Excessive debt could come from many unexpected and overwhelming costs, such as medical bills and even everyday essentials. Those unable to cover their debts might find bankruptcy a viable option, but California consumers need to understand that not all debts go away when filing for Chapter 7.
Chapter 7 bankruptcy and remaining debts
Chapter 7 bankruptcy is called liquidation bankruptcy since the process involves selling off certain assets and using the proceeds to pay creditors. Afterward, the court discharges the eligible remaining debt. Bankruptcy filers have no obligation to pay debts that received a discharge.
Credit cards and other unsecured debts typically receive a discharge. However, federal and state taxes would not likely receive any releases. Student loan obligation relief requires proof of undue hardships. Some may feel surprised that the bankruptcy court would not eliminate all debts, but the court must follow federal statutes. And yes, some debts fall under exclusions to bankruptcy rules.
Other debts that remain during bankruptcy
A closer look may reveal that the exclusions make sense. Someone who owes money due to fraud does not deserve a release from the obligations, and the law does not allow any. Chapter 7 rules won’t free someone ordered to pay government fines nor alleviate wrongful death judgments from drunk driving accidents.
The average person doesn’t likely have to deal with punitive debts, but many go through divorces. Spousal maintenance and child support are not subject to bankruptcy discharges. However, the debtor may go to family court and attempt to modify the order.
While several categories of debts do not undergo discharges, bankruptcy does provide various protections. For example, collection actions and evictions may stop when bankruptcy proceedings commence. So, the process could have other benefits to the debtors.