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How exactly is debt discharged via Chapter 7 bankruptcy? - II

In our previous post, we examined some of the differences between secured debt and unsecured debt. To recap, the former is one in which the borrower provides collateral for the loan, such that the lender has the option of seizing and selling it to recover the money owed in case of default, while the latter is one in which no collateral is provided, but the borrower typically pays a higher interest rate.

Having established this important point, we are now free to proceed with an examination of how exactly debt is discharged via Chapter 7 bankruptcy.

How does a discharge work under Chapter 7?

As we've discussed in prior posts, when a person files for Chapter 7, the bankruptcy trustee will gather and sell some -- but by no means all -- of your assets and apply the proceeds earned through this sale of assets to your debts.

Here, the debts in question are your unsecured debts.

Once this has taken place, the remaining balance will be discharged, meaning you are no longer legally obligated to pay.

Are there certain types of unsecured debts that can't be discharged?

The U.S. Bankruptcy Code indicates that there are certain types of unsecured debts that cannot be discharged, including child support, alimony, student loans (can only be done in limited circumstances), the majority of tax debt and criminal fines/penalties, to name only a few.

What about secured debts and Chapter 7?

Secured debts are somewhat more complicated. That's because while a bankruptcy filing may serve to wipe out the debt, it will not wipe out the underlying lien on the property.

This means that while the creditor is able to repossess the property, it cannot come after you for the difference between the amount you still owe them and the collateral (i.e., the deficiency).

If you would like to learn more about Chapter 7 bankruptcy and whether it would be a viable option given your circumstances, consider speaking with a skilled legal professional as soon as possible.

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