What debts can you eliminate in a Chapter 7 bankruptcy?

On Behalf of | Feb 19, 2023 | Bankruptcy |

The Chapter 7 bankruptcy process allows those with average or below-average income and significant personal debt to eliminate some of their financial obligations. The applicant uses their average income, adjusted for certain expenses, to determine if they qualify for Chapter 7 bankruptcy or not.

Also known as liquidation bankruptcy, a Chapter 7 bankruptcy will typically result in a trustee selling off assets that the applicant can’t exempt. The good news is that fewer than one out of every 10 Chapter 7 applicants have any assets sold to repay their creditors as part of the bankruptcy process.

After the liquidation and repayment process, the courts will grant the filer a discharge of the remaining eligible debts that they owe.

Many unsecured debts are eligible for discharge

Secured debts have collateral property attached to them. A mortgage is a kind of secured debt, and a car loan or a credit card with a deposit are also classified as secured debts. Any debt that does not have a deposit or property serving as collateral is likely an unsecured debt. Secured debts are not eligible for a discharge unless someone gives up the collateral property or deposit. However, most unsecured debts are eligible for discharge.

The most common unsecured debts that people seek to discharge in bankruptcy proceedings include credit card balances and medical debt. Personal loans and many other financial products may fall under the umbrella of unsecured debts. However, not all unsecured debt is eligible for discharge in bankruptcy proceedings.

What kinds of debts are not dischargeable?

Federal bankruptcy laws prevent people from discharging certain kinds of debt. Student loan debt, for example, is unsecured debt that is very difficult to discharge in most cases. Debts related to child support, alimony/spousal maintenance or court judgments are also typically difficult, if not impossible, to discharge. There are also a lot of rules that apply to tax-related debt.

Given that most people find themselves struggling with medical debt or credit card debt prior to bankruptcy, the accounts that a filer can discharge will likely be sufficient to help them regain control over their household budget and prevent aggressive collection efforts, like creditor lawsuits.

Creating a list of your financial obligations can help you determine if Chapter 7 bankruptcy and the discharge it offers would be an appropriate solution for you. You can also have a legal professional look over this list to give you access to a reputable second opinion.