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.

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.

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.

Get a free, confidential bankruptcy evaluation. Learn More

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
Advantages & Disadvantages to Declaring Bankruptcy


Related articles

LLC & Bankruptcy

A limited liability company (LLC) is a form of business organization created by the laws of the state that organized it. Although it is treated as a partnership for tax purposes, it is treated as an independent legal entity for bankruptcy purposes. Failing LLCs generally choose one of two main types of bankruptcy, Chapter 7 or Chapter 11. Creditors may force an LLC into bankruptcy.

Can a Primary Residence Be Seized if You File for Bankruptcy?

Although filing for bankruptcy can help avoid being overwhelmed by debts, you may not be able to keep all your assets. This depends on the type of bankruptcy you file and whether you take the necessary steps to keep your home. However, your situation may require you to consult with a bankruptcy attorney if it’s too complicated to make these decisions on your own.

Can a Creditor Put a Lien on Property If Chapter 13 is Dismissed?

The primary reason you likely sought Chapter 13 bankruptcy protection is to protect your property from foreclosure or repossession by your lenders. Once your bankruptcy case was filed, you were given protection against your creditors from any collection activities. However, if your bankruptcy case is dismissed your lenders can take actions against you and your property, including placing a judicial lien against it.


Related articles

How Does Bankruptcy Affect Homebuying?

Bankruptcy can give you a fresh financial start by allowing you to restructure or erase your debts under a ...

Is Social Security Included in the Means Test for Chapter 7?

Chapter 7 of the United States Bankruptcy Code permits you to discharge some of your consumer debt if you pass a means ...

Pros & Cons of Filing Bankruptcy

Individual debtors frequently file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code, and either ...

Can Creditors Attempt to Get Money After a Discharge?

When you file a petition for bankruptcy, you are asking a federal court for protection from creditors and time to work ...

Browse by category
Ready to Begin? GET STARTED