What debt cannot be discharged when filing for bankruptcy?
Bankruptcy offers those burdened with debt the opportunity to make a fresh start through liquidation (Chapter 7) or reorganization (Chapter 13). In either case, the bankruptcy court can discharge certain debts. Once the debt is paid, the creditor can no longer take action against the debtor, such as attempting to collect the debt or seize collateral. However, not all debts can be discharged and some are very difficult to discharge.
Key points to remember
- If you file for Chapter 7 or Chapter 13 bankruptcy, the court may pay off some of your debts.
- Discharge means that you are no longer responsible for paying off the debt and the creditor can no longer attempt to collect your debt.
- Some debts, however, are not eligible for discharge, and some may only be in rare cases.
Chapter 7 vs. Chapter 13
Chapters 7 and 13 are the two most common types of personal bankruptcy.
In a Chapter 7 bankruptcy, a bankruptcy court-appointed trustee will liquidate (sell) many of your assets and use the proceeds to pay your creditors a portion of what you owe them. Certain assets are exempt from liquidation. These typically include some of the equity in your home and automobile, clothing, all the tools you need for your job, pensions, and Social Security benefits.
Your non-exempt assets that may be sold by the trustee include property (other than your primary residence), a second car or truck, recreational vehicles, boats, collections or other valuables, as well as bank and investment accounts.
In Chapter 7, your debts are typically discharged about four months after you file your bankruptcy petition, according to the US Courts Administrative Office. (Bankruptcy is governed by federal law and overseen by federal bankruptcy courts, although some rules differ from state to state.)
In a Chapter 13 bankruptcy, instead, you agree to repay an agreed portion of your debts over a period of three to five years. As long as you abide by the terms of the agreement, you are permitted to retain your otherwise non-exempt assets. At the end of the period, your remaining debts are discharged.
In general, people with less financial resources choose Chapter 7. Indeed, to be eligible for Chapter 7, you must submit to a means test, proving that you would be unable to repay your debts. Otherwise, the court may determine that Chapter 13 is your only option.
Debts never paid in bankruptcy
Although the goal of Chapter 7 and Chapter 13 bankruptcy is to put your debts behind you so that you can move on with your life, not all debt is eligible for discharge.
The United States Bankruptcy Code lists 19 different categories of debt that cannot be discharged under Chapter 7, Chapter 13, or Chapter 12 (a more specialized form of bankruptcy for family farms and fisheries). Although the details vary somewhat between different chapters, the most common examples of non-dischargeable debt are:
- Alimony and child support.
- Certain unpaid taxes, such as tax liens. However, some federal, state, and local taxes may be final if they date back several years.
- Debts for intentional and malicious damage to another person or property. “Willful and malicious” here means deliberately and without valid reason. In Chapter 13 bankruptcy, this only applies to personal injury; debts for property damage can be discharged.
- Debts for death or injury caused by the operation of a motor vehicle by the debtor while intoxicated by alcohol or other substances.
- Debts that you did not mention in your bankruptcy declaration.
If you file for Chapter 7 bankruptcy, you will also continue to owe any condominium or cooperative association fees, as well as any other debts that have not been paid in a previous bankruptcy. You can usually keep your car by reaffirming your car loan and continuing to make payments. Likewise, you can usually keep your home if you file for bankruptcy, even if you owe money on it, as long as you keep making the payments and don’t have more equity than you can afford. federal and state bankruptcy laws.
If you have tax debt or student loans, you may be able to negotiate a workable repayment plan without declaring bankruptcy.
Debt difficult to pay in bankruptcy
Student loans are notoriously difficult to pay off in bankruptcy; this is only possible if you can demonstrate undue hardship on yourself or your dependents, such as being unable to maintain a minimum standard of living. In some cases, a court can pay off some, but not all, of your student loan debt. If student loan debt is a major reason you are considering bankruptcy, first contact your loan officer and see if it is possible to negotiate a repayment plan that is right for you. In the case of federal student loans, for example, several repayment plans are available.
You cannot pay off your tax debts without special relief, which can only be obtained by going to bankruptcy court and explaining why you deserve relief. So, if you have tax debts that you cannot repay, you might be better off consulting a tax lawyer to discuss your options before declaring bankruptcy.
In the case of federal taxes, for example, the Internal Revenue Service (IRS) can offer several alternatives to people who are unable to pay what they owe. One is an offer in compromise, in which the IRS agrees to accept a lesser amount. The IRS can also organize a payment plan, or an installment agreement, that will allow you to pay your taxes over an extended period.
It should be noted that your creditors have some ability to prevent the discharge of certain debts. They can also ask the court to lift the automatic suspension which prevents them from carrying out a collection activity. Thus, the discharge process does not always go as quickly or smoothly as debtors might hope.
Debt Relief Alternatives To Bankruptcy
Bankruptcy has serious consequences. A Chapter 7 bankruptcy will stay on your credit reports for 10 years, and a Chapter 13 will stay for seven years. This can make it more expensive, if not impossible, to borrow money in the future, such as for a mortgage or car loan, or to get a credit card. It can also affect your insurance rates.
So it is worth exploring other types of debt relief before filing for bankruptcy. Debt relief usually involves negotiating with your creditors to make your debt more manageable, such as lowering interest rates, forgiving some of the debt, or giving yourself more time to repay. Debt relief often also benefits the creditor, as they are likely to withdraw more money from the arrangement than if you were to file for bankruptcy.
You can negotiate yourself or hire a reputable debt relief company to help you. As with credit repair, there are scam artists masquerading as experts in debt relief, so be sure to check out any company you are considering. Investopedia publishes a regularly updated list of the best debt relief companies.