AREN’T MOST DEBTS FORGIVEN IN BANKRUPTCY?
Yes, for most people most debts are forgiven in bankruptcy. However, there are quite a few types of debts that either aren’t or may not be.
These fall into the following broad categories:
Debts which bankruptcy never forgives.
Those that are forgiven only under certain conditions.
Debts bankruptcy does forgive unless the creditor objects and proves you acted in ways that make the debt unforgivable.
Debts that are not forgiven for procedural reasons—because of timing or mistake on your part.
Under some rare circumstances, no debts are forgiven because of a serious misuse of bankruptcy laws.
1. WHICH DEBTS ARE NEVER FORGIVEN?
Bankruptcy never forgives child and spousal support or alimony, criminal fines and restitution, and claims from drunk driving accidents.
Are these debts really not forgiven under any circumstances? Well, bankruptcy law defines what each of these categories of debts includes and does not include. So there are certain specific situations where a debt which sounds like it might be included in one of these types actually isn’t included under the bankruptcy definition. So if a debt sounds like one of these debt categories but because of its circumstances that debt isn’t within the bankruptcy definition, that debt could be forgiven.
For example, bankruptcy law doesn’t actually use the words “child support” or “spousal support.” It uses a special term, “domestic support obligation,” and then defines this term using ten clauses consisting of more than 200 words. See Section 523(a)(5) and Section 101(14A) of the U.S. Bankruptcy Code. Part of this definition is that the debt is “in the nature of . . . support . . . without regard to whether such debt is expressly so designated.” Section 101(14A)(B). This means that if a divorce decree expressly designated an obligation as support but it wasn’t actually “in the nature of support,” the obligation would not be a domestic support obligation. This would happen, for instance, if a divorce judge would label something as support when it’s really designed to equalize the ex-spouses’ property division. So this obligation would not fall within this “support” exception and might potentially be forgiven.
Similarly, there are debts that appear to be criminal fines when they might instead be traffic infractions treated like civil debts and potentially forgiven. And under certain limited circumstances a claim from an accident that happened when a debtor was alcohol impaired might be forgiven—such as when there is insufficient evidence that the blood alcohol content was at an unlawful level.
So, usually child/spousal support, criminal debts, and claims from drunk driving are not forgiven in bankruptcy. But talk to an experienced bankruptcy lawyer to find out if these debt categories actually do apply to your unique circumstances.
2. WHICH DEBTS ARE FORGIVEN IF THEY MEET CERTAIN CONDITIONS?
Income taxes and student loans fall into this category.
First, state and federal income taxes can be forgiven (or “discharged”) just as completely and permanently as any other kind of debt. See a list of the 5 conditions required to Discharge Taxes in Bankruptcy (found in our Bankruptcy Information Center).
Be aware that 3 of these 5 conditions just require the passage of time—mostly for enough time to pass between when a tax return is due and is actually submitted, and when you file your bankruptcy case.
The 4th condition is that you didn’t “willfully . . . evade or defeat” an income tax. See Section 523(a)(1)(C) of the Bankruptcy Code. This condition is not a problem for most people. That’s in part because of the word “willfully” in the statutory phrase just quoted.
Second, a student loan has to just meet one condition to be forgiven: that it cause you an “undue hardship.” See Section 523(a)(8) of the Bankruptcy Code.
However, “undue hardship” is a condition that is more difficult to meet than you’d think. See Student Loans and Bankruptcy in my Bankruptcy Information Center for what it takes to establish “undue hardship.”
3. WHICH DEBTS ARE FORGIVEN UNLESS THE CREDITOR OBJECTS AND PROVES CERTAIN BAD ACTIONS?
Bankruptcy forgives some debts only if the creditor objects, does so in time, and convinces the bankruptcy court that you engaged in certain bad behavior while incurring the debt. To be clear, even if the creditor could accuse you of the behavior but doesn’t do so quickly, the debt gets forgiven.
Furthermore, the bad behavior that the creditor must allege and prove is quite specific and narrow. It does not apply to most people.
The behavior involves generally involves fraud, misrepresentation, theft, embezzlement, or intentional harm to the creditor or its property. See Section 523(a)(2), (4), and (6) of the Bankruptcy Code.
4. WHICH DEBTS ARE NOT FORGIVEN BECAUSE OF A PROCEDURAL PROBLEM?
This covers two kinds of debts.
First, it may be obvious but be aware that a bankruptcy case does not forgive debts that didn’t exist until after you file the case. So, debts you incur starting the moment after bankruptcy case filing aren’t covered.
This does not mean that at the time of filing you will necessarily know the amount you owe, or whether you actually do owe anything. Also, the debt may not be due until well after the date of filing. It may or may not be “reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Section 101(5). As long as there is some claimable right to payment at the time of filing, the debt is covered by your bankruptcy case.
Second, a debt is potentially not forgiven in bankruptcy if it is “neither listed nor scheduled” in your bankruptcy debt schedules. Section 523(a)(3).
The idea is straightforward: bankruptcy is a legal procedure that involves both you and your creditors. They get to participate if they want, so you need to tell them about your case. You do that by including all of them in your bankruptcy documents so that the bankruptcy clerk can give them notice about your case. You get the benefits of bankruptcy—including especially debt forgiveness—if you fulfill your responsibilities, especially listing all your debts. You’re penalized for failing to list a debt by having that debt not be forgiven.