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Bankruptcy is a process created by federal law that provides relief for debtors, who can either eliminate their debts or repay their debts. Chapter 7 "liquidation" is the process by which debtors wipe out or "discharge" many of their debts. Chapter 7 is known as "straight" bankruptcy. Chapter 13 "reorganization" is the process by which an individual or a business prepares a plan for repayment of creditors.

Can a Chapter 7 debtor truly "wipe out" all of his or her debts?

Discharge of indebtedness is the process by which a Chapter 7 debtor eliminates a debt during bankruptcy proceedings. A creditor or lender cannot collect a debt that has been discharged. The debtor is freed from that financial obligation. For example, a Chapter 7 debtor usually can discharge personal or unsecured loans, medical bills, most credit card debt, and some "old" taxes. However, not all types of debts can be eliminated in a bankruptcy proceeding. These debts are called "non-dischargeable."

For which debts does a Chapter 7 debtor remain liable?

Bankruptcy does not always eliminate all debts. The following types of debt cannot be discharged in Chapter 7 bankruptcy:

* Alimony or spousal maintenance

* Child support

* Debts incurred by fraud or dishonesty

* Debts incurred by fraud while acting in a fiduciary capacity, such as a trustee

* Embezzled sums

* Debts that the debtor fails to include or list on the bankruptcy "schedule"

* Recent unpaid taxes

* Debts incurred in violation of securities fraud law

* Fines or penalties imposed by government agencies, including criminal fines

* Claims due for accidents incurred due to driving while intoxicated

* Most student loans

* Debts incurred after filing for bankruptcy

* Most larger purchases made shortly before filing bankruptcy, especially for luxury goods or services

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.