When an individual or organization is unable to pay their debts, and their creditors threaten legal action to retrieve payment, they may file for bankruptcy. Most of the time, the debtor wants to declare bankruptcy to have all their debts forgiven.
A debt discharge means that the person or company is no longer required by law to repay their debts. If a creditor’s claim is discharged, they can no longer pursue legal recourse.
Debts in Bankruptcy: Dischargeable vs. Non-Dischargeable
There are types of debt that can be discharged and those that cannot during bankruptcy. The debtor is released from the responsibility to repay the discharged obligations after the bankruptcy.
A debtor who files for Chapter 7 bankruptcy is given a complete discharge of all debts eligible for this relief. In a Chapter 7 bankruptcy, the court assumes possession of all of the debtor’s assets and sells them off as needed to pay off the debtor’s liabilities to the greatest extent possible.
The outstanding amounts remaining after liquidating the debtor’s assets are no longer the debtor’s responsibility. Debts are discharged, and the debtor is no longer compelled to pay them if there aren’t enough assets left over after the liquidation to cover all the debts.
The court will accept a plan to repay the debtor’s obligations as much as possible in a Chapter 13 bankruptcy. The intention is to pay off all obligations completely, but if any balances remain unpaid due to insufficient assets in the bankruptcy estate, they may be discharged.
Tax debt often takes precedence over all other debts in bankruptcy chapters. Tax debts are the first obligations to be paid when the debtor’s assets are liquidated in a Chapter 7 bankruptcy.
Only tax-related debts can be forgiven. Additionally, there are only a few instances in which tax obligations can be discharged.
Any tax liability incurred three years before filing for bankruptcy cannot be forgiven in a Chapter 13 bankruptcy. These obligations must be covered by the Chapter 13 repayment plan and paid in full.
Income tax debt may, however, only very rarely be discharged, just like in Chapter 7 bankruptcy.
Which Debts Cannot Be Forgiven in Bankruptcy?
Bankruptcies are legal actions involving a person or a company that cannot pay their debts when they become due. In federal courts, bankruptcy proceedings are conducted by a bankruptcy judge who assesses a debtor’s assets that might be used to pay off obligations.
Various bankruptcy petitions can be submitted. What constitutes a non-dischargeable debt varies depending on whatever form is filed.
Non-dischargeable debts remain unpaid even after a bankruptcy case is successful. Based on the facts of the case, the bankruptcy court decides which additional obligations may no longer be dischargeable.
What Debts Are Most Frequently Non-Dischargeable?
Non-dischargeable debts typically fall into one of three categories, including those that are:
- Not discharged, but only if the creditor makes a case that it shouldn’t be;
- Not discharged unless the debtor can make a case that they should be;
- Non-dischargeable or never discharged.
An individual can use the following categories to evaluate whether their obligations fall into a group of debts that cannot be discharged, often known as non-dischargeable debts:
- Student loans;
- Federal, state, and local taxes;
- Any money borrowed on a credit card to pay taxes;
- Any other debts;
- Any fines or other fees associated with breaching the law; and
- Other debts that a person wants the court to forgive
Some debts may have special conditions that must be met to be forgiven, including child support or alimony, debts for injuries sustained in a drunk driving accident, debts from tax-advantaged retirement plans, and debts for a condo or cooperative housing fees.
If a creditor can convince the court that the debtor should still owe the amount, the creditor may also establish a non-dischargeable debt. A creditor must ask the court to decide whether or not the debt is dischargeable.
The debts will be dismissed if no creditors raise the question of discharge ability or if creditors do but the court rules against them. Credit card purchases for luxury items, cash advances, and debts acquired through deception or fraud may all fall under this category.
For instance, a debtor won’t be able to get rid of a debt brought on by purposefully harming someone or their property.
Is the Debtor’s Right to a Discharge Absolute?
The entitlement to a discharge is not a given for a debtor. A creditor, the case’s trustee, or the United States trustee may file a case if there is an objection to the discharge.
All pertinent details, such as dates and deadlines for the action, will be included in a notification sent to creditors. Before the state’s deadline for timeliness expires, a creditor may submit a complaint to the bankruptcy court if there is an objection.
In some circumstances, the bankruptcy court may refuse to provide a discharge because the debtor failed to follow the rules or procedures. For instance, even if a debt was ordinarily dischargeable, the court might not do so if a person defrauds their creditors.
Additionally, if a person files for bankruptcy too often in a short time, a discharge might be rejected. If a person files two Chapter 7 cases, for instance, and the second case is filed within eight years of the first, they will not be discharged in the second case.
When Can You Get a Discharge?
At the end of a bankruptcy, a discharge is granted. The discharge is granted after the liquidation in a Chapter 7 case.
Most often, a discharge is not granted in a Chapter 11 case. Corporations typically file under Chapter 11 and are not eligible for a discharge.
A discharge is granted after the repayment plan in a Chapter 12 or Chapter 13 case. However, even if a debtor doesn’t finish the plan, a discharge could still be given.
This only happens if the debtor cannot fulfill the plan due to events beyond their control, and a change of the plan is not feasible.
After a debt is discharged, the creditor is no longer allowed to take any action that would require the debtor to pay a discharged obligation, including calling the debtor, garnishing their wages, filing a lawsuit, or engaging in any other activity.
The debtor may submit a motion to the court to raise the matter if the creditor attempts to collect. The bankruptcy court’s discharge order serves as a perpetual statutory injunction preventing the creditor from acting in any way regarding the case.
A fee for civil contempt is often imposed on the creditor who violates this order. You should contact a bankruptcy lawyer if you have any questions about these specific issues or legal concerns.
Do I Require Legal Assistance for a Bankruptcy Discharge?
It may be beneficial to speak with a bankruptcy attorney if you have any unpaid personal or business bills you cannot pay to determine whether declaring bankruptcy is the best course of action for you.
Your lawyer can help you with the filing procedure and can help you find any debts that aren’t dischargeable. They can also keep you updated if there are any changes to bankruptcy laws that might affect your particular case.