Which Debts Survive Bankruptcy?

Bankruptcy doesn’t necessarily wipe out all of your debts.

The law starts with the proposition that all debts are dischargeable and then lists the exceptions to discharge.

Child or spousal support, for example, cannot be discharged under any chapter of bankruptcy.

Likewise, recent income tax debt isn’t dischargeable.  Trust fund portion of payroll taxes can’t be discharged at all.

Other debts are not dischargeable so that there is no escape from the consequences of dishonest behavior.

Discharge varies by chapter

 The scope of the discharge varies in each chapter of bankruptcy:  in Chapter 7, debts  not discharged include:

  • incurred by fraud,
  • ntentionally harmful actions,
  • theft of several kinds,
  • priority taxes, unfiled taxes, 
  • family support and debts to a former spouse,
  • student loans,
  • criminal fines and restitution

Chapter 13 discharge is broader

In Chapter 13 bankruptcy, you can discharge non support obligations to a former spouse, government fines, and some intentional torts that could not be discharged in Chapter 7 in addition to the claims dischargeable in Chapter 7.

Tax penalties are dischargeable, even if the tax itself is not dischargeable..

The list of bankruptcy exceptions to discharge is found at Bankruptcy Code Section 523.  There are some provisions outside of the bankruptcy code, as well, that make debts like military academy education non dischargeable under certain circumstances.

Other laws making debts non dischargeable

Some exceptions require creditor action

Debts that are non dischargeable by reason of the bad behavior of the debtor require that the creditor file an adversary proceeding within the time limits set out in the notice of bankruptcy.

It isn’t just enough to say the debtor defrauded me;  the creditor must prove it to the satisfaction of the judge at trial.

And the fraud must have lead to the creation of the debt;  bad behavior after a debt arises legitimately doesn’t make it non dischargeable.

This rule requiring the creditor to prove up his claims of dishonesty covers debts described in  §523(a)(2), (a)(4), and (a)(6).

If the creditor is successful in proving that the debt should survive bankruptcy, the debtor gets a discharge of all of his other dischargeable debts and the creditor’s claim lives on.

Liens survive

The bankruptcy discharge eliminates the debtor’s personal liability for the discharged debt.

If that debt was secured by a lien on the debtor’s assets, the lien survives the bankruptcy, unless the court makes an order stripping the lien.

Due process requires that a secured creditor whose lien may be stripped get notice of the proposed action and a chance to contest the action.

Read more

Avoiding liens that impair exemptions

Family law after bankruptcy reform

Stripping mortgages 

Taxes in bankruptcy

Image courtesy of Dust to Ashes.

About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.