Thomas Law Office, PLC
What Kind Of Debt Gets Wiped Out In A Chapter 7 Bankruptcy?
Most debt can be erased in a Chapter 7 bankruptcy. The standard kinds of debts that are erased in a Chapter 7 bankruptcy include credit card debt, medical debt, personal loans, auto repossession debt, real estate deficiency debt, most “old” tax debts, payday loan debts, debts owed to former friends, auto accident debts, debts related to many kinds of lawsuits such as breach of contract, sexual harassment, discrimination, homeowners association debts that predate the bankruptcy, and various other types of debts. There are various debts that cannot be erased in a Chapter 7 bankruptcy. These are covered elsewhere on this website.
But the most common kinds of debts are usually ones that can be erased in a Chapter 7 bankruptcy. During your initial consultation, the attorney will screen your situation for the various kinds of debts you have, and assess whether any of them could be ones that cannot be erased in the Chapter 7 bankruptcy. A common question that comes up in consultations is whether in a Chapter 7 case there is a minimum or maximum amount of debt that applies. In other words, potential bankruptcy filers often wonder whether they have too little or too much debt to qualify for a Chapter 7 bankruptcy. Almost always, the answer is no. There is no specific minimum or maximum that applies.
The trustee will examine your case to see if you are abusing the Chapter 7 bankruptcy process. For example, if your income is $100,000 per year and you have only $10,000 in debt, you are likely going to have a problem if you try to get a Chapter 7 bankruptcy past the Chapter 7 bankruptcy trustee, because with that level of income, unless extraordinary circumstances apply, you should be able to pay off that amount of debt in a relatively short period of time without needing to invoke Chapter 7 bankruptcy protection. It is even rarer for someone to have too much debt in a Chapter 7 bankruptcy case. We have not seen one at our office and Mr. Thomas has been practicing bankruptcy law for over twenty years.
What Kind Of Debt Is NOT Forgiven In A Chapter 7 Bankruptcy?
People sometimes have the misconception that all debts can be erased in a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, there are certain debts that cannot be forgiven. Some of the more common debts that cannot be erased in a Chapter 7 bankruptcy are child support debts, alimony debts (more often referred to as alimony or spousal support), many tax debts, many government fines, many student loan debts, overpayments of government benefits (such as unemployment benefits, social security, welfare, etc.), marital property settlements, federal criminal restitution debts, etc. There are other debts that cannot be forgiven but these are less often seen and will not be addressed here.
It is of utmost importance to seek advice from a competent bankruptcy attorney before filing your case because there are exceptions to the exceptions that may apply in your situation. For example, although most student loan debts are not dischargeable, some of them indeed can be discharged in a Chapter 7 bankruptcy. A very easy example is a person who is permanently disabled and cannot afford to repay the loan. A bankruptcy judge would very likely permit that student loan debt to be discharged. But action must be taken. If you do nothing in the example just provided, the debt will outlive the bankruptcy case (although you may be able to reopen the bankruptcy if you happen to realize this possibility after the fact).
You will need to file an “adversary proceeding,” which is like a mini lawsuit within your Chapter 7 bankruptcy case. The student loan lender would need to be sued, and if the student loan lender objects to the discharge of that student loan debt – which is likely to be the case, since most lenders have massive financial firepower and will use it against you to deter other debtors for daring to fight them – you will need to present your case to the bankruptcy judge, who will make specific findings as to whether the student loan debt can be erased in the Chapter 7 bankruptcy. Another example of a debt that is often one that cannot be erased in a Chapter 7 bankruptcy is a tax debt.
However, some tax debts can be wiped out in a Chapter 7 bankruptcy case. The very general rule – and this is a general rule so be careful about the exceptions – is that the tax debt is not dischargeable if it is less than three years old (the calculation of the age of the tax debt itself is a tricky thing to do), the return for that tax debt was filed less than two years ago, or the tax debt was assessed less than 240 days before the Chapter 7 bankruptcy case is filed. But if, for example, it is a very old debt – let’s say 5 years – and you filed your return on time and you did not attempt to evade the debt and none of the other factors (that have not been listed here because they are too numerous) are present, you should be able to wipe out that tax debt in your chapter 7 case.
However, it is often wise to contact the Internal Revenue Service to make sure they agree that it is discharged in the Chapter 7 case, because if they refused to admit that it has been discharged, it is often a good idea to file an adversary proceeding to eliminate any doubt. What you want to avoid is a situation where you file your bankruptcy on an old tax debt, assume it has been wiped out, and then years later the Internal Revenue Service comes after you hard for that tax debt. You will then have to fight with the Internal Revenue Service at an unexpected time, and that time may not be very convenient for you.
For more information on Debts Forgiven In A Chapter 7 Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.