The purpose of filing a Chapter 7 or Chapter 13 bankruptcy case is, plain and simple, to discharge debt - to make debt that has overwhelmed a debtor and his family “go away.” In order to receive a discharge, the bankruptcy debtor must comply with the provisions of the bankruptcy code. So legally proper papers must be filed with the bankruptcy court, all assets and liabilities identified and relevant financial transactions disclosed. The bankruptcy debtor has to attend a meeting with the case trustee, and must cooperate with the trustee and follow court orders to receive a general discharge.
In almost every case, if the debtor does these things, the Bankruptcy Court will enter a discharge in the debtor’s case. The discharge is a court order that permanently enjoins creditors from taking any action against the debtor to collect on a debt owed by the debtor to the creditor. The discharge order makes the debt “go away.” The discharge order gives a person who has had crippling financial problems a fresh start. The Discharge gives a person who has filed bankruptcy a chance to start over financially, free from debt obligations. And in almost every bankruptcy case, that is exactly what happens. But it is important for people looking at bankruptcy to know that some kinds of debt cannot be discharged in a bankruptcy case. In today’s blog I will look at debts that don’t “go away.”
For purposes of this blog, let’s concentrate on debts that can’t be discharged when a person files a Chapter 7 Bankruptcy case. Chapter 7 is the most common consumer debt bankruptcy filing - in a chapter 7 case, a case trustee is assigned to collect any Non-exempt Assets or recover avoidable payments by the debtor and turn the assets/payments into money to pay creditors. Chapter 7 debtors don’t make payments to the trustee; the case is (usually) processed from the date the case is filed to the date the case is discharged in approximately three and a half to four months.
Section 523 in the bankruptcy code breaks down what kind of debt is not discharged in a chapter 7 case. Non-dischargeable debts can be broken down into two categories: Debts that are not discharged because of the type of debt in question, and debts that are not discharged because of the behavior of the bankruptcy debtor. Let’s take a look at both categories.
Debts that are not discharged because of the debt category include the following:
1. Debts and/or creditors that are not listed on the bankruptcy schedules.
If a creditor is not notified that a debtor has filed a bankruptcy case, that debt is not discharged. There are a couple of things to know about this exception to discharge. First, if the creditor knows that the debtor has filed a bankruptcy case, even if the creditor wasn’t listed in the bankruptcy schedules, that debt can be discharged. Second, creditors can be notified of the bankruptcy case after the case is filed through an omitted creditor notice process. As long as the bankruptcy does not involve payment of a dividend to creditors (there’s a deadline for creditors to file claims in this situation), the creditor can be added at any time.
2. Most student loans
Student loans are presumed to not be discharged, unless the debtor can show that repayment of the student loan would work an undue hardship on the debtor. And even though this standard seems straight-forward, and attainable for a lot of debtors, in reality, it’s difficult to discharge student loans under this standard.
3. Most tax obligations
The exception to the rule are income taxes for which a return was due more than three years prior to filing the bankruptcy case, and for which the return was filed at least two years prior to filing the bankruptcy case, and in which the tax liability has been assessed at least eight months prior to the bankruptcy case. More recent income taxes, and all business-related withholding and sales taxes are not discharged in a bankruptcy case. And if a debtor uses a credit card or other credit product to pay for a non-dischargeable tax obligation, the credit card debt traceable to the tax payment can’t be discharged, either.
4. Child support and spousal maintenance obligations
The bankruptcy code calls these domestic support obligations and these are never, ever, discharged in a bankruptcy case.
5. Government-ordered restitution, fines and penalties
Financial penalties ordered by the court in connection with a criminal court proceeding are not discharged in a bankruptcy case.
6. Debts resulting from damages due to impaired operation of a motor vehicle, boat or aircraft
This exception to discharge requires that the debtor’s operation of a motor vehicle, boat or aircraft be “unlawful,” and that it was unlawful because of the debtor’s “intoxication” due to the use of alcohol, a drug, or “another substance.”
7. Debts in a previous bankruptcy case where discharge was denied
If a debtor was denied a discharge in an earlier bankruptcy, the debts in that case can’t be discharged in a new case.
8. Debts for money owed to certain pension and retirement funds
Potential bankruptcy debtors should understand that if they file a case, and the debtor has debts that may fall into one of the above-mentioned categories, the real impact of these non-dischargeability provisions are that if the debtor believes that the debt should be discharged, it is up to the debtor to bring an action in bankruptcy court, after the debtor has received her general discharge, to determine whether the debt in question is discharged. The debtor has to bring the action; if the debtor fails to do so, the debt isn’t discharged. And if the debtor does, indeed, bring the action to determine dischargeability, the debtor also has the burden of proving that the debt is subject to discharge - the creditor does not have to prove the debt is not dischargeable.
Contact a MN Bankruptcy AttorneySo as you can see, there are several debts that potential bankruptcy debtors need to realize might survive an otherwise successful trip through the Bankruptcy Process. If someone thinking about possibly filing bankruptcy has one or more of these types of debts, that person is well advised to seek the advice of a bankruptcy attorney to see if there will be a discharge problem.
Next week, I’ll take a look at debts that can’t be discharged due to the behavior and actions of the debtor.