Why Debts Can Remain After Bankruptcy

Key Takeaways
  • Chapter 7 bankruptcy can eliminate most unsecured bills.
  • Chapter 13 bankruptcy requires the repayment of a portion of what you owe before a judge discharges qualified debts.
  • Bankruptcy may not cancel all your debts.
  • Student loans are rarely discharged in bankruptcy.

The objective of the bankruptcy code is to offer relief from high debt payments while leaving you with enough resources for a fresh start. The process can wipe out debts without repaying lenders (Chapter 7) or require you to repay a portion of what you owe before qualifying for loan forgiveness (Chapter 13).

Neither case discharges every debt. Before choosing bankruptcy, you need to be aware of what debts qualify for debt forgiveness through the bankruptcy process, and which do not.

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What is a Bankruptcy Discharge?

A discharge exonerates you from personal liability for qualified debts. When a judge grants a discharge, you are no longer legally responsible for repaying the bill. The relief is permanent and prevents lenders, debt collectors, or debt buyers from pursuing payment on the associated account.

What Debts Can Be Discharged in Bankruptcy?

In most cases, you can eliminate the following bills through the bankruptcy process:

  • Revolving debts such as credit cards, store credit, gas cards, and retail charge accounts.
  • Outstanding medical bills.
  • Personal loans, payday loans, and other unsecured accounts.
  • Delinquent utilities, phone bills, or outstanding service contracts.
  • Deficiency balances due to the repossession or foreclosure of an asset.
  • Judgments from defaulted accounts.

Bankruptcy covers the vast majority of bills most consumers have. However, there are a set of exceptions that include bills bankruptcy does not cover. These include the following:

Which Debts Bankruptcy Will Not Discharge

  • Support payments such as alimony and child support.
  • Accounts not listed on the bankruptcy petition.
  • Excess bills related to divorce proceedings. Divorce agreements often include one party agreeing to repay certain debts. Once agreed upon, the bankruptcy court will not dismiss the obligation.
  • Restitution due to a personal injury settlement that resulted in the death of another.
  • Personal injury judgments due to a DUI or DWI.
  • Money owed to government agencies.
  • Court fines, penalties, and legal fees related to the bankruptcy case.

Along with a list of never discharged debts, the courts also have debt categories that rarely receive consideration for discharge.

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Debts Typically, Non-Dischargeable:

Student loan debts: To obtain a discharge for student loans, you must prove that repaying the outstanding balance will cause an undue hardship on you or your dependents. When borrowers have access to income-based repayment plans, it is rare to convince a judge that you meet this standard.

Tax and government debts: The IRS has extraordinary means to collect unpaid balances, including taking your tax refund and garnishing wages. It is also challenging to qualify for relief through bankruptcy. However, some government debts that are over three years old may be eligible for a bankruptcy discharge.

Creditor objections: A creditor may prevent the discharge of amounts owed to them if the company can prove you purchased the goods or services without the intent to repay.

Luxury purchases made prior to filing: Purchases made within 90 days of the filing that were over $725 to a single creditor could be deemed a luxury purchase and not included in the discharge. The classification also incorporates cash advances of $1,000 or more made within 70 days of filing the bankruptcy petition.

Debts incurred due to illegal activities: Any bills tied to criminal activity such as embezzlement, larceny, or willful or malicious injury are not discharged in bankruptcy.

Secured debts: Technically, you can include secured obligations in the bankruptcy petition. However, the lender retains the right to take the property associated with the lien. In most cases, if you keep the property, you must repay the debt.

  • What debts are not discharged in bankruptcy?

    The bankruptcy code lists several debts that are not granted a discharge in bankruptcy. The most common include child support, alimony, tax liens, judgments due to a DUI, and student loans.

  • What debts are dischargeable in bankruptcy?

    Bankruptcy will cancel most unsecured bills such as credit cards, medical bills, judgments, and unpaid utilities.

  • Are secured debts discharged in bankruptcy?

    Secured debts are attached to an asset. If you wish to keep the property, you must repay the lender. However, if selling the property does not fully repay the loan, including it in the bankruptcy could eliminate a deficiency judgment that might occur after the lender sells the asset.