Five Dischargeable Debts in a Chapter 7
Financial problems do not just have financial effects. About a fourth of people with debt problems often experience Post Traumatic Stress Disorder-type symptoms. These symptoms often make it difficult or impossible to function at work or school.
Bankruptcy offers both immediate and long-term solutions. As soon as debtors file their voluntary petitions, Section 362 of the Bankruptcy Code usually takes effect. The Automatic Stay immediately halts adverse actions like foreclosure, wage garnishment, and repossession. Additionally, in a Chapter 7, the judge discharges most unsecured debts within about six months.
“Discharge” does not technically erase the debt. Discharge eliminates the person’s legal obligation to repay the debt. That distinction might seem like splitting hairs, but it does come up in some situations.
At times like these, a Chapter 7 attorney makes a big difference. You need more than an aggressive courtroom advocate. You also need solid legal advice, so you can make the best possible decisions. Inexperienced lawyers and bankruptcy petition preparers cannot provide these services.
Unsecured credit card debt prompts many bankruptcy filings. The minimum payment usually barely takes care of interest. The Unpaid Principal Balance usually does not go down at all.
Financial cards, like Visa and Mastercard, are clearly unsecured. The debtor only made a promise to pay. Store-issued credit cards, such as Rooms to Go credit cards, are in a grey area. Technically, the debt is unsecured. But the store might have a security interest in the items purchased.
This distinction usually does not come up. Truthfully, companies like Rooms to Go do not want used sofas or beds. These companies are normally content to write off the debt and move on.
Another bankruptcy loophole, the 90-day fraud presumption, sometimes does come up in credit card discharge claims. Any purchases made within ninety days of filing could be considered fraudulent and therefore nondischargeable.
But fraud instances are rare. Most people with debt problems use credit cards to pay for living expenses, like groceries and utility bills. They do not use their cards to pay for luxury vacations.
Some proponents claimed that the Affordable Care Act would make medical bankruptcies a thing of the past. But in one study, researchers tied almost two-thirds of bankruptcy filings to unpaid medical bills.
Generally, doctors send unpaid bills to debt buyers after one or two missed payments. Debt buyers are extremely aggressive, especially since the Supreme Court recently diluted some consumer protections in the Fair Debt Collection Practices Act.
At its core, a bankruptcy is really about asserting control over unpaid medical bills and other debt problems. If the debtor wishes to remain in a doctor’s good graces, the debtor can probably reaffirm the debt. Prior to voluntary reaffirmation, attorneys often successfully renegotiate repayment terms.
Collectively, former students owe billions of dollars in student loans. Many individuals owe more than $100,000. According to the Bankruptcy Code, student loans are only dischargeable if the debtor shows an undue hardship. In some jurisdictions, this showing is not too difficult to make. But Illinois and Indiana still use the Brunner Rule. Under this legal doctrine, student loan debt is only dischargeable in bankruptcy if:
- The debtor made a good-faith effort to repay the loan,
- Loan repayment would drive the debtor’s standard of living below the poverty line, and
- The hardship is either permanent or expected to last for most of the repayment term.
Despite the Brunner Rule’s harshness, many people who request a discharge obtain at least partial relief. One of my law school professors once said “you don’t get anything unless you ask.”
Much like student loans, past due federal or state income taxes are only dischargeable in certain situations:
- Tax at least three years old,
- Returns on file for at least two years, and
- No assessment within the last eight months.
If the debtor has not received a letter which contains the past due balance in the last eight months, the taxing authority has probably not assessed the debt.
Even if the tax debt is nondischargeable, relief might be available. An attorney can often negotiate a repayment plan with the IRS. Alternatively, if the debtor filed Chapter 13, the tax debt would probably be included in the repayment plan.
Discharge does not affect the collateral consequences of tax debt. If the taxing authority has filed a lien, the debtor must work with the IRS to dissolve the lien, even though the underlying debt is gone. That’s a separate matter.
This category includes things like payday loans. No matter what the moneylender said, these debts are unsecured. As such, they are generally dischargeable in a Chapter 7 bankruptcy.
Rely on Experienced Lawyers
Chapter 7 eliminates most unsecured debts. For a free consultation with an experienced Chicago Chapter 7 bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Illinois and Indiana.