Bankruptcy Does Not Protect All Debts and Property Rights
Filing for bankruptcy is a swift and effective tool for discharging or managing burdensome debt, and then moving forward with a clean slate. It immediately stops or “stays” all lawsuits filed against you, blocks any eviction proceedings, bars repossession of your car and either discharges or consolidates most of your debt load. It does not, however, discharge all debt, as will be discussed below.
Types of Bankruptcies
The two most common forms of bankruptcy protection for individuals are Chapter 7 Bankruptcy, known as “Straight Bankruptcy,” and Chapter 13 Bankruptcy, known as “Reorganization.” The best method for you, and the method for which you qualify, will depend on several factors, including your total income, your total debt, and the kind of debts that you owe.
Chapter 7 or “Straight Bankruptcy”:
Chapter 7 bankruptcy is the process by which a debtor’s non-exempt assets are sold (or “liquidated”) to pay off his creditors. The debtor gets to keep most of his important assets, including his house, car, tools of trade, and a large volume of personal property up to a certain cumulative monetary value. Except for exempt debts, any debts remaining after liquidation are fully discharged and no longer owed. Exempt debts are the remaining debts that cannot be discharged by bankruptcy and are thus still owed.
Chapters 13 Bankruptcy, or “Reorganization of Debts”:
Chapter 13 bankruptcy is the process by which the debtor establishes a repayment plan which he can reliably meet over the next three to five years. As long as the debtor honors his repayment plan, at the end of that time most remaining debts will be extinguished. This option is not available to everyone. Individuals or small business owners must have no more than $383,175 in unsecured debt and $1,149,525 in secured debt in order to qualify.
Debts Commonly Non-Dischargeable (or Exempt from Discharge)
Not all debts are dischargeable due to considerations of public policy. Absent a showing of extraordinary circumstances, the following debts (among others) are rarely dischargeable:
Unscheduled Debts: When you file for bankruptcy, you list your debts in the Petition and on a Debt Schedule. Generally speaking, unlisted debts are not discharged unless the creditor knew of the bankruptcy filing or they were omitted by innocent mistake.
Taxes and Tax Liens: Some tax debts can be erased, while some cannot. First and foremost, the taxes must be income taxes. Payroll taxes and penalties for fraud cannot be discharged. Likewise, you can never discharge income taxes due if you filed a fraudulent return or attempted to evade paying taxes, and you must be current with your filings. Perhaps most importantly, the tax debt must be at least three years old, and the IRS must have assessed the tax at least 240 days prior to filing the bankruptcy petition (or the taxes have not been assessed yet). But even if you meet these criteria, you still cannot discharge a pending tax lien.
Spousal Support, Alimony and Child Support: Generally speaking, debts for accrued and current spousal support, alimony and child support cannot be discharged in bankruptcy. In fact, the bankruptcy court can refuse to discharge or reorganize debts if these payments are not current.
Fines and Penalties Due Government Agencies: A debt based on a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit,” that is not compensation for actual pecuniary loss, is not dischargeable. The exception, noted above, is for certain income tax penalties.
Student Loans: Except for a showing of undue hardship, student loans are not dischargeable.
Personal Injury Debts: If you caused personal injuries to another person as a result of driving your vehicle under the influence of drugs or alcohol, any debts related thereto are exempt from discharge.
Retirement Plans: Sometimes debtors borrow from their retirement plans. The debt owed to certain of these plans cannot be discharged.
Be sure to look carefully at the Bankruptcy Code, as there are a host of other exemptions as well.
Debts Dischargeable UNLESS the Creditor Timely Objects to Discharge
Certain kinds of debts are dischargeable by bankruptcy unless the creditor makes a timely objection. Usually these objections are made by filing a motion and determined at a hearing after the court reviews the grounds for objection.
Included in these kinds of debts are the following:
Luxury Goods: Luxury goods purchased by credit card in the preceding 90 days and adding up to $650 are exempt from discharge if the creditor objects. In other words, you cannot drive over to Rodeo Drive in Beverly Hills and purchase $5,000 of Armani fashion wear and then discharge this debt if the creditor objects, unless you prove that you intended to pay for these luxury goods when you bought them.
Cash Advances: Again, unless you can prove you intended to repay them, cash advances obtained within 70 days of your petition that add up to more than $925 cannot be discharged.
Fraud: Absent an objection, debts incurred by fraud or false pretenses are dischargeable.
Malicious Injury: When a debt is caused by a willful and malicious act against another person or property, upon timely objection the debt cannot be discharged.
In sum, while most debts are dischargeable, or subject to reorganization, there are some debts that will follow you to the grave, unless and until resolved by settlement or payment in full.
11 U.S. Code §523 – Exceptions to discharge
U.S. Courts Official Website (bankruptcy and alternatives): http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics.
https://www.law.cornell.edu/uscode/text/11/523 (exempt debts)
Online Articles of General Interest
http://www.americanbar.org/newsletter/publications/gp_solo_magazine_home/gp_solo_magazine_index/debts.html (debts that follow you to the grave)