Will Chapter 7 Bankruptcy Debt Forgiveness End My Consumer Debt?

Having too much debt is an impetus for seeking debt forgiveness through chapter 7 bankruptcy. But, can this "fresh start" decimate all of your consumer debt? Depending on your financial situation, this get out of debt solution can keep you out in the cold. You may be better off exploring other options.

Technically, speaking chapter 7 bankruptcy legally prohibits most creditors from attempting to collect what you owe. But, the keyword is "most." There is no guarantee it will rid you of all financial obligations. Debts that you may not be able to discharge include:

· Debts for most taxes and debts incurred to pay non discharged taxes

If you have federal and states income taxes, capital gains taxes, property taxes, and payroll taxes, or even if you incurred new debts to pay off non discharged taxes, all of these debts are generally not discharged.

· Debts for domestic support obligations

Beware if you're a dead-beat dad. Under the bankruptcy law, there is no debt forgiveness for domestic support obligations. This means you won't be off the hook on child support or alimony or debts that are in the nature of child support, maintenance, or alimony, which are established by a court order or authorized by law.

· Student loans

Even if you owe too much on student loans or educational loans, chapter 7 may not get you out of debt. The only way to have a student loan discharged is if you apply for a hardship discharge before a discharge of your other debts is granted, and if the bankruptcy court finds that paying off the student loan would create an "undue hardship" for you and/or your family. Generally, to demonstrate an undue hardship, you must show your inability to make the student loan payments at the time the bankruptcy is filed and in the future.

· Debts for which you gave up your discharge protections by signing a reaffirmation agreement

The United States Bankruptcy Code states that in order for you to retain possession of a secured consumer debt that should be discharged, such as your home, car, or other asset, you have to reach a voluntary reaffirmation agreement with the secured creditor. Caution: The reaffirmation agreement will require you to continue repaying such debts. And if you don't, the creditor can impose a valid lien, such as a mortgage or security interest, against your property.

· Debts incurred under a DUI (Driving Under Intoxication)

If you are responsible for any debts for personal injuries or death from driving while under the influence of drugs or alcohol, chapter 7 won't offer you any debt forgiveness. And this includes your operation of a motor vehicle, vessel, or aircraft while intoxicated.

Additionally, chapter 7 won't get you out of debt on any of the following:

· Debts that you owe to a pension, profit sharing, stock bonus, or other retirement plan, or to a Thrift savings Plan for federal employees.

· Debts that you owe for most fines, penalties, forfeitures, or criminal restitution obligations.

· A consumer debt that you did not properly list in the chapter 7 filing

· Debts that the bankruptcy court specifically decided or will decide in your bankruptcy case as non discharged.

The United States Bankruptcy Code also lists other non-exempt property that you may be obligated to forfeit pursuant to a chapter 7 filing. If you owe too much on non exempt property, sorry Charlie! This property can include luxury items, a second car, truck, or home, a vacation home, high value musical instruments, collections of stamps and coins, family heirlooms, cash, savings in bank accounts, stocks, bonds, and other investments.

The above is a partial list of debts normally excluded. However, you should consult with an attorney to determine how the bankruptcy law applies to your specific situation.

In summary, you may not be able to wipe out all of your consumer debt through bankruptcy. So, if you owe too much debt, carefully weigh your bankruptcy, including debt consolidation, credit counseling, and debt settlement. Weighing the risks, always look for another way to get out of debt without bankruptcy.

Vic Chevalier is a financial coach and author. His mission is to help people transition from debt into financial prosperity. You can read more of his debt relief and credit restoration tips at

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Chapter 7 and 13 Bankruptcy and the Foreclosure Process

For most homeowners, bankruptcy is certainly not their first choice to save their home from foreclosure. This is for a very good reason, as the credit effects can be quite serious and its results are generally poor, at best. Many of those who file bankruptcy to get out of foreclosure find themselves right back in the foreclosure process within in months of entering bankruptcy. Putting off losing the home is obviously not the reason most homeowners file, as they will then be stuck with both a bankruptcy and a foreclosure on their credit.

Chapter 7 Bankruptcy

In any event, homeowners facing foreclosure can not include the house in a Chapter 7 bankruptcy. Chapter 7 is only for unsecured debt, such as credit cards, store cards, personal loans, and the like. The mortgage is secured by the property, so it would not be dischargeable under Chapter 7. The clause in the mortgage paperwork that keeps it from being included in a Chapter 7 case is that it states the mortgage loan is secured by the underlying collateral, the property itself. Chapter 7 does not discharge secured debt, so this combination excludes the mortgage and this type of bankruptcy from having anything to do with each other.

Chapter 7 bankruptcy may, however, serve a purpose in freeing up income that the homeowners could use to keep on top of their mortgage payment. Keeping a roof on top of their heads is much more important than financing a new television or furniture, and credit card companies who are unwilling to work with homeowners in financial trouble will have to bear the costs of their poor lending decisions. Discharging most of these types of debts can significantly free up income, which can immediately be used to pay down the arrears on the mortgage or establish a repayment plan or other workout program. Homeowners with a debt-to-income ratio too high will not qualify for these bank workout programs, so discharging some of this high-interest, unsecured debt through Chapter 7 may be a reasonable path to getting the mortgage back on track.

Chapter 13 Bankruptcy

Homeowners who want to file bankruptcy to stop foreclosure can include the house in a Chapter 13 filing, which is a reorganization of the debt with a payment plan mandated by the courts. But if the house is already too expensive, then agreeing to an expensive payment plan would not make a whole lot of sense. In Chapter 13, the mortgage payments might very well go up, because the homeowners have to pay the regular monthly mortgage, as well as a portion of the amount that they are in default. Falling behind on this type of bankruptcy almost always results in the house going back into foreclosure and sold at a county sheriff sale.

Especially if the homeowners fall behind on the Chapter 13 plan, they will be in serious danger of losing the home very quickly. Bankruptcy does not actually stop foreclosure -- it only puts the process on hold and gives the owners protection under the courts to pay back what they have fallen behind. Thus, if the payments are not made as agreed, the bank will request that the courts lift the stay and allow them to proceed with the foreclosure process. And the lender will be able to proceed as if the bankruptcy never occurred, starting up right from where they left off. This can often result in a sheriff sale being scheduled very quickly, within a matter of weeks.

Filing bankruptcy to stop foreclosure is a decision that homeowners need to consider very carefully, and even potentially consult with a lawyer for approved legal advice. The only real way to get rid of the mortgage and no longer worry about the property is find some way to sell the house, give a deed in lieu of foreclosure, or have it be foreclosed on by the bank. The county sheriff sale will eliminate the mortgage liens and transfer ownership of the property. The homeowners will have to deal with a foreclosure on their credit for 7-10 years, though. There are no easy decisions during the foreclosure process, of course, but the possibility of facing foreclosure and bankruptcy on the same house should be avoided.

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