When you’re going through a financial crisis, sometimes bankruptcy is the best or only solution. Certain unforeseen events like divorce, catastrophic illness or a business failure can bring with them insurmountable debts that you don’t have the means to pay back, making bankruptcy a valid option for debt relief.
But while many debts can be discharged by filing for bankruptcy, some debts cannot be gotten rid of so easily. Let’s look at how bankruptcy works and what debts are not eligible for discharge.
At a glance:
- Some debts like tax obligations, child support, student loans, criminal debts and certain property liens cannot be discharged in bankruptcy.
- Before filing for bankruptcy, ensure debts are in your name, don’t take on new debts and be aware of potential consequences for hiding assets.
How does the bankruptcy process work?
When people talk about bankruptcy filing, most people mean filing for bankruptcy under Chapter 7 and Chapter 13 of the bankruptcy code. The main difference between the two is what happens to your assets and who qualifies for each.
- Chapter 7 bankruptcy: This type of bankruptcy focuses on liquidation — you must sell any nonexempt assets to pay off your debts. To qualify for this kind of bankruptcy, your income must be below the median for a household of your size in your state. If your household income exceeds your state’s median, you must pass a means test to qualify, which considers your income, expenses and family size to determine if you can reasonably repay your debt.
- Chapter 13 bankruptcy: This type of bankruptcy works more like a payment plan, in which you must pay off your debt in three to five years, but you have a chance to keep your property — it can even stop a foreclosure process. To qualify, you must prove to the bankruptcy court that you have enough income left over after necessary expenses to meet your repayment plan obligations.
In this article, we will focus on eight types of debt that can’t be discharged in Chapter 7 bankruptcy.
What debts cannot be discharged in bankruptcy?
There are some nondischargeable debts to keep in mind if you’re considering filing for bankruptcy. Most nondischargeable debts are classified as “priority unsecured debts.” Unsecured debt is debt without collateral, and priority unsecured debts cannot be discharged. In contrast, non-priority unsecured debt — like medical bills, credit card debt or personal loans — will most likely be discharged in bankruptcy.
Here is a list of nondischargeable debts to keep in mind.
1. Tax debt
Certain kinds of tax debts cannot be discharged in bankruptcy. This generally includes income taxes, Social Security taxes and penalties you owe, or unpaid withholding tax for your employees.
Although most back taxes cannot be discharged in bankruptcy, you may be able to have taxes discharged if they are for an income tax return due three or more years ago and you meet certain other qualifications. If you owe significant back taxes you cannot pay in a reasonable period of time, you may want to ask a tax attorney or other professional about an Offer in Compromise (OIC) or other alternatives.
2. Child support and alimony
If you owe money for spousal or child support or alimony, you can’t discharge those debts when you file for Chapter 7 bankruptcy. You’ll still be legally obligated to pay these debts once your bankruptcy case is closed.
3. Student loans
Most personal loans can be discharged by filing for bankruptcy, but student loans are more challenging to get rid of. You typically can’t discharge your student loan debt through bankruptcy — at least not right after you graduate or stop attending school.
However, if the student loans cause you an undue hardship in the court’s view, you may be able to have them discharged. To do this, you generally must show that you cannot afford to pay the student loans now or for a significant portion of the loan repayment period and that you have made a good-faith effort to repay the loans. The courts under which you file may use other tests and criteria to make a final decision.
4. Home mortgage and other property liens
If you have a lien on a property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy. State laws vary, but you can generally keep your home when filing for bankruptcy if you keep making the payments and do not have more equity in the home than you are allowed to keep by state law.
5. Debts from criminal or malicious conduct
Debts from criminal and malicious acts cannot be discharged in bankruptcy, including penalties and lawsuit judgments awarded to victims. This includes offenses such as fraud, embezzlement, larceny, or even debts for death or malicious injury due to driving under the influence of alcohol or other substances.
6. Your car loan, if you want to keep your car
When you file for bankruptcy, you can “reaffirm” your car loan, which is secured by your car. This means that if you agree to repay all or part of your loan, the creditor won’t take your vehicle. However, you must make payments according to the reaffirmed car loan under bankruptcy rules.
7. Debt that doesn’t belong to you
Be sure debt is in your name before you file for bankruptcy to get rid of it. It might sound strange, but it’s happened before — people have filed for bankruptcy only to discover the debt actually belonged to an ex-spouse or other person, and they were never responsible for it in the first place.
8. New credit card debt
It may be tempting, but don’t go on one last spending spree before you file for bankruptcy. The courts often frown on recent charges made right before filing for bankruptcy, and you don’t want that to stand in the way of any bankruptcy discharge you might be counting on.
Do the courts ever deny a Chapter 7 bankruptcy?
Yes, the courts can decide to deny a Chapter 7 bankruptcy. Most individuals typically receive a discharge under Chapter 7 if they qualify. However, if the courts find that you concealed money or other assets, fraudulently transferred assets that should have been used to pay off debts or otherwise broke the law, the entire bankruptcy case may be denied.
