Not all debts can be discharged trough bankruptcy, including child support, alimony, certain unpaid taxes, and more. Other types of debt, like student loan debt, is very difficult to get discharged. Most other loan debt can be alleviated through bankruptcy.
Bankruptcy offers people who are overwhelmed by debt an opportunity for a fresh start through either liquidation (Chapter 7) or reorganization (Chapter 13). In both cases, the bankruptcy court can discharge certain debts, but not all types of debt. Once a debt has been discharged, the creditor can no longer take action against the debtor, such as attempting to collect the debt or seizing any collateral.
Learn more about what kind of loan debt is not alleviated when you file for bankruptcy, and what kind of debt is difficult to discharge.
Key Takeaways
Types of debt that cannot be discharged in bankruptcy include alimony, child support, and certain unpaid taxes.
Other types of debt that cannot be alleviated in bankruptcy include debts for willful and malicious injury to another person or property.
If you do not list a debt on your bankruptcy, it will not be alleviated.
Certain debts, like student loans, can be discharged only in rare cases.
Chapter 7 vs. Chapter 13
Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy.
In a Chapter 7 bankruptcy, a trustee appointed by the bankruptcy court will liquidate (sell off) many of your assets and use the proceeds to pay your creditors some portion of what you owe them. Certain assets are exempt from liquidation. Those typically include part of the equity in your home and automobile, clothing, any tools you need for your work, pensions, and Social Security benefits.
Your nonexempt assets that can be sold off by the trustee include property (other than your primary home), a second car or truck, recreational vehicles, boats, collections or other valuable items, and bank and investment accounts.
In Chapter 7, your debts are typically discharged about four months after you file your bankruptcy petition, according to the Administrative Office of the U.S. Courts. Bankruptcy is governed by federal law and overseen by federal bankruptcy courts, although some rules differ from state to state.
In a Chapter 13 bankruptcy, by contrast, you commit to repaying an agreed-upon portion of your debts over a period of three to five years. As long as you meet the terms of the agreement, you are allowed to keep your otherwise-nonexempt assets. At the end of the period, your remaining debts are discharged.
In general, people with fewer financial resources choose Chapter 7. In fact, to be eligible for Chapter 7, you must submit to a means test, proving that you would be unable to repay your debts. Otherwise, the court may determine that Chapter 13 is your only option.
Debts Never Discharged in Bankruptcy
While the goal of both Chapter 7 and Chapter 13 bankruptcy is to put your debts behind you, not all debts are eligible for discharge.
The U.S.BankruptcyCode lists 19 different categories of debts that cannot be discharged in Chapter 7, Chapter 13, or Chapter 12 (a more specialized form of bankruptcy for family farms and fisheries).
While the specifics vary somewhat among the different chapters, the most common examples of non-dischargeable debts are:
Alimony and child support.
Certain unpaid taxes, such as tax liens. However, some federal, state, and local taxes may be eligible for discharge if they date back several years.
Debts for willful and malicious injury to another person or property. “Willful and malicious” here means deliberate and without just cause. In Chapter 13 bankruptcy, this applies only to injury to people; debts for property damage may be discharged.
Debts for death or personal injury caused by the debtor’s operation of a motor vehicle while intoxicated from alcohol or impaired by other substances.
Debts that you failed to list in your bankruptcy filing.
If you file for a Chapter 7 bankruptcy, then you will also continue to owe any condominium or cooperative association fees, along with any other debts that were not discharged in a prior bankruptcy.
You can usually keep your car by reaffirming your car loan and continuing to make payments. Similarly, you can usually keep your home if you declare bankruptcy, even if you owe money on it, as long as you continue making the payments and don’t have more equity than you are permitted under state and federal bankruptcy laws.
If you have income tax or student loan debt, then you may be able to negotiate a workable repayment plan without filing for bankruptcy.
Debts That Are Difficult to Discharge in Bankruptcy
Student loans are among the type of debt that is difficult to alleviate when you file for bankruptcy. You must demonstrate undue hardship to yourself or your dependents, such as being unable to maintain a minimal standard of living.
In some cases, a court may discharge part, but not all, of your student loan debt. If student loan debt is a major reason for your considering bankruptcy, contact your loan servicer first and see if it’s possible to negotiate a repayment plan that would work for you. In the case of federal student loans, for example, several repayment plans are available.
You cannot have income tax debts discharged without a special exemption, which can only be obtained by petitioning the bankruptcy court and explaining why you deserve relief. So if you have income tax debts that you cannot repay, then you may be better off consulting with a tax attorney to discuss your options before filing for bankruptcy.
In the case of federal taxes, for example, the Internal Revenue Service (IRS) can offer several alternatives to people who are unable to pay what they owe. One is an offer in compromise, in which the IRS agrees to accept a lesser amount. The IRS may also arrange for a payment plan, or an installment agreement, that will allow you to pay your taxes over an extended period of time.
Your creditors can stop certain debts from being discharged. They may also ask the court for relief from the automatic stay that prevents them from pursuing collection activity.
Debt Relief Alternatives to Bankruptcy
Bankruptcy has serious consequences. A Chapter 7 bankruptcy will remain on your credit reports for 10 years, and a Chapter 13 will remain for seven years. That can make it more expensive or even impossible to borrow money in the future, such as for a mortgage or car loan, or to obtain a credit card. It can also affect your insurance rates.
So it’s worth exploring other types of debt relief before filing for bankruptcy. Debt relief typically involves negotiating with your creditors to make your debts more manageable, such as reducing the interest rates, canceling some portion of the debt, or giving you longer to repay. Debt relief often works to the creditor’s advantage, too, as they are likely to get more money out of the arrangement than if you were to declare bankruptcy.
You can negotiate on your own or hire a reputable debt relief company to help you. As with credit repair, there are scam artists who pose as debt relief experts, so be sure to check out any company that you’re considering. Investopedia publishes a regularly updated list of the best debt relief companies.
Is it Better to Claim Bankruptcy or Settle Debt?
Debt settlement and bankruptcy can both help you achieve a fresh start by eliminating debts that you cannot pay. However, they both will negatively impact your credit score. Bankruptcy can be a faster process, but will likely have longer-term impact on your credit score.
What Is the Downside of Filing for Bankruptcy?
Bankruptcy's main downside is that it will remain on your credit report for up to seven years and negatively impact your credit score. This can make it more difficult to get approved for loans or get the best interest rates on loans such as mortgages, car loans, or personal loans.
Can You File for Bankruptcy for Student Loans?
If you declare bankruptcy, you typically do not have your federal or private student loan discharged. Student loans can potentially be alleviated by making a separate filing known as an "adversary proceeding."
The Bottom Line
Bankruptcy can help you eradicate debt that has become unmanageable to the point where you cannot pay it. However, it does have some downsides to keep in mind, including a long-term impact on your credit score. Weigh all your options as well as the pros and cons of filing for bankruptcy before you take action, and consider consulting with a professional financial advisor.
No matter which form of bankruptcy is sought, not all debt can be wiped out through a bankruptcy case. Taxes, spousal support, child support, alimony, and government-funded or backed student loans are some types of debt you will not be able to discharge in bankruptcy.
The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units ...
Some types of debt generally aren't dischargeable through a Chapter 7 bankruptcy, including child support, alimony, court fees and some tax debts. You also often can't discharge student loans through bankruptcy, although a process change in November 2022 might make it easier.
First, while most forms of consumer debt — credit card debt, personal loans, medical debt, mortgages and auto loans — are generally fair game for either eliminating or negotiating a lower payback amount in bankruptcy, that's not true for student loan debt.
Debts not discharged in chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated ...
An exclusion for the purpose of raising funds for debt service costs is referred to as a debt exclusion. Debt exclusions require voter approval. The additional amount for the payment of debt service is added to the levy limit or levy ceiling for the life of the debt only.
Often your secured debts can be discharged in Chapter 7 bankruptcy, which means you could get your home and auto loans discharged. However, if you want to keep your house and your car, you will need to continue making payments.
Chapter 13 Bankruptcy Has a Debt Limit; Chapter 7 Does Not
Some secured debts, such as a home loan, may extend beyond the five-year period according to the terms of your contract, but at the end of five years, your unpaid unsecured debt will be discharged.
You can't reaffirm a debt if you leave it out. You can usually keep your car, house, and other collateral after filing bankruptcy. The requirements depend on the type of bankruptcy you file. In a Chapter 7 case, you can keep your car if you can afford the payments and the loan is current.
You must list all debts on your Chapter 7 bankruptcy schedules without exception—even if you think they won't get wiped out by your discharge. If you leave off a debt, you run the risk of remaining responsible for it.
You typically can't keep credit cards if you declare bankruptcy. Bankruptcy isn't a pick and choose proposition, and all creditors are to be treated the same.
Debtors rarely do this, but it happens in 1-2% of the cases. Under stress, you may fail to include wages, profits, property, transfers of assets, payments, lawsuits, and child support obligations. I have seen all of these being a reason for having a bankruptcy dismissed for fraud.
Why do roughly 2 out of every 3 Chapter 13 cases fail? Well, to get a discharge of your debts, you need to complete a 3-5 year repayment plan. And most plans are 5 years long. Only at the end of the plan will the remainder of some debts be forgiven.
A Chapter 13 petition for bankruptcy will likely necessitate a $500 to $600 monthly payment, especially for debtors paying at least one automobile through the payment plan. However, since the bankruptcy court will consider a large number of factors, this estimate could vary greatly.
Chapter 7 and Chapter 13 bankruptcy are two of the most common types of bankruptcy filings. But there are four other types — Chapters 9, 11, 12, and 15. Here is a breakdown of the six different types of bankruptcy filings, starting with the most common.
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
No matter which form of bankruptcy is sought, not all debt can be wiped out through a bankruptcy case. Taxes, spousal support, child support, alimony, and government-funded or backed student loans are some types of debt you will not be able to discharge in bankruptcy.
Undisclosed debt is any loan or liability that exists at the time of closing of a mortgage loan and is not disclosed by the borrower during origination.
They don't get mad when they get your bankruptcy filing and they don't cry when they get your bankruptcy filing. Instead, they process the bankruptcy notice along with the thousands of others they get each year without an ounce of emotion about it.
The largest bankruptcy in U.S. history occurred on September 15, 2008, when Lehman Brothers Holdings Inc. filed for Chapter 11 protection with more than $639 billion in assets. Lehman Brothers Holdings, Inc. Worldcom, Inc.
More than likely, you would only be dealing with the two most common types of bankruptcies for individuals: Chapter 7 and Chapter 13. (A chapter just refers to the specific section of the U.S. Bankruptcy Code where the law is found.2) But we'll take a look at each type so you're familiar with the options.
Again, there's no minimum or maximum amount of unsecured debt required to file Chapter 7 bankruptcy. In fact, your amount of debt doesn't affect your eligibility at all. You can file as long as you pass the means test. One thing that does matter is when you incurred your unsecured debt.
Debt collectors cannot try to collect on debts that were discharged in bankruptcy. Also, if you file for bankruptcy, debt collectors are not allowed to continue collection activities while the bankruptcy case is pending in court.
Bankruptcies are considered negative information on your credit report, and can affect how future lenders view you. Seeing a bankruptcy on your credit file may prompt creditors to decline extending you credit or to offer you higher interest rates and less favorable terms if they do decide to give you credit.
Once you file for bankruptcy, an automatic stay goes into effect. An automatic stay specifically states that creditors cannot contact you to collect debts after you've filed for bankruptcy. It protects you from harassing phone calls, emails, and letters.
You can spend cash before bankruptcy if you're using it to pay for necessary bills because you have the right to pay for the things you need to work and live. However, you should avoid incurring new debt and not pay one creditor off while leaving the others high and dry.
Bankruptcy frees you from debt collection, but the headaches can linger for years. Debt settlement without bankruptcy can take more time but — if negotiated properly — can do less damage to your credit. Debt settlement stays on your credit report for seven years, but has less negative impact on your credit score.
In bankruptcy law, luxury items are any goods or services that aren't reasonably necessary for the support or maintenance of the filer or the filer's family.
Dischargeable debt is debt that can be eliminated after a person files for bankruptcy. The debtor will no longer be personally liable for the debts and therefore has no legal obligation to pay discharged debt.
The FDCPA prohibits debt collection companies from using abusive, unfair, or deceptive practices to collect debts from you. The FDCPA covers the collection of debts that are primarily for personal, family, or household purposes.
Secured debt is backed by collateral. If a borrower defaults on a secured loan, the lender could repossess the collateral. Examples of secured debt include mortgages, auto loans and secured credit cards.
Personal loans work like credit cards, and are discharged in bankruptcy. The same general exceptions apply to personal loans as do to credit cards. Payday loans are generally unsecured, and are discharged in bankruptcy.
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.
The statute of limitations on debt in California is four years, as stated in the state's Code of Civil Procedure § 337, with the clock starting to tick as soon as you miss a payment.
Debt collectors may not be able to sue you to collect on old (time-barred) debts, but they may still try to collect on those debts. In California, there is generally a four-year limit for filing a lawsuit to collect a debt based on a written agreement.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.
Unsecured debt is any debt that is not tied to an asset, like a home or automobile. This most commonly means credit card debt, but can also refer to items like personal loans and medical debt.
Unsecured Debt - If you simply promise to pay someone a sum of money at a particular time, and you have not pledged any real or personal property to collateralize the debt, the debt is unsecured. For example, most debts for services and some credit card debts are “unsecured”.
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