Some debts will survive Chapter 7
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Chapter 7 offers the more complete debt relief of the two consumer bankruptcy chapters. But, in some cases, you will still come out of Chapter 7 with some debt still intact. Today we’ll take a look at what Chapter 7 can discharge, what it can’t, and how to deal with the bills left over after a Chapter 7 bankruptcy.
If you surrender your home during the bankruptcy process because you have no equity or the loan is no longer affordable, you can wipe out your mortgage debt in Chapter 7. However, if you choose to continue with the mortgage and don’t request that it’s included in your bankruptcy petition, it will survive. Many consumers that are current on their mortgage payments and have equity choose to keep their home – and the debt associated with it – after their bankruptcy.
Both home and auto loans are secured debts and so aren’t automatically discharged as part of a Chapter 7. If you are delinquent on your auto payments and don’t want to keep the car, the debt can be discharged, but you will have to surrender the auto. Another option with Chapter 7 is to have the loan readjusted to the market value of the car and pay it off in a lump sum. If you are making your payments on time and want to keep the car and loan, that is workable as well.
Homeowner’s Association Fees
Any HOA fees that you owed prior to filing your Chapter 7 petition will be wiped out. However, if you stay in the home, any HOA fees, dues or fines that are levied after the date of the filing will remain open and owing. If you are facing foreclosure, timing of your bankruptcy is important to avoid being left with debts associated with the home that otherwise could have been avoided. HOA fees are a tricky debt to deal with during a bankruptcy process to get completely free of them.
Federal, state and/or local income taxes may be wiped out in Chapter 7 bankruptcy. However, there are a few caveats. The tax debts must have been outstanding two years prior to your filing. In addition, the tax returns must have been filed on time and cannot have been a return the IRS filed on your behalf (called a “substitute” return). Taxes incurred within the last two years or resulting from improperly or non-filed returns will survive the Chapter 7.
A prevailing myth is that student loans cannot be discharged in bankruptcy. This is not true. However, your financial circumstances must be dire in order to have them wiped out. If you have a permanent disability, significant ongoing illness, or inability to earn enough to pay the debt with no chance of improvement, you may be able to get a partial or total discharge. If you don’t ask to have them discharged or the request is denied, student loans will survive the Chapter 7.
Debts You Didn’t List
If you fail to list debts in your bankruptcy petition, they may survive the bankruptcy if the creditor later protests. In general, the bankruptcy court will take a “no harm, no foul” approach and allow post-petition discharge of debts not listed so long as it was a mistake and not a deliberate attempt to harm the creditor. If a non-listed creditor objects, the court will want to know why you didn’t include the debt and whether including the debt will materially change the bankruptcy. This can be a yes or no situation.
Any debts generated from a divorce or custody case cannot be discharged in bankruptcy. For instance, if the divorce court ordered you to pay a jointly held credit card and you file bankruptcy, your debt to the creditor will be discharged, but then the credit card company will pursue your ex and you will still have to make good on the debt. Alimony and child support can also not be lowered or discharged in a Chapter 7 bankruptcy.
Court fines, court-ordered damages, or court fees that you were assessed related to a drunk-driving charge, in a personal injury case, or a wrongful death case cannot be discharged in bankruptcy. Bail bond forfeitures may be dischargeable but, with other fines, it depends on whether it was penal or compensatory in nature. If you are charged with a fine to punish, like a speeding ticket, it will likely not be discharged. If the fine is to compensate or enrich the government, it may be dischargeable.
On the flip side, even though you may have debts left over after a Chapter 7, you should be in a much better financial situation to deal with them because of all the other debt you discharged. With student loans, you can apply for an income sensitive repayment plan. With income taxes, you can generally work out a settlement or installment plan, and with alimony and child support, you may be able to go back to family court and have your current payments lowered if you can’t afford them.
Find out more about the financial fresh start you can enjoy after a North Carolina Chapter 7 bankruptcy, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 for a free bankruptcy consultation at one of our offices in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.