Although bankruptcy is often the best possible option, it isn’t right for everyone. Depending on your situation, this strategy might trigger certain consequences, such as lowering your credit score, forcing you to part with higher-value property, or downsizing your business.
Sometimes, it might simply fail to accomplish its basic purpose: eliminating your debt. While bankruptcy can discharge massive portions of debt, some of what you owe may be left untouched.
More specifically, bankruptcy will NOT discharge:
- Debt from a family court judgment. Were you recently divorced? The judge may have awarded your ex-spouse (or another relative) child support, alimony, attorney’s fees, or other types of payments. If you are behind on these payments, do not expect bankruptcy to eliminate what you owe.
- Debts owed to government agencies. This includes fines, penalties, taxes, and student loans (see below for exceptions).
- Court fines and penalties. This includes criminal restitution, personal injury awards resulting from your operation of a motor vehicle while under the influence, and more.
- Unscheduled debts. To receive a debt discharge, you must list the debt (i.e. “schedule” it) on your bankruptcy petition. Otherwise, it will not be included in your discharge. Some jurisdictions, however, may allow an exception if you made an innocent mistake and have no assets that can be liquidated.
Keep in mind that this is not a complete list of non-dischargeable debts. You can obtain a more accurate and personalized assessment of the dischargeability of your debts by retaining professional counsel.
A Note About Taxes and Student Loans
Taxes owed to government agencies are generally non-dischargeable. However, certain taxes and federal student loans may be discharged through bankruptcy.
Your taxes may be discharged if:
- They are income taxes;
- They are at least three years old;
- You did not commit tax evasion or fraud; and
- The debt was assessed at least 240 days before you filed your bankruptcy petition.
Your student loans may be discharged if:
- You have, until now, made a good faith effort to pay your student loan debt;
- You would face undue hardship if you were to continue paying your student loans; and
- The undue hardship is likely to persist for most of your repayment plan.
Student loans are difficult to discharge, but not impossible—and there are signs that it may become easier in the future as the student loan crisis in the United States worsens.
A Note About Secured Debt
When debt is backed by collateral, the contract gives the creditor or lender the right to take that collateral if the borrower defaults on their loan. This is called secured debt—it is secured by property in case of default. The claim your lender has to your property is also called a lien.
The liens created by mortgages or auto loans are voluntary because you agree to them when you sign the loan agreement. Other liens, of course, are involuntary, meaning a creditor or debt collector places a lien on your property because you haven’t paid your debt. Credit card companies may do this by suing you and obtaining a judgment against you. The IRS can also do this, but they won’t need to take you to court first.
So how does bankruptcy affect secured debt? Generally, bankruptcy can eliminate your liability for secured debts. However, it will not eliminate your lender’s right to seize the collateral. So, while the debt may technically be discharged, you will most likely lose your house, car, or other property unless you are caught up on payments by the end of your bankruptcy proceeding. In most cases, bankruptcy does not remove liens (except for second and/or third mortgages in certain circumstances).
Bring Your Case to Our Dedicated Attorney
At Dethlefs Pykosh & Murphy, we help individuals, families, and businesses use bankruptcy to wipe out their debts and obtain much-needed fresh starts. Bankruptcy is a powerful way to overcome a financial crisis, and our attorney has the skills and experience needed to help you maximize the benefits and minimize the risks.