non-dischargeable debt in chapter 7

Non-dischargeable Debt in Chapter 7

Various debts may be discharged according to Chapter 7 bankruptcy laws, but not all debt qualifies. In this article, we are going to take a further look at non-dischargeable debts.

Although many Chapter 7 bankruptcy filers are able to discharge eligible obligations such as student loans, medical expenses, credit card balances, and personal loans, certain debts may not be discharged. In a Chapter 7 bankruptcy, they are not eliminated. Here is what to expect if you file for Chapter 7 bankruptcy.

What Are Non-dischargeable Debts?

Non-dischargeable debts are those that cannot be discharged in bankruptcy under the United States Bankruptcy Code. Certain non-dischargeable debts are accorded this special status since the sort of debt is such that not permitting filers to delete it is in the public interest. Child support and student loans are examples of this.

Other obligations, including criminal reparation, are not dischargeable due to the manner in which they were incurred. The majority of unsecured debts that people are battling with today, such as credit card debt, medical bills, personal loans, and previous utility bills, are erased when they file for bankruptcy.

If you are having trouble making ends meet each month and cannot decide whether to pay your credit card company or for rent, bankruptcy may be able to help. 

What Are the Barriers to Discharge?

The majority of debtors go through the Chapter 7 process with ease. However, bear in mind that a Chapter 7 discharge is not a sure thing. There are two obstacles to look at when considering a barrier to debt discharge:

  1. Failing to comply with court rules and the bankruptcy process – If you do not follow the applicable rules, the court may dismiss the Chapter 7 bankruptcy petition, leaving the party accountable for the debts that would otherwise be discharged.
  2. It is a nondischargeable debt – There are 19 categories of debt, more specifically, non-dischargeable debts. Based on public policy reasons, Congress concluded that some debts should not be discharged. Unless special conditions exist, the majority of these debts are evidentially non-dischargeable. When you receive a discharge at the conclusion of a bankruptcy case, the creditor is free to pursue collection efforts.

The creditor needs to successfully oppose the discharge of the debt during the bankruptcy process for a handful of the 19 categories of debts. The obligation is canceled if the creditor does not object, or if they do and the bankruptcy court disagrees.

Are there Grounds for Denial Regarding a Chapter 7 Discharge?

Debtors do not have an absolute right to a discharge in a Chapter 7 proceeding. Furthermore, a debtor must meet the conditions of bankruptcy law to receive a discharge. (See 11 USC 727.)

Creditors, the U.S trustee, or the bankruptcy trustee may object to the full Chapter 7 discharge if a debtor does not follow the rules or fails to furnish required information; for example, the bankruptcy court may refuse to grant you a Chapter 7 discharge if you:

  • Do not complete a personal financial management course
  • Hide or transfer property to hinder or defraud any creditors
  • Do not provide any of the requested tax documents
  • Hide or destroy records or books
  • Violate court orders
  • Can’t account for the loss of any assets
  • Commit fraudulent acts such as perjury that connect to the bankruptcy case
  • Filed a bankruptcy case in the past which was granted a discharge within a specific time frame – this depends on the bankruptcy filing that took place.

The debtor remains responsible for all of the obligations if successful.

What Are the Chapter 7 Non-dischargeable Debts?

If debts fall within a set of prescribed categories, it is ruled as a nondischargeable debt without the necessity for a hearing. The following are always non-dischargeable debts unless the debtor can show unusual circumstances:

  • Unless creditors received actual notice or information of the bankruptcy filing, unscheduled debts (any obligations a debtor fails to identify on the bankruptcy settlement agreement and include on the mailing list).  In addition, when there are no assets to disperse, several jurisdictions allow discharge of normally dischargeable obligations not stated in the petition because of an innocent mistake.
  • Student loans – there are several rare exceptions with regards to a student loan
  • Debts regarding spouse or child support or alimony
  • Specific taxes
  • Any debts owed to a child or former spouse if they have arisen out of a separation or divorce
  • Debts to a government agency regarding fines and penalties
  • Court fines and penalties – this includes criminal restitution
  • Attorney fees in child support and custody cases
  • Debts owed to specific types of tax-benefited retirement plans
  • Debts regarding personal injury resulting from the debtor’s operation of a car while under the influence or intoxicated
  • Debts for specific cooperative housing fees or condominium – homeowners association fees for example

While all of these are non-dischargeable debts in Chapter 7, a few can be discharged in the Chapter 13 bankruptcy code. 

Let us explore a few of these nondischargeable debts in further detail:

Student Loans

The majority of people are aware that student loan debt is not dischargeable in bankruptcy. This is especially true in Chapters 7 and 13. However, a filer may be eligible to seek a bankruptcy discharge for part or all of their student loan debt in some circumstances. The conditions for such a discharge are extremely difficult to meet.

You must show that repaying your school debts is going to put you in a position where you are unable to meet your fundamental needs. Additionally, you must also show that your existing financial condition is unlikely to change in the near future. One must also show that you made an effort in good faith to repay the nondischargeable debts if you can prove the two above-mentioned conditions.

As various individuals are behind on their monthly payments when filing for Chapter 7 debt relief, they are frequently unable to prove all of the necessary criteria to discharge their student loans.

Debts Regarding Spouse or Child Support or Alimony

Domestic support responsibilities, such as child support and alimony, are never dischargeable when it comes to bankruptcy. Domestic support payments that are past due cannot be discharged in bankruptcy. This is one of those rare exceptions to the rule of law.

Furthermore, because domestic support requirements are one of the rare exceptions to an automatic stay, family court procedures to create or modify domestic support responsibilities can proceed even after filing a bankruptcy case. The garnishment of your salary for past or current due child support obligations is not stopped by the bankruptcy filing.

Whilst you are not able to seek discharge for previous due domestic support, if you are behind on alimony payments or child support, you can file a Chapter 13 bankruptcy case to catch up. You can remove this debt by repaying it through a Chapter 13 payment plan so long as you stay current on the future payments for the nondischargeable debts.

Specific Taxes – Income Tax

A bankruptcy petition does not wipe out recent income tax problems. You can pay off any nondischargeable debt relating to income taxes with a Chapter 13 repayment plan, just like you may with domestic support commitments. Back taxes, like student loans, withstand a Chapter 7 bankruptcy settlement agreement. Even in a Chapter 7 bankruptcy, certain older income tax debts may be discharged; however, only if specific conditions are met.

More than three years after the tax return was owing, and more than two years after a return has been filed, the bankruptcy must be filed. Even if the other standards are completed, any taxes assessed in the 240 days prior to the bankruptcy filing are not discharged.

Furthermore, regardless of how old the debt is, if the IRS can prove tax evasion or fraud on your behalf, the tax debt remains non-dischargeable.

If you owe a lot of money in taxes, talk to a bankruptcy attorney about the available bankruptcy alternatives. This assists you in determining the sort of bankruptcy that is best suited to the circumstances.

Secured Debt

Secured debts are considered differently than unsecured debts since they are tied to a specific piece of property, such as a motor vehicle loan or, in the case of mortgages, a home. If you stop making your motor vehicle payments outside of bankruptcy, your car might be repossessed. Therefore, just because you filed a Chapter 7 bankruptcy does not mean you can stop making payments and retain your vehicle. To put it another way, declaring bankruptcy is not a path to a free car. 

When Does a Chapter 7 Bankruptcy Discharge Occur?

Based on the chapter under which the bankruptcy case is filed, the discharge can take a long time. In a chapter 7 (liquidation) case, for instance, the court normally grants the discharge quickly once the deadlines for filing a complaint opposing to discharge and a petition to dismiss the bankruptcy case for serious abuse have passed (60 days after the first date set for the 341 meeting).

This usually happens four months after the debtor files his or her petition with the bankruptcy court clerk. Single chapter 11 cases, as well as cases under chapters 12 (modification of debts of a fisherman or family farmer) and 13 (modification of debts of a person with regular income), normally give the discharge as soon as the debtor fulfills the payments under their plan. Due to the fact that a chapter 12 or chapter 13 plan may require payments to be completed over three to five years, the discharge usually happens four years from the date of filing.

If a debtor fails to finish “an instructional course involving financial management” in a chapter 7 or 13 case, the court can deny the debtor’s discharge. If the bankruptcy administrator or U.S trustee determines that there are insufficient educational services available, or if a debtor is incapacitated or disabled, or is on active military duty in a combat situation, the Bankruptcy Code allows for limited exceptions to the “financial management” mandate.

How Does a Debtor Obtain a Discharge?

The debtor is normally discharged automatically unless there is a breach of fiduciary including objections to the discharge. Additionally, a debtor must ask the court and must prove that they cannot accept personal liability for the debt. All creditors, the trustee in the case, the U.S trustee, and the trustee’s counsel, if any, receive a copy of the discharge order from the clerk of the court, according to the Federal Rules of Bankruptcy Procedure. This discharge order is also given to the debtor and his or her counsel. The notice, which is merely a copy of the final discharge order, is vague about which debts the court has ruled are non-dischargeable, or not included in the discharge.

In addition, the notice advises creditors that their debts have been forgiven and that they should not pursue collection efforts any further. They are warned in the notification that further collection efforts may result in contempt charges. The legality of the order granting the discharge is unaffected by the clerk’s accidental failure to provide the debtor or creditor a copy of the discharge order within the period specified by the regulations.

The debtor may also speak to a bankruptcy attorney or law firm for legal advice on the different types of debt they are facing or if the creditor objects to any specified terms after the debtor has filed for bankruptcy.

If a creditor tries to collect on a discharged debt, the debtor may file an application with the court, detailing the activity and requesting that the case be reopened to resolve the issue. To guarantee that the discharge is not violated, the court frequently does so.

The discharge is a permanent legislative injunction that prevents creditors from making any effort to recover a discharged debt, including launching a lawsuit. The court has the authority to punish a creditor who violates the discharge injunction. Civil contempt, which is generally penalized by a fine, is the most common consequence for breaking a discharge injunction.

Speak to an attorney or experienced law firm for legal advice regarding this matter.

What Debts Are Not Dischargeable if Creditors Object?

Several debts are not exempt from discharge by default. Creditors must ask the bankruptcy court to determine whether or not their debts are dischargeable. These debts are discharged if a creditor does not raise a dischargeability issue or if the creditor raises an issue yet the court does not agree.

These debts include:

  • Cash advances
  • Credit card purchases for luxury goods
  • Debts arising due to willful and malicious injuries
  • Debts incurred from fraud or false pretenses

Cash Advances

The debt is judged nondischargeable and fraudulent if a debtor receives more than $1,000 (as of 1 April 2019) from a creditor within 70 days of filing for bankruptcy. The obligation is forgiven if one can demonstrate that they planned to repay the money owed to a single creditor. 

Credit Card Purchases for Luxury Goods

These types of debt are judged nondischargeable and fraudulent if they are owing to a single creditor and total more than $725 (as of 1 April 2019) and were accrued within 90 days of filing for bankruptcy. In an adversary proceeding—a form of a lawsuit—the creditor must submit the facts to the bankruptcy court. The debt is dismissed if one can show that they meant to pay the charges back or that the goods are not “luxury” things.

Debts Arising Due to Willful and Malicious Injury

A debt incurred as a result of willfully hurting someone or their property would not be discharged.

Debts Incurred from Fraud or False Pretenses

These kinds of lawsuits usually start from people lying about their income on credit applications or buying things on credit with no intention of paying them back. 

Why Should One File for Bankruptcy If they Owe Any Nondischargeable Debt?

Even if you have a few nondischargeable debts, bankruptcy may still be able to aid you. Many filers with non-dischargeable debts discover that paying these obligations is significantly easier after they have paid off their other types of debts.

If you owe income taxes or student loans, for example, you may be able to work out a payment plan with your discharge creditors after filing for bankruptcy. You may have enough spare income to pay off nondischargeable obligations if you do not have to worry about medical bills, credit card debts, or personal loans.

Additionally, it is not prudent to ignore all of your debt since you have non-dischargeable debts. Unsecured creditors may or may not seek to collect dischargeable debts from you.

By filing for Chapter 7 debt relief, you can avoid collection activities such as debt collection litigation and wage garnishment. After earning a Chapter 7 discharge, you may have one or two non-dischargeable debts to cope with; however, you would not have to worry about facing undue hardship or the hundreds of dollars in dischargeable debts you were able to eliminate during the Chapter 7 debt filing.

The Bottom Line

In a nutshell, a bankruptcy discharge is a court order that releases a debtor from personal liability regarding specific types of debts caused by undue hardship or personal injury. If you are thinking about filing for bankruptcy to get out of debt, you should understand more about how it operates, what it can (and can’t) do, and who is qualified. Make sure to learn everything there is to know about bankruptcy before embarking on the complex journey.

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