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Discharge of Indebtedness


Bankruptcy is a process created by federal law that provides relief for debtors, who can either eliminate their debts or repay their debts. Chapter 7 “liquidation” is the process by which debtors wipe out or “discharge” many of their debts. Chapter 7 is known as “straight” bankruptcy. Chapter 13 “reorganization” is the process by which an individual or a business prepares a plan for repayment of creditors.

Does a Chapter 7 debtor truly “wipe out” all debts?

Discharge of indebtedness is the process by which a Chapter 7 debtor eliminates a debt during bankruptcy proceedings. A creditor or lender cannot collect a debt that has been discharged. The debtor is freed from his financial obligation. However, not all types of debts can be liquidated in a bankruptcy proceeding. For example, a Chapter 7 debtor, even though he or she “liquidates” his or her debts, generally cannot discharge child support payments, taxes, or student loan payments. When a debtor chooses to file under Chapter 11 or Chapter 13, the debts usually remain for future payment.

What debts can be discharged in “straight” bankruptcy?

Generally, most unsecured debt is dischargeable in “straight” bankruptcy. A Chapter 7 debtor is usually granted relief from having to pay the following types of debts:

  • Unsecured or personal loans
  • Medical and dental bills
  • Court ordered judgments
  • Repossession deficiencies
  • Claims in automobile accident or negligence cases

Depending on the circumstances, a debtor may be granted a discharge of the following types of debt:

  • Divorce property settlements
  • Debts incurred by dishonesty, fraud, or concealment
  • Amounts received by embezzlement
  • Judgments due for intentional or willful torts
  • Some taxes, including some “old” income taxes
  • Some student loans, but only in very limited “undue hardship” situations
  • Balances due on credit cards, except purchases made with the intent to file bankruptcy