Making Sense of Bankruptcy: Debts That Are Not Discharged (Written off) in a Chapter 7 Bankruptcy

Debts That Are Not Discharged (Written off) in a Chapter 7 Bankruptcy

Start by assuming that debts are written off in bankruptcy, while knowing that there are some important exceptions that may apply to you. 

 

This is today’s sentence that we’re explaining:  

Most debts that you want to discharge are discharged when you file a Chapter 7 “straight bankruptcy” case, because bankruptcy law explicitly says that all debts are discharged except for a list of specific kinds of debts that are not, which include 1) debts which ARE discharged unless the creditor objects and does so successfully, and 2) debts which are NOT discharged even without the creditor objecting.

Most Debts Are Discharged

For most consumers and small business owners filing any type of bankruptcy, most if not all their debts that they want to discharge—permanently write off—will be discharged. As our last blog post discussed, if you have a secured debt—such as a vehicle loan, home mortgage, or a furniture/appliance store purchase on a secured contract or card—most likely you can choose to exclude that debt from the discharge in order to keep the purchased collateral.

Debts that are not discharged are very select ones, probably ones you’ve heard about like income taxes, student loans, criminal fines, and child and spousal support. And even some of these can be discharged under certain circumstances.

Start with the assumption that most if not all conventional consumer debts and claims against you will be discharged. Here is just a short list of some of the types of debts that would usually be discharged in both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts”:

• credit cards
• medical bills
• personal bank loans
• utility bills
• business loans, including personal guaranties
• personal obligations on business debts to suppliers, premises and equipment leases
• claims against you arising from a vehicle accident based on negligence
• older income taxes
• “deficiency balance” on a surrendered or repossessed vehicle
• unsecured store and retail credit cards
• second or third mortgage balances after a foreclosure by the first mortgage holder
• mail order accounts
• loans from friends and relatives, whether in writing or oral

A few of these (such as the older income taxes) are discharged only under very specific conditions. And the discharge of all of the others can be challenged, but only under very specific conditions, and so very seldom are.

All Debts Are Discharged Except Those Specifically Listed

The Bankruptcy Code—the federal statutes governing bankruptcy that Congress has written under the authority of the U. S. Constitution—gives a list of the kinds of debts that are not discharged, and the conditions under which they are not discharged. Federal courts, empowered under the Constitution to interpret federal statutes such as the Bankruptcy Code, have made clear that debts are presumed to be discharged unless they fit within the Bankruptcy Code’s list of discharge exceptions.

It’s helpful to divide these exceptions to discharge into two categories:

1) debts which ARE discharged unless the creditor objects and succeeds in that objection, and

2) debts which are NOT discharged even if no objection is raised by the creditor.

A Creditor Must Raise an Objection to Discharge and Prove Appropriate Grounds

The following types of debts would be discharged unless the credit makes a timely objection with the bankruptcy court, and succeeds in convincing the bankruptcy judge that the narrow legal grounds for not discharging the debt are met:

•  Debts incurred by a debtor while making a misrepresentation or committing fraud in order to get the loan or credit. This misrepresentation or fraud can be an intentional falsehood on a loan application, cash advances or use of a credit card without the debtor’s intention to pay the debt, or any other way of deceitfully incurring a debt. 
• Debts resulting from the debtor’s theft or embezzlement, and from fraud against a person to whom the debtor owed loyalty in a trust relationship. These include stealing from an employer, cheating a business partner, and using duress to pressure an elderly relative to change his or her will in the debtor’s favor. 
• Obligations resulting from intentionally and maliciously harming a person or business, or his or its property. This includes bodily injuries and property damage caused intentionally, such as during a domestic disturbance or bar fight, as well as injuries and damages caused through reckless behavior under certain circumstances. 

The creditor owed on these types of debts must file a formal complaint in an “adversary proceeding”—a type of lawsuit specifically to determine the dischargeability of a debt—in the bankruptcy court. And this complaint must be filed quite quickly, usually by a deadline about three months after the filing of the bankruptcy case. Otherwise, assuming that the creditor was appropriately listed in the debtor’s schedule of creditors and received notice of the bankruptcy case, the debt at issue is discharged forever along with the rest of the debts.

Debt Not Discharged Even Without Objection

The creditors do not need to object (and they virtually never do) for the following types of debts, which are not discharged:

• Criminal fines, fees, and restitution
• Taxes of many kinds, as long as they meet certain conditions
• Child support, spousal support and maintenance
• Almost all, but not absolutely all, student loans
• Claims for bodily injury or death from driving a vehicle, boat, or aircraft while intoxicated
• Debts not listed in the debtor’s bankruptcy schedules