The great majority of people who have to file a Bankruptcy case receive a full discharge of all of their unsecured debt, such as credit cards and medical bills, and many also receive a discharge of their secured debts unless they choose to reaffirm the debts. However, there are categories of debts that are not dischargeable in a Bankruptcy case. The most common debts that are nondischargeable in Bankruptcy, under Section 523 of the Bankruptcy Code, are:
- Income Taxes and Other Taxes. The general rule is that taxes are nondischargeable in Bankruptcy. However, there are exceptions to the general rule, and they are discussed in more detail in another post.
- Debts incurred by fraud or false pretenses. This exception typically arises when an applicant for a loan or credit card and is dishonest about income or assets. In addition, this may include the purchase of certain “luxury” goods and cash advances in the three month period before the Bankruptcy filing. This is intended to prevent people from going on shopping sprees or taking cash advances knowing they will be filing for Bankruptcy in the near future. If you have incurred credit card debt or take significant cash advances in the three month period before meeting with a lawyer, it is important you disclose your charges and cash advances.
- Debts that are not listed in the debtor’s schedules and where the creditor did not get notice of the case. Although people filing for Bankruptcy should take care to identify all creditors, and anyone who they think may be a creditor (even if they dispute the debt), it is somewhat rare that this exception affects a debtor after the case if filed. Since most Chapter 7 cases are “no asset” cases, in which creditors receive nothing, Courts follow a “no harm, no foul” rule and hold that unidentified creditors would not have received anything anyway, so there is no harm in discharging the debt. In addition, most creditors simply won’t pursue a debt if they later find out about the Bankruptcy case as they do not want to risk violating the discharge injunction.
- Larceny, embezzlement, and debts arising from fraud or defalcation while acting in a fiduciary capacity. Stealing money from an employer or client falls within this exception. It also includes the fraud of a person who has a fiduciary duty to others, including acting as the executor of an estate or trustee of a trust.
- Child Support, Alimony or other Domestic Support Obligations. Although in many cases these debts are fairly obvious, it also includes such debts as obligations to pay your former spouse’s lawyer. Bankruptcy Courts are typically liberal in applying this exception to debts arising from a divorce case.
- Willful or Malicious Injury to person or property. If you are angry at someone and take a baseball bat to their car, or the person, this exception will come into play. However, it is not limited to acts of violence.
- Fines, penalties and forfeitures payable to a governmental unit. Bankruptcy is typically not a way out of speeding and parking tickets.
- Student Loans. Public and private student loans are typically not dischargeable in Bankruptcy unless the debtor can meet the very stringent test of “undue hardship.” We discuss student loans in greater detail in this post.
- Debts arising from Driving, Boating or Flying under the influence. Although most debts arising from auto accidents are dischargeable, this exception applies if the debtor was driving while intoxicated.
- Debts from a prior Bankruptcy case in which the debtor was denied a discharge.
- Fees due to Homeowners or Condo Owners Associations incurred after the Bankruptcy filing date. This is the exception that haunts many people who file for Bankruptcy and later find out their HOA fees start accruing again after they file their case up until the day they no longer own the property.
While this is not an exhaustive list of the exceptions stated in Section 523, they are the most common. It there is even a question that a person’s debts may be excepted from discharge under one of the exceptions, it is important the matter is discussed before filing the case. Even if a creditor has a strong case that their debt is nondischargeable, a lawyer can often negotiate a better outcome for the client, such as a reasonable payment plan or lower principal amount. In addition, getting a general discharge of debt may free up enough money to pay off a nondischargeble debt.