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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

Are All Debts Dischargeable in Chapter 7 Bankruptcy?

February 16, 2018 Scura Law Firm Bankruptcy, Debt Management, Chapter 7

credit card billChapter 7 bankruptcy can be an extremely helpful way to get back on your feet financially after you have been struggling. It allows you to “start fresh” and try again. In that process, most of your debts can be forgiven entirely, which means that those harassing phone calls and intimidating letters will stop coming. It results in significant freedom for many individuals and companies that are stressed financially.

While bankruptcy can be extremely beneficial, there are a few types of debts that it cannot fully address in most situations. Nonetheless, some of the most common forms of debt will be forgiven in Chapter 7 bankruptcy.

Medical Debts

One of the most common reasons that individuals file bankruptcy is because their medical-related debts have become unbearable. In fact, nearly 62% of bankruptcies are due to medical expenses. In most of those bankruptcies, the filing individual did have health insurance to help address these liabilities.

The cost of healthcare is exceptionally high, even if you have good health insurance. If you or a loved one suddenly develops a condition that leaves you unable to work and with significant medical bills, bankruptcy may not be far behind. Thankfully, Chapter 7 bankruptcy will permit you to discharge your medical bills. There are some unusual circumstances where you may not be able to remove your medical debts, but those situations are rare.

Credit Cards and Personal Debt

Credit card debt is also in the top ten list for reasons people file bankruptcy. While many people assume that high credit card debt is due to irresponsible spending, there are lots of other reasons why people may use credit cards as well. Emergency situations such as sudden job loss, illness, or home expenses may trigger a need to use your credit card. Personal loans often also fulfill the same type of function.

In most situations, your credit card debt and personal, unsecured debts will be dischargeable in bankruptcy. Keep in mind, however, that you should not rack up credit card debt or take out personal loans and then just assume you can file for bankruptcy. This type of spending may constitute fraud under the bankruptcy laws, and you may not be able to discharge it.

Car Loans

Many people want to keep their vehicles during and after going through bankruptcy. You can do this by reaffirming the debt to your car lender. Reaffirming the debt means that you will continue to pay an old debt even though it could have been discharged or partially discharged in bankruptcy.

Reaffirmation is particularly appropriate in car loan situations because the lender usually has both a loan and a security agreement related to your car. That means that if you do not pay your debt, the lender can repossess the vehicle to deal with the remaining amount of the loan. Even if the loan is discharged, the lien on the car remains. That means that even though the loan has been released, if you want to keep the car, you need to keep paying to get the lien off of the vehicle or the lender will be able to take it. This concept is tricky, which is why most debtors will either reaffirm their loan agreement for the car or surrender the car to their lender.

In some states, your car is exempt property. That means that you do not have to worry about anyone repossessing it because it is at least partially protected by law. In New Jersey, you can only have up to $3,775 of equity in a vehicle. If you have more equity than that in the vehicle, then the trustee in a Chapter 7 bankruptcy may be able to seize the property and sell it to pay your creditors (after giving you back the exempt amount).

While the debt related to your vehicle may be discharged, the lien will remain, which makes dealing with car loans in Chapter 7 bankruptcy somewhat complicated. You will almost never be able to discharge your debt for your car and keep your vehicle, which is important to keep in mind as you go through the bankruptcy process.

Home Mortgage

Your home mortgage is likely similar to your car in that it has both a loan and lien involved. When you refer to a “mortgage,” most people assume that you are talking about both the promissory note associated with the home and the security agreement that puts a lien on the house.

Most debtors will try to reaffirm their homes if they have significant equity in them. Others may choose to surrender their house to the bank or other lending institution. Just like a vehicle, you generally will not be able to both discharge the entire debt and lien related to your home and keep the house. You must choose whether you want to keep paying or surrender the house.

A portion of your home may be considered exempt property. However, the limitation is generally around $23,675. Talk to your bankruptcy attorney to determine the best way to keep the value of your home during and after bankruptcy.

School Loans

Student loans are currently the second-highest consumer debt category. They are a close second to a mortgage payment. For many students, their loans may be as high as a mortgage payment, with even higher interest rates. Unfortunately, however, bankruptcy will rarely offer a way to discharge student loan debts.

It is possible to discharge your student loan debt in bankruptcy, however it has been historically tough to do because you have to meet a specific legal test to discharge this type of debt. You must show extreme hardship related to an ability to pay your loans. Generally, this means that if you pay your student loans based on your current income and other expenses, you will not be able to maintain a “minimal” standard of living. You could also show that there are certain circumstances that will last for an extended period that make paying your loans impossible, such as illness or developing a condition or disability that makes you unable to work. You must also show that you have made at least some good faith effort to repay the loans before bankruptcy. Even if you meet these criteria, the standard for discharging student loans is very, very high.

With federal repayment plans based on income and other specialized deferment or repayment options, few people will be able to qualify to discharge their student loans. However, if your loan did not come from the federal government, such as through a private lender, you may have more options to discharge your loans.

Getting Help With Chapter 7 Bankruptcy

Whether Chapter 7 bankruptcy is the right option for you will depend on your unique financial situation. Speak with an experienced bankruptcy attorney to determine the best choice for you. Call our team today to schedule your free consultation.

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Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.

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