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What types of debts can be discharged in a Chapter 7 bankruptcy?

On Behalf of | Oct 31, 2024 | Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a legal process that allows a person to eliminate most of their debts. In this process, a court-appointed trustee may sell some of the person’s property to pay creditors. This provides people with a fresh start to rebuild their credit and protect their future income.

What kind of debts does it cover?

Chapter 7 bankruptcy typically allows you to discharge “unsecured” debts. These are debts where you didn’t promise any of your property as a guarantee for repayment, including:

  • Credit card balances
  • Medical bills
  • Personal loans
  • Utility bills
  • Old rent payments
  • Most civil judgments
  • Business debts

However, you may owe debts that involve specific property, such as mortgages, car loans and personal loans like furniture financing or jewelry loans. Chapter 7 bankruptcy handles these “secured” debts differently. You can either give up the property or agree to keep paying the debt. You also have the option to pay the property’s current value in one lump sum.

Chapter 7 bankruptcy also cannot remove certain obligations. This includes most student loans, recent taxes, child support, alimony and debts obtained through fraud.

What property can you keep?

When you file for Chapter 7 bankruptcy in Michigan, you can keep some of your property. The law calls this “exempting” property. However, state and federal exemptions are different, and you can only choose between one or the other.

Some key Michigan-specific exemptions include:

  • Up to $30,000 in home equity for a homestead property ($45,000 for those 65 or older or disabled)
  • Up to $3,000 total in household goods, furniture, appliances and jewelry (limited to $450 per item)
  • Up to $2,775 in one motor vehicle
  • Up to $2,000 for tools used in your primary occupation
  • Most IRAs and qualified retirement plans, which are fully exempt

These exemptions can affect your bankruptcy case by determining which assets you can keep and which the trustee may sell to pay creditors. The law also provides additional exemptions for items like family pictures, health aids and provisions for subsistence. An attorney can help you determine which exemptions apply to your specific situation and how to best use them to protect your assets.

Every person’s financial situation is different

While Chapter 7 bankruptcy can offer a fresh start, the process isn’t one-size-fits-all. To fully understand your options and potential outcomes, it’s wise to consult with an attorney who can explain how bankruptcy laws apply to your case.