What Is Non-Dischargeable in a Bankruptcy Case?
The goal of most people who file bankruptcy is the discharge, or forgiveness, of debts. Although most debts are dischargeable in bankruptcy, there are certain categories of debt that will not be eliminated. If you owe any of these debts, and you file a bankruptcy case, you will still owe those debts after the bankruptcy case is closed. These categories can be found within the federal bankruptcy code at 11 U.S.C. Sec 523.
Why do some debts go away after a bankruptcy case, but some do not? Often it's because Congress decided for policy reasons that allowing debtors (those who file bankruptcy cases) to eliminate their responsibility for that debt would not be beneficial to society. In other words, when we compare the two, the benefit to the creditor and society as a whole outweighs the benefit that the debtor would gain if his or her responsibility for payment were erased. Consider for instance child support. For instance, the benefit to the child receiving child support is more important to the child and to society than allowing the person responsible for the support to eliminate the debt.
Please note that the list below is not exhaustive and that there are other categories of non-dischargeable debt that apply to very specific situations and are usually not applicable to most individuals. If you wish to determine whether any of these or other exceptions to discharge apply to you, please consult with an experienced bankruptcy attorney. Do not assume a debt is dischargeable prior to a bankruptcy filing. Always remember that bankruptcy is complex and what is not dischargeable may hinge on a small distinction.
Student loans are almost never dischargeable in a bankruptcy. The only way to discharge a student loan is by demonstrating undue hardship. This is an extremely difficult hurdle to overcome. There is currently increasing concern about the increasing student loan debt in the United States. Because of this law, there is little way out for students that default. However, there are ways to use bankruptcy to manage your student loans. We've written an entire series of articles on how bankruptcy can help you with your student loan issues. Start here: Managing Student Loans: Introduction.
The majority of recent taxes owed to the federal government, state, or locality are not dischargeable in a bankruptcy. The only exception to this rule is income tax that meets stringent requirements. In general, taxes that are more than three tax years old can be discharged depending on when you filed your tax returns, whether you received extensions for the returns, and other requirements. Read our article on discharging income taxes to learn more about this issue. Here's another article: Discharging Income Tax Debts: What is Dischargeable?
Domestic support obligations are not dischargeable in bankruptcy. For example, this may include spousal support/alimony and child support. If your ex-wife obtains an order from a state court requiring you to pay $500 per month to her in spousal support, this debt will never be discharged in bankruptcy. Learn more at Discharge of Domestic Support Obligations and Other Divorce-Related Debt.
Fines and Restitution
Fines and penalties owed to the government, except for tax penalties, are not dischargeable. Restitution to victims of crimes is also not dischargeable.
Also not dischargeable is a debt that you incurred when you operated a motor vehicle while intoxicated and caused personal injury or death of an individual. For example, if you are sued for hurting a motorist because you were driving drunk, and a judgment is obtained against you, the judgment is not dischargeable. See Discharging Debts: Debts that are Not Discharged.
Failure to List Debts
Debts may also not be discharged if you fail to list them in your bankruptcy schedules. This occurs if you fail to list the debt in time for the creditor to file a proof of claim and the creditor had no knowledge of the bankruptcy. Failure to list all of your debts is cause to deny you a discharge and is a federal crime!
Determination of Dischargeability
There are other debts that may not be dischargeable, but only if the creditor files a lawsuit against you and the bankruptcy court determines it to be non-dischargeable. This includes debts incurred by fraud, embezzlement, larceny, breach of fiduciary duty, debts arising from willful or malicious injury, and a debt arising from a marital settlement agreement or divorce. Learn more at Discharging Debts: Debts That May Be Discharged.
Thus, if you file for bankruptcy and the creditor never files a lawsuit to have the debt determined as non-dischargeable, as to those categories, the debt will be discharged. However, this is not the case as to the previous categories listed above, which are automatically not dischargeable.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.
Updated July 2017 by Carron E. Nicks