Whether a bankruptcy can wipe out debt owed to the government is one question that many people have when considering filing for a chapter 7 or chapter 13 bankruptcy. Whether a bankruptcy discharge will eliminate this type of debt depends on the specific nature of the debt owed to the government. One common form of government debt is tax debt. Tax debt is generally not dischargeable in bankruptcy.
Income Tax May Be Dischargeable in Minnesota
However, income tax debt may be dischargeable if it meets certain criteria. First, the income tax debt must have become due, at least, three years before the date the bankruptcy petition is filed. For example, tax debt for the 2017 tax year, which became due on April 15th, 2018, would meet this requirement for a bankruptcy case that is filed after April 15th of 2021.
Second, the person filing for bankruptcy (i.e. the debtor) would have had to have filed the taxes no less than two years prior to filing for bankruptcy. Filing tax returns with an extension is acceptable, but when the government files a tax return for the debtor, this requirement is not met. Lastly, the government cannot have assessed the tax debt within the 240 day (8 month) period before filing for bankruptcy for the debt to be dischargeable.
If the debtor has not received anything from the government taxing authority (i.e. IRS or Minnesota Department of Revenue) within this time period, stating that the taxes are being assessed by the government, this is a good indication that this requirement has been satisfied. Only when all of these requirements are met, will the income tax debt be considered dischargeable and wiped out by the bankruptcy.
Fines and Penalties as Debts in Minnesota
Another type of debt owed to the government comes in the form of fines and penalties. These types of debts typically include tickets (i.e. traffic tickets), fines and restitution, and are generally not dischargeable in bankruptcy. These types of debts are imposed by the government for the purpose of punishing and deterring wrongful behavior, and thus, these debts cannot be discharged for public policy reasons. However, the notable exception to this rule is that debts owed for civil infractions, such as traffic tickets, are dischargeable in a chapter 13 bankruptcy, but not in a chapter 7. On the other hand, monetary penalties, such as fines and restitution, imposed against the debtor for criminal acts are never dischargeable in either a chapter 13 or 7 bankruptcy.
Debts Designed to Punish
Debts owed to the government which are designed to punish the debtor for wrongful acts are distinguishable from debts owed for the purpose of repaying the government for costs that it has already expended. An example of this is when a former prisoner is required to pay back the government for the costs expended by the government for the debtor’s incarceration.
Another example is when a defendant in a civil or criminal case has to pay back court costs and fees for processing their case. Debts owed to the government that is compensatory in nature, rather than punitive, such as these, are dischargeable.
Government Financial Support for a Debtor's Minor Child
One notable exception to this is when the government expends money to support the debtor’s minor child, such as when the child is incarcerated in juvenile detention. In this situation, courts have ruled that the debt owed is in the form of “child support” which is not dischargeable in bankruptcy.
Government Loans as Debt in Minnesota
Another form of debt owed to the government is in the form of government loans. Most commonly, these government loans are in the form of student loans. Unlike other types of unsecured loans, student loans are generally not dischargeable in bankruptcy, regardless of whether they are public or private loans.
Student Debt in Minnesota
Student loan debt is dischargeable only upon a showing that the debt creates an “undue” financial hardship on the debtor. The determination of whether a debtor’s financial hardship is sufficient to discharge their student loan debt must be made by the bankruptcy court in a separate legal action that is filed by the debtor.
Bankruptcy courts in Minnesota look at the totality of the debtor’s financial circumstances when deciding whether the student loan debt should be discharged. The court will consider the debtor’s past, present and future financial resources, and living expenses, among other relevant facts and circumstances.
Student Debt Discharge and Minimal Standard of Living
The court will typically not rule that the student loan debt should be discharged if the debtor is able to make payments and still maintain a “minimal standard of living.” Courts are very reluctant to find that the debtor’s financial situation warrants their student loan debt being discharged and the debtor rarely succeeds in these kinds of cases.
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This is a generalized overview of the types of debts owed to the government and which types of debts are dischargeable. For a more detailed explanation of how government debts are treated under bankruptcy law and how filing for bankruptcy will impact your specific debts, you should consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!
