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.

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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.

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