Debts That Remain After a Chapter 7 Discharge

If you file a bankruptcy petition under Chapter 7, you'll note that not all debts are discharged once the bankruptcy process is complete. Generally, in a Chapter 7 proceeding, the following types of debts are not eliminated:

  • Debts not listed at the start of the case (or debts for unlisted creditors), known as schedules
  • Most student loans (unless a payment plan would cause the debtor and their dependents undue hardship)
  • Recent federal, state, and local tax debts
  • Child support and spousal maintenance (alimony)
  • Government-imposed restitution, fines, and penalties
  • Court fees
  • Obligations resulting from personal injury or wrongful death damages from drunk driving cases
  • Debts that were non-dischargeable in a prior bankruptcy
  • Debts owed to specific pension plans
  • Certain debts owed for condominium dues and fees
  • Debts not dischargeable in a previous bankruptcy because of the debtor's fraud

Read on to learn more about non-dischargeable debts in a bankruptcy case.

Chapter 7 Debt Discharge

A Chapter 7 bankruptcy discharge releases individuals from personal liability for most of their outstanding debts. It also shields them from creditor collection actions. This can be a complicated process. So, it's important to seek professional legal guidance before commencing the bankruptcy proceedings.

Bankruptcy courts grant a discharge of debt in nearly all Chapter 7 cases involving individual debtors. This high approval rate makes the discharge procedure accessible for many individuals. But some cases might be dismissed or converted to a different bankruptcy type.

The bankruptcy court typically issues the discharge order within 60 to 90 days of the initial creditors' meeting. Unsecured creditors have a 90-day window after the initial meeting to file their claims with the court.

In addition to completing a means test, most individuals seeking to file Chapter 7 must complete a credit counseling course.

If the court approves your Chapter 7 petition, nonexempt property will be sold through a process called "liquidation." Creditors receive the liquidation proceeds. This process will generally discharge:

  • Unsecured debts, such as credit card debt
  • Medical bills
  • Unsecured personal loans

The automatic stay also protects you from collections upon filing a bankruptcy petition.

Other Non-Dischargeable Debts

The following debts are not discharged if a creditor objects during the liquidation case. Under bankruptcy law, creditors must prove the debt fits one of these categories:

  • Debts from fraud
  • Income tax (depends on the individual's circumstances)
  • Certain debts for luxury goods or services bought 90 days before filing
  • Certain cash advances taken within 70 days after filing
  • Debts from willful and malicious acts
  • Debts from embezzlement, theft, or breach of fiduciary duty
  • Debts from a divorce settlement agreement or court decree where the detriment to the recipient would be greater than the benefit to you

A Chapter 7 bankruptcy can remain on your credit report for up to 10 years, hurting your credit score.

Student Loans and Car Loans

Educational loans are generally not discharged by a Chapter 7 bankruptcy. But the court may include them if the judge finds that paying off the loan will impose an "undue hardship" on the debtor and their dependents.

To qualify for a student loan discharge, you must show you can't make payments at the time you file for bankruptcy or in the foreseeable future.

You must apply for the hardship discharge before discharging any other debts. The application for a hardship discharge is not included in the standard bankruptcy fees. You'll pay an extra fee after the case is filed.

Courts in certain districts have started voluntary mediation programs where the parties can modify student loan debts.

Some loans, like car loans, can be discharged under certain circumstances. But you'll usually have to give up your car. The filer turns over their car to the creditor through voluntary repossession. Alternatively, the car can often be retained if the debtor agrees to enter into a reaffirmation agreement with the creditor.

Grounds for Denial of a Debt Discharge

Even if your types of debt would typically qualify for a debt discharge, some circumstances might prevent their discharge. Lenders can ask the court to deny a discharge if they can prove your debt meets one of the grounds for denying a debt discharge.

There are strict requirements for denying an individual debtor a discharge in Chapter 7 bankruptcy. So, the court typically favors the party opposing the discharge request. The court may deny the debtor's discharge if it finds that the debtor:

  • Failed to maintain or provide sufficient financial records and books
  • Couldn't provide a satisfactory account of any missing assets
  • Engaged in bankruptcy-related crimes, including perjury
  • Disobeyed a valid court order issued by the bankruptcy court
  • Engaged in fraudulent transfers, concealment, or destruction of assets that should have been part of the bankruptcy estate
  • Didn't complete a mandatory financial management course, as required

These criteria are specified under 11 U.S.C. § 727 and are governed by Fed. R. Bankr. P. 4005.

Revocation of Debt Discharge

The court may also revoke a Chapter 7 discharge during the bankruptcy if:

  • The bankruptcy trustee, creditor, or U.S. trustee requests a revocation (if the discharge was obtained through fraud by the debtor)
  • You acquire property that is property of the estate
  • You knowingly and fraudulently failed to report the acquisition of such property
  • You fail to surrender the property to the trustee
  • You (without a satisfactory explanation) make a material misstatement or fail to provide documents or other information in connection with an audit of your case

Keeping Secured Property: Debt 'Reaffirmation'

Secured creditors often retain specific rights to claim property serving as collateral for an outstanding secured debt. This may even happen following the grant of a discharge. In some cases, debtors may opt to retain ownership of secured assets, such as a vehicle, by entering into a "reaffirmation" agreement.

A reaffirmation agreement represents a mutual understanding between the debtor and the creditor. The debtor agrees to remain responsible for the debt. They commit to paying all or a portion of the outstanding balance, notwithstanding the possibility of the debt being discharged during bankruptcy proceedings. In exchange, the creditor provides assurance that it will not repossess or take back the property as long as the debtor continues to meet the repayment obligations.

Reaffirming Debt

Reaffirming a debt in bankruptcy includes several essential steps. The debtor must make this decision before the discharge is granted. They must sign a written reaffirmation agreement filed with the court.

Reaffirmation agreements must meet rigorous requirements outlined in the Bankruptcy Code. These conditions include providing comprehensive disclosures, such as:

  • The precise debt amount to be reaffirmed and how it was calculated
  • A clear notification that reaffirming the debt means the debtor's ongoing personal liability won't be discharged in the bankruptcy process
  • The debtor must submit a statement detailing their current income and expenses (demonstrating their financial ability to support the payment of the reaffirmed debt)

If the debtor's financial balance doesn't cover the debt to be reaffirmed, there is a presumption of undue hardship. This could lead to the court disapproving the reaffirmation agreement.

If a debtor lacks legal representation, the bankruptcy judge's approval is mandatory. In cases where an attorney represents the debtor in connection with the reaffirmation agreement, the attorney must provide written certification. This certification does the following:

  • Advises the debtor on the legal consequences of the agreement, including defaults
  • Certifies that the debtor was fully informed and entered into the agreement voluntarily, ensuring that reaffirming the debt won't result in undue hardship for the debtor or their dependents

In situations where an attorney hasn't represented the debtor during the agreement negotiation or if the court disapproves of the reaffirmation agreement, the Bankruptcy Code mandates a reaffirmation hearing.

It's important to note that debtors retain the option to voluntarily repay any debt, even without a reaffirmation agreement. Such repayment may be structured within a Chapter 13 bankruptcy repayment plan, offering a reorganization of the debtor's financial situation.

Discover the distinctions between Chapter 7 and Chapter 13 bankruptcy.

Get a Handle on Your Debts by Speaking With a Bankruptcy Attorney

Bankruptcy will help you experience debt relief by eliminating credit card debt, medical bills, and creditor harassment. However, even the most well-executed bankruptcy filing will leave you with certain debts in many cases, including student loans and child support obligations.

A lawyer can help predict the scope of your discharged debt. Your bankruptcy lawyer will also guide you through complex bankruptcy forms. Contact a local bankruptcy attorney for legal advice and a fresh start.

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