Chapter 7 Questions and Answers

What happens to your debts under Chapter 7 bankruptcy.

Q: If I file for bankruptcy, will my debts be forgiven?

A: Generally yes. When an individual files a Chapter 7 petition, normally, most of an individual's debts will be forgiven, providing a "fresh start."

Q: If I file for bankruptcy, will my taxes be forgiven?

A: Not normally. Although certain "stale" federal income taxes-those assessed more than three years ago-may be discharged in bankruptcy, most taxes will not be forgiven.

Q: I am behind in making alimony payments to my ex-spouse. Will a bankruptcy filing eliminate this debt?

A: No. A bankruptcy will generally not eliminate your debts for unpaid alimony or child support.

Q: I got divorced last year. As part of our agreement I am supposed to pay my ex-spouse $50,000 this year. Can I wipe out this obligation by filing for bankruptcy?

A: Probably not. Before 1994, debts created by a marital property settlement-in other words, a division of marital property-were dischargeable. This distinction disappeared in 1994. Debts related to a property settlement incident to a divorce or separation are now nondischargeable. The law does provide a limited exception to the rule that property settlements are nondischargeable. Such debts are dischargeable if the debtor's net income after reasonable expenses is not adequate to pay the debts.

Q: If I file for bankruptcy, will my student loans be forgiven?

A: Not normally. However, certain older student loans can be forgiven in a bankruptcy proceeding. This topic is covered in more detail in the text.

Q: I bought my car on credit, and I am still making payments on it. Will I be able to keep my car if I file for bankruptcy?

A: You will probably be required to either refinance the debt or reaffirm the terms of your car loan to keep the car.

Q: I have a house and am making mortgage payments on the house. Will I be able to keep my house if I file for bankruptcy?

A: Probably not, but it depends on your individual situation. In many cases, your house will be sold, and you will receive a fixed amount of cash from the sale, which you may keep after the bankruptcy.

Q: I have a pension covered by ERISA. Will I lose it if I file for bankruptcy?

A: No. Since a Supreme Court decision a few years ago, it is now clear that ERISA pensions are beyond the reach of creditors in a bankruptcy. In many states IRAs are protected as well.

Q: My records aren't very tidy. What happens if I forget about an unpaid creditor and fail to list him on my bankruptcy schedules?

A: Unfortunately, your untidiness may result in your having the bill survive your bankruptcy. Discharge of debts is not "automatic" because you must first list the debts. There is no debt relief if a creditor is not identified on the forms.

Q: A co-worker told me that all of my debts will be discharged in bankruptcy. Is this true, or are there any exceptions?

A: Although most debts of an individual are discharged, there are a number of exceptions. Debts that are nondischargeable generally fall into the following categories:

1. Individual income taxes that are assessed within three years of the filing but remain unpaid.
2. Debts that have been incurred by the use of false financial statements or by the use of other false pretenses.
3. Unscheduled debts.
4. Debts that arise from fraud or embezzlement or from the misuse of funds when the debtor was acting as a fiduciary.
5. Alimony maintenance and child support.
6. Any debt incurred from willful or malicious injury.
7. Fines and penalties.
8. Most educational loans
9. Debts for luxury goods or services over $1,000 incurred within 60 days of the court's order of relief.
10. Debts for cash advances in excess of $1,000 on credit cards incurred within 60 days of the court's order of relief.
11. Debts arising from a judgment incurred from drunk driving.

Q: I consulted an attorney about filing bankruptcy. She advised me that the court had the power to deny a discharge of certain debts. When will the bankruptcy court deny a discharge?

A: If the court finds that the debtor intentionally delayed or hindered or defrauded a creditor with an intent to remove, destroy, or conceal property; destroyed, falsified, concealed, or failed to keep books and records; or knowingly and fraudulently made a false statement claim or engaged in bribery or withheld from the trustee, then a discharge will be denied. Other reasons for denial of a discharge include failure to explain a loss of assets, failure to obey lawful court orders, or failure to cooperate in another case involving the insolvency.

Q: What exactly is the difference between "exempt" and "non-exempt" property? Should I worry about the difference?

A: Yes, you should really focus on the distinction, and you will need to determine how much exempt and nonexempt property you have. The bankruptcy law divides your property into "exempt" property and "nonexempt" property. Your creditors will be able to get your "nonexempt property," but you will be able to keep all of your "exempt" property. Obviously, part of your decision about filing bankruptcy will hinge on how much property you may lose.

Q: Are exemptions the same all over the country?

A: No. Although bankruptcy is a federal legal remedy, the rules governing exemptions provide for state by state variations. In many states, a debtor may file a list of exempt property according to either a federal list or a state list. These lists provide which property is exempt. In most states, a debtor must rely solely on the state list of exempt property, while other states require that debtors merely use the federal list.

Q: What exactly is the difference between a "secured" creditor and an "unsecured" creditor?

A: A secured creditor is a creditor who can look to specific property-collateral-for repayment of a debt. An unsecured creditor is a creditor who has no collateral. When you finance a car, the dealer or bank takes the car as collateral. If you don't make timely payments on your car loan, they may repossess the car and sell it to pay off your loan. If you get a credit card at a department store-say Sears or Penney's-the store doesn't ask you to put up collateral. The store will be an unsecured creditor. Secured creditors do quite well in bankruptcy and generally can reach and sell collateral. Generally, if a secured creditor's debt is not paid off, the secured creditor can normally reach and sell the collateral even when legal title is in the name of the debtor.