Chapter 7 Bankruptcy Code: Unsecured Debts

The chapter 7 bankruptcy code contains many provisions setting forth rules for every aspect of chapter 7 bankruptcy. Two key aspects of the chapter 7 bankruptcy code include the policy towards unsecured debts and the limitations on who may file chapter 7. 

Understanding Unsecured Debts

There are two major types of debts: secured debts and unsecured debts. Most unsecured debts are discharged, or forgiven, when you file a chapter 7 bankruptcy. However, secured debts generally are not wiped away under chapter 7, since there is collateral behind those debts. Thus it is important to understanding exactly what secured debt and unsecured debt are:

• Secured debt is debt that has an asset acting as security for the lender. If you do not pay the loan back, the lender can take the asset. Both a mortgage loan and a car loan are secured debt; if you don't pay your car, the lender will repossess it and if you do not pay for your house, the bank will foreclose on it.
• Unsecured debt is debt that is not guaranteed by anything other than your word you will pay it back. Unsecured debt is riskier for lenders, as if you do not pay, there is much less that they can do. After all, if you charged a vacation to Hawaii and some groceries, the lender cannot repossess either of those two things if you later are unable to pay the bill.

Chapter 7 and Unsecured Debts

Under the chapter 7 bankruptcy code, most unsecured debts are forgiven. This is true of credit card debt, medical debt and personal loans. However, certain unsecured debt- such as student loan debt, tax debt and unpaid child support- is not discharged in a chapter 7 in the vast majority of situations. In fact, to have student loan or tax debt discharged is almost impossible.

When you file a chapter 7, the bankruptcy trustee assigned to your case will make arrangements to take most of your assets (with the exception of some home equity, retirement accounts and certain other exempt items). Those assets will be sold. The proceeds from that sale go to your creditors, and then any unpaid or remaining balance is wiped out on unsecured debt and you are considered bankrupt but largely debt free.

It is important to note that not everyone can qualify for a chapter 7- you must make below a set income determined by either the median income level in your state or a means test. 

Getting Help

If you are considering declaring chapter 7 bankruptcy, you should consult with a qualified lawyer who can assist you. Your lawyer can help you make sure you are eligible for a chapter 7 and can file all required documents and papers with the bankruptcy court to get your case under way.