As a general rule, most unsecured debts will be discharged
in bankruptcy. An unsecured debt is a debt where the creditor
is not holding any collateral or security to enforce payment
of the debt. The most common examples of unsecured debts
are credit cards/credit lines, medical bills, and utility
bills. There are, however, several exceptions to discharge
in Chapter 7. Child support, taxes (that are not more
than three years old), student loans (that have not been
in repayment for more than seven years before declaring
bankruptcy unless an undue hardship can be established),
personal injuries caused by drunk driving, and fines/penalties
owing to a governmental unit (traffic tickets, criminal
fines, restitution) are never dischargeable in Chapter
7. The creditor needs to take no action to have the debt
declared non-dischargeable.
Several other types of debts are "potentially
non-dischargeable", which means that the creditor
must object to the discharge of the debt within a specified
time period, or the debt will be declared discharged.
The most common examples of debts in this category include
debts incurred by fraud (NSF checks, major credit card
use shortly before filing), and debts incurred by willful
and malicious injury (assaults, sale of secured collateral).
A debtor has three options on secured debts, those
where the creditor is holding collateral to enforce
the payment of the debt. The most common examples
of secured debts are home mortgage loans, auto/truck
loans, and furniture/electronics/appliance/jewelry
accounts. First, the debtor can "reaffirm"
the debt, meaning that the debtor agrees to keep
making payments as if there had never been a bankruptcy
filing. The debtor is then entitled to retain
the property. Sometimes, the balance to be reaffirmed
can be negotiated with the creditor. Failure to
make payments following the reaffirmation of a
debt can result in a repossession of the item,
and the collection of a deficiency judgment. Secondly,
the debtor can "redeem" the collateral
by making a one-time lump sum payment equivalent
to the value of the merchandise. For example,
if a debtor owes $8,000 on a car that is only
worth $6,000, the debtor can obtain clear title
to the car by paying the creditor $6,000. For
obvious reasons, this option is rarely exercised.
Finally, the debtor can surrender the collateral
back to the creditor. The entire debt will then
be discharged, and the creditor cannot collect
a deficiency balance following the sale of the
item.
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