Nondischargeable Debts in Bankruptcy: Debts That Will Not Go Away …
Debts That Will Not Go Away After Chapter 7 Bankruptcy
Mar 3, 2010Suzanne Bechard
People file for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code in order to get out from under their debts and make a fresh start. Chapter 7 bankruptcy is a liquidation proceeding in which most of the debtor’s nonexempt property is liquidated (sold) and the proceeds go toward paying off the creditors. Thereafter, the remaining debts are permanently discharged and the debtor is free and clear of them.
Some Debts Cannot be Discharged in Chapter 7 Bankruptcy
But there are some types of debts the debtor cannot get out from under by filing for Chapter 7 bankruptcy. In other words, even after bankruptcy is complete, the individual will have to pay these debts. The following are some of the types of debts that cannot be discharged in bankruptcy according to 11 U.S.C. § 523:
- Specific taxes, including certain income and property taxes.
- Debts owed for last-minute cash advances and the purchase of luxury items.
- Debts arising from the debtor’s fraudulent behavior or certain other wrongdoing.
- Domestic support obligations, such as child support and alimony.
- Student loans, whether private or government-backed.
- Debts that were omitted from the petition.
Some Taxes Cannot Be Discharged in Bankruptcy
According to Stephen P. Parsons, author of The ABCs of Debt, federal, state and local income taxes for the three tax years preceding the filing of Chapter 7 bankruptcy cannot be discharged. Likewise, property taxes due for the year preceding the filing of the bankruptcy petition cannot be discharged. A debtor who files a false tax return, no return or a late return within two years prior to filing bankruptcy cannot get those tax obligations discharged.
Debts for Luxury Items and Cash Advances Are Not Dischargeable
The law presumes that a debtor who has incurred more than $500 in debt to a single creditor for luxury goods or services in the 90 days prior to filing for bankruptcy has committed fraud. Thus, those debts will not be discharged in Chapter 7 bankruptcy. Items reasonably necessary for the maintenance or support of the debtor or the debtor’s dependents will not be considered “luxury” items, however.
Cash advances totaling more than $750 obtained in the 70 days prior to the filing of the petition will not be discharged in bankruptcy. As Parsons explains, “The policy behind these consumer provisions is to punish last minute spending sprees by unethical debtors.” Nevertheless, the bankruptcy debtor may be able to convince the court that the debts were necessary. If he or she is successful in doing so, the debts may be discharged.
Debts Arising From the Debtor’s Wrongdoing are Non-dischargeable
As a general rule, a debtor may not file for bankruptcy in order to get out from under debts incurred as a result of his or her own bad behavior. These may include:
- Debts created by means of false pretenses or the use of a fraudulent financial statement.
- Debts arising from fraud or defalcation in a fiduciary capacity.
- Debts incurred as a result of the debtor’s embezzlement or theft.
- Debts arising from the willful or malicious injury of another person.
- Personal injury and wrongful death claims that are the result of the debtor’s driving under the influence.
- Government fines, penalties and forfeitures.
Child Support and Alimony Cannot be Discharged in Bankruptcy
Alimony, support or maintenance of a spouse, former spouse or child of the debtor will not be discharged in bankruptcy. As Parsons notes, these obligations must arise from a court order or settlement agreement. “Both domestic support obligations and other debts to a former spouse or child of the debtor in the course of a divorce or separation are exempted from discharge” under the law.
Student Loans are Non-dischargeable in Bankruptcy
Prior to the 2005 amendments to the Bankruptcy Code, only government-backed educational loans were non-dischargeable in Chapter 7 bankruptcy. Now, all student loans, including private student loans, fall under the exemption from discharge in bankruptcy unless the debtor can prove undue hardship.
Debts Not Listed in the Bankruptcy Petition Will Not be Discharged
In preparing a bankruptcy petition to file in court, the debtor is responsible for listing all debts he or she owes. If a debtor fails to list a debt in the bankruptcy petition, the debt may not be discharged, even if the omission was inadvertent. Nevertheless, if a debtor has omitted a debt by mistake, it may be possible to amend the petition with the court’s permission and get the debt discharged.
There are many schedules and lists that must be filed along with the bankruptcy petition, and debtors completing the paperwork involved must be very careful to avoid mistakes such as omitting a debt that could otherwise be discharged. Because of the complexities involved in filing for bankruptcy, anyone considering Chapter 7 bankruptcy should seek the advice and counsel of an experienced bankruptcy attorney.
Source: Parsons, Stephen P. The ABCs of Debt. N.Y.: Aspen, 2009.
Additional Resource: What is Bankruptcy Credit Counseling
Disclaimer: This article is in no way intended as legal advice. For help with specific legal problems, one should contact an attorney in one’s local area.
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