When you’re facing bankruptcy, dischargeable debt is likely to be one of the first things on your mind. Which debts will you be able to let go of? Which ones are harder to have dismissed by your discharge? Here, we look at what constitutes dischargeable debt – and how to make the most of your bankruptcy discharge with the help of a legal professional.
What Does Dischargeable Debt Mean?
In bankruptcy, a discharge is the end of the legal process. When your case is discharged, you are no longer in bankruptcy and many of your debts may be dismissed or wiped from your record. These debts are known as dischargeable debts since they qualify for dismissal upon your discharge.
Which Debts Qualify for Discharge?
The important thing to know about debt in a bankruptcy case is that some types qualify for dismissal upon discharge and others do not. Some of the most common forms of dischargeable debt include:
- Personal loans
- Medical debt
- Past-due utility bills
- Credit card debt
- Business debt
- Claims against you, including car accident judgments or negligence claims
While these categories are all generally dischargeable, there are exceptions for each based on circumstance. You may choose to reaffirm certain kinds of debt, such as a car payment or mortgage payment, which will allow you to keep the property but will also require you to continue paying your regular payments.
The best part about identifying and capitalizing on dischargeable debt is that once your debts are discharged, they are wiped from your record. You walk away from the obligation to repay them, and your former creditors can no longer legally contact you regarding them. For many people dealing with bankruptcy, this is a welcome relief that allows them to focus on rebuilding their financial future.
Will Your Creditors Receive Any Repayment of Discharged Debts?
Typically, dischargeable debt is never repaid to creditors. As part of your bankruptcy agreement, they must acknowledge that your debt is dismissed and that they no longer have the right to contact or pursue you for repayment. However, there are some specific differences as to what your creditors may or may not receive after your discharge, depending on whether you file for chapter 7 bankruptcy or chapter 13 bankruptcy.
How is Dischargeable Debt Addressed in Chapter 7 Bankruptcy?
Chapter 7 bankruptcy cases are usually what’s known as no asset cases. This means that there is no property or significant valuables for the bankruptcy trustee to sell, which leaves no assets for use for repayment of debts. Essentially, you can’t pay your outstanding debt since you have no means with which to do so, meaning your debts are discharged without repayment.
In cases where there is property or other assets to sell for compensation of debt, priority debts will be the first to be repaid. These debts include:
- Child support
- Certain kinds of tax debt
Only after repayment of these debts will creditors receive a pro-rata share of the leftover proceeds – if there is anything left to be had.
It is important to note that while debt discharge as part of a chapter 7 bankruptcy eliminates your responsibility to repay these debts, it does not affect any liens against your property. This means that if you have a mortgage or car lien, you must continue to pay regular payments for that piece of property – otherwise, your lender may repossess or foreclose on your property and leave you no options for an argument against it.
How is Dischargeable Debt Addressed in Chapter 13 Bankruptcy?
In a chapter 13 bankruptcy, the priority of your bankruptcy is a reorganization of debt to enable you to repay some or even all your outstanding debt. For this reason, debt discharge is less common in chapter 13 – but it still happens.
Any remaining debts in chapter 13 are generally considered to be nonpriority general unsecured claims. This means they are dismissed entirely upon your discharge from bankruptcy proceedings, and your creditors receive little to nothing as part of your bankruptcy agreement. If you have any secured loans, though – such as a car payment – you will be left with two options. Either surrender the car or other items of property and be absolved of any further obligation to pay for it or continue making minimum monthly payments to keep it. What you do will depend largely on the assets at your disposal and your overall needs.
Understanding the Effect of Timing on Debt
When your debt occurs can have some impact on whether it is dischargeable as part of your bankruptcy case. Expenses incurred during your proceedings – after you file for bankruptcy but before you receive your discharge – are not generally considered to be dischargeable debt. However, portions of debt from those same creditors may be dischargeable.
As an example, consider your overdue utility bills. The portions of those cost that were incurred before your filing date will be eligible for discharge. Any expenses incurred after your proceedings began will be considered new debt and are not typically eligible for discharge.
There are exceptions to almost every rule when it comes to bankruptcy. For example, chapter 13 bankruptcy often allows for new obligations to be worked into the three- to five-year plan that constitutes your bankruptcy case, so don’t be afraid to ask for them to be included. Understanding these exceptions is the job of your legal counsel, so be sure you don’t head into bankruptcy court without a lawyer at your side. They can help you determine what you’re really entitled to, when that may have changed, and what to do in all these circumstances to receive the best possible outcome.
At My341, our attorney directory feature can help you find the right lawyer in your area to help you with identifying and making the most of dischargeable debt in your bankruptcy case. With an experienced legal professional in your corner, you’re much more likely to get a favorable outcome and find the most qualifying dischargeable debt. Don’t leave this potential goldmine of debt relief to chance.