What Type of Debt Can I Erase in Chapter 7 Bankruptcy?

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 do. Keep reading to learn what types of debt are erased in Chapter 7 bankruptcy.  

What Debts Are Wiped Out in Chapter 7 Bankruptcy?

Most debts incurred by the typical American consumer are erased by Chapter 7, including:

• Credit card debt

• Medical bills

• Personal loans

• Payday loans

• Unpaid utilities

• Phone bills

• Your personal liability on secured debts, like car loans (if there’s no reaffirmation agreement)

• Deficiency balances after a repossession or foreclosure

• Court judgments from unpaid credit card debt, medical bills, or other unsecured debt

These dischargeable debts are wiped out automatically when the court enters the discharge order.

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.

Can You Get Rid of Tax Debt in Chapter 7 Bankruptcy?

Tax debts that are more than three years old can typically be discharged through Chapter 7 bankruptcy. If you owe back taxes from income returns you’ve filed in the last three years, that debt isn’t usually dischargeable in Chapter 7.

When it comes to discharging tax debt in bankruptcy, timing matters a lot. To learn more, read our guide to dealing with tax debt.

Can You Get Rid of Student Loan Debt in Chapter 7 Bankruptcy?

Some people are able to successfully discharge their federal student loan debt through bankruptcy. To do so, 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, which has 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. 

Private student loans typically can’t be discharged through bankruptcy.

What Debts Aren’t Erased in Chapter 7 Bankruptcy?

Not all debts can be erased through bankruptcy. The following debts are called non-dischargeable debts, which means you’ll still owe them even if your bankruptcy case is successful:

• Taxes from the last three 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

Are Secured Debts Like a Mortgage or Car Loan Dischargeable in Bankruptcy?

Secured debts, like mortgages and car loans, work a little differently in bankruptcy. These debts are tied to specific property, like your house or car, which acts as collateral. In Chapter 7 bankruptcy, you can discharge your personal obligation to pay the debt, but the lender still has the right to take back (or repossess) the property if you’re not making payments. If you’re willing to surrender the property, you won’t owe anything further on the debt.

If keeping the property is important to you, Chapter 13 bankruptcy might be a better fit. In Chapter 13, you can set up a repayment plan to catch up on missed payments over 3–5 years. This can make it possible to keep your home or car, even if you’re behind on payments. If you aren’t sure which route to go, consider scheduling a free consultation with a bankruptcy attorney. They can give you personalized legal advice on your situation.

When Creditors Can Object to Discharge

In rare cases, creditors can object to having their debt discharged in Chapter 7 bankruptcy. This can happen if a creditor believes you misrepresented information or committed fraud. For example, if a credit card company suspects you lied on your credit application or made large purchases right before filing, they may argue that you never intended to pay back the debt and are abusing the bankruptcy process.

If a creditor files an objection, the bankruptcy court will review the case. U.S. bankruptcy law determines whether you or the creditor must prove their side. If you lose, you may still be responsible for that debt even after your other debts are discharged.

To reduce the risk of creditor objections, it’s best to stop using credit cards as soon as you decide to file for bankruptcy. If you’re struggling to make your budget work without relying on credit, discuss this with a credit counselor during the required pre-bankruptcy credit counseling session. Although it might hurt your credit score in the short term, avoiding an objection is worth it.

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 seven years from the date of filing. 

A Quick Refresher on Chapter 7 and Chapter 13 Bankruptcy

Chapter 7 and Chapter 13 bankruptcy work in different ways to help people manage overwhelming debt. 

Here are some Chapter 7 basics:

• Chapter 7 Bankruptcy (also known as liquidation bankruptcy) lets you wipe out qualifying debts without a repayment plan.

• It’s called "liquidation bankruptcy" because the bankruptcy trustee can sell any of your property that’s not protected by an exemption.

• Exemptions protect certain property, and most people who file don’t lose any assets because of these protections.

• Chapter 7 is generally best for people with limited income who can’t realistically pay off their debts.

Here are some Chapter 13 basics:

• Chapter 13 Bankruptcy is known as reorganization bankruptcy.

• Instead of wiping out debt immediately, it sets up a 3–5-year repayment plan to help you catch up on missed payments and reorganize your finances.

• Chapter 13 is often a good option for people who have a regular income and want to keep important assets, like a house or car, while getting back on track with payments.

Both types of bankruptcy provide protection from creditors as soon as you file, thanks to the automatic stay, which temporarily stops collections, lawsuits, and other creditor actions. 

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. 

Let’s Summarize...

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.

If you decide to file Chapter 7 and you have a simple case, you may be eligible to use Upsolve’s free tool to prepare your bankruptcy forms. If you’re still investigating your debt relief options, take Upsolve’s quick debt screener to see which options you’re eligible for.