the average American consumer are discharged under Chapter 7. The following are the categories of debts that can be discharged in a Chapter 7 bankruptcy:
If you don’t have a reaffirmation agreement, you’re personally liable for secured obligations like vehicle loans.
When the discharge is entered, these dischargeable debts are automatically erased.
Some debts are only discharged in a Chapter 7 bankruptcy on rare occasions. The difference is determined by the timing and financial circumstances of the particular debtor filing bankruptcy.
Debts That Sometimes Can Be Eliminated In Chapter 7 Bankruptcy
Back taxes owed from income tax returns that were filed on time but not paid can be removed if they are more than three years old. There’s a lot more to determining whether a tax bill can be wiped by filing for bankruptcy, but it all comes down to timing.
Student loan debt: Student loans are not dischargeable in bankruptcy under the Bankruptcy Code. It is feasible, however, provided the filer can demonstrate that they would suffer undue hardship if the student debts were not canceled. To determine whether a debtor’s student debts should be dismissed, a separate adversary action is required. For this type of adversarial proceeding, there is no filing cost.
Debts That Sometimes Cannot Be Eliminated In Chapter 7 Bankruptcy
A credit card company or a bank may request that a debt they owe not be discharged. This can occur if the bank suspects the debtor of lying on their credit application. Credit card firms sometimes object, claiming that the debtor never intended to pay the amount and is exploiting the bankruptcy process.
Whether the individual debtor or the objecting creditor must show their case is determined under US bankruptcy law. It’s best to stop using credit cards as soon as you’ve decided to file bankruptcy to avoid this problem. Consider contacting your credit counselor during the necessary pre-bankruptcy credit counseling if you’re not sure how to make your budget work only on your monthly income. It may simply signify that you have stopped making your monthly debt payments. Although this may affect your credit score in the short term, it’s preferable to prevent a bankruptcy discharge objection.
Some Debts Can Only Be Erased In Chapter 13 Bankruptcy
A repayment plan overseen by a bankruptcy trustee is part of a Chapter 13 bankruptcy. While creditors do not receive huge interest rates (unsecured creditors do not receive any), they do receive something. That’s why, under Chapter 13 of the Bankruptcy Code, a bankruptcy filing can be used to discharge other debts related to a divorce, such as a property settlement.
Even if you meet the means test requirements for Chapter 7, if you owe a property settlement, talk to a bankruptcy lawyer about filing Chapter 13 instead. Although a Chapter 13 repayment plan can take up to five years to complete, it only stays on your credit report for seven years from the date of filing.
Filing Bankruptcy Provides Immediate Protection From Creditors
The automatic stay protects you after you file a bankruptcy petition for any type of bankruptcy. The automatic stay prevents debt collectors, banks, credit card companies, and anybody else who owes you money from contacting you or pursuing collection action. It “stays” or “stops” creditors from pursuing you for debt in any form, including wage garnishment.
This is something that everyone should be aware of. Domestic support responsibilities and back taxes are the sole exceptions. This will continue to happen if your child support payments are deducted directly from your salary. Even if you file bankruptcy, the Internal Revenue Service is entitled to withhold your tax refund to pay back taxes you owe. The automatic stay is just for a limited time. It will come to an end after the bankruptcy court has granted you a discharge.
Let’s Summarize
The majority of consumer debt can be discharged in bankruptcy. Medical costs, personal loans, credit card debt, and most other unsecured debts are all erased under Chapter 7 bankruptcy. Debt incurred as a result of a “bad conduct,” such as injuring someone or lying on a loan application, cannot be forgiven. The ability to discharge tax debt through bankruptcy is contingent on a variety of variables that should be assessed by a bankruptcy attorney.
Does Chapter 7 wipe out all debt?
Most unsecured debts are discharged in a Chapter 7 bankruptcy. Debts that are not secured by collateral are referred to as unsecured debts. (A mortgage is a secured debt secured by the home, whereas a car loan is a secured debt secured by the vehicle.) Credit card debt, medical bills, and gasoline card debt are examples of unsecured debts that can be discharged in Chapter 7 bankruptcy.
However, you won’t be able to eliminate all unsecured debt. Child and spousal support, as well as school loans (unless in rare instances), are nondischargeable debts that must be repaid after bankruptcy. Other debts, such as recent bills for luxury goods, debts incurred by fraud (such as lying on a credit application or signing a bad check), and tax payments due within the preceding three years, may not be dischargeable if the creditor objects. What Bankruptcy Can and Cannot Do and When Chapter 7 Bankruptcy Isn’t the Right Choice explain which liabilities remain after Chapter 7 bankruptcy.
Does Chapter 13 wipe out all debt?
You can use Chapter 13 bankruptcy to make up for missing mortgage or vehicle loan payments and reorganize your obligations with a repayment plan. When you finish your plan, you will be granted a Chapter 13 discharge, which will wipe out the majority of your remaining debts.
What chapter bankruptcy wipes out debt?
After three to four months, Chapter 7 bankruptcy discharges (erases) eligible debts such as credit card balances, medical expenses, and personal loans.
Can bankruptcy erase its debt?
Only if all of the following conditions are met may you wipe away or discharge tax liability by filing Chapter 7 bankruptcy: The debt is either a federal or a state tax debt. Other taxes, such as fraud fines and payroll taxes, are unaffected by bankruptcy. Your tax liability has been outstanding for at least three years.
Immediate relief in the form of a much-needed breathing spell
You are protected from creditors as soon as your bankruptcy case is filed with the bankruptcy court. When you file for bankruptcy, all collection operations are automatically halted. All phone calls, garnishments, and collection letters must cease immediately. Repossessions, evictions, and foreclosures were all put on hold for the time being.
Permanent debt relief in the form of a bankruptcy discharge
Most sorts of debt, including credit card debt, medical bills, and personal loans, are erased when you file Chapter 7 bankruptcy. When the bankruptcy court grants you a bankruptcy discharge, you no longer have to pay these sorts of unsecured debts.
Getting your bankruptcy discharge is virtually guaranteed
You can achieve your bankruptcy discharge in as short as three months if you’ve never filed bankruptcy before, pass the means test, and act honestly with the bankruptcy court and the bankruptcy trustee. It’s virtually automatic if you make sure you meet all conditions before and after filing your bankruptcy petition.
You’ll probably get to keep all of your stuff
More than 95 percent of people who file Chapter 7 bankruptcy in the United States keep everything they own. This is because the law safeguards certain assets, known as exempt assets, from creditors. If it’s covered by an exemption, you get to retain it, whether it’s your monthly social security check, your watch, or your kitchen table.
If you want, you can even keep your car after filing bankruptcy
You’ll have to pay for it, but isn’t that just fair? If you don’t want to keep it, though, Chapter 7 bankruptcy permits you to walk away from both the car and the loan! Here’s all you need to know about preserving your car after declaring bankruptcy under Chapter 7.
After filing bankruptcy, missed monthly payments and other negative marks on your credit report no longer hurt your credit score
When your bankruptcy is discharged, you will be given a clean slate on which to rebuild your credit and raise your credit score. One year after filing Chapter 7, the majority of folks have a higher credit score than they did when they first started the bankruptcy process.
Improved Access to Credit and Banking
You’ll get more credit card offers than you know what to do with shortly after filing for bankruptcy. This will not only assist you in rebuilding your credit and increasing your credit score, but it will also provide you with the security net that comes with owning a credit card in the event of an emergency.
Is Chapter 7 or 13 worse?
Chapter 7 bankruptcy is often a better option than Chapter 13 bankruptcy. For example, Chapter 7 is faster, and many filers can keep all or most of their property without having to pay creditors through a three- to five-year Chapter 13 repayment plan. However, not everyone is eligible to file for Chapter 7 bankruptcy, and in some circumstances, Chapter 7 bankruptcy isn’t the best option. Find out when filing for Chapter 7 bankruptcy is preferable to filing for Chapter 13 bankruptcy.
What does 100% means in a Chapter 13?
What is a 100% Bankruptcy Plan under Chapter 13? A 100 percent plan is a Chapter 13 bankruptcy in which you work out a repayment plan with your attorney and creditors. All secured debt must be paid in full, and all unsecured debt must be paid in full.
What debts are not dischargeable in Chapter 13?
Certain long-term obligations (such as a home mortgage), alimony or child support debts, certain taxes, debts for most government-funded or guaranteed educational loans or benefit overpayments, and debts arising from death or personal injury caused by driving while intoxicated are not discharged in chapter 13.
What qualifies you for Chapter 13?
Chapter 13 bankruptcy is similar to Chapter 11 bankruptcy, which is typically used by enterprises. In both circumstances, the petitioner proposes a reorganization plan that protects assets against seizure or foreclosure while also asking for debt forgiveness. They’re both different from a Chapter 7 bankruptcy, which liquidates all assets except those that are specifically safeguarded.
There is no guarantee that filing for bankruptcy will wipe out all of your debts. Child support and alimony payments, as well as most school debts and some types of taxes, are not dischargeable. However, bankruptcy can wipe off many other debts, but it will almost certainly make it more difficult for the debtor to obtain money in the future.
An individual must have no more than $419,275 in unsecured debt, such as credit card bills or personal loans, to be able to file for Chapter 13 bankruptcy. They are also limited to $1,257,850 in secured debts, such as mortgages and vehicle loans. These numbers are updated on a regular basis to account for changes in the consumer price index.
One of Chapter 13’s provisions permits you to halt a foreclosure attempt on your home. Any ongoing foreclosure procedures and payment of any other obligations outstanding are halted when a Chapter 13 petition is filed. This buys you time while the court analyzes your strategy, but it doesn’t get rid of your debt. Hopefully, the bankruptcy plan will free up enough of your income for you to be able to keep your home and make regular mortgage payments.
What are the four types of bankruptcies?
Bankruptcy, which is handled by federal courts, can assist a person get rid of debt or arrange a repayment plan.
Can you, on the other hand, distinguish between the various bankruptcy chapters? In the United States, there are six different types of bankruptcy: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15, with Chapter 7 and Chapter 13 being the most prevalent.
The details of each of the different bankruptcy chapters are listed below.
The most prevalent type of bankruptcy in the United States, Chapter 7 bankruptcy, often known as liquidation bankruptcy, is the most basic form of bankruptcy. Chapter 7 liquidates an individual’s assets before distributing them to creditors. Individuals are permitted to keep their possessions “property that is exempt.”
Businesses that file chapter 7 may be assigned a trustee who will run the business for a period of time. The trustee will be in charge of asset liquidations and proceeds in general.
Municipalities, such as cities, towns, counties, and school systems, can file for Chapter 9 bankruptcy. Municipalities that file for chapter 9 bankruptcy are shielded from creditors while they work out a plan to pay off their obligations. In 2013, the city of Detroit filed for Chapter 9 bankruptcy, making it the largest metropolis in US history to do so.
Individuals and businesses can file for Chapter 11 bankruptcy, which is a reorganization bankruptcy. In contrast to Chapter 7, the debtor retains control of business operations and does not sell all of its assets in Chapter 11. A chapter 11 bankruptcy allows a company to emerge from bankruptcy as a healthy company. Businesses will try to alter the terms of indebtedness, such as interest rates and payment amounts.
This type of bankruptcy is intended for financially distressed “family farmers” and “family fishermen.” Under Chapter 12, the debtor devises a plan to repay creditors over the course of three to five years.
In a chapter 13 bankruptcy, or a reorganization plan, “Individuals with regular income are allowed to construct a plan to repay part or all of their debts under the “wage earner plan.” In contrast to Chapter 7, Chapter 13 permits people to keep their homes instead of having them foreclosed on.
Chapter 15 bankruptcy, which was added to the United States bankruptcy code in 2005, allows for the resolution of cases involving multiple countries. The primary purpose of Chapter 15 is to facilitate collaboration between a foreign debtor, foreign courts, and bankruptcy courts in the United States. As a result, a foreign debtor with assets in several countries might file chapter 15 bankruptcy.
Secured Debts
Secured debts aren’t usually listed in bankruptcy filings. These debts are secured by assets such as your home or vehicle.
If a home or car was sold to provide money for a bankruptcy, but the sale price did not pay the amount owed on the mortgage, secured loan, or hire purchase agreement, the difference (known as a shortfall) might be included in the bankruptcy.
Income Support, Benefit and Tax Credit Overpayments By Means Of Fraud
If the Department of Work and Pensions (DWP) has determined that the overpayments of benefits and tax credits were fraudulent, they cannot be included in the bankruptcy.
Court Fines
Court penalties (including speeding and parking tickets) and liabilities arising from a confiscation order issued under S.1 of the Drug Trafficking Act 1986 or S.71 of the Criminal Justice Act 1988 are not included in bankruptcy.
Personal Injury Claims
Any obligations owed to the MIB (Motor Insurers’ Bureau) as a result of personal injury claims against you will not be included in bankruptcy.
Debts Gained Just Before Bankruptcy
Any obligations acquired shortly before bankruptcy and for which there was no chance of the credit agreement being honored (the debt being paid) will be exempt from bankruptcy.
Bankruptcy Advice
If you haven’t already gotten guidance from us and are thinking about filing for bankruptcy, you can use our online bankruptcy test tool to get a free assessment of whether you qualify for bankruptcy and how it would affect your current circumstances. We’ll also send you an email with our “Free Guide to Bankruptcy.”
Call our FREE Bankruptcy Helpline at 0800 368 8231 if you’d rather talk to someone (freephone, including all mobiles).
Bankruptcy Alternatives
Bankruptcy can be a powerful tool for resolving personal debt, but it should always be viewed as a LAST RESORT, and the Court will expect you to have exhausted all other options.
Before filing for bankruptcy, be sure you’ve thought about the following questions:
What’s the difference between Chapter 11 and Chapter 7 bankruptcy?
People often wonder if bankruptcy is the best option when they are faced with apparently overwhelming bills. Learn more about Chapter 7, Chapter 13, and Chapter 11 bankruptcy, as well as what they can entail for your finances and credit, in the sections below.
Key Takeaways
- A Chapter 11 bankruptcy is a corporate reorganization plan that is frequently utilized by major corporations to enable them continue in business while repaying their creditors.
- A repayment plan is not required in Chapter 7 bankruptcy, but you must liquidate or sell nonexempt assets to reimburse creditors.
- Chapter 13 bankruptcy discharges qualified debts over a three- or five-year repayment plan.
- Bankruptcies under Chapter 7, Chapter 11, and Chapter 13 all have an impact on your credit, and not all of your debts are discharged.
- Because bankruptcy is a complicated legal process, it’s a good idea to speak with an experienced bankruptcy attorney to see if it’s an option for you and which sort of bankruptcy would be best.
