Chapter 7 bankruptcy wipes out most but not all debts. Learn what type of debt is erased by a Chapter 7 bankruptcy discharge.
Written by Attorney Andrea Wimmer.
Updated July 12, 2023
Chapter 7 bankruptcy is a legal debt relief tool. If you’ve fallen on hard times and are struggling to keep up with your debt, filing Chapter 7 can give you a fresh start. For most, this means the bankruptcy discharge wipes out all of their debt. But, not all debts are created equal and there are limits on what a Chapter 7 bankruptcy case can and cannot do. Keep reading to learn what types of debt are erased in Chapter 7 bankruptcy.
Chapter 7 Bankruptcy Discharge Wipes Out Most Debts Forever
Most debts incurred by the typical American consumer are erased by Chapter 7. The types of debt Chapter 7 bankruptcy discharges are:
credit card debt
personal loans and other unsecured debt
your personal liability on secured debts, like car loans (if there’s no reaffirmation agreement)
deficiency balances after a repossession or foreclosure
judgments from unpaid credit card debt, medical bills, or other unsecured debt
These dischargeable debts are wiped out automatically when the discharge is entered.
Some debts are only sometimes discharged in a Chapter 7 bankruptcy. Timing and the financial situation of the individual debtor filing bankruptcy determine the difference.
Debts That Sometimes Can Be Eliminated In Chapter 7 Bankruptcy
Tax debt: Back taxes owed from income tax returns that were filed when due but just haven’t gotten paid can be eliminated if they’re older than 3 years. There’s a lot more that goes into the analysis of whether a tax debt can be discharged by a bankruptcy filing, but it all boils down to timing.
Student loan debt: To have your student loan debt discharged, you must prove that repaying the debt causes undue hardship. This used to be very confusing and a difficult standard to prove, but in late 2022, the Department of Justice clarified guidance around undue hardship and made it easier to discharge federal student loans in bankruptcy.
You still need to file a separate adversary proceeding (after you file your bankruptcy case) to determine whether you meet the undue hardship standard. There is no court filing fee for this kind of adversary proceeding.
Debts That Sometimes Cannot Be Eliminated In Chapter 7 Bankruptcy
It’s possible for a credit card company or bank to ask that debt they’re owed is not discharged. This can happen if the bank thinks that the individual debtor lied on their credit application. Sometimes, credit card companies object on arguing that the filer never planned on paying the debt, and is abusing the bankruptcy process.
United States bankruptcy law determines whether the individual debtor or the objecting creditor has to prove their case. To avoid this problem, it’s best to stop using credit cards as soon as you’ve decided to file bankruptcy. If you’re not sure how to make your budget work on your monthly income alone, consider asking your credit counselor during the mandatory pre-bankruptcy credit counseling. Sometimes, it simply means that you stop making the monthly payments on the debt. Although that may hurt your credit score in the short term, it’s better to avoid an objection to your bankruptcy discharge.
Debts That Chapter 7 Doesn't Erase
Taxes from the last 3 years
Alimony or child support
Other debts related to a divorce proceeding
Debts from a personal injury you caused driving while under the influence of drugs or alcohol
Money you owe the government
Court fines and penalties
Some Debts Can Only Be Erased In Chapter 13 Bankruptcy
A Chapter 13 bankruptcy involves a repayment plan overseen by a bankruptcy trustee. While creditors are not getting paid high interest rates (unsecured creditors receive no interest) they are getting paid something. That’s why a bankruptcy filing under Chapter 13 of the Bankruptcy Code can be used to discharge other debts related to a divorce proceeding, like a property settlement.
Even if you qualify for Chapter 7 under the means test, if you owe a property settlement, consider speaking to a bankruptcy lawyer about filing Chapter 13 instead. Although it can take up to five years to complete a Chapter 13 repayment plan, this type of bankruptcy only stays on your credit report for 7 years from the date of filing.
Filing Bankruptcy Provides Immediate Protection From Creditors
Once you file a bankruptcy petition for any type of bankruptcy, the automatic stay protects you. The automatic stay bans debt collectors, banks, credit card companies, and anyone else you owe money from contacting you or taking any other collection actions. It “stays” or “stops” the creditors’ ability to collect debt from you in any way, including wage garnishments.
This applies to everyone across the board. The only exceptions are domestic support obligations and back taxes. If your child support payments are taken directly out of your paycheck, that will continue to happen. If you owe back taxes, the Internal Revenue Service is allowed to keep your tax refund to pay for it even after you file bankruptcy. The automatic stay is temporary. It ends once the bankruptcy court grants your discharge.
Most consumer debt is dischargeable in bankruptcy. Chapter 7 bankruptcy wipes out medical bills, personal loans, credit card debt, and most other unsecured debt. Debt that is related to some kind of “bad act” like causing someone injury or lying on a credit application can’t be wiped out. Whether you can eliminate tax debt with a bankruptcy filing depends on a number of factors best reviewed by a bankruptcy attorney.
Upsolve Can Help
If most or all of your debt is dischargeable, you qualify for Chapter 7 bankruptcy under the means test, and don’t have any nonexempt property you’re worried about, you may be eligible to use Upsolve’s free tool to prepare your bankruptcy forms. Check out this guide on how to file without a bankruptcy lawyer to learn more.