For many facing a looming crisis with debts, bankruptcy can represent a lifeboat that can help them stay afloat and have enough time to reorganize or negotiate with creditors. Bankruptcy also allows debtors to discharge (or be forgiven) certain debts thus helping them start to get back on their feet. However, there are certain debts that cannot be discharged and some of them can be whoppers.
Chapter 7 bankruptcy is the most common method consumers use to declare bankruptcy and it is usually fairly quick. If you are eligible, a bankruptcy trustee will look at all of your assets, determine which ones are exempt (which means you can keep them) and which ones are not exempt. Those that are not exempt will be sold and the proceeds will go to your creditors. Debts that are left unpaid by the trustee and do not fall in the categories below will be discharged, meaning the debtor is no longer required to pay them.
The second type of consumer bankruptcy is Chapter 13 which focuses more on reorganization of debt than liquidation (which is selling assets to get the cash to pay off creditors). Under Chapter 13, the debt is reorganized and the debtor is required to make a certain monthly payment to the court-appointed bankruptcy trustee. The trustee then distributes the payments to the creditors. Chapter 13 bankruptcy can take around three to five years to complete.
Debts that cannot be discharged under Chapters 7 or 13:
There are certain debts that you just cannot discharge, no matter which bankruptcy proceedings you have chosen. This means that you will continue to be obligated to pay these debts, regardless of your bankruptcy. For Chapter 7 debts, that means the payments will need to continue. For Chapter 13 debts, it means that whatever debt is leftover after the payment plan is complete will need to continue to be paid.
Those debts include child support and alimony, student loans, fraudulent debts, taxes, any debts that the debtor fails to list on the bankruptcy petition, and fines associated with criminal convictions.
Additional Debts that are Not Dischargeable Under Chapter 7: Debt discharge is a more common phenomenon under Chapter 7 simply because its focus is liquidation rather than reorganization. This means that many of the debts will also be discharged simply because there are no assets or not enough assets to pay back creditors. It makes sense, then, that additional debts would be given protection from discharge. Debts that cannot be discharged under Chapter 7 include attorneys fees for child support and custody cases, debts arising out of the debtor’s “willful and malicious behavior” such as a civil court judgment for personal injury or death, and certain debts for tax-advantaged retirement plans.
Additional Debts that are Not Dischargeable Under Chapter 13: Since Chapter 13 is most concerned with reorganization and repayment of existing debts, the list of debts that are not dischargeable is shorter. However, those that are on the list do not require as much effort from creditors to keep. For example, while Chapter 7 does not allow for the discharge of debts incurred from the debtor’s willful and malicious conduct, it still requires the creditor to appear and argue as to why the debt should not be discharged. There is no such requirement in Chapter 13. This debt is automatically ineligible for discharge. However, this rule only applies to damages that result from personal injury or death—and not property damage.
If you are considering filing for bankruptcy, having an experienced bankruptcy attorney with you from the start is a necessity. Carolyn Duncan is an attorney who is a compassionate and experienced bankruptcy practitioner. I am ready and able to assist you in getting back on your feet. Contact me today to get started.