Will Chapter 7 discharge all your debts?

Many people think if they file Chapter 7 bankruptcy, the court will discharge all their debts, meaning they will not have to pay them and can start fresh. This, however, is not necessarily the case. While Chapter 7 can discharge virtually all of your consumer debts such as credit card debts, it may not affect everything you owe.

Debts that cannot be discharged

The Bankruptcy Code prohibits the discharge of some debts, including the following types of payments owed:

  • Spousal or child support
  • Most criminal restitution orders
  • Compensation for personal injuries you caused while driving under the influence of alcohol or drugs

While it is not impossible to discharge student loans, it is difficult.

Discharge denial

The bankruptcy court may also refuse to allow the discharge of some debts in some situations. For instance, it most likely will deny discharge of any debts for which you did the following:

  • Neglected to obey a bankruptcy court order
  • Neglected to successfully complete a prescribed financial management course
  • Neglected to maintain and/or produce sufficient financial records
  • Failed to sufficiently explain how you lost some or all of your assets
  • Concealed, destroyed or fraudulently transferred some of your assets to someone else
  • Committed perjury or another bankruptcy crime

Debt reaffirmation

Certain other debts do not become discharged, even though they could have been but for your own decision. These represent the debts you reaffirm; this means you agree in writing to pay them, or at least part of them, even though you could have received a full discharge.

While you may not be able to imagine deliberately reaffirming a debt, consider the following scenario.

One of your debts is a car loan. The car dealer holding the loan decides to repossess the car because you failed to make full timely payments.

However, before he can repossess it, you file Chapter 7 bankruptcy. The dealer, therefore, offers you a new deal. You need this car since it constitutes your only means of transportation. He agrees not to repossess it if you agree to reaffirm your remaining debt on it and start making payments once again. You may decide to do so since you know you will have a difficult time obtaining another car loan right after bankruptcy.