What Kind Of Debts Can Be Discharged?

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.