How Unsecured Debts Are Analyzed In a Chapter 7 Bankruptcy

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By:Mike Cibik


How Unsecured Debts Are Analyzed In a Chapter 7 Bankruptcy


We all have faced some kind of financial challenges at various points in our lives. However, there are some unfortunate instances when you or your business is in debt and there is no other way but to file for a bankruptcy.


Chapter 7 Bankruptcy is one of the most widely filed for bankruptcy clauses in which a debtor’s assets are liquidated to pay the outstanding debt of the lenders. In this process, chapter 7 gives rise to certain unsecured debts. Now, let us take a look at how these unsecured debts work or how they are managed in bankruptcy cases.


Types of Unsecured Debts


When people file for bankruptcy, there are two types of unsecured debts that come to play. These are:


  • Priority Debts – These debts are considered special by the law for one or more reasons. Priority debts are treated in a better way than the rest of the unsecured debts because of some special significance attached to them. Examples of priority debts include past-due child support, unpaid recent income taxes, etc.


  • General Unsecured Debts – These are all those accumulated debts apart from the Priority Debts. In fact, any debt that is unsecured and not being categorized under Priority debts are General Unsecured Debts. These include retail accounts, credit card debt, personal loans, unpaid utilities, overdrawn check accounts and so on.


Now, let’s understand how the General Unsecured Debts are dealt with in the Chapter 7 Bankruptcy cases.


Discharge of Debts


Filing for Chapter 7 is done to accomplish two primary goals. First, to stop the creditors from collecting or asking for any further repayment and second, to discharge as many debts as possible. Now, the first objective is achieved by means of a process or order called automatic stay.


Automatic Stay is an injunction that immediately stops foreclosures, lawsuits, garnishments and all other collection activities against the debtor, right as soon as the bankruptcy petition is filed. In Chapter 7 bankruptcy cases, this automatic stay order lasts for as long as the case continues, which can be anywhere between 3 and 4 months. Although creditors can ask for a temporary ‘relief from the Automatic Stay”, there is no way that they can prevent the stay from going into immediate effect right at the beginning of your case.


The second objective that is discharging of the debts is undertaken with promptness. After about 3 months of the filing of Chapter 7 by your lawyer, the bankruptcy court enters a discharge order. This order is signed by the bankruptcy judge before it comes to effect.


What Does this Discharge Mean?


A Discharge Order is meant to put an end to your debt related anxieties. Once the discharge order is passed, the actions take place, and the following things come into effect:

  • Creditors can no longer attempt to personally collect a discharged debt from the debtors
  • Creditors cannot sue, garnish wages or assert a deficiency in collecting the debts
  • Creditors cannot contact the debtors personally through mail, phone or other means
  • Creditors who act against this discharge order may even be required to pay the debtor’s damages as well as the lawyer’s fees.


Let’s take an example of how general unsecured debts work in the above-mentioned procedure. Assume that you have $50,000 debt in a combination of credit cards, medical bills, personal loans, etc. These are considered general unsecured debts because there is no collateral attached to them.


Now, just as you qualify for a Chapter 7 bankruptcy, it is ensured that the creditors cannot pursue you any further. During this time, you are required to disclose everything to your lawyer and follow the process.


After 3-4 months, your bankruptcy judge will sign the discharge order, and at that point, you are no longer legally considered to owe any of that $50,000 in debt. The discharge would make you debt-free at that very point.


While Chapter 7 does not deal with the priority debts, it allows discharge of most of the general unsecured debts in a hassle-free manner. It is best to seek an expert opinion in your professional bankruptcy lawyer to make sure your unsecured debts are taken care of.


Give Us a Call Today


For 35 years, Cibik & Cataldo, P.C has been providing superior debt-relief services for clients all throughout Pennsylvania. Talk to one of our expert bankruptcy lawyers at 215-735-1060 and get all your queries about your debts answered.


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