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Which debts are dischargeable?
May 7, 03:05 PM

Legal Ace
By RAFAEL “ACE” S. CLIMACO

People who are seriously considering filing for Chapter 7 bankruptcy are doing so because they have more debt than they can handle, and most importantly, they want to get rid of that debt. A successful Chapter 7 bankruptcy filing will likely wipe out most of a person’s debt, but not all of it. Although this article will not provide an exhaustive list of examples, it will explore some common types of debts that would likely be discharged after successfully completing Chapter 7 bankruptcy.

In a Chapter 7 bankruptcy filing, you normally will not have to pay any portion of the debt directly; rather, the bankruptcy trustee (the court official who administers a Chapter 7 bankruptcy case for the court) will sell your non-exempt assets, if any, and then divide the proceeds among your creditors. Anything that remains will be discharged by the court.

Chances are that most people who file for Chapter 7 are trying to get rid of unmanageable credit card debts. The good news is that a Chapter 7 filing will more likely than not free them of credit card debt. Only in certain exceptional situations, such as fraud or luxury purchase immediately before the bankruptcy filing, would the credit card debt not be discharged.

Outstanding medical bills would also be discharged. For years, millions and millions of people have been without health insurance. Yet the uninsured still get sick or are involved unforeseen accidents, and therefore need medical treatment. Even those people who have had health insurance may find themselves with overwhelming medical bills; for example, perhaps their insurance company would not cover certain sicknesses, injuries, or treatments outside of their coverage. Some people may have been dropped from their insurance altogether. Whatever the case may be, a successful Chapter 7 filing would discharge any medical bills owed.

What about leases? If you live in an apartment, chances are that you entered into a lease with the landlord. If you have a car, perhaps you opted to lease one rather than buy it. If you own a business, you may have entered into contracts that you can no longer meet, such as a contract to deliver merchandise or to perform services. More often than not, filing for bankruptcy will convert your lease or contractual obligation into a dischargeable debt. An exception may apply and the lease or contractual obligation would not be discharged if, for example, the trustee believes that the lease or contract can be sold to a third party to raise money to pay your unsecured creditors, or the court finds that you filed for bankruptcy for the specific purpose of getting out of a personal services contract.

Personal loans and promissory notes are other common examples of debts that can normally be discharged. However, the court will not discharge any debt if the creditor can prove that you obtained the loan fraudulently.

To reiterate, the examples above do not represent an exhaustive list, but illustrate the most common forms of debt that would likely be discharged in a Chapter 7 bankruptcy case. After successfully completing the bankruptcy process, it is likely that these types of debt would be wiped out and you would no longer be under any obligation to pay the creditors.

Notwithstanding the foregoing, do not take filing for Chapter 7 bankruptcy lightly. At the end of the process, your ability to obtain credit would likely be hampered. If trying to rent an apartment, the landlord may ask for a credit check which may dissuade him or her from renting to you. Therefore, it is probably best that you consult a bankruptcy professional before filing for Chapter 7 bankruptcy.

(Atty. Rafael “Ace” S. Climaco is admitted to practice law in the State of California, the U.S. District Court of Northern California, and the Ninth Circuit Court of Appeals. A former president of the Filipino Bar Association of Northern California, he received his B.A. from UCLA and his J.D. from the Univ. of San Francisco)

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