What Is Nondischargeable Debt?
If your debts have overtaken you, bankruptcy is often the only way to start over and be relieved of the liabilities that have piled up. However, the U.S. Courts consider several types of debt nondischargeable. In other words, you'll still owe those creditors even if your bankruptcy is discharged.
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 to eliminate their responsibility for that debt would not be beneficial to society. The benefit to the creditor and society as a whole outweighs the benefit that the debtor would gain if their responsibility for payment were erased.
Consider, for instance, child support. 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.
The list of dischargeable debts varies depending on the chapter of the U.S. bankruptcy code.
How Nondischargeable Debt Works
When you file for bankruptcy, part of the process will include submitting a list of all of your current liabilities. A trustee will be assigned to your case, and they will review your liabilities to determine which ones can be discharged. The debts that are dischargeable will be included in your bankruptcy case, while the nondischargeable ones will not.
Some creditors may dispute which specific debts can be discharged in court. In that case, the courts will have to assess those debts and determine whether those creditors have a legitimate claim to the debt that should endure through bankruptcy.
Once your bankruptcy case is discharged (i.e. you fulfilled the terms), you are protected from creditors for any debts included in your case. Any creditors with whom you hold nondischargeable debts can continue to contact you and pursue payment.
Types of Nondischargeable Debt
Here are some of the most common types of nondischargeable debt.
Student loans are almost never dischargeable in bankruptcy. The only way to discharge a student loan is by demonstrating undue hardship. This is an extremely difficult hurdle to overcome. Because of this law, there is little way out for students that default. However, there are other options for managing your student loans, including consolidation and refinancing.
The majority of recent taxes owed to the federal, state, or local government are not dischargeable in bankruptcy. The only exception to this rule is income tax debt 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 and whether you received extensions for the returns, among other requirements.
Domestic support obligations are not dischargeable in bankruptcy. This includes spousal support/alimony and child support. For instance, 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.
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.
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. Intentional failure to list all of your debts is cause to deny you a discharge and may result in fraud charges.
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.
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 nondischargeable. This includes debts incurred by fraud, embezzlement, larceny, breach of fiduciary duty, debts arising from willful or malicious injury, and debt arising from a marital settlement agreement or divorce.
Thus, if you file for bankruptcy and the creditor never files a lawsuit to have the debt determined as nondischargeable under one of these categories, the debt will be discharged. However, this is not the case as to the previous categories listed above, which are automatically not dischargeable.
Please note that these lists are not exhaustive and that there are other categories of nondischargeable debt that apply to specific situations. If you wish to determine whether any of these or other exceptions to discharge apply to you, consult with an experienced bankruptcy attorney.
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 by Carron E. Nicks
- Nondischargeable debts are those debts that you can't have forgiven in bankruptcy proceedings.
- The list of nondischargeable debts varies depending on the bankruptcy chapter.
- Some debts are never dischargeable, while others can only be discharged in some circumstances.