What Debts Remain After Bankruptcy?

Bankruptcy offers a lifeline for individuals drowning in debt, providing a fresh start and a path toward financial stability. However, not all debts are created equal. While bankruptcy can discharge many types of debts, but certain debts remain even after the bankruptcy process is complete. These debts, which are called non-dischargeable debts, are not typically cancelled by a bankruptcy. In this comprehensive guide, we’ll unravel the intricacies of non-dischargeable debt, shedding light on what debts cannot be eliminated through bankruptcy.

Understanding Non-Dischargeable Debts:

Non-dischargeable debt refers to obligations that cannot be wiped out through bankruptcy proceedings. These debts remain enforceable even after the bankruptcy process concludes, requiring individuals to continue fulfilling their financial obligations. Here are some common examples of non-dischargeable debt:

1. Student Loans:

– Federal and private student loans are generally non-dischargeable in bankruptcy unless individuals can demonstrate undue hardship through an adversary proceeding. The adversary proceeding (AP) is a sperate lawsuit filed within the bankruptcy that typically requires numerous steps, including discovery and depositions.
– Undue hardship is a high legal standard and often challenging to prove, making it difficult for most borrowers to discharge student loan debt. The standard requires that the court find that not only can the debtor not afford to pay the student loans and maintain a minimal standard of living, but also that there has been reasonable attempts at paying the student loans and that there are also other factors that prevent the debtor from making payments (usually long-term illness, disabilities, etc.). It is often even more difficult to prove an undue hardship for federal student loan debt when the federal government offers various payment plans, including income based payment plans. 

2. Certain Tax Debts:

A common myth is that no tax debt can go away with bankruptcy; however, there are actually many tax debts may be dischargeable under specific circumstances, such as income tax debt meeting certain criteria, other tax obligations are non-dischargeable. Things like trust fund penalty debts, aka payroll tax debt, or recent tax debt, can never go away with a bankrutpcy.
– Non-dischargeable tax debts include recent income tax debts (typically within the last three years), tax debts associated with unfiled returns, and tax debts resulting from fraudulent activity.
– After discharge, the taxing authorities review any balances and make their own determination of the debts.

3. Domestic Support Obligations:

– Debts arising from alimony, child support, or other domestic support obligations are non-dischargeable in bankruptcy.
– Individuals remain responsible for fulfilling these obligations, ensuring the financial well-being of dependents. During a Chapter 13 plan, a trustee cannot confirm a bankruptcy plan unless the Debtor is current with all support obligations and cannot get a discharge unless he has made all his support payments during the plan.

4. Court-Ordered Restitution:

– Debts arising from court-ordered restitution, fines, or penalties imposed for criminal offenses are typically non-dischargeable.
– Bankruptcy does not absolve individuals of their responsibility to satisfy these legal obligations.

5. Certain Types of Debts/Judgments:

– Debts resulting from judgments for personal injury or wrongful death caused by intoxicated (drugs and/or alcohol) driving are non-dischargeable.
– Additionally, debts incurred through fraud, embezzlement, or willful and malicious conduct are generally non-dischargeable. If there has been a court order/determination that the debtor falls into one of the non-dischargeable categories, the bankruptcy court usually with accept the finding of a previous court. However, if there was no court finding, the creditor can file an adversary proceeding (AP) and ask the bankruptcy court to make a determination that the debt falls into one of the other categories.

6. Division of Debts or Assets from a Divorce Settlement Agreement or Court Decree:

– Debts resulting for Equitable Distributions (division of assets or debts) are not dischargeable in a Chapter 7, but may be discharged in a Chapter 13. able.
– The Court can review the situation to determine if there is any reason the equitable distribution is actually related to support and should actually be classified as a support obligation.
– If there is a court order related to the equitable distribution and awards attorneys fees, those fees follow the same rule as the underlying debt.

7. Debts Subject to Creditor Objections and Adversary Proceedings:

In addition to non-dischargeable debts, creditors can object to the discharge of certain debts during bankruptcy proceedings. Under bankruptcy law, creditors must prove the debt fits one of these categories:

In order to prove that a debt fits into one of the five above categories, the creditor must file a Non-Dischargeability Adversary Proceeding: When a creditor objects to the discharge of a debt, they initiate a legal process known as an adversary proceeding. During this proceeding, the creditor must present evidence supporting their objection, and the debtor has the opportunity to defend against the claim. Adversary proceedings are conducted separately from the main bankruptcy case and require adherence to specific procedural rules outlined in the Bankruptcy Code.

The recent debts, like cash advances within 70 days of filing and new debts within 90 days of filing, are limited to discharge because the idea is you should have known that you wouldn’t be able to pay the debt back when you took it out. When a presumption of fraud arises, you can present evidence that you intended to repay the debt. A typical defense would include presenting evidence that you could pay the charge, that you intended to repay it, and that you didn’t intend to file bankruptcy.

Typically, you’d want to present as much evidence as possible. Ideally any defense would include a significant change in circumstance. For example, if you incurred a large debt or purchase a luxury item and then you lost  your high paying job, then you may be able to explain there was a change of circumstances outside your control.

Planning Around Non-Dischargeable Debts

The presence of non-dischargeable debt underscores the importance of careful consideration and strategic planning when contemplating bankruptcy. Individuals must recognize that while bankruptcy offers relief from many types of debts, certain obligations persist beyond the process. Understanding the implications of non-dischargeable debt is crucial for managing financial expectations and planning for the future; understanding what debts remain after bankruptcy. It was also designed to prevent consumers from running out and taking cash advances on the eve of a bankruptcy filing. This presumption can be rebutted by providing that the Debtor did not take the cash advance in contemplation of filing bankruptcy; this can be difficult, unless there was a substantial change in circumstances after incurring the debt.

Even if you have a debt that is non-dischargeable, or likely non-dischargeable, it may still make sense strategically to file bankruptcy. Sometimes creditors will miss deadlines to object to the dischargeablity of a debt or it may make sense to handle the rest of your debts through bankruptcy so you can better afford to handle any debts left over.

Even though some taxes do not go away with bankruptcy, the bankruptcy process can be a tool to handle the financial situation over all. A common practice our offices recommends is filing a Chapter 7 to possibly get rid of your credit card debt and personal loan debt and then open your budget up to be able to afford a payment plan directly with the taxing authorities, like state tax or IRS. Similarly, if some of the tax debt is potentially dischargeable, the result can be even better by reducing the tax debt and limiting the tax debt that needs to be paid back.

Navigating the complexities of non-dischargeable debt requires a comprehensive understanding of bankruptcy laws and their implications. While bankruptcy offers a viable solution for many struggling with overwhelming debt, it’s essential to recognize the limitations imposed by non-dischargeable obligations. Seeking guidance from a qualified bankruptcy attorney can provide invaluable insights tailored to individual circumstances, ensuring informed decision-making and a clearer path toward financial recovery. By understanding what debts survive bankruptcy, individuals can proactively address their financial challenges and work toward a brighter financial future.

Attorney Ashley Morgan is an experienced bankruptcy lawyer. She enjoys helping her clients manage their debts. She likes to educate her clients on all the available options to deal with their financial situation. She regularly is educating individuals about bankruptcy and all available options; she believes educating the public is the best way to make sure everyone makes the best and most informed decision possible. She also has helped clients defend and settle claims of non-dischargeablity in various situations.