Chapter 7gives you a fresh financial start by legally erasing your debts. That’s enough if your debts are simple ones.
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It’s pretty straightforward. You have debts you can’t handle. You go through a procedure called Chapter 7. In about three months your debts are gone. You have your fresh start.
But often life is more complicated than that. You may have special debts that you might not want to erase, such as your home mortgage or vehicle loan. But you may be behind on them and need help catching up. Or you have debts that you can’t erase, like your child support or certain taxes. You need help dealing with them.
Today’s blog is about the simple debts that are simply erased. The next blogs get into the other ways that bankruptcy can help if you have more complicated debts.
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As you consider how you are going to meet your New Year’s resolution to fix your financial life, be aware that a bankruptcy can be as simple or as complicated as your life is. In many ways bankruptcy is very flexible—it can help with straightforward debts and also more challenging ones.
Your choice about whether or not to file bankruptcy, and if so under which Chapter, is affected by aspects of your financial life other than your debts—like your assets and your income, but let’s focus here just on your debts.
The Discharge of “Simple” Debts
So it’s simple: if you are overwhelmed by your debts, and those debts are all simple debts, a Chapter 7 “straight bankruptcy” will legally erase (“discharge”) the debts so you will not have to pay them. Never. They will be gone forever.
What are the simple debts that are discharged? “Simple debts” is not a legal term, but what is meant here are debts that have no complications. They are debts that you want to discharge, and can and will be discharged.
Secured Debts
Debts that are secured by collateral, like a home, vehicle, or furniture create some complications. Usually you’ll know if a debt is secured by collateral, but sometimes you won’t know for sure. For example, your debt for purchases of furniture, appliances, electronics and similar medium-priced items ARE secured by what you bought, some are not. Also, some cash loans are secured by collateral while others are not. This is something your attorney will discuss with you, so that you know whether or not any of your possessions have to still be paid for if you want to keep them.
Secured debts can often be handled in a Chapter 7 case—most such cases have at least a secured debt or two. But, as you’ll see in a future blog or two, there’s more to secured debts than the simple discharge of the debt.
Non-Discharged Debts
As you’ve very likely heard, not every kind of debt will be discharged in a Chapter 7 bankruptcy. Without going into the list of them here, there are basically two kinds: those that don’t get discharged regardless whether the creditor raises an issue about it or not, and those that do get discharged unless the creditor complains during your bankruptcy case. The first category—in which the creditor doesn’t need to complain—includes child and spousal support, and certain income taxes, among others. The second category—which requires the creditor to complain, and do so by a strict deadline—includes bounced checks, and credit card advances and purchases shortly before filing bankruptcy, among others.
Your attorney will be able to tell you in advance whether you have any debts in the first category. But he or she will not necessarily be able to tell in the second category because, with those, until the creditor complains no one knows for sure. But often we WILL have a good idea whether there’s a risk that a creditor will complain, based on whether any of them may have legal grounds to do so.
If you have any non-discharged debts—of either category—then how much of such debts you have, how much you have compared to the amount of the debts being discharged, and how such debt would be treated under Chapter 7 vs. Chapter 13 all affect whether bankruptcy is an appropriate solution for you, and if so under which Chapter to file.
The Bottom Line
If all of your debts are both unsecured and will be discharged in bankruptcy, you will usually want to try to file a Chapter 7 case. Even if you have some secured and/or non-discharged debts, Chapter 7 may still work, depending on all the circumstances. Chapter 13 is often the better solution if you have a lot of secured and/or non-discharged debts, but again it depends. The next few blogs will look at how both Chapters can help you with these more complicated types of debts.