What Debts are Discharged in Bankruptcy
The first thing to understand is the word discharged. This is the legal order from the Court that
releases the debtor from their responsibility to pay back the debts they promised to pay before
bankruptcy. For example, if you get a credit card from any bank or credit card company, you are
required to sign a promissory note. This promissory note is a contract between you and the lender
that you will pay back the money you borrow or the lender can sue you and potentially take
personal property if you default or fail to pay. The promissory note is undone by the discharge order
and lenders can no longer pursue you and try and collect the debt. These creditors cannot sue you, try and garnish your wages or even call you about the debt after the discharge order has been issued. Virtually all debts are discharged in bankruptcy with a few exceptions, so for this conversation it makes more sense to discuss those debts that are not discharged instead of those that are discharged.
The categories of non-dischargeable debt are certain taxes, student loans, debts obtained as a result of fraud and family
support obligations such as child support. The only category that is absolutely never dischargeable are family support obligations no matter how much, from when or why the debtor could not pay. There are no exceptions and no theories under which a person can discharge those types of debts.
Debts incurred as a result of student loans are presumed non-dischargeable which means that with no special action in the bankruptcy case, the student loans will not be discharged. If the debtor can prove a hardship a partial or complete discharge is possible. To prove hardship the debtor must show three things; that they have made good faith efforts to repay their loans; that they have sustained some sort of hardship such as medical issues, or economic issues; and finally, that if forced to repay the loans the debtor would not be able to maintain a minimum standard of living.
Tax debts can be discharged if they meet a three part test showing that the taxes are old enough to be discharged. The tax debt cannot have come due less than three years prior to the bankruptcy case filing. Taxes come due April 15th the following year after the tax period, i.e, 2014 taxes come due April 15, 2015. For example: if a debtor files their case on April 15th, 2015 the first year of tax debts that is dischargeable is 2011 as that tax year came due April 15th, 2012. If the tax came due more than three years prior to the case filing the debtor must have also filed for that tax year more than 2 years prior to the filing of the case. For example: 2011’s taxes must have been filed at least two years prior to the filing date chosen. If the first two time elements are met then the debtor must not have been assessed a tax within the last 240 days. Tax assessments usually come in the form of audits but that is not the only form. Once these basic elements are present then an experienced attorney should be consulted to ensure there are no exceptions that would cause the tax debt to not be dischargeable.
Dischargeability is a complicated assessment and only an experienced attorney should be trusted to determine whether a particular debt can be discharged. The last thing you should do is trust a friend or family member to tell you what type of bankruptcy to file, when to file it or which debts will be discharged. I have seen several debtors who either filed on their own or were not informed by their attorney of non-dischargeable debts that resulted in a pointless bankruptcy where no debts were discharged.