While people generally understand Chapter 7 bankruptcy and bankruptcy basics, there are still misconceptions about discharged debt.
Bankruptcy has serious consequences that can affect a person's credit history, access to credit in the future, and access to opportunities. Knowing exactly what is dischargeable allows you to make an informed decision.
Individuals who file for Chapter 7 get relief from majority of the unsecured debt they have. In some cases, they can also have some secured debt discharged. Here's what there is to know about the kind of debt that can/can't be discharged.
Dischargeable Unsecured Debt
Unsecured debt is debt that isn't backed. For instance, if you don't enter into a contract with a creditor stating that they can repossess whatever property they sell to you if you don't repay, the resulting debt is considered unsecured. Most unsecured debt is discharged in a chapter-7 bankruptcy.
Generally, individuals who have mortgages or car loans agree that the creditor can take back such assets or sell them to get back their money if payments aren't made as agreed. Mortgages and car loans are classic examples of secured debt.
Examples of unsecured debt include personal loans, back rent, medical bills, and credit card charges. Generally, unsecured debt is dischargeable, meaning an individual filing for Chapter-7 won't be obligated to repay. Secured debt isn't dischargeable, but there are exemptions.
Dischargeable Secured Debt
While secured debt isn't dischargeable in almost all cases, there are exceptions. Creditors generally have the right to recover property that isn't paid for as agreed. Lien attached to secured debt doesn't go away even if secured debt is discharged.
Assuming you are able to discharge a mortgage loan, you'll need to surrender the house in typical circumstances. If you don't need the property, there's nothing wrong with a creditor taking it back. You just need to indicate your intention to give up the property when filing for bankruptcy. As a result, you should cooperate as the creditor repossesses the property.
If a creditor doesn't bother taking back property because of several reasons i.e., the cost of taking the property (such as a car obtained via a secured loan), then you can keep the property. A typical example would be a car whose value falls within the state exemption for cars. Even if a dealer makes a claim, they wouldn't gain anything because of state limits.
However, such scenarios are rare. The value of secured debt rarely equals property state exemptions. If the state exemption covers only part of your car loan, expect the creditor to repossess the car, sell it and keep the difference after the car has been sold and the state exemption deducted.
To understand in-depth what kind of debt is dischargeable in Austin TX, talk to a seasoned bankruptcy attorney in Austin TX.
Which Specific Unsecured Debt Isn't Dischargeable?
As mentioned above, not all unsecured debt is dischargeable. The most common examples include;
Student loans are unsecured. However, they remain a person's responsibility unless it is demonstrated that a person won't be capable of repaying in the future. There are special considerations in regards to student debt and bankruptcy.
A seasoned bankruptcy lawyer can be able to help you discharge debt that wouldn't normally be dischargeable.
Debt Through Fraud & False Pretense
Buying things on credit without intending to pay for them will result in debt that can't be discharged. If you get property, services, cash, or other equivalents through fraud, such debt can't be discharged. The same applies to actions like overstating your income to get a loan that you can't afford to pay. If you get such a loan, such debt can't be discharged.
If it is revealed that you are filing for Chapter-7 because you want to defraud a creditor/s, your debt won't be discharged. What's more, besides being unable to discharge debt due to false pretense and fraud, you may face stiff penalties, fines and/or jail time in some instances.
Significant Purchases or Advances Just Before Filing for Chapter-7 Bankruptcy
If some eligibility requirements aren't met in Chapter-7 bankruptcy, your debt won't be discharged. Among the most critical requirements is you file for bankruptcy genuinely and don't engage in activities that may be interpreted negatively.
For instance, if you make a hefty purchase just before filing, you may be seen to be reducing the cash you have in line with state requirements for purposes of avoiding to meet your repayment obligations. Such actions, if proven, may stop debt from being discharged. Your bankruptcy petition could also be rejected.
Generally, you aren't supposed to incur debt or make any "suspect" transactions three months (90 days) before filing for bankruptcy. There may be special limits to the cash you can/can't spend on luxury items and the loan amounts you can/can't take just before filing for bankruptcy. You need legal advice to avoid doing anything that can compromise your bankruptcy process. Debt presumed to be taken just before bankruptcy without intending to pay can't be discharged.
While a court judgment may be dischargeable, there are exceptions. Generally, you should file for Chapter-7 bankruptcy before you are subjected to a lawsuit judgment. Money judgments can give creditors power to place a lien against debtor property, and most liens don't go away with bankruptcy.
Even if creditors can't force a person to repay debt, they can take some steps to sell your property or acquire it. They can wait until you dispose of the property and come after the proceeds. If you have existing lawsuits, talk to a bankruptcy attorney to advise you accordingly.
While tax debts aren't normally dischargeable, some can be discharged. For instance, income taxes are dischargeable if there is no tax evasion on fraud involved. Other instances where income tax is dischargeable include when returns were filed over 2 years before filing for bankruptcy. Also, taxes due three years or more before filing for bankruptcy and tax liability assessed over 240 days before filing can be discharged.
Since the kind of debt that is dischargeable can vary depending on factors like state laws and special circumstances, you need an experienced bankruptcy attorney in Austin, TX, to let you know exactly what is dischargeable in your Austin TX Chapter-7 bankruptcy case.