When individuals file for bankruptcy because they face aggressive collection activity or recognize that they will never be able to pay off the debts they have accrued, they typically choose between Chapter 13 bankruptcy and Chapter 7 bankruptcy. Chapter 7 bankruptcy is available for those who can pass a means test based on their limited income.
Chapter 7 filings are a popular choice because they lead to a quick discharge if someone successfully completes the process. What can someone do during a Chapter 7 bankruptcy, and what isn’t an option?
People can stop collection activity
It would be very stressful and frankly unfair if creditors could continue hassling someone who is in the process of declaring bankruptcy and who has already acknowledged that they are unable to meet their financial obligations. The automatic stay granted at the time of a bankruptcy filing prevents most lawsuits from moving forward and will stop collection calls, foreclosure efforts and other attempts to collect on the individual’s debts for as long as someone’s case remains open (and as long as an exception to this rule doesn’t apply).
People can discharge most unsecured debts
Personal debts fall into two categories. Secured debts have collateral property attached to reduce the risk for the lender. Mortgages and car loans are both secured debts. Unsecured debts have no collateral property, meaning that lenders offer them based on someone’s credit score or personal history with the company. Credit cards, hospital debt and personal payday loans are all examples of unsecured debts that are eligible for discharge in bankruptcy proceedings in many cases. So long as people disclose their eligible debts to the courts and send proper notice to their lenders, they can discharge most of their unsecured debts. Overdue child support, alimony, most student loans and most tax debts are notable exceptions.
The party filing cannot discharge debts unless they include them in their bankruptcy paperwork. They also cannot discharge every debt they owe, as obligations such as judgments related to personal injury lawsuits and the debts noted above are exceptions to the dischargeable nature of debt in bankruptcy.
Although there are limits to what someone can discharge, what people are able to do in a Chapter 7 bankruptcy often makes filing a worthwhile endeavor. Understanding both the uses and limitations of Chapter 7 bankruptcy may benefit those worried who are about how they will be able to handle their personal debt.