What Kinds Of Debt Is Dischargeable In A Chapter 7 Bankruptcy?

In a Chapter 7, most types of debt are dischargeable. That includes the most common types, such as credit cards, medical bills, personal loans, deficiencies from past leases or landlords, and just about any other type of unsecured debt. Debt that is specifically either not forgiven or is more challenging to get discharged includes taxes, student loans and other types of government debt and child support is typically never dischargeable.

Can Taxes be Discharged In A Chapter 7 Bankruptcy?

Yes, absolutely. Certain types of taxes such as personal income tax to the IRS, for example, the most common, can be discharged under certain circumstances and the circumstances are very specific to the individual, so it is hard to make a general statement. As a general rule however, if the taxes are over two years old and the returns were filed on time, and the IRS has had that opportunity to collect on them, there is a chance that those debts can be discharged but, not an absolute guarantee. There is a complicated analysis the IRS goes through to determine what taxes are dischargeable or not, and it can be very complicated to try and predict what tax debts will be discharged in a chapter 7 bankruptcy.

What Can A Person Expect After Completion Of A Chapter 7 Bankruptcy?

The vast majority of chapter 7 cases in Los Angeles and Orange County (the Central District of California) are no asset cases, so the individual keeps all their assets, and there are “no assets” for the bankruptcy trustee to administer or liquidate for the benefit of creditors. Although asset cases are rare, there certainly are circumstances when the chapter 7 bankruptcy trustee sells an asset or requires the debtor to pay the trustee a reasonable amount of money to essentially “buy back” the asset in chapter 7 bankruptcy. California, although not the most generous, has some pretty favorable “exemption” laws for debtors, which means most assets can be exempt from liquidation in bankruptcy and the debtor is able to retain those assets.

The Chapter 7 Bankruptcy Exemption Rules In California

California has two sets of exemption arrangements, one for homeowners who wish to protect or “exempt” the equity in the home in which they live (up to a certain amount), and one for debtors who do not own a home and can therefore use the “wildcard” exemption for any type of asset. The exemption for homeowners only applies if the debtor actually lives in the home, investment or rental property do not qualify, however renting out part of the house or sharing the house with others does not disqualify it from the homeowner exemption treatment. Equity can be protected up to $125,000, anything over that amount of equity is subject to the trustee liquidating. It can be a complicated analysis and I would advise anyone who owns a home to hire a qualified bankruptcy attorney to represent them and protect their assets.

For debtors who do not need to protect equity, they can take advantage of California’s wildcard exemption of about $25,000 to apply toward any asset, even cash in a bank account. It is important to note, that it is up to the debtor to choose for themselves which set of exemptions they would like to use, it is not mandatory to use one or the other. So oftentimes, even if someone does own a house, they may not have any equity in the house and you can still choose to use the other set of exemptions which includes the $25,000 wildcard. So as you can see, there is some nuance to making the right strategic decision as to which set of exemptions to use, and how to calculate your exemption in the most favorable way.

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