When your personal debt levels become overwhelming, you may feel like you have no option other than to take drastic measures to regain financial solvency. Bankruptcy may only comes to mind when you have more debt than you can feasibly repay. Chapter 7 bankruptcy, in particular, can offer a functional and aggressive solution for those whose debt levels have reached unsustainable amounts.

Contrary to what some people mistakenly believe, not all debts can be discharged in  bankruptcy. Many debts can legally be discharged regardless of the kind of bankruptcy you choose, however. Understanding which debts you will still have an obligation to repay and which ones the courts can potentially discharge can help you make a more informed decision about whether Chapter 7 bankruptcy would benefit your financial circumstances.

Bankruptcy discharges target unsecured personal debt

Generally speaking, only unsecured debt is eligible for discharge in a Chapter 7 bankruptcy. Secured debt typically remains valid and must be repaid by the debtor. Determining whether a debt is secured or unsecured is relatively straightforward.

Unsecured debt does not have any collateral held to compensate the financial institution for extending a line of credit. Credit cards are one of the most common kinds of unsecured debt, although medical debts also fall into this category. Many other debts not secured by collateral, such as student loan debts, child support, alimony and court-ordered payments due to a lawsuit, are typically not eligible for discharge in bankruptcy proceedings.

Mortgages and auto loans, on the other hand, have valuable, specific assets that serve as the collateral that secures the debt for the creditor. If the person borrowing money fails to repay the debt, the lender can theoretically foreclose on real estate holdings or repossess vehicles and other valuable assets as a way of recouping the losses they suffer when the borrower fails to repay the debt.

Although the automatic stay in Chapter 7 proceedings can stop repossession efforts, bankruptcy will not forgive secured debts or allow you to retain the collateral without reaching an agreement with the lender. 

If you secure a discharge, your repayment obligations end with bankruptcy

For those unfamiliar with how bankruptcy discharges work, the concept that their debts no longer require repayment can seem somewhat confusing. Although the company involved will lose money, the debtor benefits from a fresh financial start and the ability to put more of their income toward their actual living expenses.