What happens to general unsecured debt in Chapter 7?

Examples of general unsecured debts include credit card debt and medical debt.  If you are thinking about filing for bankruptcy, you should know how these general unsecured debts are handled.

Secured debt usually is tied to your most important possessions, such as your home or your car. So it’s understandable that being able to keep these types of collateral will drive your bankruptcy decisions.  Likewise, your “priority” debts tend to involve your most aggressive creditors and often can’t be discharged in bankruptcy, so these also grab our attention. But it’s more likely that you owe more in general unsecured debt than in secured and priority debts combined.

What happens to general unsecured debt in a Chapter 7? It depends on 2 things: 1) “dischargeability,” and 2) asset distribution.

Dischargeability

Dischargeability refers to whether you are able to get a discharge of that debt in bankruptcy. The dischargeability of most general unsecured debt is not challenged. In the rare case that your discharge of general unsecured debt is challenged, you may have to pay back some or all of that particular debt. But this would depend on whether the creditor is able to show that the debt fits within some narrow grounds for non-dischargeability, such as fraud, misrepresentation, or other similar bad behavior on your part.

Asset Distribution

If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of it from you – this is called a “no asset” case. But if you have an “asset case,” where the trustee takes some of your assets for distribution to your creditors, your general unsecured creditors will not necessarily receive any of those assets. The trustee must first pay off any priority debts and must pay the trustee’s own fees and that of any other professionals who were hired. Only if any funds remain will the unsecured creditors get to share in the leftovers.

To summarize, in most Chapter 7 cases your general unsecured debts will be discharged, preventing those creditors from ever being able to pursue you for them. Also, these creditors will receive nothing from you, so long as all your assets are exempt. Relatively rarely, a creditor may challenge the discharge of its debt. And if you have an asset case, the trustee may pay a part or—very rarely—all of the “general unsecured debts,” but only if the priority debts and trustee fees do not exhaust all the funds being distributed.

 

One Response to What happens to general unsecured debt in Chapter 7?
  1. Jorge
    November 10, 2015 | 12:17 pm

    October 29, 2012Two years ago I was scammed via an intrenet advertising under which I invested from my Sears Master Card account, and on my Visa account ( banks: Citi and One in Iowa) when I realized this might be a scam I started to implement a dispute action. The scame provider promissed to award me10,000 dollars within several months, foolishly, I bought it. Now both accounts are in default. I don’t feel a need to correct my credit score which was 789. I’d like your suggestion about reinstituting the disput action. Frankly, I m less than disfatified with the help either of these two creditors offered. I have acquired a debit card from my credit union and have been making reguar payments toward a visa card from the cu. I’m now a widdowder living in the same house for over forty years. I was able to have my mortagage adjusted to 2% and have a tax free monthly income of $1,800. I really don’t have a need for credit any longer, but I’d be interested in you comment regarding the feasability of reinstituting the dispute action. The scamer has flown the coop. If I could get it off my record I am in the process of a legimate home bas business, and could make negotiated recompanse to creditirs within eighteen months[]

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