Bankruptcy offers overwhelmed debtors an opportunity for a fresh start through either the liquidation (Chapter 7) or reorganization (Chapter 13) of debt. In both cases, the bankruptcy court is said to discharge the debts. Creditors lose the right to take action against the debtor, such as collection or repossession attempts. Not all debts can be discharged, however, and several are very difficult to discharge. The most common types of debt to avoid discharge include tax liens, student loans, alimony, debts obtained through fraud, debts for willful injury or wrongful death, and debts where the borrower was acting in a fiduciary capacity.
Debts Never Discharged in Bankruptcy
The U.S. Bankruptcy Code lists 21 different categories of debts that cannot be discharged. Perhaps the most common debts that cannot be discharged under any circumstances are child support and alimony. Other debts that cannot be discharged in bankruptcy include:
- Unpaid withholding tax, Social Security tax, income taxes, and other back taxes or tax penalties
- Mortgage debt
- Debts incurred due to fraud, larceny, embezzlement, or “willful and reckless acts”
- Debt that doesn’t belong to you
- New credit card debt incurred within 90 days before you filed for bankruptcy, as long as it teaches a certain threshold amount
- Debt owed due to borrowing against certain retirement plans
- Court fees
If you file for a Chapter 7 bankruptcy, you will also continue to owe any condominium or cooperation association fees, along with any other debts that were not discharged in a prior bankruptcy. You can usually keep your car loan if you want to keep your car; the bankruptcy process allows you to reaffirm your car loan. You can also usually keep your house if you declare bankruptcy, even if you owe money on it, as long as you can keep making the payments and don’t have more equity than you are permitted to have under state and federal bankruptcy laws.
Debts Difficult to Discharge in Bankruptcy
Student loans are notoriously difficult to discharge; it is only possible if you can demonstrate undue hardship that is permanent or expected to last for a majority of the life of the note. Usually, you cannot discharge student loan debt in bankruptcy within a certain amount of time after you graduate or stop attending school. However, a 2014 ruling in the Eighth Circuit Court of Appeals used a more lenient threshold in discharging a Webster University student's debt.
You cannot discharge income tax debts without a special exemption, which can only be obtained by petitioning the bankruptcy court and explaining why you deserve relief. If you have income tax debts you cannot repay, you may be better off consulting with a tax attorney about making an offer in compromise, or some other arrangement.
Creditors have some ability to stop certain debts from being discharged and the ability to motion the court to grant them relief from the automatic stay that prevents them from pursuing collection activity.