Bankruptcy offers people overwhelmed with debt the opportunity to start over through liquidation (Chapter 7) or reorganization (Chapter 13). In both cases, the bankruptcy court can discharge certain debts. Once a debt has been discharged, the creditor can no longer take action against the debtor, such as trying to collect the debt or seizing any collateral. However, not all debts can be paid off, and some are very difficult to pay off. To fully understand which debts cannot be discharged through bankruptcy, be sure to read this article.
Chapter 7 vs. Chapter 13: Which debts cannot be discharged by bankruptcy in each chapter
Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy. In a Chapter 7 bankruptcy, a trustee appointed by the bankruptcy court will liquidate (sell) many of his assets and use the proceeds to pay his creditors a portion of what he owes them. Some assets are exempt from liquidation. These usually include part of the equity in your home and car, clothing, tools you need for your job, pensions and Social Security benefits. Your non-exempt assets that can be sold by the servicer include property (other than your main home), a second car or truck, RVs, boats, collections or other valuables, and bank and investment accounts.
According to the Administrative Office of the US Courts, Chapter 7 debts are typically discharged about four months after the bankruptcy petition is filed. Bankruptcy is governed by federal law and is supervised by federal bankruptcy courts. However, some rules differ from state to state, which may affect which debts cannot be discharged in bankruptcy.
In a Chapter 13 bankruptcy, by contrast, you agree to pay an agreed portion of your debts over a period of three to five years. As long as you meet the terms of the agreement, you will be able to keep assets that are not otherwise exempt. At the end of the period, the remaining debts are settled. In general, people with fewer financial resources opt for Chapter 7. In fact, in order to file for Chapter 7, you must submit to a means test, showing that you would be unable to pay your debts. Otherwise, the court may find that Chapter 13 is your only option.
Which debts cannot be discharged by bankruptcy under any chapter
While the goal of both Chapter 7 and Chapter 13 bankruptcy is to put your debts behind you so you can move on with your life, not all debts are eligible for discharge. The US Bankruptcy Code lists 19 different categories of which debts cannot be discharged by Chapter 7, Chapter 13, or Chapter 12 bankruptcy (a more specialized form of bankruptcy for family farms and fish farms). Although the details vary somewhat between different chapters, the most common examples of non-dischargeable debts are:
- Certain unpaid taxes, such as tax liens. However, some federal, state and local taxes may be exempt if they go back several years.
- Debts for intentional and malicious damage to another person or property. In Chapter 13 bankruptcy, this applies only to personal injury; property damage debts can be discharged.
- Debts for death or personal injury caused by the debtor driving a motor vehicle while intoxicated by alcohol or under the influence of other substances.
- Debts you did not include in your bankruptcy filing.
If you file for Chapter 7 bankruptcy, the condominium or cooperative association dues, along with any other debt not discharged in a prior bankruptcy, will still be included in which debts cannot be discharged by bankruptcy. You can usually keep your car by reaffirming your car loan and keep making the payments. Similarly, you can usually keep your home if you file bankruptcy, even if you owe money on it, as long as you keep making the payments and you don’t have more equity than state and federal bankruptcy laws allow.
Debts that are difficult to pay off in bankruptcy
Student loans are notoriously difficult to discharge through bankruptcy. Cancellation is only possible if you can demonstrate undue hardship, such as being unable to maintain a minimum standard of living. In some cases, a court can forgive some, but not all, of your student loan debt. If student loan debt is one of the main reasons you’re considering bankruptcy, first contact your loan servicer and see if it’s possible to negotiate a repayment schedule that works for you. In the case of federal student loans, for example, there are several repayment schedules.
Within which debts cannot be eliminated by bankruptcy also include those for income tax. There is a special exemption in some cases, which can only be obtained by filing an application with the bankruptcy court. Therefore, if you have tax debts that you cannot pay, it is best to consult a tax attorney to explain your options before filing bankruptcy. In the case of federal taxes, for example, the Internal Revenue Service (IRS) can offer several alternatives to people who cannot pay what they owe. One of these is an offer in compromise, in which the IRS agrees to accept a lesser amount. The IRS can also set up a payment plan, or installment agreement, that will allow you to pay your taxes over an extended period of time.
It is worth noting that your creditors have some ability to prevent certain debts from being discharged. They can also apply to the court for a waiver of the automatic stay that prevents them from carrying out collection activities. Therefore, the cancellation process is not always as quick or easy as debtors expect.
To carry out the process and not suffer complications along the way, it is best to have the help of an experienced lawyer in the matter such as Michael Brooks. He will not only be able to advise on which debts cannot be eliminated by bankruptcy, but he will be able to guide you in your case to choose the best option and guarantee a good result.