Are there some debts that cannot be discharged in bankruptcy?
Bankruptcy was established to provide relief to those that find themselves in a position of no longer being able to repay the debt they have incurred. Chapter 7 bankruptcy is a form of relief designed to discharge those debts in the most expeditious manner, while chapter 13 relief allows people that can afford to do so the opportunity to pay back some of their debt while discharging the part they cannot pay. A debt that is discharged through bankruptcy can never be collected in the future; it essentially ceases to exist. A debt that is not discharged is not affected by the bankruptcy and can be collected just like it was before the bankruptcy was filed.
There are, however, certain types or categories of debts that are excluded from the discharge provisions of bankruptcy. This article is meant to be a brief overview of the types of debts that may not be discharged. More detail about some of these will be discussed specifically in later articles. Please note, only those types of debts that people are most likely to have will be discussed here.
The following discussion is based on Title 11 United States Code, Section 523, for those of our readers interested. If you happen to review this section of the Bankruptcy Code you will see how complex this issue can be and why it is important to seek the advice of a competent and experienced bankruptcy attorney to determine whether any particular debt you might have is excluded from discharge under this statute.
These rules are the same no matter whether a chapter 7 or a chapter 13 is filed, with one important exception. That will be discussed below.
Two main types of nondischargeable debts;
There are two basic categories of debts that cannot be discharged: those that are “automatically” nondischargeable and those that require the determination of the Bankruptcy Court. By “automatic”, I mean that the creditor does not have to take any action in the bankruptcy case to have the debt determined nondischargeable. Even those debts are sometimes in controversy, so in some cases, the court must make a determination about the definition of a debt. There will be examples of that sort of debt below.
Other debts require the court to determine the debt is nondischargeable. In seeking such a determination the creditor is required to file an objection to discharge within a specific time frame as determined by the court upon the filing of the bankruptcy petition. A creditor with this type of objection to discharge must file a type of lawsuit, called an “Adversary Proceeding” with the bankruptcy court within that time limit or the debt will be discharged.
Debts that are automatically not discharged;
The types of automatically nondischargeable debt that are most common for individuals and small businesses are:
- Certain taxes
Although the law is very complicated on this subject, the basic rule for the most common type of tax, income tax, is that the tax is not dischargeable if:
— It became last due 3 or less years prior to the filing of the bankruptcy petition
— The return was filed 2 years ago or less, or not filed at all, or
— The tax was first assessed less than 240 days prior to the filing of the bankruptcy petition
Whether a tax fits inside of these or other rules can be determined by the Bankruptcy Court or later by a Tax Court.
- Debts that are not listed in the Bankruptcy Case in time for the creditor to file a Proof of Claim
However, most chapter 7, and some chapter 13, cases do not pay anything to general creditors, so a debt may be discharged even when it was never listed. This area in particular is one where an experienced and knowledgeable attorney must be consulted for assistance.
- Domestic Support Obligations (child or spousal support)
- A fine, penalty, or forfeiture owed to a governmental unit
- Most Student Loans
Although some student loans can be discharged due to hardship, a hardship claim is sometimes difficult to prove. If student loans are the main issue, this should be explored in depth with an experienced Sacramento bankruptcy attorney.
- Death or personal injury caused by operating a motor vehicle, vessel or aircraft while intoxicated
- Certain debts that were not discharged in a prior case or were not listed in a prior case
- Debt incurred to pay a tax that would not have been dischargeable
The classic type of debt that falls into this category is a credit card or other loan used to pay taxes. If that tax would not have been discharged, the new debt is not dischargeable.
- Debt created by settlement or judgment in a divorce or separation under state law.
This category of debt is treated differently under chapter 7 and chapter 13. Under chapter 7, it is automatically not discharged. Under chapter 13, it is treated as a general unsecured debt and is discharged to the extent not paid n the chapter 13.
That can be a very important consideration to those where this type of debt is the major issue. An experienced attorney will file under chapter 13 and discharge most of this debt.
- Homeowners Association dues and certain other types of debt that come due after the bankruptcy is filed.
While this is not usually a large amount of money, it can be significant under some circumstances. Seek the advice of a skilled Sacramento bankruptcy attorney to determine how to handle these types of claims. Sometimes the timing of the bankruptcy filing can make a big difference.
Debts where dischargeability must be determined by the Bankruptcy Court
The types of debt that may be nondischargeable and where the creditor must request that the Court make a determination are:
- Debt incurred or obtained by fraud, false representation, false pretenses or by a statement in writing that is false, is regarding the borrower’s financial condition, was relied on by the creditor and was intended to deceive.
Certain other debts are assumed to be fraudulent under this statute, such as credit cards debts incurred just before the case was filed.
- Debt for fraud or defalcation while acting as a fiduciary, embezzlement or larceny
- Debt for willful and malicious injury to another person or their property
Out of the above three types of debt, the most common by far is the first. In order for these types of debts to be made nondischargeable, the creditor must file an Adversary Proceeding within approximately 90 days of the date the bankruptcy petition is filed (this date is determined and clearly indicated upon the filing of the bankruptcy petition) or the debt will be discharged.
When an Adversary Proceeding is filed, the dischargeability of the debt must be determined by the Bankruptcy Court as to the facts and the law.
Future articles on dischargeability issues
See later articles for more information on these types of debts. In particular, there will be discussions on Taxes, Fraud, Creditors that were not listed and Student Loans.
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