What can be forgiven under Chapter 7 bankruptcy?

A chapter 7 bankruptcy can be the right option for someone with a substantial amount of unsecured debt and who is looking for a fresh financial start. Of course, there are some consequences of filing, such as a negative mark on your credit and low chances of loan approval during the first few years after filing. In most cases we’ve seen, though, the petitioner held onto their debt for a longer period than it would have taken for the debt to be wiped from their record. 

Almost 380,000 Americans filed a Chapter 7 bankruptcy in 2020, significantly declining from 480,000 bankruptcies in the previous year. Despite the decline, Chapter 7 bankruptcies remain very common, and an experienced Florida bankruptcy lawyer can be there to walk you through the tedious steps. 

What Is Different About Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is special because this route offers a fresh, clean slate in a relatively short time period. A typical Chapter 7 takes roughly 2-4 months to file with proper communication between attorney and client. This type of bankruptcy case will dismiss all of your unsecured debt while liquidating any applicable, non-exempt asset. 

A few examples of unsecured debt that can be forgiven in a bankruptcy case are credit card debt, medical bills, and personal loans. Typically, all unsecured debt is applicable for erasure under a Chapter 7 bankruptcy. This category may include certain IRS payments, like owed income tax payments, but it does not extend to IRS liens. 

More than 99% of Chapter 7 bankruptcies are discharged favorably, and the debtor is left without any obligation to their previous liabilities.   

Secured vs. Unsecured Debt

Not all debt is created equal! 

Generally, two types of debt are referred to in bankruptcy court: secured and unsecured debt. 

Secured debt is not directly resolved through most bankruptcy filings, and if it makes up for a majority of what you owe, a Chapter 7 may not be your best option. Secured debt refers to money that is lent out but backed up by physical collateral. Mortgage, car, and phone plan payments are all considered secured because there is a physical entity backing up the money (house, car, cellphone). This type of debt is harder to have forgiven, and will likely result in the surrendering of said physical collateral in the event of bankruptcy. If you do have a substantial amount of secured debt, another bankruptcy option like Chapter 13 may be beneficial. 

Unsecured debt is described as debt created without any collateral being promised to the collector. You can usually only accumulate this kind of debt once you’ve built a good credit report or agree to an exponentially high-interest rate to make up for the risk of not having collateral. This type of debt can be erased by a Chapter 7 bankruptcy because there is rarely a physical asset to lose come liquidation time. Secured debt can also sometimes be erased in a Chapter 7 bankruptcy, but only if the debtor is ready to consent to the discharge and effectively surrender the collateral. 

How Does Debt Discharge Work?

A bankruptcy discharge releases you, the debtor, from any personal liability to pay back the accumulated debt, and it also stops the creditor from taking any further action to collect. Simply put, you are not legally bound to your debt anymore and have no obligation to pay any collectors. The discharge is usually enacted automatically, around three to four months after filing and pending a final ruling by the judge presiding over your case. If a collector attempts to contact you regarding a debt payment that has already been dismissed by the bankruptcy court, they can face serious legal trouble. 

Bankruptcy offers protection from creditors and collectors even prior to the debts’ discharge. When you file for bankruptcy, protection is put in place known as an
“automatic stay.” The automatic stay prevents collectors from trying to contact you during the process of your bankruptcy or otherwise make efforts to collect on the debts. This protection is important because it can shield you from actions like unwanted contacts, escalating collections actions, and wage garnishments. 

It is important to remember the difference between pre-filing and post-filing debt. When you file for bankruptcy, your goal is to get all, or a majority of, your pre-filing unsecured debt dismissed. If you accumulate more credited expenses during the time of your bankruptcy case; this is called post-filing debt. This debt will not be discharged at the end of your case. This makes Chapter 7 bankruptcies very favorable because they are relatively quick, so collectors won’t have as much time to tack more expenses onto your bills through interest, penalties, and other means like fines.

Also of note is the fact that certain debts accumulated in the 70 to 90 days immediately prior to filing may not be eligible for discharge. The creditor can allege that you are attempting to defraud them, and the court may rule that the specific debt is not included in the current bankruptcy filing.

Exempt vs. Non-Exempt Assets

Chapter 7 is known as “the liquidation bankruptcy,” because you are set to sell your non-exempt assets to pay for a portion of your accumulated debt. You are allowed a certain amount of exemptions, however, which can prevent you from having to sell certain property and prized possessions.

It is important to note that more than 94% of Chapter 7 petitions are filed as “no asset,” cases meaning the debtor does not have valuable assets (second home, car) to be liquidated. 

Protected assets, such as a primary household, governmental assistance/social security, and a reasonable amount of household goods are exempt from liquidation. In fact, Florida’s homestead laws protect your property, up to an unlimited amount, from being subjected to creditor collection in bankruptcy. 

Secured debt that cannot be dismissed with the help of a bankruptcy case:

  • Recent income tax (previous 3 years)
  • Child support
  • Court fines 
  • At-fault personal injury expenses  

Talk With An Experienced Bankruptcy Attorney Today!

You probably have a lot to think about after doing your research on bankruptcy and if it is the right step for your unique situation. Fortunately, there are experienced professionals ready to discuss your potential case and guide you through all of the necessary tasks in order to restore your financial peace of mind. 

Our team at Hoskins, Turco, Lloyd & Lloyd offer a free, no-obligation consultation, and we are transparent about all fees and expenses related to our services. With our help, you can seek to eliminate the debt that has been weighing you down and prepare for a bright future with more opportunities than before.

Contact us online or feel free to give us a call at (866) 460-1990 to schedule your free case review and get your financial record back on the right track!

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