In a Chapter 7 case all or most “general unsecured debts” get “discharged”—legally written off. That’s one of the big benefits of Chapter 7.
Last time we said there are two kinds of unsecured debts, “priority” and “general unsecured”:
- “Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, by treating them much better than other unsecured debts. You can find a list of all the priority debts at Section 507 of the U.S. Bankruptcy Code.
- “General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.” “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”
We’ll get into “priority” debts later. Today’s post is about how “general unsecured” debts are dealt with in Chapter 7 “straight bankruptcy.
The Discharge of Debts
The main goals of a Chapter 7 case are 1) to stop creditors’ collection actions against you and then 2) to discharge as many of your debts as possible.
First, creditor collections are virtually all stopped by the “automatic stay.” This includes general unsecured debts. We discussed the automatic stay in our blog post of November 22, 2017. We compared how it works in Chapter 7 and 13. Also, see Section 362 of the Bankruptcy Code about it.
Second, in most Chapter 7 cases all “general unsecured debts” get discharged. See Section 727 of the Bankruptcy Code about the discharge of debts.
The discharge happens quite quickly. About 100 days after your bankruptcy lawyer files your case, the bankruptcy court enters a discharge order. Here is a very straightforward version of the Order of Discharge, consisting basically of this single short sentence: “A discharge under 11 U.S.C. [the Bankruptcy Code] is granted to [Debtor].” Your assigned bankruptcy judge signs this order.
The Effect of Discharge
The effect of this discharge order is explained right on this form order, stating:
Creditors cannot collect discharged debts
This order means that no [creditor] may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.
Most General Unsecured Debts Get Discharged
“Priority” debts don’t get discharged. For example, unpaid child or spousal support can never be discharged. Nor can recent income taxes.
But most general unsecured debts do get discharged. There are some exceptions. We’ll cover those next time.