Dischargeable Debt in Bankruptcy (definition with examples)

What is dischargeable debt? 

Dischargeable debt is debt that can be cancelled or forgiven because you have become bankrupt. This means that creditors cannot collect from you. “Collect” covers a broad scope of actions, including: calling you, filing or continuing a lawsuit, writing to you to pay debts, repossessing property in your possession and certain types of credit reporting [read more: credit reporting article]. Bankruptcy allows you to have a fresh start. Sounds quite nice doesn’t it? [read more: pros and cons of filing for bankruptcy]

Examples of dischargeable debts:

Medical Bills
One of the biggest “yikes” anyone might utter is from opening up an envelope containing a medical bill. Especially without insurance, it might feel hopeless. They can quickly balloon so that one is unable to pay off the entire bill even in a lifetime depending on the amount. It doesn’t help that the sicker you are the less money you are likely to be able to bring in. It’s no wonder that crippling medical debt seems to grow exponentially like a virus: the more bills that arrive cause even more stress, and a sicker person works less and performs worse thereby increasing the debt deficit.

Utility bills that are passed due
Let’s say you struggle every month to pay the water bill. This is an example of dischargeable debt if you file for bankruptcy. 

Credit card debt
A very common problem is rising credit card debt. But building credit is essential to owning a home or even a car. It is often harmful just paying the minimum balance on a statement and this is how many people get into a vicious cycle of not being able to pay their debts. However, with some guidance, you can actually leverage credit cards to build credit rather than harming your credit score.

Personal loans made by friends, family and others
This can be any personal loan. Let’s say you help a friend pay rent and she or he then owes you $500. If they file for bankruptcy, then this can be forgiven. 

What about non-dischargeable debt?

Now, we can’t fully discuss dischargeable debt without also mentioning non-dischargeable debt. So what’s the difference and what does it look like? 

Non-dischargeable debt is debt that cannot be forgiven or cleared despite the fact you have filed for bankruptcy. Some debts don’t start off as dischargeable but can become dischargeable based on circumstance. Non-dischargeable debt can be in different forms. The following are all examples of non-dischargeable debts.

Examples of non-dischargeable debts

Student loans
These are almost never dischargeable in bankruptcy. The only way it could be is if by some miracle the student is able to convince that he/she has gone through some undue hardship; but this is no easy feat.

Taxes
This includes the majority of taxes that go to the federal, state, and local government. There is an exception to income tax that meets a certain stringent set of guidelines. It’s interesting to note also that in general, taxes that are more than 3 years old can be discharged depending on when it was filed and whether it received an extension. 

Domestic support
Includes child support/alimony and spouse support. So let’s say the ex-wife has an order from the state court that requires you to pay $500 a month to her in spousal support. This is not going to be dischargeable even in bankruptcy.

Fines and Restitutions
This includes fines and penalties that are owed to the government as well as restitution to victims of crimes. The exception is for tax penalty.

Personal Injuries
A great example of this is driving drunk and getting into an accident that harms or kills another person. The judgement and financial losses due to this are not dischargeable.

Debts that have failed to be listed as part of the bankruptcy
Any debts that have not been listed in time for the creditors to file a proof of claim will not be discharged. If you hide debts on purpose, not only will you not be discharged at all, but also might rack up fraud charges.

How does this affect my decision to file for bankruptcy?

There are many different types of debt. Some can be cleared with filing for bankruptcy while others cannot. Hopefully understanding the difference between dischargeable and non-dischargeable debt will empower you even in a financial crisis. Bankruptcy doesn’t have to always mean hope is lost. Sometimes, it can even pull you to brighter days… 

This blog is not a replacement for legal advice. If you need to know whether a specific debt is “dischargeable” or not, please CONTACT US.