Bankruptcy is a process created by federal law that provides relief for debtors to either eliminate or repay all or a portion of their debts in an orderly manner within one’s budget. It surpasses non-bankruptcy consolidations and other similar schemes by being the one sure way to eliminate or reduce debt and achieve a true fresh start.
Chapter 7 “liquidation” is the process by which debtors wipe out or “discharge” many of their debts. Chapter 7 is known as “straight” bankruptcy. In most cases, your assets are exempt from liquidation to satisfy your debt. Chapter 13 “reorganization” is the process by which an individual or a business prepares a plan for repayment to creditors of all or a portion of debt. A Chapter 13 plan can prevent a foreclosure and provide for the repayment of mortgage arrearages on a debtor’s home while at the same time allowing the debtor to seek a mortgage modification.
Can a Chapter 7 debtor truly “wipe out” all of his or her debts?
Discharge of indebtedness is the process by which a Chapter 7 debtor eliminates debt during bankruptcy proceedings. A creditor or lender can never attempt to collect a debt that has been discharged. The debtor is freed from that financial obligation. For example, a Chapter 7 debtor usually can discharge personal or unsecured loans, medical bills, most credit card debt, and some “old” taxes. However, not all types of debts can be eliminated in a bankruptcy proceeding. These are “non-dischargeable” debts.
Which debts does a Chapter 7 debtor remain liable?
Bankruptcy does not always eliminate all debts. The following types of debt cannot be discharged in Chapter 7 bankruptcy:
- Alimony or spousal maintenance* Child support
- Debts incurred by fraud or dishonesty
- Debts incurred by fraud while acting in a fiduciary capacity, such as a trustee
- Embezzled sums
- Debts that the debtor fails to include or list on the bankruptcy “schedule”
- Recent unpaid taxes
- Debts incurred in violation of securities fraud law
- Fines or penalties imposed by government agencies, including criminal fines
- Claims due for accidents incurred due to driving while intoxicated
- Most student loans
- Debts incurred after filing for bankruptcy
- Most larger purchases made shortly before filing bankruptcy, especially for luxury goods or services