Beebe and O'Neil

What debts can you legally discharge in a Chapter 7 bankruptcy?

Many American households are only one health incident or job issue away from financial problems. Quite a few people live paycheck-to-paycheck, meaning they don't have adequate reserves and savings to protect them if they lose their income or incur substantial unexpected expenses.

When your creditors start calling and your income is no longer high enough to cover all of your costs of living, you will have to start considering debt relief solutions, potentially including bankruptcy. Those with income below the state median in Connecticut have the option of filing for Chapter 7 bankruptcy.

Chapter 7 bankruptcy is also known as liquidation bankruptcy, as the courts may order the sale of certain assets if you qualify for this kind of bankruptcy. Determining if the debts that caused your financial hardships will receive a discharge through Chapter 7 bankruptcy is an important part of deciding whether bankruptcy will give you the relief you need.

Typically, most unsecured debts can receive a discharge

The debt that Americans carry typically falls into one of two categories. Secured debt is debt that has an asset used as collateral for the funds. When you sign a mortgage, for example, your home serves as collateral for the note on the loan. If you fail to pay, the lender can initiate foreclosure proceedings and take your house due to non-payment.

A similar process is available in loans where you use a vehicle as collateral. If you don't pay, the lender can take steps to repossess your vehicle, which can mean that you lose all of the money you have paid on that debt. Unsecured debts, on the other hand, do not have collateral to offset their value.

Medical debts, including hospital debt, as well as credit card debts, are common forms of unsecured debt. While bankruptcy can protect you from issues with your car loan or your mortgage, you will typically need to reaffirm or re-sign loan documents if you wish to retain the collateral possessions. Unsecured debts, on the other hand, will receive a discharge. That means you will no longer have an obligation to repay the creditor.

Certain unsecured debts, including priority debt, aren't eligible

Some of the biggest debts you need to pay will likely not receive a discharge in Chapter 7 proceedings. Many Americans carry tens of thousands of dollars worth of student loan debt. Unless the school in question did not have accreditation when you attended or has since lost accreditation, you likely cannot discharge your student loan debt.

In extreme circumstances, such as an injury that will preclude you from seeking employment in your degree field, it may also be possible to obtain emergency relief from student loan debt. In almost all cases, however, the person who files for Chapter 7 bankruptcy will still need to repay student loan debt.

Other priority debts, including spousal support, court judgments and child support, whether currently owed or back due, cannot receive a discharge under bankruptcy law. You will still need to pay what you already owe, as well as the amounts that continue to accrue. Discussing your debt and financial circumstances with an experienced Connecticut bankruptcy attorney can help you better understand what form of bankruptcy or debt relief would work best in your circumstances.

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