CPA Exam — REG (Regulation)Business LawEasy
A debtor files for Chapter 7 bankruptcy. Among their debts are $50,000 in student loans, $10,000 in credit card debt, and $5,000 for a recently purchased luxury item. The debtor successfully argues that due to severe medical conditions and limited future earning capacity, repaying the student loans would impose an 'undue hardship.' Which of the following debts is most likely to be dischargeable in this Chapter 7 proceeding?
- AAll of the debts will be dischargeable.
- BThe credit card debt, as it is generally dischargeable.
- CThe student loans, due to the undue hardship finding.
- DThe luxury item debt, if incurred within 90 days of filing.
Show answer & explanationAnswer & explanation
Correct answer: B. The credit card debt, as it is generally dischargeable.
Credit card debt is generally dischargeable in Chapter 7 bankruptcy. Student loans are typically non-dischargeable unless the debtor proves 'undue hardship,' which was successfully argued here. Debts for luxury goods incurred close to the filing date can be presumed non-dischargeable.
Why the other options are wrong
- A. Student loans are generally non-dischargeable, and luxury debts can be challenging, so it's unlikely all will be discharged without specific findings for each.
- C. While student loans *can* be discharged with undue hardship, the question asks which is *most likely* to be dischargeable, and credit card debt is dischargeable without this high bar.
- D. Debts for luxury goods over a certain amount incurred within 90 days of filing are presumed non-dischargeable, making this less likely than general credit card debt.
Dischargeable Debts (Chapter 7)
Debts that are legally released by a bankruptcy court, freeing the debtor from personal liability.
- Most unsecured debts (e.g., credit cards, medical bills) are dischargeable.
- Certain debts (e.g., student loans, most taxes, child support) are generally non-dischargeable.
- The purpose is to give the debtor a 'fresh start' by eliminating obligations.
Memory trick: 7 Deadly Non-Dischargeables, but most others are free!