Do You Get Out Of All Debts if You Declare Bankruptcy?
Debts That Can Be Discharged or Erased in Bankruptcy
Which debts you can get out of or, more correctly, discharge in bankruptcy, is difficult for many to understand.
Your really need an experienced bankruptcy attorney to determine whether you can eliminate a particular debt.
This is due to the long and complex list of statutory exceptions to discharge in The Bankruptcy Code.
Congress has decided over time that certain debts should not be dischargeable. For some of these, the party to whom the debt is owed (the “Creditor”), is required to formally object to the discharge by a specific time deadline in a case. If they do not timely object, the debt gets discharge.
Others are not dischargeable only if certain criteria are not met. These include some taxes.
And, to make it more confusing, some debts are dischargeable under bankruptcy Chapter 13, but not under Chapter 7 or Chapter 11. These include debts such as fines and penalties owed to the government. And, non-support debts owed to a spouse pursuant to a divorce, such as marital equalization payments.
What Exactly is a Bankruptcy Discharge Anyway?
To be a accurate, the discharge of a debt in bankruptcy does not “erase” or “remove” the debt. The discharge is a federal court injunction which prevents the creditor from taking any further collection action on the debt. Violation of this injunction carries some potentially stiff penalties for contempt of court.
So, which debts can be discharged in bankruptcy?
The easiest way to look at it, I think, is to start with the assumption that all debts are dischargeable in bankruptcy except for ones that are not.
Summary of Debts Not Discharged in California Bankruptcy
Below is a summary of some of the debts you cannot eliminate in bankruptcy in California and elsewhere.
- Debts Incurred through Fraud This encompasses situations such as running up your credit card debts without the intent to repay them. This requires the creditor to timely file an objection to discharge and prove the fraud elements.
- Income Tax Debts for which the returns were due to be filed less than 3 years before filing the bankruptcy case, assessed less than 240 days before filing the bankruptcy case, and for which the returns were actually filed less than 2 years before filing the bankruptcy. For more details on discharging taxes, see my tax discharge page.
- Domestic Support Obligations including Alimony and Child Support
- Willful and Malicious Injury to a person or property. This requires the creditor to timely file an objection to discharge by the deadline. The creditor must prove that the injury was both willful AND malicious. This means that they intended the harm that resulted. This includes things such as destruction of property, copyright infringement, and the obvious physical battery. This is only excepted from discharge in Chapter 11 and 7. This type of debt can be discharged in a Chapter 13 case if a judgment making these findings in a civil proceeding before the bankruptcy case.
- Embezzlement or Larceny. Debts incurred through theft are not dischargeable. But again, this requires the creditor to timely file an objection in the bankruptcy case.
- Fines, Penalties or Forfeitures owed to a governmental unit.
- Student Loans unless “undue hardship” is proved in a trial. See more on student loan discharge.
- Motor Vehicle Injury While Intoxicated. Death or injury resulting from driving a motor vehicle, vessel, or aircraft, while intoxicated.
- Criminal Restitution
- Non-Support Debts to Spouse. This includes things like marital equalization payments and other items owed pursuant to a divorce that are not designated as “support”. These debts are not dischargeable in Chapters 7 or 11, but are in Chapter 13.
What Happens To Debts in Chapter 13 or 11 Bankruptcy?
My California clients often get confused in Chapter 13 or Chapter 11 cases as to whether a debt is discharged.
In Chapter 13 and 11 you do a partial repayment plan to creditors, so how does that affect discharge of the debts?
When you make payments in a Chapter 13 or Chapter 11 case, it is often for less than the full amount of the claim. In fact, the percentage that gets paid to unsecured creditors can be anywhere from 0% to 100% depending on value of assets and amount of disposable income available to pay.
So, in those cases you pay whatever you are required to pay, and anything remaining at the end is discharged assuming it is a dischargeable debt.
Frequently Asked Questions About Debt Discharge in California Bankruptcy
Q. Can I Get Out of Paying Credit Card Debts in Bankruptcy?
A. Yes. Credit card debts are generally dischargeable in all bankruptcy chapters, unless the debt was incurred through fraud. For example, if you incur charges on a card without intending to repay that debt, then it might not be dischargeable. To determine intent, courts look at factors such as how recent the charges were in relation to filing the bankruptcy case, how many payments were made after each loan, whether there was an unexpected change of financial circumstances after the charges were made (such as loss of a job, increased expenses, etc.) and similar elements.
It is presumed to be nondischargeable if more than $725 in charges are made for “luxury goods or services” to a single creditor within 90 days before filing the bankruptcy. Also cash advances of over $1,000 taken within 70 days prior to filing bankruptcy are presumed to be nondischargeable.
Q. Can I Discharge Medical Bills in Bankruptcy?
A. Yes. Medical debts are almost always dischargeable in bankruptcy. Of course, as with any debt, if you incur it without the intent to repay it, the discharge can be objected to by the creditor.
Q. Can I Discharge Taxes in Bankruptcy?
A. Many tax debts can be discharged in bankruptcy. The analysis is very complex, so you really need an attorney to analyze the tax transcripts in your case to determine if they can be discharged. This is true for income taxes, sales taxes and excise luxury taxes. The basic requirements are
- It must be more than 3 years from the date the tax returns for a given period were due to be filed;
- The returns must have been actually files more than 2 years before the bankruptcy case;
- The taxes must have been assessed more than 240 days before the bankruptcy case.
- There cannot have been any willful attempt to evade paying the taxes.
There are may exceptions and extensions of the above dates depending on various factors. In California, contact us to determine if your tax debts can be discharged.
Q. Can I Discharge Student Loan Debts in Bankruptcy?
A. At this time, educational loan debts can only be discharged if you bring an adversary proceeding to determine “undue hardship”. This requires proving the elements established in the Brunner case, and thus it has become known as the “Brunner Test”. This test requires proof:
- That you cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for yourself and your dependents if forced to repay the loans; (This is usually the easiest prong to satisfy.)
- that additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans; and,
- that you made good faith effort to repay the loans. This does not just include making payments on the loans. It requires doing things over time such as making efforts to increase your income (which includes going back to school to get additional degrees or experience), consolidating loans, entering into an “Income Based Repayment” plan, and other similar efforts.
Courts are trending towards loosening up the above requirements, but it is still a difficult burden to meet, and requires going through a trial. This can obviously get fairly expensive.
Q. Can I Discharge Debts Relating to a Motor Vehicle Accident?
A. Yes. As long as it was an accident and you did not intend to ram your vehicle into something or someone. There is an exception to discharge for motor vehicle accidents (including aircraft and sea vessels) where the driver was intoxicated. So as long as you were not intoxicated under your state’s laws, the resulting debt should be dischargeable. Keep in mind that intoxication is not limited to alcohol. Drugs, including legal ones, can also cause intoxication.
Q. I Owe My Landlord Rent. Can I Discharge This in Bankruptcy?
A. Oh yes. But of course the landlord has the right to evict you for nonpayment of rent (subject to any laws temporarily preventing that due to Covid-19). But anything you owe a landlord is dischargeable in bankruptcy.
Q. Are California EDD Unemployment Overpayments Dischargeable in Bankruptcy?
A. Yes, as long as they did not result from fraud on your part. For example, if you lied on the unemployment application statements and they relied on that to give you unemployment, that would be a basis for them to object to the discharge of that overpayment debt. However, based on my clients, errors by my clients have been “good faith” unintentional ones and these overpayment debts are almost always dischargeable.