The Non-Dischargeable Debts • How to Discharge Some of Them
The normal reason for a creditor to contest a bankruptcy is because the debtor is attempting to discharge one of the non-dischargeable debts from Section 11 United States Code 523 of the Bankruptcy Code. However, seven major debts cover the majority of these problems. Additionally, almost every non-dischargeable debt is discharged or managed—under the right circumstances. In fact, most times you only to properly plan and file the bankruptcy.
Child Support and Alimony are Non-Dischargeable Debts but Payable Debts
Child Support and alimony are repaid in a Chapter 13 bankruptcy but not “discharged”. In fact, filing a bankruptcy does not even delay the child support or alimony case in state court. In fact, it is by statute that child support and alimony pass through a bankruptcy case, generally without affect. But judges don’t care how you pay the child support. They normally just want you to pay it. In Chapter 13 you can also pay the child support or alimony at the expense of other creditors. Plus, in some cases, you pay zero to the unsecured debt to insure support is paid.
To be dischargeable, income tax debt must be 3 years old. You also must show your returns for the last 2 years. In addition, there must be no assessments within 240 days. Other tolling events that might extend the waiting periods include the following:
- Prior bankruptcy cases
- Offer in compromise
- Any fraud or improper efforts to delay collection
Bankrupting income tax debt is largely a timing issue. For instance, you can easily discharge the unsecured, nonpriority part of the tax debt. Also, you may value the liens on homes to reduce the amount owing and pay taxes over time. In Chapter 13, bankruptcy taxes, penalties, and interest on the unsecured tax debt is an unsecured debt. See the tax portion of our website for a full explanation.
Student loans are managed by a bankruptcy. Interestingly, you might stop the collections for years and pay little or nothing in Chapter 13. Also, by putting them into rehabilitation and consolidation, it might force them to what is affordable. Income-base repayment plans are also possible. However, you often have to also file an adversary proceeding to get this to work. Another option is to consolidate or rehabilitate student loans into income-based repayments. Here is the studentloanify program which helps you do it without being a victim of your own servicer. However, if you run into problems, call me at 502-625-0905 today.
If student loans are an undue hardship the judge might allow you to discharge the debt in an adversary proceeding. Undue hardship is when you cannot afford food shelter clothing and medical care. Filing an adversary proceeding is hard work but, deserving debtors earn the discharge close to 50% of the time.
The Brunner Test
The rules for student loans changed in October 1998 and 2005. As a result, Bankruptcy now only allows undue hardship discharges. Interestingly, the Bankruptcy court considers 3 factors:
- Whether you made good faith efforts to repay (not required if you never had the money).
- Your ability to repay now and in the immediate future.
- Whether it creates a hardship to your family if you repay. You normally need to file for the Ford income-based repayment loan program prior to filing to be considered for a hardship discharge. Being denied is a basis for an undue hardship discharge.
Partial discharges are more common than complete discharges. In fact, three studies show that persons who qualify under Brunner and attempt the adversary proceeding get a discharge almost 50% of the time. The issue is, most attorneys don’t know how to file an adversary. But, even if they know how, it is $5,000 – $10,000 of additional work. Also, if you are not paying an attorney, they probably can’t afford to work for free. As a result, many people obtain these discharges on their own.
An Example of a Hardship Discharge
In one case an attorney owed child support to two women. First, student loans take 50% of his income. Next, the two mothers take another 40%. So, there is literally nothing left if child support is paid. As a result, the attorney files bankruptcy and an adversary to discharge the student loans with the argument: he either supports the children or pays the student loans. It is worth noting that both the bankruptcy judge and the US attorney were females who were filing divorce cases and seeking child support. This resulted in the Judge discharging 120,000 of the 150,000 in debt. Then, the remaining 30,000 was placed into an IBR (Income Based Repayment.)
An Example of Managing Student Loan Debt in Chapter 13
Bill owes 50,000 to a private student loan and 30,000 to the Department of Education. He files a Chapter 13 and an adversary to discharge the federal student loan only. First, the Chapter 13 plan has a 0% repayment. Next, the Private student loan is unpaid for 5 years and is charged off. The result is that collections are never attempted again. The government loan is also forced to grant an affordable IBR at a low or zero repayment or be discharged. See our page and section on How to manage student loans.
Debts Due to Theft or Fraud Might not be Non-Dischargeable Debt
Even if a debt has an element of fraud the debt might be dischargeable in Chapter 13. Interestingly, only relied on, proven, material, and intentional financial misrepresentations are fraud in Bankruptcy. If banks make bad loans or fail to check facts, it does not make debts non-dischargeable. Added to that the lender has a hard burden to prove fraud.
Making Charges Just Before Filing
However, a charge or cash advance over about $950 or purchases over $675 for luxury items within 90 days before filing are assumed fraudulent, so timing and amounts are important. This presumption does not have a bright-line where it isn’t fraud if you are a dollar under and it is fraud if you are a dollar over. In fact, there are 21 factors the judge looks at to determine it. Therefore, if you lose such a case you only have to repay the amount of the luxury goods or cash advance you charged just before filing. However, you still discharge the remaining amount on the card.
Criminal Acts and Intentional Injuries
Criminal acts and intentional injuries are non-dischargeable in bankruptcy. However, if an injured person fails to file an adversary proceeding and objects to the discharge, it is often discharged in bankruptcy anyway. Bankruptcy won’t stop criminal courts from ordering criminal restitution. Bankruptcy is only a defense in Civil Court.
Drunken Driving Accidents
You can get your license back from a civil judgment if you get a discharge in bankruptcy. Drunk driving accident victims must file adversary actions in bankruptcy court and prove drunk driving or chance being forever barred from collecting. Then, you get your license back. (Learn how in the bankruptcy manual.)
Marital Property Settlement Agreements
Filing Chapter 13 normally eliminates your obligation to pay the marital property settlement if you properly structure the plan. However, simply listing a marital property settlement in Chapter 7 won’t eliminate it.
If you have non-dischargeable debts, list them anyway. There are ways to bankrupt many of them and the expense of the debt must be accounted for in your budget. In fact, the following debts are discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable:
- Money or property obtained by false pretenses
- Fraud or defalcation while acting in a fiduciary capacity
- Restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person
11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).