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Exceptions to Bankruptcy Discharge

What Debts Are Not Discharged in Bankruptcy? (11 USC § 523)

When a prospective client asks about bankruptcy, in particular chapter 7, he or she should rest at ease when it comes to the discharge of their debts. First, “discharge” in bankruptcy is simply the technical term used to reference the result of bankruptcy, which is nothing more complicated than the removal of one’s debt obligation. That is the whole point of bankruptcy: to remove the obligation to pay one’s debt. But much like life, there are exceptions to the general rule. For many debtors looking to bankruptcy to help ease the burden of debt, many of these exceptions are not applicable. But every debtor should review exceptions to bankruptcy discharge with an experienced attorney. We invite you to contact us at Arnold & Smith, PLLC to arrange a free consultation with an attorney to discuss your case and those potential exceptions that would impact you.

Every debtor’s case is unique. However the bankruptcy code outlines several specific examples of debts that will likely be non-dischargeable. A few examples of debts that survive bankruptcy are as follows:

1. All student loans

Before the 2005 amendments to the bankruptcy code, debtors were allowed to discharge private student loans. Public or federal student loans, such as the Federal Stafford loans, have always been nondischargeable. After 2005, however, Congress made all student loans nondischargeable. There is an undue hardship exception to this rule, however, courts around the United States have used this exception in very, very rare instances. No perspective debtor should feel that the exception may be applied to them because of its sparse application. Rather, debtors should recognize that if they file bankruptcy and they have student loans, those student loans will survive the bankruptcy.

2. Taxes

Most taxes are nondischargeable; in other words, tax debt survives bankruptcy. With that said, there are some occasions in which taxes can indeed be discharged. It is a complicated formula that an experienced bankruptcy attorney can assist with, but generally the formula starts with the proposition of whether the debts owed are more than three years old. Thereafter a debtor’s tax return must have been filed at least two years ago and lastly, the tax debt cannot be the product of tax evasion or tax fraud. Please note: the determination of whether taxes can be discharge in bankruptcy is one of the most complicated areas of bankruptcy law. To determine whether your taxes could be discharge in bankruptcy and whether a separate lawsuit within the bankruptcy would need to be filed to accomplish that are questions for an experienced attorney.

3. Alimony, Child Support, and other debts incurred through a divorce separation

Rarely is there a surprise when debtors learned that alimony and child support child support survive bankruptcy. In fact, many debtors owe or will owe child support and alimony are content with this debt. What debtors often do not realize, however, is that any debts agreed to be paid or forced to be paid by a separation agreement or court order also survive bankruptcy.

4. Personal Injury judgments from willful/malicious acts

Oftentimes, this exception to bankruptcy discharge involves personal injury called caused by willful or malicious behavior by debtor, most commonly injury caused by the debtors driving under the influence. Therefore any judgments or restitution ordered by a state court would likely survive bankruptcy.

5. Debts procured by fraud

One of the most prevalent debts that survive bankruptcy are debts procured by fraud. These fraud debts are unique in that they require the creditor to file a lawsuit within the bankruptcy for a determination by the bankruptcy judge as to whether a particular debt was the product of fraud. Determining whether a debt was incurred by fraud is hard to define. A judge will listen to the facts of the case and testimony of the witnesses to determine in his or her mind whether or not the creditor was defrauded. If so, the debt survives bankruptcy in is deemed nondischargeable. Examples of debts procured by fraud may include purchasing a television on credit the day before filing bankruptcy or lying on a credit application such as about your income or assets.

6. Any reaffirmed debts

Reaffirmed debts are the product of the 2005 Bankruptcy Code amendments. Those amendments allowed debtors the opportunity to reaffirm debt. Reaffirming debts will cause the debt to survive bankruptcy, as if the bankruptcy had never been filed as to that particular debt. The classic example being automobiles. A debtor owes money on his or her car and files bankruptcy. From that point forward the debtor is no longer obligated on that car. However, the creditor may require the debtor to sign a separate agreement (a reaffirmation agreement) that re-obligates the debtor on that car loan. It may also be a condition of the debtor keeping the car after bankruptcy. The benefit is that the debtor may continue to use that vehicle. The drawback, however, is that if the debtor should ever default in the future then the creditor would pertain all of the rights it previously had, such as repossession and even filing a lawsuit for any unpaid balances.

7. Debts previously determined to be nondischargeable

If a debtor has previously filed bankruptcy and the court or the bankruptcy judge has decided that for whatever reason a debt listed in that previous bankruptcy is nondischargeable then that debt cannot be discharged in a subsequent bankruptcy. That protects against a debtor filing bankruptcy, the court determining that some debt was fraudulent, and in then the debtor turning around and filing a second bankruptcy to remove the debt.

The general rule holds true: most debts are discharged in bankruptcy. But there are exceptions to discharge. An experienced attorney should be consulted to help explain those exceptions and provide the best advice in helping you make your decision as to whether bankruptcy is a good option for you.