When we consider what debts are discharged in bankruptcy, we start with the idea that all debts are discharged unless the Bankruptcy Code specifically says otherwise. So in the Bankruptcy Code, Congress has created a long list of types of debts that are either not discharged, or may not be discharged if certain proof is provided by a creditor. This brief article will describe in basis terms the main types of debt that might not be discharged in a consumer or small business case. For a question about any particular debt, you should speak with an experienced bankruptcy attorney to see if it is included as a debt that cannot be discharged. This subject is very complicated and may require detailed analysis and research to know the true answer.
There are 19 different categories of debt that are not dischargeable, with all but 3 of those being nondischargeable without any action by a creditor or any decision by the court. Below is a basic description of the categories most often faced by consumers and small businesses. There are other types of debts that are not discharged in a bankruptcy, but they are not as common.
The following debts are not dischargeable even if the creditor takes no action:
At the top of the list are various types of taxes. The most common tax that is not discharged is recent income tax. The basic rule is that a tax that was last due less than 3 years before a bankruptcy is filed is no discharged. Then it gets complicated. If the tax was an older year but the return was filed less than 2 years ago, it is not dischargeable. As simple as that sounds, some returns that were filed late are not considered a “tax return” and that tax cannot be discharged even if it is many years old. Also, if the tax authority just accessed the tax within 240 days of the bankruptcy or after the bankruptcy was filed, that tax is not discharged either.
Debts that are not listed are generally not discharged, but there is an important exception to this rule. If a debt is inadvertently not listed in a Chapter 7 case where there is no distribution to creditors (a “no asset” case), that debt is still discharged once the creditor has actual notice of the bankruptcy case. A person must be careful here or they may end up with a debt that is not discharged.
Child or spousal support (“domestic support”) is not dischargeable.
A fine, penalty or forfeiture owed to a governmental unit is not dischargeable. This usually involves traffic or parking ticket.
Almost all debt incurred for any educational purpose is not discharged, including Federal, State and private student loans or debt owed directly to a school of almost any kind. In rare circumstances the court can determine that not discharging the debt would create a “hardship” on the debtor, but this is difficult to prove.
A debt caused because someone caused injury to someone else, or caused their death, while driving, operating a boat or airplane while intoxicated.
A debt owed to a current or former spouse or a child that is not domestic support that was created in the course of a divorce or separation or in connection with a separation agreement, divorce judgment or other order of the court.
* It is important to note that this type of debt is NOT discharged in a Chapter 7 case, but it IS discharged in a Chapter 13 case.
Homeowners Association dues, or similar fees or assessments that come due after a bankruptcy is filed are not discharged. This includes dues for property where the person filing bankruptcy no longer lives until the title is transferred, possession is completely given up and all other interests are terminated. Debt incurred prior to the filing is discharged, but if the Association has placed a lien on the property, they may be entitled to payment out of proceeds of the sale of the property. As with most of this list of debts, this can be complicated and the advice of an experienced bankruptcy attorney will be needed to help make this determination.
The following debts are dischargeable unless the creditor takes action within a short time after the bankruptcy is filed. To keep these types of debts from being discharged in a bankruptcy, a creditor must file a lawsuit on time and then go on to prove their case to the bankruptcy court.
Debts incurred through the use of false pretenses, a false representation or actual fraud (other than a written statement) may not be discharged.
A debt incurred by using a written statement that is false, states the borrower’s financial condition that is relied on by the creditor and with the intent to deceive may not be discharged.
Consumer debts totalling over $600 incurred within 90 days before the case is filed for luxury goods or services or for cash advances over $750 within 70 days before the case is filed are presumed to be nondischargeable. If the creditor takes timely action in the bankruptcy court, the result will almost always be that the debts are not discharged.
A debt incurred by fraud or “defalcation” (misappropriation or taking) with acting as a fiduciary capacity is not discharged. An example would be someone holding money in a trust and they take it or use it for themselves.
A debt owed for embezzlement or larceny (theft) is not discharged.
A debt caused by a willful and malicious injury caused to someone or their property is not discharged.
The bottom line?
Get the advice of an experienced bankruptcy attorney if you have questions about whether one or more of your debts might not be discharged in a bankruptcy case. While it may be up to a judge to make the final determination, good legal advice about what to expect at the very beginning will make the process more predictable and help you decide what is in your best interest.