What are 5 types of debt that are not dischargeable in bankruptcy?

Individuals and businesses may petition for bankruptcy when they are not able to pay their debts and their creditors threaten to take legal action to recover payment. In the majority of cases, the debtor hopes to have their debts discharged through bankruptcy.

Debt discharge means that the individual or business is no longer legally obligated to pay back their debts. A creditor that has their claim discharged cannot legally collect on their claims.

Dischargeable vs. Non-Dischargeable Debts in Bankruptcy

For the purposes of bankruptcy, there are two categories of debt: dischargeable and non-dischargeable. Once a bankruptcy is complete, the debtor is freed from the legal obligation to pay the debts that were discharged.

Chapter 7 bankruptcy provides a debtor with a full discharge of their debts that are legally permitted to be discharged. In a Chapter 7 bankruptcy, the court takes control of all of the debtor’s assets and liquidates them as necessary in order to pay off as much of the individual’s debt as possible.

A debtor is no longer responsible for the unpaid balances that remain after the liquidation of their assets. If an individual does not have enough assets after the liquidation to pay off all of their debts, those debts are discharged and the debtor is no longer obligated to pay them.

In a Chapter 13 bankruptcy, the court will approve a plan to repay the individual’s debts to the greatest extent possible. The goal is to pay the debts off in full, but if some of the balances cannot be paid in full because the assets in the bankruptcy estate are inadequate, they may then be discharged.

In general, tax debt is priority debt in all chapters of bankruptcy. Tax debts are the first debts to be paid when the debtor’s assets are liquidated in Chapter 7.

Only income tax debt may be discharged. In addition, income tax debt can only be discharged in limited circumstances.

In a Chapter 13 bankruptcy, any tax debt incurred during the three years before the bankruptcy filing cannot be discharged. These debts must be included and paid in full in Chapter 13 repayment plan.

As in Chapter 7 bankruptcy, however, income tax debt may be discharged in very limited circumstances.

What Debts are not Discharged in Bankruptcy?

Bankruptcies are legal proceedings that involve an individual or a business that is not able to make payments on their outstanding debts. Bankruptcy proceedings take place in federal courts under a bankruptcy judge who evaluates an individual’s assets that may be eligible for repayment on their debts.

There are different types of bankruptcies that may be filed. Depending upon which type is filed, what is considered a non-dischargeable debt may vary.

Non-dischargeable debts are debts that are not forgiven even after a successful bankruptcy proceeding. The bankruptcy court determines which additional debts may become non-dischargeable based on the circumstances of the case.

What are the Most Common Non-Dischargeable Debts?

Typically, there are three categories of non-dischargeable debts, including those that are:

• Not discharged unless the debtor is able to argue that they should be;
• Not discharged, but only if the creditor argues that it should not be; and
• Never discharged, or non-dischargeable.

From these categories, an individual can determine whether their debt falls into a category of debts that will never be discharged, also referred to as non-dischargeable debts, including:

• Student loans;
• Federal, state and local taxes;
• Any money that was borrowed on a credit card to pay taxes;
• Any fines or penalties for breaking the law. For the other debts that an individual wants the court to discharge, the debtor must convince the court;
  • For some debts, the debtor may need to meet a specific legal exception to be discharged;
• Child support or alimony;
• Personal injury debts that arose from a drunk driving accident;
• Debt arising out of a tax-advantaged retirement plan; and
• Condo or cooperative housing fee debts.

A creditor may also create a non-dischargeable debt if it can justify to the court why the debtor should still owe the debt. A creditor must request the court to determine if the debt is dischargeable or not.

If a creditor fails to raise the issue of dischargeability or if the creditor raises the issue but the court disagrees, the debts will be discharged. These debts may include credit card purchases for:

• Luxury goods;
• Cash advances; and
• Debts obtained by fraud or false pretenses.

For example, a debtor will not be able to discharge a debt caused by intentionally injuring an individual or their property.

Does the Debtor Have an Absolute Right to a Discharge?

No, a debtor does not have an absolute right to a discharge. If there is an objection to the discharge, a case may be filed by:

• A creditor;
• The trustee in the case; or
• The United States trustee.

Creditors will receive a notice that includes all of the important information, including dates and deadlines to meet for the case. If there is an objection, a creditor may file a complaint with the bankruptcy court before the state deadline for timeliness passes.

In some cases, the bankruptcy court may deny a discharge due to the debtor’s lack of compliance with the rules or procedures. For example, if an individual defrauds their creditors, the court may not discharge the debt, even if they were otherwise dischargeable.

In addition, a discharge may be denied if an individual files bankruptcy too frequently within a certain time period. For example, if the individual files successive Chapter 7 cases, they will not receive a discharge in the second case if it is within 8 years of the filing date of their first case.

When Is a Discharge Given?

A discharge is given at the conclusion of a bankruptcy. In a Chapter 7 case, the discharge is given at the end of the liquidation.

In a Chapter 11 case, a discharge is typically not given. Typically, corporations file under Chapter 11 and they are not permitted to receive a discharge.

In a Chapter 12 or a Chapter 13 case, a discharge is given upon completion at the end of the repayment plan. However, a discharge may be granted even if a debtor fails to complete the plan.

This only occurs if there are circumstances beyond the debtor’s control that cause the debtor to fail to complete the plan and modification of the plan is not practicable.

Once a debt is discharged, the creditor will no longer be permitted to:

• Call the debtor;
• Garnish their wages;
• Sue them in court; or
• Engage in any other activity that would force the debtor to pay a debt that has already been discharged.

If the creditor attempts to collect, the debtor may file a motion with the court to address the issue. The discharge order from the bankruptcy court is a permanent statutory injunction prohibiting the creditor from taking any action on the case.

If a creditor violates this order, it is typically punishable by a fine for civil contempt.

Do I Need a Lawyer for Help with a Bankruptcy Discharge?

If you have any outstanding personal or business related debts that you are unable to make payments on, it may be helpful to consult with a bankruptcy lawyer to see if filing for bankruptcy is right for you.

Your attorney can assist you with navigating the filing process as well as identifying any non-dischargeable debts.