1) What is a Bankruptcy Discharge?
Before discussing debt, let’s look at what a bankruptcy discharge does for you. The bankruptcy discharge releases your legal liability to repay the discharged debt. Creditors cannot pursue you for debt after the debt is discharged or forgiven in a bankruptcy. You never have to worry about repaying a discharged debt. Now, let’s look at the types of debts included in bankruptcy cases.
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You do not want to choose the wrong debt relief option. The reason why is there is a lot of information, costs, and pros and cons to consider. As such, you can takae the bankruptcy and debt options calculator below to compare different debt relief options. It compares Chapter 7, Chapter 13, Debt Management, Debt Settlement and Debt Payoff Planning. We can also guide you through the different debts that are potentially dischargeable and those that are not, which we will discuss below.
2) Three Types of Debts in Bankruptcy Cases
There are three different categories of debt in bankruptcy cases.
Unsecured Debts
For example, creditors who hold unsecured debts do not have collateral to secure the amount owed. If they want to pursue legal means to collect the debt, they must file a debt collection lawsuit to obtain a personal judgment. Some states permit judgment holders to obtain a wage garnishment order to collect the judgment. However, some states do not allow wage garnishments for judgment debts. Examples of unsecured debts include:
- Credit Cards
- Medical Debts
- Personal Loans
- Old Utility Bills
- Most Personal Judgments
- Old Rent or Lease Payments
- Gym Membership
- Student loans
Priority Unsecured Debts
Furthermore, priority unsecured debts have priority in a bankruptcy case. Priority unsecured debts are also an unsecured debt. Examples of priority unsecured debts include:
- Alimony or spousal support
- Child support
- Restitution
- Tax Debts
- Judgments Related to DUI Accidents
- Most Debts Owed to the Government
Secured Debts
Secured creditors hold a lien on collateral to secure the debt. Examples of secured debts include mortgages and car title loans.
3) What Debts Are Dischargeable in Chapter 7?
It's extremely important to know which debts can be discharged in a bankruptcy. We cover the types of debt below, and we also wrote another article titled, "Can you file bankruptcy on student loans, medical bills, and credit cards" that you may want to check out as well.
Most unsecured debts are dischargeable in a Chapter 7 case. Therefore, you can get rid of medical debts, credit card debts, most personal judgments, and personal loans in Chapter 7. However, there are a few exceptions. For example, priority unsecured debts are not eligible for a discharge in Chapter 7. You cannot get rid of back alimony or child support payments by filing Chapter 7. You cannot get eliminate most debts owed to the government or restitution payments.
Student Loans in Chapter 7 Cases
Student loans are typically not dischargeable in bankruptcy. However, if you meet specific criteria, you could receive a bankruptcy discharge of student loan debt. The Brunner test defines when student loans can be discharged. The “test” evaluates your ability to provide for yourself and your dependents if you must repay the student loan debt, your anticipated future financial situation, and whether you have made reasonable efforts to repay the student loan before filing for bankruptcy relief. Learn more about discharging student loans below and in our blog about filing bankruptcy on student loans.
Income Tax Debts in Chapter 7 Cases
You might be able to discharge some old income tax debts if you meet specific criteria. In general, the tax debt must be for income taxes that are at least three years old. You must have filed the tax returns for the tax debts at least two years before filing your Chapter 7 case, and the IRS must have assessed the income tax debt at least 240 days before you filed for bankruptcy. Learn more about taxes in bankruptcy by reading our article, “How to Handle Back Taxes in Bankruptcy.”
Secured Debts in Chapter 7 Cases
For example, a Chapter 7 bankruptcy filing does not release the lien on collateral held by secured creditors. If you want to keep the collateral, you must continue paying the payments to the secured creditors. If you owe more on the account than the collateral is worth or you just do not want to continue paying the creditor, you can voluntarily surrender the collateral in full satisfaction of the debt. The creditor cannot obtain a deficiency judgment if it is not paid in full.
Furthermore, a deficiency judgment is a personal judgment for the amount of money that the creditor did not receive after the collateral was sold. If you had not filed a Chapter 7 case, the creditor could request a wage garnishment order or levy against your other property to collect the deficiency judgment. Your Chapter 7 discharge eliminates this possibility. However, in some cases, you might be able to work out a new payment arrangement with the creditor or file a motion to pay what the property is worth instead of what you owe to satisfy the debt.
Furthermore, entering reaffirmation agreements with secured creditors does have risks. You “reaffirm” the debt, which means that you agree to be legally responsible for the debt. The creditor can foreclose or repossess the collateral and obtain a deficiency judgment, which could result in wage garnishment or other collection actions if you reaffirm the debt. You might want to consult a Chapter 7 bankruptcy attorney before entering reaffirmation agreements to discuss the pros and cons of reaffirmation agreements.
Exceptions for Some Credit Card Debts
First, some credit card debts are not eligible for a discharge in bankruptcy. For example, if you use your credit card to pay debts that would not be discharged in Chapter 7, that amount of your credit card debt would not be discharged in bankruptcy. Likewise, some recent credit card charges for luxury items or cash advances are not discharged in bankruptcy. Our article, “Can You File Bankruptcy On Credit Cards,” discusses these issues in greater detail.
You may also be interested to understand how creditors deal with credit card applications post-bankruptcy. On the bkforum, one user stated that their American Visa Card by JP Morgan Chase was likely denied due to being a creditor on their bankruptcy proceedings.
4) What Debts Are Dischargeable in Chapter 13?
Priority vs. Nonpriority Debts in Chapter 13?
Furthermore, if a debt is not dischargeable in Chapter 7, it is not dischargeable in Chapter 13. For example, student loans that cannot be discharged in Chapter 7 are not discharged in Chapter 13. Your student loan payments are deferred during your Chapter 13 case. However, the loans continue to accrue interest, and you still owe the student loan debt when you complete the Chapter 13 case.
Priority Debts in Chapter 13 Cases
For example, other debts that are not discharged in bankruptcy are given priority status. Priority debts must be paid in full through the Chapter 13 plan. The advantage of filing Chapter 13 is that you can spread out priority debts over a 60-month Chapter 13 plan. For many individuals, spreading out the payments over five years makes it affordable to repay those debts.
Nonpriority Debts in Chapter 13 Cases
Nonpriority debts or general unsecured debts are also included in your Chapter 13 plan. However, those creditors only receive a portion of the money owed to them through the Chapter 13 plan. When you complete your Chapter 13 case, the remaining balances owed to the general unsecured creditors (except for student loan debts) are discharged. The creditors cannot attempt to collect the discharged debts.
The amount you pay toward nonpriority debts in Chapter 13 depends on several factors. Generally, all your disposable income must be used to repay nonpriority debts in a Chapter 13 plan. Disposable income is calculated by subtracting allowable living expenses from your average monthly income for the six months before filing Chapter 13.
The Chapter 13 Means Test calculates your current monthly income and disposable income. Some living expenses are based on national standards and the number of people in your household. Expenses for luxury services or services and goods that are not necessary are typically not allowed to be included in the calculation of disposable income.
We discuss the Means Test calculations in greater detail in our blog about passing the Means Test for Chapter 7 bankruptcy. You may also want to use our free Chapter 13 bankruptcy calculator to explore whether Chapter 13 is affordable for you.
Are you ready to estimate costs and weight pros and cons?
Before filing for bankruptcy relief, you may also want to explore other methods of paying off debts. If you need assistance locating a bankruptcy lawyer near you or want to discuss our services in more detail, please contact us online or by calling (310) 307-5134. We want to help you find the best way to get out of debt that works for your financial situation.