Chapter 7 bankruptcy is colloquially known as “fresh start” bankruptcy. Unlike its Chapter 13 counterpart — under which the debtor obligates himself or herself to repay at least part of his or her debts under a payment plan — Chapter 7 generally completely eliminates or “discharges” eligible debts. In this way, the debtor is able to start over again with a mostly clean financial slate.
Chapter 7 should not, however, be mistaken for a “magic bullet” that will destroy all debts. Some types of debts are either not dischargeable at all, or require some showing of proof that they will constitute a hardship on the debtor before the bankruptcy court will discharge them.
The U.S. Bankruptcy Code contains some debt types that are effectively immune from discharge under Chapter 7. These include creditors and debts that the debtor omitted from the bankruptcy petition; federal, state and local taxes; fines, penalties, restitution amounts and court fees that the government has required the debtor to pay; amounts owed to others as a result of a drunk driving conviction; alimony and child support obligations; debts not dischargeable under an earlier bankruptcy because of fraud on the part of the debtor; and other debts in connection with pension plans and condominium fees and dues.
Student loans can be difficult to discharge, but if the debtor or his or her dependents can establish that having to repay such a loan would constitute an undue hardship, it may be possible to eliminate them through bankruptcy.
Finally, there are some debts that a Chapter 7 bankruptcy may discharge, but if a creditor objects to discharge they may remain as obligations of the debtor. These include amounts owed in connection with malicious acts or illegal acts including embezzlement or larceny, and debts that were taken on fraudulently, such as buying luxury items within 90 days of filing the bankruptcy petition.
Amounts owed under a divorce settlement or decree, are immune to discharge if the balance of hardship to the former spouse would outweigh the benefit of discharge to the debtor (and assuming that the debtor would be able to pay).
Anyone contemplating Chapter 7 would be well advised to speak with a bankruptcy attorney to learn more about which debts may still remain even after the bankruptcy is completed.