Debts You Can Eliminate By Filing For Bankruptcy

Which Debts Can You Discharge in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy erases or "discharges" credit card balances, medical bills, past-due rent payments, payday loans, overdue cellphone and utility bills, car loan balances, and even home mortgages in as little as four months. But not all obligations go away in Chapter 7.

In this article you'll learn:

1. how Chapter 7 bankruptcy clears debt
2. which debts Chapter 7 will discharge
3. why your filing date determines what bankruptcy covers
4. which debts and liens Chapter 7 bankruptcy won't clear, and
5. how to stop collection calls after bankruptcy.

Once you understand more about discharging debts in bankruptcy, you'll likely find that using Chapter 7 to eliminate debts you're struggling to pay is just what you need to get a fresh financial start.

What Is a Chapter 7 Bankruptcy Discharge and How Does It Work?

A bankruptcy discharge is an order issued by the bankruptcy court that breaks the contract between the bankruptcy filer and a creditor. Without the contract, the filer isn't legally required to pay the discharged debt, and the creditor can't take collection actions.

However, the debt won't disappear entirely. The bankruptcy filer's credit report will show the debt "discharged in bankruptcy" for up to ten years, although the notation's impact on the debtor's credit score will lessen over time.

Most Chapter 7 filers receive a discharge order about four months after filing the bankruptcy petition.

Which Debts Will Chapter 7 Bankruptcy Discharge?

Chapter 7 filers discharge all of the following debts (a Chapter 13 discharge erases a few more):

• credit card charges, including overdue and late fees
• collection agency accounts
• medical bills
• personal loans from friends, family, and employers
• past-due utility balances
• repossession deficiency balances
• most auto accident claims
• business debts
• past-due rent and money owed under lease agreements
• most civil court judgments
• old tax penalties and unpaid taxes
• most attorneys' fees
• government program overpayments, including welfare, Social Security, and veterans assistance programs.

It's best to review your particular debts with a bankruptcy lawyer. Why? Because you might have dischargeable debts that don't appear above.

As much as we'd like to, we can't create a list that includes all dischargeable debts because bankruptcy law doesn't tell us the debts you can discharge. Instead, the law tells us the debts you can't erase in bankruptcy, which we cover in "Chapter 7 Bankruptcy Doesn't Clear All Debts" below.

Note about fraud and utility deposits. Any debt-related misconduct or fraud can turn a dischargeable obligation into a non-dischargeable debt. Also, a utility provider can't refuse to provide service because of a bankruptcy filing but can charge a reasonable deposit to ensure future payment.

Why Your Filing Date Affects the Debts Chapter 7 Bankruptcy Covers

Your Chapter 7 bankruptcy will discharge debts you had before filing but not after. Not even debts you incurred after filing but before you received your discharge. Here's how it works.

Pre-filing debt. The bankruptcy court will discharge all qualifying "pre-petition" debt. You incur pre-petition debts before you file for bankruptcy.

Post-filing debt. The bills you rack up after filing for Chapter 7 are considered "post-petition" debts. You'll remain responsible for paying post-petition balances, including those incurred during your bankruptcy case.

In short, the bankruptcy court discharges debts that existed before the Chapter 7 filing date. You'll have to pay for anything you get on credit after filing your petition, even bills you incur before receiving a discharge.

Example. Jessica fell behind on her electric bill, listed the balance in her Chapter 7 bankruptcy schedules, and continued to use her electric service. After receiving her Chapter 7 discharge, the energy company deleted the charges predating her bankruptcy filing and billed her for the electricity she used after her bankruptcy filing date.

Chapter 7 Bankruptcy Doesn't Clear All Debts

The discharge order won't list the debts you wiped out in Chapter 7. Instead, it will list the debts that bankruptcy law says all filers remain responsible for paying. You'll stay on the hook for the following:

• Mortgages, car loans, and other "secured" debts if you keep the property. A Chapter 7 bankruptcy wipes out mortgages, car loans, and other secured debts. But if you don't continue to pay as agreed, the lender will take back the home, car, or other collateralized property using the lender's lien rights. Below, we explain more in "Bankruptcy Doesn't Clear Most Liens on Your Property." You must also meet other requirements to avoid losing property in Chapter 7, so consider learning about keeping a home and keeping a car in bankruptcy.
• Recent income taxes, support obligations, and other "priority" debt. You must repay important priority debts even if you file for bankruptcy. Learn about spousal and child support arrearages, newer tax bills, and other priority debts you'll pay after Chapter 7.
• Debts incurred by fraud or criminal acts. A court can declare an obligation non-dischargeable if a filer defrauded the creditor or engaged in another wrongful action, such as injuring or killing someone while driving under the influence. The creditor must first file a bankruptcy lawsuit or "adversary proceeding" and prove the debtor committed fraud or a qualifying wrongful act.
• Student loans. The bankruptcy court doesn't discharge student loans automatically. You'll remain responsible for paying a student loan after Chapter 7 bankruptcy unless you file an adversary proceeding and prove that repaying the debt would cause you undue hardship or meet a similar burden required by your bankruptcy court.

Bankruptcy Doesn't Clear Most Liens on Your Property

Bankruptcy clears you of the responsibility to pay a mortgage, car loan, or another secured debt automatically. Bankruptcy doesn't remove a lien giving the creditor the right to take property if you don't pay.

For instance, you'll lose your car if you don't continue paying your car payment informally or sign a reaffirmation agreement. The lender can use its lien rights to repossess it during the Chapter 7 case after asking the court to lift the "automatic stay" order preventing collection efforts, or wait until the Chapter 7 case ends.

Stopping Collection Calls After Filing for Chapter 7 Bankruptcy

You can stop most creditor calls cold by providing your bankruptcy case number and filing date. Start by finding a filed bankruptcy document or notice. You should have one handy because you get copies of all mailings, even if a bankruptcy lawyer represents you. The filing date will be next to the case number at the top.

Why will this work? The creditor can use the information to verify your bankruptcy, and if the calls don't stop, the creditor will be subject to sanctions. Find out more about what happens if a creditor tries to collect a debt during your bankruptcy.

What happens to credit cards?

When you file bankruptcy, you are required to surrender any credit cards to your trustee. Don’t worry, we will tell you how you can manage things like online purchases, and you can apply for a new secured credit card to use while bankrupt.

You can eliminate credit card debt; however, you should not run up your balances right before claiming bankruptcy. Bankruptcy does not eliminate debts due to fraud. If in the ordinary course you went grocery shopping and paid for your weekly groceries on credit, that’s fine. But purchasing items with your credit card with the intention of not paying this debt could be viewed as a fraudulent transaction. This has two implications: The debt may remain after bankruptcy, and if you are filing a consumer proposal, your credit card company may vote against your proposal offer.

What happens to student loan debt?

Student loans are technically unsecured loans, but because they are loans guaranteed by the government, they aren’t treated the same way as any other personal loan.

You can discharge student loan debt through bankruptcy, but only if you left school (including both part-time and full-time) at least seven years ago.

In other words, you can’t declare bankruptcy immediately after graduation. The law requires you to make every reasonable effort to pay down your loans before you can ask for them to be discharged.

Can student loans be discharged early?

While the seven-year rule applies in the vast majority of cases, a bankruptcy court will consider discharging student loan debt early in extreme cases. You can apply to the court for discharge from student loans in five years.

To qualify for the hardship provision, you must prove that you tried to repay your loans and made use of the assistance programs available. You must also show that even those programs still left behind a severe hardship for you; for example, you can’t repay your student debt and buy food or pay rent.

Bankruptcy law can resolve tax debts

Dealing with the CRA can be stressful when you have unpaid income taxes, source deductions, or HST installments. They have strong collection powers and can act quickly to collect on unpaid taxes.

Bankruptcy law is federal legislation. As a result, both a bankruptcy and consumer proposal can successfully resolve outstanding tax debt.

It is important, however, to contact a Licensed Insolvency Trustee before CRA has placed any lien on your property.