Recently on our legal forum a user asked, “I have more than $50,000 in student loan debt from five years of trying to get my doctorate degree. I also owe $19,000 in credit card debt and $5,000 for my car. Unfortunately, I have not been able to get a job since I left college 2 years ago. I keep hearing stuff about getting a Chapter 7 discharge. It sounds too good to be true. What is it?”
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is often referred to a liquidation bankruptcy. Although many debtors do not qualify, if you do, you may be eligible to liquidate certain assets, repay your creditors with the proceeds from the sale and discharge certain other unsecured debts.
Although Chapter 7 bankruptcy remains the most popular type of bankruptcy filed in the United States, it is not the only option. Some debtors may also choose to file Chapter 13 bankruptcy and keep certain assets, repaying their debts through a three or five-year debt repayment plan.
What is a Chapter 7 discharge?
Now, you asked about a Chapter 7 discharge. A Chapter 7 discharge is a court order from the bankruptcy court which releases your obligation to repay certain debts. It also bars creditors from continuing to try to collect payment for the discharged debts.
Before getting too excited about having your debts discharged by filing Chapter 7, however, you must first determine if you are eligible to file Chapter 7. Debtors whose income is too high will not be able to file Chapter 7 bankruptcy but will, instead, have to file Chapter 13 bankruptcy and repay a portion of their debts back.
Will my debts be discharged with a Chapter 7 discharge?
The second question you will need to review, after you determine your eligibility to file Chapter 7, is to determine whether or not your debts can even be discharged. Many debtors are under the misconception that filing Chapter 7 bankruptcy is the answer to all of their problems, but in fact, many debtors will not benefit from it at all.
With that in mind, let’s review your debts. First, you mentioned you have a federal student loan. While this is an unsecured debt, it can be very difficult to get a student loan discharged by filing Chapter 7 bankruptcy. Difficult, but not impossible. Talk to a lawyer about the possibility of getting your student loan discharged.
Next you mentioned your credit card debts. Most credit card debts can be discharged. There are exceptions, however. For example, they may not be eligible for discharge if the court determines the debts were for luxury goods or cash advances within a specified date of the bankruptcy filing.
Finally, you mentioned you have a car loan. A car loan is a secured debt which is collateralized by the car. If you do not repay your car loan the debt will not be discharged. Instead, the car lender will simply repossess your car and auction it off. They will apply the proceeds from the sale to repaying your loan, potentially leaving you with a deficiency balance. This balance, however, may be discharged under Chapter 7 bankruptcy.
Other debts not discharged under the Chapter 7 discharge include child support, alimony, and tax debt which has not been assessed for more than three years.
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