What Types of Debt Can and Cannot Be Discharged in Bankruptcy?
If you’re considering filing for bankruptcy, you’re probably interested in what debts can be discharged. While it’s true that there are some debts that can’t be discharged by any form of bankruptcy, it is also true that some debts can only be discharged in certain kinds of bankruptcy. Logistically, this can figure heavily into what chapter you file under or whether or not filing for bankruptcy would be to your advantage at all. In this article, we’ll discuss what kinds of debts can be discharged by different kinds of bankruptcy.
Debts That Can Be Discharged in Bankruptcy
Almost all unsecured debt can be discharged in bankruptcy.
Secured debt (debt in which some collateral has been posted) is not discharged in bankruptcy, unless the collateral is surrendered. If the collateral is surrendered, the deficiency balance (the amount that is owed after the creditor sells the collateral) would become unsecured and discharged in your bankruptcy. A discharge of a deficiency balance only occurs if you have not signed a reaffirmation agreement (an agreement to repay the debt).
The following debts cannot be discharged in bankruptcy:
- Debts that were incurred by fraud
- Any debt that resulting from operating a motor vehicle, boat or aircraft under the influence (alcohol or drugs)
- Most taxes cannot be discharged, but some personal income tax may be dischargeable in bankruptcy.
- Property settlement agreements as a result of a divorce or legal separation.
- Student loans are not dischargeable in bankruptcy, except in cases where it would create an extreme hardship on the debtor to pay back the student loan.
- Child and spousal support obligations
- Any debt that is a fine or penalty payable to a government unit
- Any payment of an order of restitution
- Home owner association dues
Debts That Cannot Be Discharged by Any Type of Bankruptcy
There are certain debts that you simply have to pay and that cannot be discharged by any form of bankruptcy. That doesn’t mean that there aren’t remedies available to you. It simply means that bankruptcy is not among them. These types of debts include:
- Child support or alimony,
- Fines or restitution owed for breaking the law,
- Back taxes owed, and
- Debts from civil penalties in a DUI.
In addition, there are other kinds of debt that will typically not be discharged by any form of bankruptcy. These include the following:
- Student loan payments, and
- Back income taxes.
In order to have these debts discharged, you will need to prove that you qualify for a special exemption. This is typically difficult to do. You generally need to show that some hardship exists, such as illness or injury, that precludes you from every making restitution on these debts.
In these cases, there are other programs available that might help you repay these debts in a manageable way.
Debts That Cannot Be Discharged After a Creditor Objection
When filing for bankruptcy, a creditor may come forward and object to a discharge. If they are successful in convincing the court that your debt should not be discharged in bankruptcy, that debt will not be discharged in bankruptcy. Examples of these can include debts that are:
- from fraud,
- from willful malice,
- arising from embezzlement, larceny, or fiduciary breach, and
- not listed on your bankruptcy petition.
Debts That Cannot Be Discharged by Chapter 7
Chapter 7 can discharge most forms of unsecured debt. That is debt that is not backed by real property. Secured debt can only be handled in Chapter 13. Delinquent balances after a default can be discharged in Chapter 7, but if you want to retain possession of the property for which you took out the loan, this must be done in Chapter 13.
In addition, Chapter 7 can discharge some taxes provided that they have been owed for a certain number of years. However, if any of these debts were incurred by fraud, they may not qualify for discharge under Chapter 7.
In addition, there are some debts that can only be discharged in Chapter 13. These include the following:
- Marital debts arising from a divorce settlement (that are not child or spousal support);
- Debt incurred to pay off a nondischargeable tax debt;
- Condo, coop, or HOA fees;
- Court fees; as well as
- Any debts that could not be discharged in a prior bankruptcy.
Can Secured Debt Be Discharged in Chapter 13?
Chapter 13 allows you to perform what is known as a “cramdown”. A cramdown essentially allows you to pay off the real value of a property that you’re making payments on. In other words, it shaves off interest and reduces the cost of payment to a current appraisal and not the value of the property when you paid for it.
Most forms of secured debt are eligible for a cramdown. The lone exception is a mortgage on your primary residence. Chapter 13 can consolidate your other debts so that it is easier to make payments on a mortgage, but you cannot cramdown your home.
Cramdowns work like this. Let’s say you own a car that is worth $10,000, you’ve paid $5,000, but you still owe another $10,000. You would only be responsible for paying the delinquent $5000, the interest would be shaved off, and the balance from that would be lumped into your unsecured debt. At the end of your bankruptcy, you will own the car outright.
Chapter 13 and Student Loans
Chapter 13 cannot discharge student loans unless you qualify for an exemption. You can, however, roll your student loan payments into a Chapter 13. At the end of the Chapter 13, you will be required to make payments on your student loan as per usual.
Debts Incurred After Filing for Bankruptcy
Your filing date marks the beginning of your bankruptcy. Any debts incurred after the filing date will not be discharged in the bankruptcy. For that reason, you want to be somewhat strategic in when you file.
Talk to a California Bankruptcy Attorney
To learn more about the types of debt that can be discharged in bankruptcy. Contact The Law Office of Diane Anderson, a certified bankruptcy expert in California. Call us for a free initial consultation.