What Debts Can and Cannot Be Discharged in Chapter 7 Bankruptcy?
May 6, 2025
When you're facing overwhelming debt, Chapter 7 bankruptcy can provide a fresh start by discharging certain debts and providing the opportunity to regain financial stability. This form of bankruptcy is often referred to as "liquidation bankruptcy" because it involves the sale of non-exempt assets to pay creditors.
However, not all debts are dischargeable in Chapter 7 bankruptcy. Understanding which debts can and can’t be discharged is crucial in determining whether Chapter 7 is the right option for you and how it will impact your financial future.
At the Law Office of Victor Druziako, P.C. in Vineland, New Jersey, I aim to guide individuals through the bankruptcy process in the most straightforward manner possible. I’m here to break down what debts can be discharged in Chapter 7 bankruptcy, what debts cannot, and some exceptions that may apply.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy allows individuals and businesses to discharge or wipe out most of their unsecured debt. The process involves a trustee being appointed to oversee the liquidation of any non-exempt assets and then distributing the proceeds to creditors.
While the debtor may lose some assets in the process, Chapter 7 provides a quick and relatively straightforward way to eliminate most of your debt.
Once the bankruptcy is completed, you can be relieved of your obligation to pay back most of your debts, giving you a fresh financial start. However, not all debts can be discharged in Chapter 7 bankruptcy, so it's essential to understand which debts remain your responsibility.
Debts That Can Be Discharged in Chapter 7 Bankruptcy
Chapter 7 bankruptcy is designed to eliminate most types of unsecured debt. Unsecured debts are debts that aren’t tied to any specific asset or collateral. The following debts can typically be discharged in Chapter 7 bankruptcy:
Credit Card Debt
Credit card debt is one of the most common types of unsecured debt that is eligible for discharge in Chapter 7 bankruptcy. If you've accumulated significant credit card balances and are struggling to keep up with payments, Chapter 7 can potentially wipe out this debt entirely. This applies to both personal and business credit cards.
It’s important to note that while credit card debt can generally be discharged, any debt incurred through fraud (e.g., using the card for items you never intended to pay for) may not be dischargeable. The creditor could challenge the discharge of that debt in bankruptcy court.
Medical Bills
Medical debt is another significant burden for many individuals seeking bankruptcy relief. Medical expenses can accumulate quickly, particularly if you or a family member suffers from a serious illness or injury. Chapter 7 bankruptcy can discharge most medical bills, allowing you to eliminate a large portion of your financial obligations.
In New Jersey, where medical costs can be high, Chapter 7 provides a powerful tool for clearing out these debts and starting over. However, similar to credit card debt, medical debts arising from fraud or intentional harm may not be dischargeable.
Personal Loans
Personal loans, which include loans from friends, family members, and online lenders, are also typically dischargeable in Chapter 7 bankruptcy. If you’re unable to repay a personal loan, Chapter 7 can provide a way to eliminate this obligation, so long as it was not obtained through fraudulent means.
However, loans obtained by fraud, misrepresentation, or false pretenses may be excluded from discharge. Additionally, if the lender has collateral backing the loan (such as a car or property), the debt may be tied to that collateral and treated differently.
Unpaid Utility Bills
Utility bills such as electricity, gas, and water bills may also be dischargeable in Chapter 7 bankruptcy. This can be especially helpful if you’re behind on these necessary services and are facing disconnection.
However, if your utility service was disconnected recently, the utility provider may require a deposit or take other actions to prioritize continued service. It's important to consult a bankruptcy attorney to understand how this will affect your situation.
Payday Loans
Payday loans, which often come with very high-interest rates, are typically considered unsecured debt and can be discharged in Chapter 7 bankruptcy. Many people who use payday loans do so because they are in a difficult financial situation, and Chapter 7 can offer a way out.
However, it's important to note that if you took out payday loans with fraudulent intent or misrepresented your financial situation, those loans may be non-dischargeable.
Deficiency Balances on Repossessed or Foreclosed Property
If your property was repossessed (such as a car) or foreclosed upon (such as a home), and the sale of that property didn’t cover the remaining balance of the loan, the remaining deficiency balance may be dischargeable. This means that if you owe money after the property was sold, you may not have to pay it.
However, if you reaffirmed the debt on a repossessed item (i.e., you agreed to continue paying it after the property was taken), that debt may remain non-dischargeable.
Debts That Cannot Be Discharged in Chapter 7 Bankruptcy
While Chapter 7 can provide relief from a wide range of debts, there are certain debts that can’t be discharged under any circumstances. These include:
Child Support and Alimony
Child support and alimony obligations are considered "priority debts," and they can’t be discharged in Chapter 7 bankruptcy. This is because these debts are seen as necessary for the well-being of children and former spouses, and public policy aims to make sure these obligations are met.
If you owe child support or alimony, you will still be responsible for these payments after your bankruptcy is complete, regardless of the bankruptcy's discharge of other debts.
Student Loans
In most cases, student loans aren’t dischargeable in Chapter 7 bankruptcy. This includes both federal and private student loans. However, it’s possible to discharge student loans in bankruptcy if you can demonstrate that repaying the loans would cause "undue hardship."
Undue hardship is a difficult standard to meet, and most courts apply a strict interpretation of this term. In New Jersey, you would need to file a separate adversary proceeding in bankruptcy court and prove that paying the student loans would cause severe financial distress for you and your dependents.
Taxes
Certain taxes aren’t dischargeable in Chapter 7 bankruptcy, including:
Income taxes that are less than three years old.
Taxes that were filed fraudulently.
Taxes that the taxpayer attempted to evade or avoid.
However, older income tax debt may be eligible for discharge if certain conditions are met. These include:
The tax debt must be at least three years old.
The tax return for the debt must have been filed at least two years prior.
The taxes must not be related to fraud or willful evasion.
If you’re facing significant tax debt, consulting with a bankruptcy attorney is essential to determine whether it can be discharged in your case.
Debts Incurred Through Fraud or Misrepresentation
If you incurred debt through fraudulent means, such as lying on a loan application or using credit cards with no intent to repay, these debts aren’t dischargeable. Creditors have the right to challenge the discharge of debt they believe was incurred through fraud.
Additionally, if you were involved in a fraudulent scheme, the debt arising from that scheme will likely remain your responsibility even after bankruptcy.
Personal Injury or Death Claims
If you caused an accident that resulted in personal injury or death due to your reckless or negligent actions (such as driving under the influence), the resulting debts can’t be discharged. Personal injury and wrongful death claims are considered "priority" debts and can’t be erased by filing for bankruptcy.
This exception also applies if you were convicted of a crime related to the injury or death. Victims of personal injury or death claims arising from your actions may still pursue legal action against you even after bankruptcy.
Homeowners Association Fees
If you owe fees to a homeowners association (HOA) for your property, these fees are typically not dischargeable in Chapter 7 bankruptcy. These fees are considered a form of "property-related" debt and continue to be owed even after the bankruptcy process.
Exceptions to Dischargeable Debts
There are exceptions to the general rules about dischargeable debts. These exceptions include:
Reaffirmation of debts: If you choose to reaffirm a debt, you agree to continue paying it after your bankruptcy is complete. This can apply to car loans, mortgages, and other types of secured debt. However, reaffirming debt is voluntary, and you must be careful about whether it makes financial sense for you.
Non-dischargeable debts in divorce settlements: If you’re going through a divorce, certain obligations within a divorce settlement, such as debt payments assigned to you by a divorce decree, may not be dischargeable.
Debts incurred after bankruptcy filing: Any debts you incur after filing for bankruptcy aren’t included in the discharge process. You will need to repay any new debt accumulated after the bankruptcy process has begun.
A bankruptcy attorney can provide more detailed information on these exceptions and how they may affect your situation.
Contact an Experienced Bankruptcy Attorney
If you’re facing overwhelming debt and are considering bankruptcy, the Law Office of Victor Druziako, P.C. is here to help. When you work with me, I’ll assess your specific situation, explain the dischargeability of your debts, and guide you through the Chapter 7 bankruptcy process. I serve clients in Vineland, New Jersey, and throughout South Jersey. Contact me today to learn more or begin the bankruptcy filing process.