What is a Chapter 7 Bankruptcy Discharge?
There’s a pretty simple short answer to this one: The chapter 7 discharge is the reason you file chapter 7 bankruptcy in the first place. The discharge is actually a court order doing two separate, but related things:
1) Giving you complete forgiveness of any dischargeable debt you owed to any person, business, or government entity as of date you filed for bankruptcy protection.
2) Ordering your creditors to stop collecting on any dischargeable debt you owed them as of the date you filed bankruptcy. They were “stayed” from collecting when you filed, but the discharge order turns the “automatic stay” on collection of these debts into a “permanent injunction.” Creditors who violate this injunction may be sued and made to pay damages and attorneys fees. While most creditors follow the rules, I have had to sue a dozen or so over the years when they ignored the order.
Notice that you only get these protections against collection of your debts if they’re “dischargeable.”
So what’s dischargeable in chapter 7? Well EVERYTHING the Bankruptcy Code DOESN’T list as an “exception to discharge.”
The big exceptions to discharge include:
a) Student loan obligations (unless you can prove an “undue hardship”, which is not currently possible for most borrowers)
b) At least the last three years of tax debt (and credit card debt incurred to pay tax debt)
c) Child support and spousal maintenance obligations
d) Criminal fines and restitution and most other fines and penalties imposed by the government (including most traffic tickets)
e) Personal injury damages related to drunk or intoxicated driving
f) Debts incurred by fraud, larceny, embezzlement, “defalcation” while acting as a fiduciary, (BUT only if sued and found liable by the bankruptcy court), and
g) Debts arising from malicious destruction of property (if sued and found liable by the bankruptcy court)
The list goes on a little longer than that, but you can see what I left out – a lot!
The reality for most folks filing a chapter 7 bankruptcy is that it will allow them to discharge most or all their debts. Debts typically discharged in a chapter 7 bankruptcy include:
1) Credit card debt
2) Medical bills, including ambulance bills, Dr.’s bills, hospital bills, and bills for tests or drugs administered
3) Lines of credit and overdraft protection accounts
4) Payday loans
5) Auto loans (of course, you’ll need to pay or “redeem” if you want to keep the vehicle)
6) Home loans (and you can sell and pay the lien or surrender your home to foreclosure by the lien holder)
7) Broken rental or cell phone lease agreements
8) Utility bills (even if continuing to use the utility, though a deposit may be needed)
9) Some older taxes, so long as other requirements are met, and
10) Unpaid attorneys or other professional or service fees.
And this is all possible if you’re willing to go through the chapter 7 process, meet with your creditors, and either plan a “no asset” case with your attorney or turn over (usually minimal) “non-exempt” property and money to your trustee.
If you’re drowning in debt and can qualify for chapter 7 relief, it’s almost always worth it.
Andrew Trexler is a bankruptcy attorney practicing in the Denver Metro Area