Although touted as a fresh start for financially troubled consumers, bankruptcy does not automatically wash away all debt, either. Debtors may still remain on the hook for liens, support payments, student loans and certain types of taxes. This depends on the debtor's personal situation and whether he files a Chapter 7 or 13 bankruptcy, which offers slightly more leeway. Debts acquired under false pretenses are also excluded from consideration; they may result in legal sanctions, as well.
The U.S. Bankruptcy Code exempts 19 debts in Chapter 7, 11 and 12 filings from discharge, the legal term for debts that no longer must be repaid. These include alimony, child support, palimony and other type of family support; liens on property, or other pieces of collateral; money owed for government fines; student loans; and debts for injuries acquired through drunken driving, according to the court's website.
Debtors filing under a Chapter 13 repayment plan can expect a different experience because the list of exemptions is more limited, according to the code. Unlike a Chapter 7 filing, for instance, debts arising from willful and malicious injury to property are exempt. So are debts incurred for non-dischargeable tax obligations, or property settlements in divorce or separation proceedings. There is no similar provision for support payments, which must take priority in a three- to five-year repayment plan.
Converting secured or otherwise non-dischargeable debts by paying them with credit cards, and putting those amounts into bankruptcy, carries severe legal consequences. The code allows creditors to object, under certain circumstances. Large cash advances or patterns of heavy credit card usage before filing -- or continuing to use a card while unemployed -- can trigger an adversarial hearing by creditors to challenge the dischargeability of such debts, according to the National Bankruptcy Forum. Such actions can result in sanctions by the court.
Bankruptcy law permits hardship exemptions, such as for student loans, although the burden of proof is extremely high. Some types of student loans filed before Oct. 7, 1998, are considered dischargeable if paying them would impose an undue hardship, says California bankruptcy attorney Mark Markus. However, if the program receives nonprofit funding, the loan is not dischargeable. Similarly, Chapter 13 filers can apply for a hardship discharge for not completing a repayment plan -- but only the nonpayment occurred for reasons beyond their control.
In rare cases, a court may deny the entire discharge petition. Section 727 of the code allows creditors to file such an objection if they suspect the debtor made false claims, tried to conceal their actual financial position or attempted to conceal, destroy or transfer any property within one year before filing for bankruptcy. This standard follows the same exclusion of fraudulently acquired debts from being discharged -- making it all the more important that debtors file truthfully, says Markus.
- Attorney Mark Markus: Denial of Entire Bankruptcy Discharge
- Attorney Mark Markus: Student Loans: Discharge in Bankruptcy for Undue Hardship
- National Bankruptcy Forum: Eliminating Credit Card Debt -- Credit Card Discharge Issues
- Super Bankruptcy Pros: What Kind of Debts Cannot Be Discharged
- U.S. Bankruptcy Court: Discharge in Bankruptcy
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