June 6, 2023

Does Chapter 7 Bankruptcy Wipe Out All Debt?

If you’re considering filing for Chapter 7 bankruptcy, you’re wondering whether this option will offer complete relief from the crushing burden of debt. The good news is that yes, Chapter 7 bankruptcy can provide a respite from major financial obligations while also allowing you to keep certain assets and income. 

This blog post highlights some potential benefits, so you can determine if this route is best for your unique financial situation. 

Understanding Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a type of relief available to individuals and businesses alike. It offers filers the opportunity to discharge large portions of their debt, giving them the chance to start fresh. Those considering filing for Chapter 7 should first weigh the potential benefits against possible drawbacks before taking action.

When it comes to debt discharge, Chapter 7 bankruptcy is frequently regarded as one of the most reliable means of escaping most unsecured obligations. The process includes liquidating the debtor’s assets, which means selling any non-exempt items in order to pay back creditors. 

Although not all debts can be fully discharged in Chapter 7 proceedings, such as student loans, and back taxes, many do become significantly reduced or written off completely. Understanding which types of debt can — and cannot — be eliminated through Chapter 7 bankruptcy requires knowledge about what applies in particular scenarios. 

Types of Debts That Are Discharged in Chapter 7

Chapter 7 bankruptcy is typically portrayed as a debt-canceling event where all of an individual’s debt is wiped away. However, that isn’t necessarily true; some debts are exempt from discharge in Chapter 7. Knowing what types of debt cannot be discharged will help those considering filing for Chapter 7 understand the extent of the financial relief that can be expected.

The U.S. Bankruptcy Code dictates which types of debt can and cannot be discharged. Through Chapter 7 bankruptcy, it discharges unsecured debt such as credit card balances and medical expenses. However, this doesn’t discharge secured debt such as mortgages or car loans, or certain obligations, such as child support and alimony payments, student loans, and certain taxes.

Exceptions for Dischargeable Debts

When it comes to exceptions for dischargeable debts in Chapter 7 bankruptcy, the conversation is often complex. On one hand, there are certain types of debt that can be eliminated as long as they meet specific criteria through a completed bankruptcy claim.

When it comes to student loan debt, these usually stand the test of time and are not eligible for discharge unless an individual can demonstrate “undue hardship”. Many creditors that lend large sums of money often include in their contracts a nondischargeability clause; meaning that the borrower is responsible regardless of whether they file bankruptcy. Furthermore, taxes and criminal restitution are generally not eligible for discharge in Chapter 7 bankruptcy.

Ultimately, it is essential for debtors to always check with a legal professional prior to filing a Chapter 7 bankruptcy petition in order to find out which debts are exempt from being discharged and which ones can potentially be eliminated since every lender has their own list of exceptions. 

Credit Card Debt and Other Secured Debts

Secured debts, such as those from mortgages and car loans, are not necessarily automatically wiped out by declaring Chapter 7 bankruptcy either. These creditors have much more at stake than the typical unsecured creditor and thus can attempt to keep their security interest even in the face of bankruptcy. That being said, if you are current with your payments and obligations and sign reaffirmation agreements, you may be able to keep some secured items like a house and car with an affordable payment plan. 

It’s important to remember when discussing secured debts that creditors can decide whether or not they want to repossess certain items in order to satisfy their claim, regardless of whether they have been granted relief from the discharge of balance owed by a court. Knowing this, filing for Chapter 7 is just one option available for managing debt—careful planning and financial literacy can also help individuals find themselves out of debt without any negative records on their credit reports. 

Who is Eligible for Chapter 7 Bankruptcy?

A debtor should be able to pass a means test, which is often used to see if they are eligible for Chapter 7 bankruptcy before they can file for it. This test will evaluate the debtor’s household size and financial resources, total income, and current expenses in calculating what portion of their debt could potentially be repaid over a certain period of time.

Those who can meet the mean test criteria are then theoretically eligible to have their debts eliminated or discharged through Chapter 7 bankruptcy, while those who cannot are only eligible for other types of bankruptcy filings like a reorganization under Chapter 13.

How Assets are Divided During Chapter 7 Bankruptcy

If you file for Chapter 7 bankruptcy, your assets will probably be split between your creditors to pay off any bills you still owe. However, other assets that are not considered exempt can potentially be taken by the court for asset liquidation if the creditor is able to establish a legal claim against those assets. 

Generally speaking, individuals filing Chapter 7 bankruptcy can expect more of discharged, to be discharged but they will also have fewer assets after the process since some of their assets will be divided among creditors.

Ultimately, it’s important to know that you don’t have to face Chapter 7 bankruptcy alone; getting professional help along each step of the way is wise. Contact us today for a consultation!

Can Chapter 7 Bankruptcy Wipe Out All Debt? 

Chapter 7 bankruptcy is a formal procedure that allows individuals and businesses to eliminate the majority of their unsecured debts, such as credit cards, medical expenses, and personal loans.

Consult with our bankruptcy attorney in Media, PA, today to find out which debts can and cannot be discharged through Chapter 7 bankruptcy. 

Hire Our Chapter 7 Bankruptcy Attorney in Media, PA

Filing for Chapter 7 bankruptcy can provide a powerful form of relief from overwhelming financial burdens and can enable individuals to start over without the burden of excessive debts. However, before making this decision, it’s important to understand the potential risks involved and make sure this option truly is the best way forward.

Contact us today at 610-255-7500 for a consultation!