Types of Dischargeable Debts:
Filing for bankruptcy discharges and extinguishes the personal liability to pay debts. This is very important when considering one’s liability with secured debts in a bankruptcy proceeding. A secured debt is one which the creditor has rights to the debtor’s property as collateral. In other words, a secured debt has two parts: 1.) personal liability by a person to pay and 2.) a lien on property to also enforce payments.
Two common secured debts occur when purchasing cars and homes. When a person finances the purchase of car, the lender retains the ability to repossess the vehicle if payments are defaulted. The vehicle would be repossessed to be sold. A home with a mortgage is also a secured debt. The home is placed as collateral, to which the creditor may foreclose the home to enforce the debt obligation.
The bankruptcy proceeding only discharges a person’s personal liability to pay the debt. Bankruptcy does not extinguish the lien portion of a debt. A creditor retains its right to exercise its rights with the lien.
For example, a person falls behinds payments on his vehicle and subsequently declares bankruptcy. He owes $12,000.00 on a vehicle worth $10,000.00. His liability for the $12,000.00 becomes discharge and is no longer liable. However, the creditor is able to repossess the vehicle and sell it for $10,000.00. There is a $2,000.00 deficiency. As the person discharged his personal liability in bankruptcy, he is not responsible for the $2,000.00 difference and was not able to prevent the creditor from exercising its right by repossessing the vehicle.
However, not all personal liability for debts are discharged in bankruptcy. There are several exceptions to when personal liability may be discharged for a debt. Please see the information and chart below.
| DISCHARGEABLE |
NOT DISCHARGEABLE |
Personal Loans
Credit Cards
Unsecured Deficiency Balances
Auto Accident Claims
Medical Bills
Unsecured Judgments
Business Debts
Leases
Guaranties
Negligence Tort Claims
Non-Priority Income Tax
Tax Penalties 3 Years Old
(More details on taxes below) |
Child Support or Alimony
Divorce Settlements Awarded other than Alimony
Criminal Fines or Restitution
Accident Claims Involving Intoxication
Debts Not Listed in BK
Penalties Payable to the Gov.
(See specifics for Tax Penalties below)
Student Loans
Debts that were previously denied discharge in BK
Trust Fund Taxes
Recent Taxes
(More detail on taxes below) |
In addition to those debts that are dischargeable under chapter 7, a chapter 13 bankruptcy also discharges non-alimony debts to a former spouse that results from a divorced. Other family support such as child support and alimony remain as nondischargeable debts.
Such past due support debts and priority tax debts must be paid in full through the Chapter 13 repayment plan.
Some taxes and associated penalties are dischargeable under Chapter 7. Those that cannot be discharged can be paid without interest in a Chapter 13 repayment plan. Whether taxes are dischargeable depends on the kind of tax involved, the age of the tax, whether a return was filed, and the chapter of bankruptcy selected.
For more on Taxes during Bankruptcy, Click Here.
A debtor can be denied some or all debts if the court finds, after trial, that the debtor committed certain acts deemed dishonest and fraudulent.
Acts that prevent obtaining a discharge altogether include transferring, concealing or destroying assets or financial records; making a false oath on the schedules or under oath in the case; or failing to keep books and records from which the debtor’s financial condition can be ascertained. The complete list of acts can be found at 11 U.S.C. 727.
Debts can also be denied discharged if a creditor is successful with an objection. If a creditor can show that a debt was taken within intent to not pay back with anticipation of filing bankruptcy, the debt will not received a discharge.
