What Happens to Most of Your Debts in Chapter 7 “Straight Bankruptcy”?

Posted by Kevin on September 1, 2019 under Bankruptcy Blog | Comments are off for this article

First, let’s review the different types of debts in bankruptcy.

Secured debts are collateralized usually by your home, your car or your truck, maybe your furniture and appliances. Priority debts are ones that are usually not secured but are favored in various ways in the bankruptcy law. For most consumer debtors, they include child and spousal support, and certain taxes.

The remaining debts are called general unsecured debts.   Think credit cards and medical bills.   What do all these debts have in common-no collateral attached to these debts and not given a favored (priority) position under the law.

In most Chapter 7 bankruptcies, the vast majority of debts are general unsecured debts.  In Chapter 7 bankruptcy, most general unsecured debts are legally, permanently written off.  The legal term is “discharged”.  That means that once they are discharged—usually about 3-4 months after your case is filed—the creditors can take absolutely no steps to collect those debts.

The only way general unsecured debts can be paid anything is if either 1) the debt is NOT dischargeable or 2) it is paid (in part or in full) through an asset distribution in your Chapter 7 case.

 1) “Dischargeability”

A creditor can dispute your ability to get a discharge of your debt.  In the rare case that the discharge of one of your debts is challenged, you may have to pay that particular debt. That depends on whether the creditor is able to establish that the facts fit within the  narrow grounds for an exception to dischargeability.  This usually involving allegations of fraud, misrepresentation or other similar bad behavior on your part. If the creditor fails to establish the necessary grounds, the debt is discharged.

There are also some general unsecured debts that are not discharged unless you convince the court that they should be, such as student loans. The grounds for discharging student loans are quite difficult to establish.  Check /http://studentdebtnj.com/ for more detailed information relating to your student loans.

2) Asset Distribution

In order for a debtor to get a fresh start, the Bankruptcy Code allows a debtor to exempt certain property.  That means you keep that property.  If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of your assets from you. This is what usually happens—you’ll hear it referred to as a “no asset” case. But if the trustee DOES take possession of any of your assets for distribution to your creditors—an “asset case”— your “general unsecured creditors” may receive some of it. The trustee must first pay off any of your priority debts, as well as pay the trustee’s own fees and costs.  Whatever remains goes to the unsecured creditors on a pro rata basis.

Conclusion

In most Chapter 7 cases your general unsecured debts will all be discharged and, most of the time, general unsecured creditors will receive nothing from you.  Rarely, a creditor may challenge the discharge of its debt.  If the creditor is successful, you will still owe that debt after the close of the bankruptcy.  And if you have an “asset case,” the trustee may pay a part, or in extremely rare cases, all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.