Often all your debts are discharged—legally written off—in Chapter 7. But some you might want to pay, or might not be able to discharge.
Two blog posts ago we ended by saying that most general unsecured debts get legally written off—“discharged”—in a Chapter 7 bankruptcy case, but that there are some exceptions. We’ll get into those exceptions now. These exceptions include all types of debts—general unsecured, secured, and priority debts.
Definitely Not Discharged vs. Might Not Get Discharged
When you file a Chapter 7 “straight bankruptcy” likely your main objective is to discharge your debts and move on. The point is to get a fresh financial start. So when you’re considering your options you need to know whether you will still owe any of your debts after finishing bankruptcy.
Debts Definitely Not Discharged
You might still owe debts afterwards that you’ll know in advance you’ll owe. These include two types—those you’ll still owe voluntarily and those you’ll owe whether you want to or not.
Voluntarily Not Discharged
Why would you voluntarily agree to owe a debt after bankruptcy when the main point of Chapter 7 is to wipe out all the debts you can? You’d do it to get something worthwhile in return.
What would you get in return? The debts most commonly retained are debts secured by collateral, such as a home, vehicle, or something else worth keeping. In return for continuing to make payments and owe the debt, you get to keep the collateral. And you get the sometimes important benefit of being able to quickly start rebuilding your credit record.
In these situations you’d usually formally “reaffirm” the debt. You’d sign a “reaffirmation agreement” to remain legally liable on the debt in return for keeping the collateral. See Section 524(c) of the U.S. Bankruptcy Code.
Or, rarely, you might just want to keep paying a debt, simply because you want to. This is usually done with special, usually more personal debts, such as one owed to a relative. It’s usually based on a moral or family obligation, not a binding legal one. As the Bankruptcy Code says, “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 522(f).
Not Discharged by Force of Law
There are also debts you simply can’t discharge in a Chapter 7 case because the law says you can’t. Here are the most common ones:
- Child and spousal support can never be discharged, and most other divorce-related obligations can’t be under Chapter 7. Section 523(a)(5) and Section 523(a)(15).
- Income tax debts can’t be discharged, unless they meet a list of conditions (mostly related to how old the tax is). Section 523(a)(1)
- Most (but not all) student loans can’t be discharged unless imposing an “undue hardship” on the debtor. Section 523(a)(8)
- You can never discharge criminal fines and restitution (except sometimes minor traffic infractions that are not considered “criminal.” Section 523(a)(7) and (13)
Debts that Might, or Might Not Get Discharged
There’s one more set of debts that WILL get discharged in a Chapter 7 case, UNLESS all three of these happens:
1. The creditor files a formal objection to the discharge at the bankruptcy court
2. That objection is filed on time—within 60 days after the “First Meeting of Creditors”
3. The court determines that the debt should not be discharged
As long as the creditor was included on your schedules of creditors and the creditor does not object in time, the debt is discharged just like any other debt.
The bankruptcy court determines whether the debt gets discharged based on whether the creditor convinces the court that the debt meets one of 3 sets of conditions. These conditions include whether you obtained the debt through:
1. Misrepresentation or fraud on the creditor (Section 523(a)(2))
2. Fraud while acting as a fiduciary (such as an executor of a decedent’s estate), embezzlement, or larceny (theft) (Section 523(a)(4))
3. “Willful and malicious injury” against someone or something (Section 523(a)(6))
Again, if the creditor does object on time but does not show that one of these conditions apply, the debt still gets discharged.
Because you don’t know for sure whether a creditor will object, and if one does how the judge will decide, this is a debt that you won’t know in advance whether it will get discharged. But of course you’d usually know if there is a risk that any of your creditors have a basis for raising such an objection. If you have any inkling that one does, talk with your bankruptcy lawyer about it. You’ll find out whether you or not you should be concerned. Often you’ll learn that your risk that the creditor would object is actually quite low. However, sometimes you’ll just have to wait to see if the creditor objects by the deadline.
This is just an outline of debts that don’t or may not get discharged. We’ll look more closely at these in the upcoming blog posts.