When people go through a financial crisis, sometimes bankruptcy is the best or only solution.
For example, when someone has insurmountable debts, often due to one-time events such as divorce, catastrophic illness, or business failure, bankruptcy may be the best way to overcome debt that person has no way of ever paying back.
By “bankruptcy,” most people mean filing under Chapter 7 of the bankruptcy code. This is the so-called straight bankruptcy, in which debts can be discharged (gotten rid of).
Certain types of debt cannot be discharged in Chapter 7 quite so easily, however.
Take note of these 8 exceptions before you decide to file Chapter 7 bankruptcy:
Most back taxes and customs
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 a return due 3 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, or OIC, or other alternatives.
Child support and alimony
These payments are specifically not dischargeable under Chapter 7 bankruptcy.
You can’t get rid of student loan debt through bankruptcy – at least not right after you graduate or stop going to school.
If the loans cause you an undue hardship in the court’s view, however, you may be able to have them discharged.
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.
Home mortgage and other property liens
If you have a lien on the property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy.
State laws vary, but you can generally keep your home in bankruptcy if you keep making the payments and if you do not have more equity in the home than you are allowed to keep by state law.
Debts from fraud, embezzlement, larceny, or from “willful and reckless acts”
This includes debts for death or injury due to driving under the influence of alcohol or other substances.
Your car loan, if you want to keep your car
If you are paying off your car, the loan is secured by your car. When you file for bankruptcy, under the new bankruptcy rules, you can “reaffirm” your car loan.
The good news is that if you agree with your car loan creditor to repay all or part of your loan, the creditor won’t take your car.
Of course, you must make payments according to the reaffirmed car loan.
Debt that doesn’t belong to you
Be sure debt is really in your name before you file for bankruptcy to get rid of it. Strange but true – people have filed for bankruptcy, only to discover the debt actually belonged to an ex-spouse or other person.
New credit card debt
Don’t go on one last spree before you file for bankruptcy. The courts frown on recent charges made right before a person files for bankruptcy.
Do the courts ever deny a Chapter 7 bankruptcy?
It can happen. Most individual debtors receive a discharge under Chapter 7.
However, if the courts find that an individual 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.