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Chapter 7 if You Can’t Off All Your Debts

Chapter 7 may still give you enough help even if you have one or more debts that you will continue to owe afterwards.

The last two weeks we’ve covered three possible complications in Chapter 7 “straight bankruptcy” cases. If you:

  • have relatively high income

  • have non-exempt assets—those that are not protected from creditors

  • are behind on your vehicle or home obligations

Today we get into a fourth and final possible complication in a Chapter 7 case. What happens if you have a debt that Chapter 7 does not discharge—legally write off? When is Chapter 7 still the right solution? When do you need the extra help of a Chapter 13 “adjustment of debts”?

When All Your Debts Are Discharged Under Chapter 7

Many people have every single one of their debts completely discharged if they file a Chapter 7 case. If you have nothing but credit card debts, personal unsecured loans, medical bills, old income tax debts, and or other miscellaneous bills there’s a good chance they will all simply be discharged.

You need to talk with an experienced bankruptcy lawyer because whether any particular debt is discharged can depend on the circumstances. For example, a credit card creditor is especially likely to challenge the discharge of the debt if the charges were recent. Even older income tax debts are at risk if there is evidence of tax evasion. Or there may be collateral tied to a debt that you thought had no collateral.

But if all of your debts can and will be discharged, that often results in an uncomplicated Chapter 7 case.

Debts that Chapter 7 Does Not Discharge

However, probably most people have at least one, and maybe more, debts that would continue being owed afterwards. There are three basic kinds of debts that Chapter 7 would not, or might not, discharge:

  • Debts of a kind that simply don’t qualify for discharge. These primarily include recent income taxes, child and spousal support, and criminal fines and restitution, among others.

  • Debts that Chapter 7 usually discharges, but a creditor may successfully object and prevent from discharging. These include debts allegedly incurred through fraud, or from actions causing “willful and malicious injury.”

  • Secured debts with collateral you want to keep. If you have a vehicle loan, for example, to keep your vehicle you’ll have to pay the debt. You’ll almost for sure have to “reaffirm” the debt—voluntarily agree to remain liable on it. Same with most other kinds of secured debts.

How Chapter 7 Could Still Help You Enough

Just because you have one of more of these debts doesn’t necessarily mean that Chapter 7 isn’t the right option for you. If you are discharging most of your other debts, having one or two you still have to pay may be very manageable. We’ll give you a short example from each of the above three kinds of not-discharged debts.

  • You owe the IRS $2,700 in income tax from last year, a debt that Chapter 7 does not discharge. But after finishing your case and discharging all your other debts you know you’ll be able to consistently pay the IRS $150 per month in installment payments. Including interest and penalties you’ll pay off the taxes in about 20 months. And you are having more than enough taxes withdrawn from every paycheck so won’t owe taxes in the future. Here, Chapter 7 helps you enough so that the tax debt is a complication but a manageable one.

  • You bounced a string of checks, resulting in a debt, including all fees and damages, totaling $4,000. Your bankruptcy lawyer is very familiar with the collection company pursuing you. He or she advises you that this collection company will dispute the discharge of that $4,000 debt, and that on the facts of your case you’d lose that dispute. So you know you’ll have to pay it. But you are also informed that this collector will be willing to accept reasonable monthly payments. Furthermore, you actually want to make good on those bounced checks. And you’ll be able to afford to pay the required $250 monthly payments after discharging your other debts. Here again, Chapter 7 helps you enough so that you can settle and pay off this continued debt in a reasonable time.

  • You are current on your vehicle loan but barely able to afford the monthly payments. Chapter 7 discharges all of your other debts. You are happy to reaffirm the vehicle loan for three reasons. 1) You really need and want your vehicle. 2) You can now comfortably afford to pay the loan payments. 3) This starts rebuilding your credit right away. Chapter 7 clearly helps you enough here.

Chapter 13 as Your Fall-Back Option

When Chapter 7 does NOT provide you enough help, the Chapter 13 “adjustment of debts” often does. Next week we’ll show the above three examples, under somewhat different facts, where Chapter 7 does NOT help enough. And we’ll also show how Chapter 13 saves the day in those situations.

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