[COLUMN] Which debts are discharged in Chapter 7 bankruptcy?

THE Constitution of the United States of America allows bankruptcy to its citizens and residents to allow them to become productive again if they are saddled with accumulated debt.

The Supreme Court calls Chapter 7 bankruptcy “the fresh start.” You may have good income but debt repayment could be eating up all of your disposable income. In this case, you are compared to Sisyphus, the character in Greek mythology who is condemned to roll a rock up to the top of a mountain, only to have the rock roll back down to the bottom every time he reaches the top. The debtor with too much debt is the same as Sisyphus because no matter how much his income is, he pays his minimum required payments each month, left with no disposable income every month, only to have to pay out the same amount to his creditors next month and forever, leaving nothing for the debtor himself in savings. The debtor becomes a hamster running inside the wheel. It goes nowhere.

Are you a modern-day Sisyphus?

The myth of Sisyphus prompted the French philosopher and Nobel-prize winner, Albert Camus, to say that an eternity of futile labor is a hideous punishment. But debtors with too much debt, in reality, are the modern-day Sisyphus.

‘Busting out of debt’

To break out of the debt cycle, or in bankruptcy slang, the Chapter 7 “bust out” of debt allows debtors to petition the court to grant relief from debt by “discharge” of debt by court order. The discharge order prohibits the creditor from collecting the debt, in effect wiping it out.

But what debts are discharged and what debts are not discharged?

Dischargeable debts

The bankruptcy code states that a debt is dischargeable, unless it is excepted from discharge. §523 of the bankruptcy code contains a list of debts, which are not discharged. Generally speaking, most debts are discharged. For example, credit card balances up to any amount, medical bills, unpaid rents, payday loans, any kind of unsecured or secured loans or credit lines, bank loans, utility bills, car loans, and even home mortgages are discharged in Chapter 7. Even hundreds of millions of court judgments for the collection of debt are wiped out.

Non-dischargeable debts

What kinds of debts are not discharged? Child support, alimony, student loans (unless 3 prong test of hardship is proven in an adversary proceeding), HOA for the house where you live (not HOA for your rental property which is dischargeable), damages caused by intentional torts (willful intent to cause damage to the person or property is proven, income taxes owed where the requirements for discharge are not met (income taxes are dischargeable if specific requirements for discharge are met.)

Therefore, if you have too much credit card debt — for instance, you owe $40,000 of credit cards, a judgment for unpaid rent of $200,000, owe $1 million to the casino in Pechanga, owe a $2 million in a civil lawsuit, say for breach of contract — a Chapter 7 discharge will wipe all of your debts away. But if you owe $300,000 of student loans, unless you can prove hardship under the three-prong test in an adversary proceeding, you are stuck with the student loans until you die, unless Uncle Biden gives you a way out of it.

 

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Disclaimer: None of the foregoing is considered legal advice for anyone. There is absolutely no attorney-client relationship established by reading this article.

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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.

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