Chapter 7 Bankruptcy Discharge

Does Chapter 7 Discharge Tax Debts?

Chapter 7 bankruptcy can discharge certain types of tax debts, but specific conditions must be met for these debts to be eligible. Generally, the debts that can be discharged in Chapter 7 include income taxes. However, to qualify for discharge, these debts must meet the following criteria:

• Age of the Tax Debt: The taxes must be at least three years old, meaning the due date for filing the tax return (including extensions) is at least three years before the bankruptcy filing date.
• Filing of Tax Returns: The tax returns for the discharged debts must have been filed at least two years before filing for bankruptcy.
• Assessment Period: The tax debt must have been assessed by the IRS at least 240 days before filing for bankruptcy or must not have been assessed yet. This time frame allows for any assessments or reassessments by the IRS.
• No Fraud or Evasion: The debtor must not have committed fraud or willful tax evasion. If the tax return was fraudulent or if there was a deliberate attempt to evade paying taxes, those debts cannot be discharged.

It’s important to note that other types of debts, such as payroll taxes or fraud penalties, cannot be discharged in Chapter 7 bankruptcy. 

Does Chapter 7 Discharge Liens?

While Chapter 7 can eliminate the debtor’s liability on secured debts, it doesn’t remove liens from property. This means that if there is a secured debt, like a mortgage or a car loan, with a lien on a property or an asset, the lien remains even after the bankruptcy discharge.

If a debtor chooses to surrender the property securing a debt in Chapter 7, the debt itself can be discharged, but the lien will remain on the property. Therefore, the creditor can still enforce the lien and repossess or foreclose on the property.

In some cases, a debtor might avoid certain types of liens in Chapter 7 bankruptcy, like judicial liens or nonpossessory, non-purchase-money security interests in household goods. This is done through a legal process within the bankruptcy case.

However, liens like voluntary liens (like mortgages and car loans) or tax liens typically survive a Chapter 7 discharge. As a result, debtors often continue to pay these secured debts to retain the property, or they may lose the property to foreclosure or repossession if they don’t pay.

Does Chapter 7 Discharge Car Loans?

Chapter 7 bankruptcy can discharge the debtor’s liability on a car loan, meaning the debtor will no longer be required to repay the loan. However, this does not affect the lender’s lien on the vehicle. The secured creditor still has the right to repossess the car if payments are not made.

Here’s what generally happens with car loans in Chapter 7 bankruptcy:

• Surrender the Vehicle: If the debtor chooses to surrender the car, the car loan can be discharged, freeing the debtor from any obligation to make further payments. The car is returned to the lender, who then sells it to recoup some of the loan balance.
• Reaffirm the Debt: The debtor might keep the car by “reaffirming” the debt. This means they agree to continue making payments on the car loan as if the bankruptcy had not occurred. In this case, the car loan is not discharged, and the debtor remains liable for the debt.
• Redeem the Vehicle: In some cases, a debtor might be able to “redeem” the car by paying the lender the current market value of the vehicle in a lump sum, which could be less than the outstanding loan balance. This option is less common due to the lump sum payment requirement.