What Debt Remains After Chapter 7 Bankruptcy?
Federal Student Loans, Taxes, Fines Stay After Attorneys Go Home
Aug 21, 2009
Americans are floundering in debt up to their eyeballs. As if it weren’t hard enough to make ends meet in years past, now add on the mortgage crisis, the banking crisis, massive job losses, etc, and the bills pile higher than the rooftops.
Bankruptcy is an ancient practice allowing the debtor some protection in times of extreme duress. While it can be a financial lifesaver, it is not a panacea. There are several kinds of debts that will remain long after the Chapter 7 or 13 are discharged.
Bankruptcy law is federal, not state. The codes (laws) are nationwide. What is nondischargeable in Maine, will still be nondischargeable in Arizona.
The following exceptions to bankruptcy discharge are taken from the US Bankruptcy Code Title 11 Chapter 5 Subchapter II §523.
- Taxes and Customs duties (Paragraph 1). Taxes that are “priority”, filed fraudulently, or in a deferment agreement with the IRS. The legal jargon is confusing at best, but the essence of the material is that taxes are eternal.
Note: Simply delaying the tax return until after filing bankruptcy doesn’t cut it. According to Cornell University Law School, those are exempt from discharge as well. (US Code Collection, 2009)
- Credit obtained fraudulently (Para. 2). Debtors who lied on their application or who otherwise use fraud to obtain or extend credit, services, monies, etc, will probably find themselves stuck with that debt even after bankruptcy.
- Unscheduled Debt (Para. 3). Debts that were left off the bankruptcy schedules may or may not be dischargeable depending on circumstances, according to the Bankruptcy Court of the Western District of Wisconsin (WIW, 2009). As always, those considering bankruptcy should seek legal counsel and be sure they understand completely the ramifications.
- For fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. (para. 4).
- Debts for willful and malicious injury by the debtor to another entity or the property of another entity (Para. 5).
- Domestic support (Para. 6). Cornell University Law School states that this is only for funds owed directly to the (ex)spouse or child. (US Code Collection, 2009) Definitions of these items are set by Bankruptcy law, not state law.
- Certain liabilities for penalties (Para. 7) if the penalty is for a tax that was nondischargeable. These are penal type penalties, not civil charges or tax collections that are simply labeled “penalties”.
- Student loans or benefit overpayments (Para. 8). Direct, insured or guaranteed loans all count. This is a change from before. Used to be that only federally insured student loans were nondischargeable. Now it includes more.
Once the student loan is “due and owed” for five years (that is after loan deferments end) or if paying the debt would cause an “undue hardship on the debtor or the debtor’s dependents” then it may be discharged.
- Nondischargeable debts from previous bankruptcy (Para. 9). One exception to this is an unscheduled debt from a prior bankruptcy.
A creditor who is owed a debt under paragraphs 2, 4, or 5 (all related to fraud or criminal activity) must be present at bankruptcy court to initiate proceedings to have that debt made exempt from discharge. If he is not there, according to Cornell University Law School, the debt will be discharged. (CULS, Legal Information Institute, 2009)
All too frequently when someone in debt and experiencing financial trouble asks about bankruptcy, that person is told that taxes and student loans are not dischargeable. Even many debt collectors believe this to be the case. Before acting on any non-legal advice, debtors need to find out the facts and act with full and accurate knowledge of their rights and responsibilities. Anything less can result in even greater problems than they started out with.
While this article has been thoroughly researched via trusted legal resources, it is intended purely for informational purposes and not to be construed as legal advice. Persons considering or needing counsel about bankruptcy should contact a bankruptcy attorney or their state legal services office.
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