Someone with enough debt to consider filing for Chapter 7 bankruptcy does so with the expectation that most or all of his/her legal obligations will be wiped out when a court orders a discharge (a legal process that releases a debtor from personal liability for the debt). However, Chapter 7 bankruptcy is not necessarily the right process for everyone to relieve overwhelming financial burdens. One of the first assessments that will help decide if this process is right for a particular individual is the ratio of debt that would be discharged in bankruptcy against how much would survive. A court is not authorized to release a debtor from liability for all forms of debt, and some are specifically excluded from the Chapter 7 process. Thus, Chapter 7 bankruptcy only makes sense if most or all of a person’s debt is eligible for discharge. Otherwise, Chapter 7 is not worthwhile, and other forms of bankruptcy or debt reduction strategies should be explored.

Assessing the type of debt a person has is one of the first evaluations a bankruptcy attorney will make before counseling a person on the possible next steps, but having an idea of how one’s debt would be treated under Chapter 7 can help speed up the process of deciding what to do. A discussion of the types of debt dischargeable under Chapter 7, and those that would survive the bankruptcy case, will follow below.

Dischargeable Debt

There are two considerations when analyzing the type of debt one has – is it consumer-related debt, and is the debt secured or unsecured? Chapter 7 is primarily concerned with relieving unsecured, consumer-based debt, and is often referred to as consumer bankruptcy for that reason. When a debt is unsecured, it means that property is not being used as collateral to guarantee payment. Some examples of unsecured debts that would be discharged include:

• Medical bills;
• Credit cards;
• Utility bills;
• Back rent; and
• Personal loans.

These debts account for most of the liabilities the average person has, but many people also have secured debts in the form of home mortgages and car loans. Secured debts often represent some of the more important possessions a person owns, and are treated differently under the law because the lender has the right to foreclose on its lien even if the debt is discharged by the bankruptcy court. As a result, in most cases, the only way to completely wipe out secured obligations is to surrender possession of the property to the lender. A debtor can opt to reaffirm the debt in order to keep the property, but will remain obligated to pay the lender once bankruptcy is over. Special rules apply to mortgage lenders that should be discussed with an experienced bankruptcy attorney to learn whether retaining the home is possible.

Non-Dischargeable Debt

In contrast to debts that are released in the bankruptcy process, there are 19 categories of debt that are specifically excluded from a Chapter 7 discharge. In addition, the bankruptcy court can deny discharge of any debt if a debtor fails to follow court rules and bankruptcy procedure, and, if egregious enough (fraud or failure to produce requested tax documents, for example), can reject the bankruptcy petition entirely. Some of the more common types of debt that are not included in a Chapter 7 discharge are:

• Creditors not listed in the bankruptcy petition;
• State, local and federal taxes;
• Child support and spousal maintenance;
• Student loans;
• Debts owed to some pension plans;
• Court fees; and
• Debts not discharged in a prior bankruptcy.

Thus, the critical preliminary analysis that should be initiated before filing for bankruptcy must reveal that Chapter 7 will eliminate the majority or all of an individual’s debt. If the debt is related to overdue child support or large student loans, Chapter 7 bankruptcy is not the best route to find relief.

Get Help

Bankruptcy is a technical and complex process that you cannot afford to get wrong. Work with an experienced bankruptcy attorney to ensure you receive the greatest amount of debt elimination available under the law. Christopher L. Arrington is a Danville bankruptcy attorney that takes the time to listen to his clients, and can help you get out of overwhelming debt. Contact his office today to schedule an appointment.