The Discharge of Indebtedness in Chapter 7

By Cara O'Neill

A Chapter 7 bankruptcy proceeding is preferred by most individual debtors. It does not require the debtor to enter into a repayment plan and only takes approximately four months to complete. If you owe dischargeable debts -- obligations that can be forgiven in bankruptcy -- and qualify to file for bankruptcy under this chapter, doing so may be a way to resolve your current financial concerns.

A Chapter 7 bankruptcy proceeding is preferred by most individual debtors. It does not require the debtor to enter into a repayment plan and only takes approximately four months to complete. If you owe dischargeable debts -- obligations that can be forgiven in bankruptcy -- and qualify to file for bankruptcy under this chapter, doing so may be a way to resolve your current financial concerns.

Dischargeable Debts

The purpose of bankruptcy is to discharge, or wipe out, obligations owed to your creditors. Fortunately, most consumer debts can be discharged in bankruptcy, the most common being credit cards, medical bills and home equity mortgages.

Get a free, confidential bankruptcy evaluation. Learn More

Nondischargeable Debts

There are exceptions, though, since all debt is not dischargeable through bankruptcy. Specifically, most debt owed to government agencies is not dischargeable. Generally, this includes amounts owed for unpaid income taxes, parking tickets and property taxes. The same is true for spousal and child support, student loans, debt incurred through fraud, and debt on secured property that is not liquidated in the bankruptcy proceeding, such as a home or a car.

Qualifying for Discharge

After you file your completed petition, the court appoints a bankruptcy trustee to review the petition to ensure your income does not exceed qualification guidelines, the biggest reason most debtors fail to qualify for Chapter 7. The bankruptcy trustee also determines whether you own more property than you can legally exempt from bankruptcy. If you do, the bankruptcy trustee sells the excess property and distributes a percentage of the proceeds to each creditor according to their proportionate amount of debt. Specifically, you are allowed to keep such things as a car, household possessions and your home, as long as the value of any particular item does not exceed the maximum dollar value set by your home jurisdiction. For example, if your home jurisdiction allows you to retain $500 in artwork, you cannot keep a sculpture valued at $1,300. The bankruptcy trustee will sell the sculpture, return your exemption amount of $500 and disperse the remaining $800 to your creditors. If, however, your assets don’t exceed your exemptions, the bankruptcy trustee declares your case a “no asset” case and the creditors receive nothing.

Receiving a Discharge of Indebtedness

After you successfully complete all the requirements of a Chapter 7 bankruptcy case, you will receive a notice of discharge. At this point, your creditors are forever barred from any further collection of the discharged debts.

Get a free, confidential bankruptcy evaluation. Learn More
California Law on Discharge of Non-Scheduled Debts in a No Asset Chapter 7 Case

References

Related articles

Who Is Eligible to Go Bankrupt?

Individual debtors generally choose between two types of bankruptcy, Chapter 7 and Chapter 13. Under Chapter 7 bankruptcy, a bankruptcy trustee will liquidate your non-exempt assets and use the proceeds to pay your creditors. After that, you receive a debt discharge. Under Chapter 13, you repay your debts over three to five years, and any debt discharge is strictly limited. Both forms of bankruptcy are subject to eligibility requirements.

What Do I Do When I Leave Out a Creditor in a Bankruptcy?

When you file the initial petition for bankruptcy, you will complete a schedule that lists all of your creditors and the amount of debt you owe for each. Each creditor listed on your bankruptcy schedule is included in your bankruptcy case. Once you realize you have excluded a creditor from your petition, there might be a few things you can do to correct the omission. However, sometimes adding a creditor to a bankruptcy petition is impossible, and you might be left with a debt that survives your bankruptcy case.

Schedule F Bankruptcy Discharge

Bankruptcy means a fresh start – a court order protects you from collections and lawsuits, and eventually, the court discharges (cancels) some of your debts. You must report your assets and liabilities, and you will be required to sell your non-exempt property to repay creditors (in Chapter 7) or set up a repayment schedule (in Chapter 13). As your bankruptcy case begins, you'll complete a Schedule F, and it's vital to know the difference between a secured and unsecured debt when preparing this form.

Related articles

Who Is a Secured Creditor in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is designed to allow individuals to obtain relief from their debts and make a fresh start through ...

Do I Have to Reopen an Asset Chapter 7 for an Unlisted Creditor?

Bankruptcy can give you a fresh start financially by erasing certain debts, but federal bankruptcy law gives certain ...

What Is Liquidating Debt?

For individuals or companies that find themselves completely unable to meet their financial obligations, bankruptcy ...

What Prompts a Home Inspection in a Chapter 7 Bankruptcy?

Home inspection in a Chapter 7 bankruptcy is a rare occurrence. Certain circumstances, however, make an inspection ...

Browse by category