Many people seek bankruptcy relief in order to receive a fresh start. They are looking to wipe the slate clean and start anew. While bankruptcy can certainly achieve this goal, not all debts are created equal in bankruptcy. There are certain debts that are deemed non-dischargeable. This means they will not get wiped out in a Chapter 7 and may not get wiped out in a Chapter 13 bankruptcy.
There are several types of non-dischargeable debts. There are nineteen to be exact. The full list can be found in the United States Bankruptcy Code at Section 523. The most common non-dischargeable debts, and those we see most frequently as consumer bankruptcy attorneys, are:
Taxes
One thing to remember is that just as not all debts are created equal, neither are all taxes created equal. Most debtors think that if they owe the IRS, they are going to owe the IRS until the day they die. This is not entirely true. Only certain, not all, taxes are non-dischargeable. Some can be wiped out. Generally, taxes are non-dischargeable in bankruptcy if a return was not filed at all for that tax year, or was filed late and within two years of the bankruptcy filing; fraudulent returns were filed; the tax years owed are within three years of the bankruptcy filing; and the taxes were assessed within 240 days of filing the bankruptcy. This means that there is hope for a debtor who has old tax debt and who filed returns on time.
Child Support and Alimony
I like to joke around with my clients and say that the IRS and ex-wives are the worst creditors to have. While this may or may not be true, domestic support obligations, like taxes, are another non-dischargeable debt. Unlike taxes, there are not any exceptions to this non-dischargeability rule. If you are debtor who owes child support and/or alimony, and you are behind in payments, you will not be able to wipe out these debts in a bankruptcy. Additionally, other forms of “domestic support” obligations, such as equalizer payments or property settlements can also be considered non-dischargeable. These are considered debts owed to a spouse, former spouse, or child pursuant to a divorce agreement. Because the provision for domestic support is broad, it is important to also consider the bankruptcy implications of a divorce decree when in the process of getting divorced.
Fraud
Fraud is a scary word and no one likes to be accused of it. However, fraud in bankruptcy can mean many things. Certain debts are non-dischargeable under the standard definition of fraud, i.e. a debtor obtained financing or credit by mis-representing certain facts, or by lying about his/her financial situation. This type of fraud must be proven in order for a debt to be deemed non-dischargeable. It can be difficult to do so because one must prove that a debtor had the intent to deceive or mislead his/her creditor. On other hand, there is also a more general type of fraud in bankruptcy. If a debtor charges, or incurs debt, over $600.00 within ninety days of filing bankruptcy, the debt may be determined to be incurred fraudulently, and is, therefore, non-dischargeable. The point here is that even though a debtor may not have intended to mislead anyone, he/she should not have incurred a lot of new debt on the eve of a bankruptcy filing.
Student loans
Ah, student loans, they are near and dear to my heart. Unfortunately, they are also very, very difficult to discharge in a bankruptcy. This was not always the case, but when the bankruptcy code was revamped in 2005, the rules of discharging student loans were also refined. Now, any loan incurred for the purpose of receiving an educational benefit is non-dischargeable unless not discharging the loan would be a hardship to a debtor or a debtor’s dependents. This means all educational loans, whether federal or private, may be deemed non-dischargeable. There is that nice hardship exception, but it is difficult to prove hardship. You cannot argue hardship just because you went to Harvard business school, incurring a bunch of loans and believing you would easily be CEO of a huge corporation, but now find yourself managing a Starbucks. Usually hardship is determined by a three part test: 1. that the debtor would not be able to maintain a minimal standard of living if forced to pay the student loans; 2. that the situation will continue to exist over a significant portion of the repayment period; and 3. the debtor has made good faith efforts to repay the loans.
This is just a sample of the non-dischargeable debts. If you choose to file Chapter 7 bankruptcy, and you do not fit into an exception of the dischargeability rule, these debts will remain with you after your bankruptcy is completed. You may choose to file a Chapter 13 bankruptcy in which certain of the debts (taxes and child support) are still not dischargeable, but can be paid 100% over a three to five year period. Although there is still repayment, this sometimes assists debtors in managing the debt and payments. Certain debts, such as the more general domestic support debts and civil fines, can also be discharged in a Chapter 13, where they would automatically be non-dischargeable in a Chapter 7.
