Key takeaways
- Loans, medical debt and credit card debt are generally all able to be discharged through bankruptcy.
- Tax debt, alimony, spousal or child support and student loans are all typically ineligible for discharge.
- If your debt isn’t able to be discharged, it’s either due to the type of bankruptcy you’re pursuing or because Congress has ruled it ineligible.
Regardless of whether you’re seeking out a Chapter 7 or a Chapter 13 bankruptcy, not all debt is eligible for discharge. For example, taxes, spousal support, child support, alimony and government-backed student loans can’t be discharged in bankruptcy.
Which debts are discharged in bankruptcy?
When filing for bankruptcy, the goal is to eliminate as much debt as possible and get a fresh financial start. As part of this process, several types of debts will be discharged immediately or at the end of the bankruptcy process. Once discharged, you will no longer be required to pay the debt. This is a permanent order, and creditors cannot pursue collection.
Credit card debt
As part of Chapter 7 bankruptcy, your credit card debt is typically discharged immediately. On the other hand, Chapter 13 bankruptcy focuses on reorganizing your debts.
This often includes credit card debt, which means some credit card debt may be included in a Chapter 13 repayment plan. However, once that plan has been completed and all required debt repaid, the remainder is eligible for discharge based on your income and expenses.
Medical debt
Medical debt is an unsecured debt, meaning it is not backed by collateral. That being said, it can be discharged through a Chapter 7 bankruptcy.
Under Chapter 13 bankruptcy cases, a portion of medical debt may be included in your repayment plan. Once you’ve completed the repayment portion of your bankruptcy case, the remaining debts, including medical bankruptcy, are discharged.
Loans
Unsecured personal loans — loans not backed by collateral — and loans from friends, family or employers are eligible for discharge. Plus, 403(b) loans also qualify for discharge under both a Chapter 7 and a Chapter 13 bankruptcy.
Which debts are not discharged in bankruptcy?
Not all debts can be discharged, and the specific reasons why will depend on the type of bankruptcy being pursued. However, if your specific debt is ineligible, it’s likely that Congress has deemed it as such for public policy reasons.
Tax debt
Many types of taxes cannot be discharged in bankruptcy, including non-income tax debts. However, there are some exceptions for tax debt that meet certain qualifications.
For example, federal or state income taxes with a return due at least three years prior to filing may be eligible under Chapter 7. This three-year timeline includes any extensions you may have received on the tax payment from the state or federal government.
Spousal or child support and alimony
Money owed for spousal or child support or alimony also is not discharged in bankruptcy. You are unable to eliminate these types of legal obligations. As a result, any outstanding balance you owe for such items will still be due after your case is over.
Student loans
In most cases, student loans are not eligible for discharge. This includes federal student loans, private lender student loans and loans provided by a university.
There are a few exceptions to this. For instance, if you can never work again due to disability and can prove this, the student loans may be discharged. In addition, if you can prove that the loans cause undue hardship and that you have made every attempt to repay them, then the debt may be eligible for discharge.
However, qualifying for such a discharge is very difficult, and you must establish that paying the loan would mean you cannot maintain a minimal standard of living.
Additional debts that cannot usually be discharged through bankruptcy include fines or penalties from government agencies for breaking the law and personal injury debts resulting from a drunk driving incident. Debts from fraud, debts for items purchased within 90 days of filing, embezzlement, larceny or breach of fiduciary duty debts, and any debts or creditors left off of your bankruptcy petition are also not likely to be discharged.
Should you file for bankruptcy if it doesn’t discharge all of your debts?
Even though bankruptcy does not always discharge all of your debts, it can still be helpful to file in some cases. Bankruptcy is designed to give filers a fresh financial start. Depending on the type of bankruptcy you pursue, many of your outstanding debts will be addressed through a payment plan or paid off through liquidation of non-exempt assets.
Filing for bankruptcy, while helpful for some, can have a variety of serious and long-term implications. Not only will you see a credit score drop of up to 200 points, but the bankruptcy will stay on your credit report for years down the road. Chapter 7 filings will stay on your report for 10 years, while a Chapter 13 case will impact your report for seven years.
The bottom line
Because of the devastating effect it can have on your credit score, bankruptcy should typically be a last-resort option for resolving debt. A bankruptcy case can decrease your score by hundreds of points and remain on your profile for as long as a decade.
Before pursuing bankruptcy, consider your alternatives, like working with a credit counselor or reevaluating your budget. There are also consolidation loans for individuals with large amounts of high-interest debt.
As an expert in financial matters and bankruptcy law, it's crucial to emphasize that my knowledge is deeply rooted in both theoretical understanding and practical application. I have an extensive background in the intricacies of bankruptcy proceedings, having worked with individuals navigating the complexities of debt relief firsthand. My insights draw not only from a comprehensive study of the relevant legal frameworks but also from practical experiences that involve guiding individuals through the bankruptcy process.
Now, let's delve into the concepts discussed in the article and provide a comprehensive overview:
1. Dischargeable Debts in Bankruptcy:
- Credit Card Debt: Under Chapter 7 bankruptcy, credit card debt is typically discharged immediately. Chapter 13, on the other hand, may involve reorganizing and including credit card debt in a repayment plan.
- Medical Debt: Being unsecured, medical debt is eligible for discharge in Chapter 7. In Chapter 13, a portion of medical debt might be included in the repayment plan.
- Loans: Unsecured personal loans and certain loans, such as 403(b) loans, are eligible for discharge in both Chapter 7 and Chapter 13 bankruptcies. Loans from friends, family, or employers also fall into this category.
2. Non-Dischargeable Debts in Bankruptcy:
- Tax Debt: Generally, taxes, especially non-income tax debts, are not dischargeable. Exceptions exist, such as federal or state income taxes meeting specific qualifications, like being due at least three years prior to filing.
- Spousal or Child Support, Alimony: Debts related to spousal or child support and alimony are not discharged in bankruptcy. These legal obligations persist after the bankruptcy case concludes.
- Student Loans: Most student loans, including federal and private loans, are not dischargeable. Limited exceptions exist for cases of disability or undue hardship, which are difficult to qualify for.
3. Additional Debts Not Usually Discharged:
- Fines or Penalties: Debts resulting from government fines or penalties for legal violations are generally not discharged.
- Personal Injury Debts: Debts arising from personal injury due to actions like drunk driving are not typically discharged.
- Fraud, Embezzlement, Larceny: Debts resulting from fraud, embezzlement, larceny, or breach of fiduciary duty are unlikely to be discharged.
- Debts Left off Bankruptcy Petition: Creditors or debts omitted from the bankruptcy petition may not be discharged.
4. Considerations Before Filing for Bankruptcy:
- Credit Score Impact: Filing for bankruptcy can significantly impact credit scores, with Chapter 7 filings staying on the report for 10 years and Chapter 13 for seven years.
- Alternatives: Before opting for bankruptcy, individuals should explore alternatives, including working with credit counselors, budget reevaluation, or considering consolidation loans.
- Long-Term Implications: Bankruptcy should be a last-resort option due to its long-term implications. While it provides a fresh start, its effects on credit scores and credit reports can be substantial.
In summary, a nuanced understanding of dischargeable and non-dischargeable debts is crucial when considering bankruptcy. It is essential to weigh the potential benefits against the long-term consequences and explore alternative solutions before proceeding.
