Even though bankruptcy provides the most comprehensive debt relief for most folks who are struggling to make ends meet, it's not a way to get out of any and all debts. This means you need to carefully review your debts to make sure that filing bankruptcy will actually help you improve your situation. After all, if most or all of your debts can’t be eliminated as part of your bankruptcy filing, the downsides of filing bankruptcy may outweigh the debt relief benefits your bankruptcy discharge provides.
Written by Attorney Jenni Klock Morel.
Updated November 5, 2020
Even though bankruptcy provides the most complete debt relief for most folks who are struggling to make ends meet, it’s not a way to get out of all debts. This means you need to carefully review your debts to make sure that filing bankruptcy will actually help you improve your situation. After all, if most or all of your debts can’t be eliminated as part of your bankruptcy filing, the downsides of filing bankruptcy may outweigh the debt relief benefits your bankruptcy discharge provides.
Student Loan Debt
Student loan debts are usually non-dischargeable in bankruptcy. This means that student loans must be paid back even after a successful bankruptcy filing. However, discharge of student loans is not impossible. There are some cases when student loans can be discharged or partially discharged, but it requires an adversary proceeding and showing of undue hardship. It’s difficult for a filer to meet the requirements of undue hardship.
Recent Income Tax Debts
Recent income tax debts also can’t be erased through bankruptcy. However, income tax debts become dischargeable once a certain period of time passes. For an income tax debt to be dischargeable, it must meet three criteria:
The tax debt must be at least 3 years old.
The tax return associated with the tax debt must have been due, including any extensions, more than 3 years before the bankruptcy filing.
The tax return related to the debt must have been filed with the IRS at least 2 years ago.
If the tax return wasn’t filed on time, that tax return must have been filed more than 2-years before the bankruptcy case filing date.
The IRS must have assessed the tax debt at least 240 days prior to filing bankruptcy.
A tax debt is considered “assessed” on the date the tax liability is officially assessed at the IRS Service Center and the applicable form is signed by an IRS official.
If your income tax debts meet all three of these conditions, then they may be erased in bankruptcy. The exception is if a tax lien has already been filed.
A tax lien is a security interest placed on real estate or personal property to secure the payment of taxes. Once a tax lien is filed, it’s considered a secured debt and may not be eliminated in bankruptcy even if the tax debts are old enough.
Other Non-dischargeable Debts
The United States Bankruptcy Code creates a list of exceptions to discharge. In addition to student loan debt and recent income tax debts, there are a few other common non-dischargeable debts to know about.
As you evaluate how bankruptcy can help improve your situation, consider how different types of debts are treated differently under different types of bankruptcy. Certain debts that are non-dischargeable in Chapter 7 bankruptcy are dischargeable in Chapter 13 bankruptcy.
Alimony And Child Support
Domestic support obligations are non-dischargeable in Chapter 7 and Chapter 13 bankruptcies. This includes any missed alimony and child support payments. During the bankruptcy process, you are required to continue to pay domestic support obligations as they become due.
While domestic support obligations are never dischargeable, debts from a divorce decree or property settlement agreement that are not characterized as support payments can be discharged in a Chapter 13 bankruptcy.
Credit Card Charges Made Before Filing Bankruptcy
Credit card debts are unsecured debts not backed by property and are usually dischargeable through bankruptcy. But you can’t charge up credit cards while planning to erase that debt by filing for bankruptcy. That could be considered bankruptcy fraud. Debts incurred with the intent to discharge them in bankruptcy are non-dischargeable.
Charges made to credit cards in the months before filing bankruptcy can be scrutinized. There’s a 90 day look-back period on certain charges. Charges made to a creditor for more than $725.00 in luxury goods or services within 90 days of filing are presumed to be non-dischargeable.
A creditor can object to these debts being discharged by showing that more than $725.00 for luxury goods or services was charged during the 90 day look-back period. The creditor would not need to prove that the bankruptcy filer didn’t intend to pay back the charges when they were made.
The Bankruptcy Code doesn’t define what luxury goods or services are, but it carves out an exception for credit card charges made for necessities. Debts incurred before filing for goods or services reasonably necessary for the support of the filer or their dependents are dischargeable.
Debts From “Bad Acts”
Debts incurred through bad acts of the filer are non-dischargeable. These include debts related to:
personal injury caused driving while intoxicated
willful and malicious injury to someone or someone’s property
You should note that debts from the filer’s willful and malicious damage of property can be discharged in a Chapter 13 bankruptcy case even though it’s non-dischargeable in a Chapter 7 case.
If the person filing a current bankruptcy case has a previous bankruptcy on their record, any debts intentionally omitted in that prior case are non-dischargeable. Any debts the filer waived discharge on or was denied discharge for in a prior case are non-dischargeable in a later bankruptcy case.
A Quick Note About Secured Debt
Secured debt is sometimes listed as a debt that can’t be discharged in a Chapter 7 bankruptcy. This is not technically true. The filer’s personal obligation to pay the secured debt - usually in the form of a car loan or mortgage - is discharged. But, the only way to keep the property that is securing the debt is by paying for it.
So, it may feel like the secured debt was not discharged because you still have to make the monthly payments. When you file bankruptcy, you’re able to choose what you want to do with your car loan.
You can have the secured creditor go through with a repossession after filing secure in the knowledge that the car loan has been eliminated. Only if a reaffirmation agreement has been signed and, if needed, approved by the bankruptcy court judge, does a car loan survive the bankruptcy.
Chapter 13 bankruptcy vs. Chapter 7 bankruptcy
The two most common types of bankruptcy filed by individuals and married couples are Chapter 13 bankruptcy and Chapter 7 bankruptcy. Both chapters of bankruptcy can erase unsecured debts, including credit card debt, medical bills, and personal loans. Both chapters will appear on the filer’s credit report.
As soon as you file your bankruptcy petition, all collection activity against you must stop, including collection phone calls and wage garnishment. This is because of the automatic stay, a bankruptcy law that makes your creditors stop all collection actions against you. You will not have to pay back your discharged debts after receiving a bankruptcy discharge order in either Chapter 7 or Chapter 13. Both chapters have the power to give you the fresh start you deserve.
Chapter 13 is different from Chapter 7 because it requires monthly payments to be made to the bankruptcy trustee for 3 to 5 years. The monthly Chapter 13 repayment plan amount is calculated based on your monthly income minus allowable expenses. A Chapter 7 bankruptcy is typically completed within 6 months and doesn’t require a repayment plan. A Chapter 13 filing can fall off of a credit report sooner than a Chapter 7 filing.
As discussed above, some debts that can’t be discharged in Chapter 7 can be discharged in a Chapter 13 bankruptcy case. Reviewing the categories of debts you owe and their dischargeability with a bankruptcy attorney isn’t a bad idea.
Another way a Chapter 13 bankruptcy can help with otherwise non-dischargeable debts is by providing a mechanism to pay them off. Non-dischargeable debts can be included in the Chapter 13 repayment plan and paid off over the life of the plan. For example, past due domestic support obligations can be paid off in full in a Chapter 13 repayment plan.
Chapter 13 can also give a filer the opportunity to structure manageable monthly payments on their debts. For example, student loan payments can be made in the repayment plan. Although the remainder of student loan debt is non-dischargeable and will need to be paid back after bankruptcy, this gives the filer a chance to make affordable monthly payments while in Chapter 13 bankruptcy.
Ready For The Next Steps?
If a lot of your debt is non-dischargeable, talking to a bankruptcy lawyer can help you understand what solutions are available to you. You can get a free bankruptcy evaluation and learn more about your options. If you can't afford a lawyer to help you file a Chapter 7 bankruptcy, Upsolve’s web app may be able to help. Eligible filers can use Upsolve's free web app to prepare their bankruptcy forms.