In most straightforward Chapter 7 cases all debts not secured by any collateral are discharged–forever written off. You pay nothing on them.
Most of our blog posts of the past couple months have been about how bankruptcy deals with secured debts. These are debts that are secured by a lien on some asset(s) of yours. We especially focused on debts secured by a vehicle or home because of their importance.
But how about unsecured debts? How are they treated?
“Priority” and “General Unsecured” Debts
How an unsecured debt is treated depends on which kind it is. There are two kinds of unsecured debts, “priority” and “general unsecured” ones. All unsecured debts are either one or the other of these.
Like the name implies, “priority” debts are special. They are categories of debts that Congress has decided are to be treated specially.
The “priority” debts are all on a list in the Bankruptcy Code. If a debt is not one of the kinds on that list, then it’s a “general unsecured” debt.
We’ll address “priority” debts later. Today we’re talking about the “general unsecured” ones.
The Discharge of Debts
The main goal of a Chapter 7 “straight bankruptcy” case is to “discharge” all or most of your debts. To discharge a debt means for a bankruptcy judge to order the debt to be legally written off.
Most “general unsecured” debts ARE discharged in a successfully completed Chapter 7 case. Most Chapter 7 cases ARE completed successfully. So, in most cases the court discharges all “general unsecured” debts. (We discussed the major exceptions to discharge in a series of blog posts in mid-April.)
A Simple Example
Assume that you qualify for Chapter 7 bankruptcy. You have $85,000 in a combination of credit cards, medical bills, and personal loans. As long as there is no collateral tied to any of those debts, they are very likely “general unsecured” debts. Assume you have no other debts.
Through your bankruptcy lawyer you file a Chapter 7 case. From that moment on, your creditors cannot pursue you, your income, or your assets to pay its debt. Then, as long as you disclosed everything accurately to your lawyer, and follow the required procedure, it’s extremely likely that about 3 or 4 months later the bankruptcy judge assigned to your case will sign an order declaring that your debts are discharged.
As of that point you would legally no longer owe any of that $85,000 in debt. You would be debt-free.