Understanding the Discharge of Debt in Bankruptcy

Pile of billsMost people who have considered filing bankruptcy understand the fundamental difference between a Chapter 7 filing and a Chapter 13 petition. With a Chapter 7 bankruptcy, you may be able to discharge, or permanently terminate any obligation to repay, certain debts. Though discharge will occur in a Chapter 13, how you get there is different. Instead of subjecting assets to sale or liquidation, a Chapter 13 debtor restructures his/her debts, agreeing to repay creditors under new terms. A Chapter 13 Bankruptcy can discharge certain debts that are not dischargeable in Chapter 7 and there are limits and restrictions, though, on your right of discharge in a Chapter 7. Here are some of the debts you can and cannot extinguish in a Chapter 7 proceeding.

Dischargeable Debts in Chapter 7

A discharge will permanently release you from any obligation to repay a debt. Furthermore, your creditor will have no legal recourse to attempt to collect the debt. Under the bankruptcy code, there are 19 specific types of debts that cannot be discharged—all others generally qualify.

If you owe money for any reason, and that debt is secured by a lien, the discharge of the debt does not discharge the lien, unless the lien is removed in a separate proceeding. Accordingly, you may not owe any more on the obligation, but the creditor can still exercise the right to repossess the property under the lien. This is the subject of another article.

Non-Dischargeable Debts

Certain debts are always not discharged in both Chapter 7 and Chapter 13, and others can be discharged in Chapter 13 only. Here are some of them:

  • Child support or alimony “domestic support obligations”. Always not discharged.
  • Any other debt to a former spouse under a divorce judgment or marital property settlement is not dischargeable in Chapter 7 but can be discharged in Chapter 13.
  • In Chapter 13, or in a Chapter 7 where the Trustee has money to pay creditors, any debts not listed in your bankruptcy schedules
  • Unpaid income taxes, if a non-fraudulent tax return was filed. This is subject to complicated exceptions. Generally, if the return was last due over 3 years before the bankruptcy filing, the tax may be discharged. Note that most tax penalties ARE discharged.
  • Virtually all student loan debt, except in rare circumstances that qualify as “undue hardship” under a very hard test to meet.
  • In Chapter 7, amounts owed to governmental agencies for fines or penalties, except tax penalties for failure to pay or file tax returns. These CAN be discharged in Chapter 13 unless they were part of a criminal sentence.
  • Criminal fines, or restitution ordered as part of criminal sentencing.
  • Drunk driving or driving under the influence, if property damage or personal injury results.

There are also debts that may be discharged unless a creditor successfully object by filing a Complaint with the bankruptcy court. These include:

  • Purchases of luxury items on a credit card within 90 days of the bankruptcy filing, provided the total amount of such purchases exceeds $650
  • Cash advances of more than $925 within 70 days of a bankruptcy petition
  • Debts incurred through fraud, Consumer Fraud, misrepresentation or willful and malicious injury (eg assault or battery).

These rules are complex. The above is just a summary. If this is important to you, you should consult with a qualified and experienced bankruptcy attorney.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

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