Most people file for Bankruptcy in the hopes of a fresh start. In the simplest of terms, there are two main types of Bankruptcy: (1) Chapter 7 where debts are erased and (2) Chapter 13 where debts are repaid.
At the end of a Chapter 7 Bankruptcy, the person who filed (called a “Debtor”), will receive a Discharge. A Discharge is a Court Order that says that the Debtor is no longer responsible to pay back his or her debts. It is a blanket discharge with a few exceptions. Those exceptions are debts that are not discharged in Bankruptcy and they include the following: Taxes, Child Support and Alimony, Student Loans, Court Fees, Fines and Restitution, and Personal Injuries caused under the influence.
Let’s explore and analyze each category.
Most taxes are not dischargeable in Bankruptcy. However, if your federal income taxes meet certain criteria, they may be discharged in Bankruptcy. The Debtor’s tax debt must meet five elements: (1) the subject tax must be federal income tax debt owed to the IRS, (2) the taxes cannot have been filed fraudulently and the Debtor cannot have attempted to evade paying taxes, (3) the tax debt must be at least three years old (this is tricky to calculate because its based on the tax’s due date), (4) the tax debt must have been assessed at least 240 days before the date the Debtor filed for Bankruptcy and (5) all tax returns must have been filed and filed on time. Basically, all the stars in the sky must have aligned! They certainly don’t make it easy but it is doable.
Child Support, Alimony, and other domestic support obligations, especially those that arose from a dissolution of marriage, are not dischargeable in Bankruptcy.
Student loans are next on the list. And while they were almost wholly not dischargeable since 1987, recently the Department of Justice (DOJ) provided guidance on discharging education loans in Bankruptcy. I previously wrote an article about this topic last year. Suffice it to say, it can be done, and I have done it for a client but it is difficult as the DOJ relies on these three conditions: “(1) the Debtor presently lacks an ability to repay the loan; (2) the Debtor’s inability to pay the loan is likely to persist in the future; and (3) the Debtor has acted in good faith in the past in attempting to repay the loan.” Essentially, the Debtor must have an undue hardship, oftentimes, a disability that prevents them from earning enough income to afford to pay back the loans in the future. Discharge of student loans requires an extra step in a Bankruptcy called an Adversarial Proceeding and can be partial, full or none at all, depending on how it shakes out.
Court fees, fines and restitution are not dischargeable in Bankruptcy. This includes the court filing fees to file Bankruptcy, as well as criminal fines and victim restitution. Although, a Debtor may apply for a waiver of Bankruptcy filing fees (if qualified) or an application to pay them in installments.
Personal injury caused under the influence of drugs or alcohol, or due to intentional harm are not dischargeable in Bankruptcy. Most personal injury claims are dischargeable in Bankruptcy because they arise out of pure negligence. But if it is adjudicated that the Debtor hurt someone under the influence or with intent, then the debt is not discharged.
In general, only debts that were incurred prior to the filing of the Bankruptcy are dischargeable. Debtors can only receive one Bankruptcy Discharge every eight (8) years.
All of this information and more, is outlined in the Bankruptcy Information Sheet prepared by the Office of the United States Trustee (UST). The UST is the entity that oversees the Bankruptcy process. It is part of the Department of Justice. The other part of the Department of Justice is the FBI, and the FBI does investigate all Bankruptcy crimes and frauds. The immediate past United States Trustee is Tara Twomey. I had the pleasure of seeing Attorney Twomey and hearing her speak at the Connecticut Bankruptcy Conference in 2023. But long before that, I was a fan of hers when she was Of Counsel to the National Consumer Law Center, (a wonderful resource for Debtors and Bankruptcy Attorneys). She, like me, is “passionate about the Bankruptcy Code and its promise of relief to financially struggling Americans.”
I have dedicated my life to stomping (or is it stamping?) out the stigma attached to Bankruptcy. Although not all debts may be discharged in Bankruptcy, most are, and it is that relief that gives my clients a second chance, a fresh start. As Tara Twomey says “Bankruptcy can be a powerful engine of economic renewal” and it “has the power to transform lives, offering individuals and families a chance to rebuild and thrive.”