Which Debts Can and Cannot Be Discharged in Bankruptcy?

Filing for bankruptcy can give you relief from substantial debt, but it doesn’t give every creditor a reason to stop collecting. Many ordinary unsecured debts, including credit card balances and medical bills, can generally be discharged. Other obligations, including child support, alimony, most student loans, and certain tax debts, generally remain after bankruptcy.

If you’re unsure whether your debts can be discharged, a bankruptcy lawyer can help you sort through the rules and determine what may apply to your case.

What Does It Mean for a Debt to Be Discharged in Bankruptcy?

Bankruptcy begins when the debtor files a bankruptcy petition. Once the bankruptcy is initiated, an automatic stay takes effect. Creditors cannot pursue collection activities while the bankruptcy court reviews and rules on the case. Creditors cannot start or continue court proceedings. They cannot foreclose on the debtor’s property, enforce a lien, or execute a repossession.  

A bankruptcy discharge is the legal term for a court order that releases someone from financial debt in bankruptcy court. The individual who filed bankruptcy is no longer personally liable for repaying the debt. A debt discharge is different from a secured debt, such as a lien on property.

Secured debt can survive bankruptcy because of the separate collateral agreement. Discharging it requires a separate process.

Whether a debt is dischargeable depends on the type of bankruptcy filed:

1. Chapter 7 bankruptcy is called a “liquidation” bankruptcy. The debtor’s non-exempt assets are gathered and sold to pay off creditors.
2. Chapter 11 bankruptcy is for businesses or for an individual who owns the business. It restructures debts and establishes a plan for future payments.
3. Chapter 13 bankruptcy is for individuals who use a repayment plan to pay back some or all of their debt.

Which Debts Are Typically Dischargeable?

The good news for people considering bankruptcy is that many everyday debts are dischargeable. The type of debt matters, but so do the circumstances surrounding it.

Credit Card Debt

Credit card balances are a common form of consumer debt, and they are generally dischargeable in bankruptcy. If you have accumulated balances from everyday or luxury goods purchases and can no longer afford the payments, a bankruptcy discharge may eliminate your personal responsibility for those debts.

Medical Bills

Medical debt is generally treated as ordinary unsecured consumer debt in bankruptcy. Qualifying unpaid hospital bills, doctor bills, and similar medical expenses may be discharged.

Simply listing a medical provider as the creditor does not take the debt outside the scope of bankruptcy. There can be exceptions, however.

Personal Loans and Other Unsecured Debts

Certain personal loans, collection accounts, cash advances, utility bills, and unsecured business debts may also be dischargeable in bankruptcy. Whether you qualify for that relief can depend on how the obligation came about.

A debt that looks ordinary on paper may receive different treatment if the facts place it within one of the Bankruptcy Code’s exceptions.

Other Debts That May Be Dischargeable

Bankruptcy can also address other types of debt, including certain civil judgments, older tax obligations, contract debts, and unsecured consumer debt. A car loan can be more complicated because the vehicle secures the loan. Discharge of your personal liability does not necessarily eliminate the lender’s rights against the car.

Which Debts Generally Cannot Be Discharged?

Some types of debt are not eligible for discharge. These non-dischargeable debts are typically related to a domestic support obligation, a prior court case, or a government-owed debt.

Child Support and Alimony

Child support and alimony generally cannot be discharged in bankruptcy. These obligations typically qualify as domestic support obligations, which remain the debtor’s responsibility after the bankruptcy case ends. That includes qualifying support owed to a spouse, former spouse, or child. Failing to pay can also lead to collection measures such as wage garnishments.

Most Student Loans

Most student loan debt will survive a bankruptcy discharge unless an exception applies. Federal bankruptcy law specifically addresses qualifying educational loans and permits discharge when repayment would impose an undue hardship on the debtor and the debtor’s dependents.

Student loans therefore aren’t absolutely nondischargeable, but obtaining a discharge under the undue hardship exception can require additional proceedings and evidence.

Certain Tax Debts

Bankruptcy law doesn’t treat all tax debts the same. Certain older income tax debts may be dischargeable. Recent tax liabilities and payroll taxes generally remain nondischargeable.

The court looks at when the tax became due, whether the debtor filed the required return and when, and whether fraud or an attempt to evade the tax was involved.

Debts Based on Fraud, Theft, or Intentional Misconduct

If a debt arose because of fraud or intentional misconduct, bankruptcy may not eliminate it. Section 523 covers several situations, including debts resulting from false pretenses, false representations, or actual fraud. It also includes qualifying debts tied to embezzlement, larceny, and willful and malicious injury.

Certain Fines, Penalties, and Criminal Restitution

Certain government-imposed fines and penalties generally survive bankruptcy. Depending on the circumstances, that can include court fines, forfeitures, and other qualifying obligations owed to a governmental unit.

Criminal restitution is also generally not dischargeable. Bankruptcy law has specific rules for these obligations, so the nature of the fine or penalty matters when determining whether it will remain after the case ends.

Debts for Certain Intentionally Caused Injuries

Certain personal injury debts cannot be discharged when the underlying conduct amounts to a willful and malicious injury. An accidental injury or ordinary negligence claim is different from an intentional injury, and the facts of the underlying case can determine where the debt falls.

When Can a Creditor Challenge the Dischargeability of a Debt?

Creditors also have rights during the bankruptcy process. A creditor can challenge the discharge of a debt based on specific legal theories. They may be required to initiate an adversary proceeding.

The creditor could challenge the discharge on the grounds of fraud. The creditor could show the debtor used false pretenses, false representation, or actual fraud to obtain the debt. In some situations, the fraud could amount to larceny or embezzlement. The creditor could also claim that the debt resulted from a willful or malicious injury.

What Happens When the Bankruptcy Court Grants the Discharge?

Once an eligible debtor qualifies for a debt discharge, the court will issue the order to do so. Once the court issues the official discharge order, creditors are prohibited from taking collection action.

They cannot file a lawsuit, make collection calls, send letters, or take any other personal collection action. Continued collection activity on a discharged debt can expose a creditor to contempt proceedings. The discharge protects against personal liability, but it does not automatically eliminate a valid lien against property.

Seek Legal Advice

A bankruptcy discharge can provide significant relief from debt, but it doesn’t erase every obligation you have. A bankruptcy attorney can review your debts, explain which obligations may survive the case, and help you respond if a creditor argues that a particular debt shouldn’t be discharged.

If you’re considering bankruptcy, use the Super Lawyers bankruptcy lawyer directory to find an attorney who can review your situation.