Debts that Remain After a Chapter 7 Discharge
If you file a bankruptcy case under Chapter 7, not all debts are eliminated (or "discharged") once the bankruptcy process is complete.
Generally speaking, in a Chapter 7 proceeding, the following types of debts are not discharged:
- Debts that were not listed at the start of the case (or debts for unlisted creditors). These lists are called "schedules." They must be filed with the courts.
- Most student loans (unless repayment would cause the debtor and their dependents undue hardship)
- Recent federal, state, and local taxes
- Child support and spousal maintenance (alimony)
- Government-imposed restitution, fines, and penalties
- Court fees
- Debts resulting from personal injury or wrongful death damages from drunk driving cases
- Debts that were non-dischargeable in a prior bankruptcy
- Debts owed to certain pension plans
- Certain debts owed for condominium dues and fees
- Debts not dischargeable in a previous bankruptcy because of the debtor's fraud
Additional Non-Dischargeable Debts
The following debts are not discharged if a creditor objects during the case. Creditors must prove the debt fits one of these categories:
- Debts from fraud
- 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 (if you can pay and the detriment to the recipient would be greater than the benefit to you)
Chapter 7 Debt Discharge 101
A bankruptcy discharge releases individual people from personal liability for most debts. It prevents the creditors owed those debts from taking any collection actions against you.
Because a Chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing. It is important to discuss the scope of the discharge.
Generally (and excluding cases that are dismissed or converted), individual debtors receive a discharge in more than 99% of Chapter 7 cases.
Unless a creditor files a complaint objecting to the discharge, or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case. This typically happens 60 to 90 days after the date first set for the meeting of creditors.
Student Loans Do Not Go Away in Bankruptcy
As noted in the above list, educational loans are generally not discharged by a Chapter 7 bankruptcy. However, they may be removed if the court finds that paying off the loan will impose an "undue hardship" on the debtor and their dependents.
To qualify for a hardship discharge of a student loan, you must demonstrate that you cannot make payments at the time the bankruptcy is filed, or in the foreseeable future.
You must apply for the hardship discharge before any discharge of other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees. It must be paid for after the case is filed.
When Debt Discharge Is Denied
Even if the types of debt you have would typically qualify for a debt discharge, there might be other circumstances in your case that prevent their discharge. Creditors can ask the court to deny a discharge if they can prove your debt meets one of the grounds for denying a debt discharge.
Grounds for Denial of a Debt Discharge
The grounds for denying an individual debtor a discharge in a Chapter 7 case are narrow. They are construed against the moving party (the person who asks for a denial).
Among other reasons, the court may deny the debtor a discharge if it finds that the debtor:
- Failed to keep or produce adequate books or financial records
- Failed to explain any loss of assets
- Committed a bankruptcy crime such as perjury
- Failed to obey a lawful order of the bankruptcy court
- Fraudulently transferred, concealed, or destroyed property that would have become the property of the estate
- Failed to complete an approved instructional course concerning financial management
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"
It is harder to discharge secured debt than it is to discharge unsecured debt. Furthermore, secured creditors may have some rights to seize property that "secures" an underlying debt. This can happen even after a discharge is granted. Securing a debt means your money is tied up in the property, such as a car.
Depending on individual circumstances, if you wish to keep certain secured property, you may decide to "reaffirm" the debt.
A reaffirmation is an agreement between you and the creditor that:
- You will remain liable for the debt
- You will pay all or a portion of the money owed
You can choose to do this even though the debt would otherwise be discharged in the bankruptcy.
In return, the creditor promises that it will not repossess or take back the automobile or other property — so long as you continue to pay the debt.
Steps to Reaffirm Debt
If you decide to reaffirm a debt, you must do so before the discharge is entered. You must sign a written reaffirmation agreement and file it with the court.
The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures. Among other things, the disclosures must advise you of:
- The amount of the debt being reaffirmed
- How the debt was calculated
- The fact that your personal liability for the debt will not be discharged in the bankruptcy
The disclosures also require you to sign and file a statement of your current income and expenses. This shows that the balance of income-paying expenses is sufficient to pay the reaffirmed debt.
Issues With Reaffirming Debts
If your current money balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship. The court may decide not to approve the reaffirmation agreement. Unless you are represented by an attorney, the bankruptcy judge must approve the reaffirmation agreement.
If you are represented by an attorney for the reaffirmation agreement, the attorney must certify in writing that they have advised you about:
- The legal effect and consequences of the agreement
- What happens if you default under the agreement
The attorney must also certify that:
- You were fully informed and voluntarily made the agreement
- Reaffirmation of the debt will not create an undue hardship for you or your dependents
The Bankruptcy Code requires a reaffirmation hearing if you have not been represented by an attorney during the agreement's negotiating, or if the court disapproves of the reaffirmation agreement.
You may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. If you plan to repay debt, you may want to consider a Chapter 13 bankruptcy repayment plan.
Get a Handle on Your Debts by Speaking With a Bankruptcy Attorney
Bankruptcy will help you get rid of credit card debt, medical bills, and creditor harassment. 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 explain the scope of how much discharged debt you will have. They will explain categories of debts and which ones may not be discharged in a Chapter 7 filing. Your attorney will also provide you with suggestions for how to best manage these debts. Contact a local bankruptcy attorney today.
Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.