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Chapter 7 Bankruptcy: Wipe Out Your Debts
A Chapter 7 Bankruptcy is typically filed to discharge (wipe out) certain debts that are keeping you from paying your rent, mortgage, car loans, and/or necessary living expenses. In most cases, people retain all of their property in Chapter 7 Bankruptcy.
What kinds of debts can I wipe out in a Chapter 7 Bankruptcy?
Unsecured Debts.
An unsecured debt is a debt without a valid lien or mortgage against the property of a debtor.
Generally, Credit Cards are unsecured debts because the credit card companies do not require any collateral when extending credit. Therefore, unless a bankruptcy filer has property that is not protected under the state or federal bankruptcy code, credit card debt is generally discharged (wiped out) in a Chapter 7 Bankruptcy without affecting any property interests of the Chapter Bankruptcy filer.
Medical Bills and Utility Bills are also unsecured debts and wiped out in Chapter 7 Bankruptcy.
Payday Loans are unsecured debts that are almost always discharged in Chapter 7 Bankruptcy.
Lawsuits and Garnishments are unsecured debts that are generally wiped out in bankruptcy. A garnishment of one’s paycheck or bank account must stop immediately after the filing of a Chapter 7 bankruptcy petition. The entire lawsuit proceeding against the bankruptcy filers must stop and in generally ends against a bankruptcy filer once a Chapter 7 Bankruptcy is filed. However, there are exceptions; most notably where a nature of the complaint for damages in a lawsuit against a bankruptcy filer is based upon debt owed that was induced by fraud or breach of fiduciary duty.
Are any Unsecured Debts Not Dischargeable in Chapter 7 Bankruptcy?
Yes, some unsecured debts cannot be wiped out in Chapter 7 Bankruptcy. Student Loans are the most common unsecured debts that are not dischargeable in almost all bankruptcy cases. Certain Recent Credit Card Purchases and Cash Advances from credit card are not dischargeable in Chapter 7 Bankruptcy. Therefore, it is important that you seek the advice of an experienced attorney who may advise you to wait to file your Chapter 7 bankruptcy petition until those credit card debts can be discharged.
Unsecured debts you are ordered to pay in a Divorce Decree or Legal Separation Agreement are also not dischargeable unless your ex-spouse does not object to the dischargeability of these debts in a Chapter 7 Bankruptcy case. For example, if you are ordered to pay certain credit card debts in your divorce decree, you will probably not be able to discharge them in Chapter 7 bankruptcy. Therefore, if you are considering filing for Chapter 7 bankruptcy and are also considering divorce or in the middle of divorce proceedings, it is strongly advisable that you consult a bankruptcy attorney about filing for Chapter 7 Bankruptcy before your divorce is finalized and divorce decree is signed and entered with the court.
Secured Debts.
A secured debt is a debt with a valid lien or mortgage against the property of a debtor. The most common secured debts are those mortgages and car loans.
Are secured debts dischargeable?
Secured debts are dischargeable in Chapter 7 Bankruptcy if the bankruptcy filer wishes to Surrender or Abandon the Property secured by the debt or loan and the debt is worth more than the collateral. This is the unsecured portion of the secured debt. The payment terms of the loan are also canceled in Chapter 7 Bankruptcy where the secured property is Surrendered or Repossessed.
For example, car loans typically have “Negative Equity” because the car is worth less than the auto loan. If this car is surrendered or repossessed, the residual balance of the loan after the vehicle is sold will be discharged in Chapter 7 bankruptcy. The payment terms of the loan are also canceled in bankruptcy where the secured property is surrendered or repossessed.
In today’s declining real estate market, Homes that are Surrendered or Foreclosed upon and are sold for less than the mortgage(s), have remaining unsecured debt that will be discharged in Chapter 7 Bankruptcy.
Can I Keep Paying on a Secured Loan in Chapter 7 Bankruptcy To Keep my Car or Home?
Yes, in most cases. If you owe more than your car is worth, you can keep your car so long as you continue to make the loan payments. You can also have a significant amount of equity and keep your car in Chapter 7 Bankruptcy. You can keep your car even if you have $5,000 of equity and in many cases, You Can Have Over $10,000 of Equity and Still Keep Your Car. The same holds true for Chapter 13 Bankruptcy.
In Chapter 7 bankruptcy cases in Washington State (where you have resided in Washington for at least 2 years prior to filing for bankruptcy), You Can Have Up to $125,000 Equity and Still Keep Your Home. The same holds true for Chapter 13 Bankruptcy.
Of course, you will need to be current and continue to pay on your mortgages or car loan to keep these properties.
Can a Keep my Home or Car and stop paying my mortgage or car loan?
No. In Chapter 7 bankruptcy, in order to retain property that is secured, you need to continue paying on the secured loan and many times will also need to sign a Reaffirmation Agreement with the lender to keep that property.
Can I Keep my Furniture and Other Property?
The bankruptcy code provides for bankruptcy filers to keep a generous amount of personal property. In almost all Chapter 7 and Chapter 13 cases, a bankruptcy filer can keep all of his furniture, tools, and other household items.
Can I modify my mortgage payment in Chapter 7 Bankruptcy?
No. Chapter 7 bankruptcy cannot modify your mortgage payment. However, in Chapter 13 Bankruptcy, second mortgages can sometimes be modified if they can be paid in full within 5 years. Also, in some cases, a second mortgage can be discharged in Chapter 13 bankruptcy.
Can I lower my car loan in Chapter 7 Bankruptcy?
Yes, in certain circumstances. You Can “Redeem” Your Car for its Fair Market Value in cash to your auto lender or apply for a private “Redemption Loan” from a redemption loan company and make lower payments in the reduced, balance of the new redemption loan. Our law firm can refer you to companies that offer redemption loans.
Call The Everett Debt Doctors Today for a Free Confidential Attorney Consultation: (425) 953-4364
Snohomish County bankruptcy lawyer David M. Lux represents individuals throughout the Great Puget Sound Region and Snohomish County, including Everett, Arlington, Mukilteo, Lynnwood, Mukilteo, Duvall, Lake Stevens, Monroe, Mountlake Terrace,Granite Falls, Bothell, Snohomish, Marysville, Mill Creek, and Stanwood, WA.