What Is a Chapter 7 Debt Discharge?
Under Chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code, some or all of your existing debt can be discharged. A “discharge" means you are not personally liable for the money and do not need to pay it back. The creditor you owe, such as a hospital or credit card company, cannot call you or take collection actions against you once the debt is permanently discharged.
Note: Most people will file a Chapter 7 bankruptcy to remove credit card debt and seek debt relief. If you are new to Chapter 7 bankruptcy, you can read more about the process and what to expect. For those filing Chapter 13 bankruptcy, you will need to pay back most of your debt in a repayment plan. Some debts may have a bankruptcy discharge but you might have to keep personal liability for other debts.
Debt Discharge Comes After Selling Off Assets
Chapter 7 bankruptcy often involves the liquidation (or selling off) of assets in order to pay past debts. Only after this process is completed can you have qualifying debts discharged. Some property is protected from liquidation by federal or state bankruptcy exemptions. In fact, many people who file for Chapter 7 can keep a majority of their property. It will be up to your attorney and bankruptcy trustee to decide what you can keep, what deals you can make with the creditor, and what you need to give up in your bankruptcy case.
Once assets are liquidated, the courts tend to discharge debts right away. In the whole Chapter 7 bankruptcy process, this happens about four months after you first file in bankruptcy court. Keep in mind you need to complete educational classes on debt management in between filing and receiving the discharge, or the judge may dent your debt discharge.
Debts That Cannot Be Discharged
There are many exceptions to the debt you can get rid of in Chapter 7 bankruptcy. You should consult with an experienced attorney for a detailed review of your specific debts.
Debts that cannot normally be discharged include:
- Alimony and child support
- Certain tax debts
- Student loans
- Certain educational debts
- Personal loans
- Debts owed in a personal injury lawsuit
- Debts for certain criminal restitution orders
These debts must be paid back according to state and federal law.
Use Reaffirmation to Stop Creditors Taking Your Property
Some creditors can keep their rights over your property even following a discharge. One way this can happen is through what is called a "lien." A creditor can use a lien to enforce payment or take back the property.
For example, let's say you keep certain secured property, such as your car. Your creditor may seek to reaffirm the debt with a lien. This “reaffirmation" takes place if you and the creditor agree:
- You will remain liable for this debt
- You will pay back some or all of a debt
- You pay even though the debt would be discharged in bankruptcy
- The creditor will not repossess the property as long as you continue to pay the debt
Reaffirmation must occur before the order of discharged debt is entered. If you want to keep a car or other property, you need to discuss this with the creditor early on. Your attorney can handle this for you and try to negotiate a fair payment schedule.
Property That Can Be Taken Before a Discharge
Bankruptcy is intended to help you get relief from the burden of debt, so removing all of your property would be counterproductive, as you would need to rebuy a car or other items.
Property that is considered necessary for modern life may be exempt from creditors taking it back. But, you may need to petition a judge to stop them.
Some examples of the property a creditor might try to take back include:
- Motor vehicles or a second vehicle
- A second home or vacation home
- Expensive clothing
- Household furniture
- Tools used in your work
- Musical instruments (unless you can prove you are a professional musician)
- Cash, bank accounts, stocks, bonds, and other investments
- A portion of the equity in your home
- A portion of earned but unpaid wages
- Public benefits that have accumulated in a bank account
- Damages awarded for personal injury
- Family heirlooms
While this list looks scary, it is important to remember that creditors can try to take these items, but they generally will not succeed. Much of this property is protected by your state's exemptions or wildcard exemptions, as it is essential for work or daily life.
A creditor will receive a notice saying your debts have been discharged. They can try reaffirming these items or sue you for debt if they do not agree with the discharge.
Once the discharge of debt is in place, things are considered final. A creditor cannot sue you, try to take your property, or harass you.
How To Get a Debt Discharge
Filing for bankruptcy is not an easy decision to make, but sometimes it's necessary. You can start the process by asking an attorney what property is excluded in a Chapter 7 bankruptcy, and what could be included. They can tell you what a creditor might come after and how to legally and effectively stop them.