What Debts are Dischargeable in a Chapter 7 Bankruptcy?

Most people that file for bankruptcy do so to cancel their debts and have a fresh start. This is referred to in the law as debt “discharge” and is perhaps the most important feature of a Chapter 7 bankruptcy. However, bear in mind that not every type of debt is dischargeable. A non-dischargeable debt means that you would still be on the hook to pay back the money owed once the bankruptcy process is complete.

What is a Discharge?

As mentioned above, having a debt discharged means that you are no longer legally required to pay it. But, keep in mind that this does not mean that you can’t pay it back. For example, if you borrowed money from a family member, you may choose to send them cash voluntarily after the bankruptcy wraps up. 

Note that discharge means that creditors are not allowed to come after you for the debt. This effectively puts a stop to any phone calls, letters, or lawsuits concerning the money owed.

However, keep in mind that a discharge will not remove a lien. Liens are claims against a piece of property. Here, the asset is being used as collateral to satisfy the debt. An example would be if you defaulted on a car loan. In this case, the lender has a lien on your vehicle. As you can see, lenders are more likely to offer money when the loan is “secured” by the property you are purchasing. 

But, there are some cases where you can avoid a lien, meaning the creditor cannot take the underlying asset. However, these types of cases are complicated so it’s best to speak with an attorney to see if an exception applies to your situation. 

Timeline for Discharge

Now, discharge happens automatically at the end of your bankruptcy case. After you complete your initial filing, the next step will be to attend the 341(a) meeting of creditors. This typically happens within 20-60 days of filing.

Creditors then have 60 days to object to the debt being canceled. After this time, the court can enter an order to make the discharge official. The entire process can take about four months to complete. 

What Debts are Dischargeable? 

With that in mind, the bankruptcy laws specify which debts are dischargeable. These include: 

• Credit card balances
• Medical bills
• Civil lawsuit judgments
• Personal loans
• Past-due utility bills
• Past-due rent 

But, beware that there are few caveats regarding this list. First, only pre-filing debt is dischargeable. This means that if you took on any additional debt after filing, such as charging items to a credit card, this would not be dischargeable.  

In addition, if there was any fraud or misconduct in connection with the debt, it may also be deemed not suitable for discharge. An example would be if you lied on your credit card application. Another instance would be if you spent over $500 on a luxury good or service in the 90 days leading up to filing. The latter is presumed fraud under the law.

Note that debts arising from a willful or malicious act will not be discharged. An example would be if you were ordered to pay restitution to a victim in connection with an assault charge. Further, your debt can’t be incurred as a result of embezzlement, larceny, or breach of fiduciary duty.

Finally, and perhaps most importantly, only debts that you list on your bankruptcy papers are subject to being discharged. This means that you will still be responsible for any debt that you fail to include. For this reason, it’s essential to have an attorney involved in your case.  

What Debts are Not Dischargeable? 

Now, in addition to those listed above, certain debts are by their very nature non-dischargeable. These include:

• Child support
• Spousal support
• Fines owed to the government for breaking the law
• Personal injury due to drunk driving (property damage is dischargeable)
• Homeowner association fees
• Debts for loans from retirement plans
• Debts you could not discharge from a previous bankruptcy (because the court determined there was fraud, for example) 

It may surprise you to learn that student loans are not dischargeable unless you can show there was an undue hardship. Undue hardship can be difficult to prove and requires a separate action filed in bankruptcy court. Note that this rule applies to both government-issued and private loans.

Discharging Tax Debt

There’s a common misconception that tax debt is nondischargeable in bankruptcy. However, sometimes this is not the case and the debt can be canceled. To qualify, you must meet all of the following criteria for the tax return year in question.

First, the return must be for income taxes and non-fraudulent. Second, it must have been filed at least two years before your bankruptcy. Third, the return must be based on a tax liability that is at least three years old. Finally, your debt must have either not been assessed by the IRS or assessed within 240 days of filing for bankruptcy.