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Understanding Bankruptcy: Dischargeable and Non-Dischargeable Debts

Filing for bankruptcy can be a daunting process, but understanding which debts can and cannot be discharged can help you make informed decisions. In this article, we will explore the types of debts that are dischargeable and non-dischargeable in bankruptcy, and discuss alternatives to bankruptcy for debt relief. If you need expert mortgage services, contact O1ne Mortgage at 213-732-3074.

What Debts Can’t Be Discharged in Bankruptcy?

While bankruptcy can provide relief from many types of debt, there are certain obligations that cannot be eliminated. Here are some common non-dischargeable debts:

Undeclared Debts

To successfully discharge debts, you must comply with all bankruptcy court requirements, including listing all outstanding debts in the required declaration documents. Failure to declare a debt means it cannot be discharged, even if it is otherwise eligible.

Most Unpaid Taxes

Bankruptcy can discharge unpaid state and federal income taxes that are more than three years old, provided the returns were filed on time. However, most other taxes are not dischargeable.

Spousal and Child Support

Unpaid spousal and child support payments cannot be forgiven through bankruptcy. In Chapter 13 bankruptcy, the repayment plan will include steps to bring these payments current, but you will still be obligated to meet all future payments.

Malicious-Injury Judgments

Compensation or damages owed for injuries you willfully inflicted on individuals or property cannot be discharged. In some Chapter 13 cases, fraudulent funds may be dischargeable unless the other party objects.

Debts Incurred Through DUI-Related Personal Injury

Fines, compensation, or damages ordered by a court for injuries caused by driving under the influence cannot be discharged.

Government Agency Fines and Penalties

Fines or penalties imposed by government agencies, such as unpaid parking tickets or court fees, are not dischargeable.

Federal Student Loans

Most federal student loans can only be discharged if you can prove undue hardship in an adversary proceeding.

Loans From Retirement Plans

Debts from borrowing against employer-sponsored retirement plans like 401(k) or 403(b) cannot be discharged. Unpaid loans are treated as early withdrawals, subject to penalties and taxes.

What Debts Can Be Discharged in Bankruptcy?

Bankruptcy can discharge several types of debt, including:

• Unsecured consumer debt such as credit card balances and unpaid personal loans
• Medical debt
• Private loans from friends or family
• Back rent
• Unpaid utility, phone, and cellphone bills

Delinquent payments on loans secured by property may be discharged, but the lender can seize the property if payments are not maintained.

Should You File for Bankruptcy if You Can’t Discharge All of Your Debt?

Even if some debts cannot be discharged, bankruptcy can still provide significant relief. Here are two common types of bankruptcy:

Chapter 13

Chapter 13 bankruptcy allows you to enter a repayment plan to address both dischargeable and non-dischargeable debts. The court will approve or adjust your plan, which must include full repayment of priority debts like child support and taxes. If you complete the plan, the remaining portions of covered debts will be erased.

Chapter 7

In Chapter 7 bankruptcy, you must forfeit non-exempt property to a trustee, who will convert it to cash for distribution to creditors. Dischargeable debts will be forgiven, but non-dischargeable debts remain your responsibility.

Debt Relief Alternatives

Before filing for bankruptcy, consider these alternatives:

Debt Consolidation

If you have fair to good credit, you may be able to consolidate your debts with a loan that has a fixed monthly payment and lower interest rate. This can simplify budgeting and reduce monthly payments.

Debt Management Plan

A certified credit counselor can help you create a debt management plan (DMP) to repay your debts within three to five years. Note that certain debts, like mortgages and federal student loans, cannot be included in a DMP.

Debt Settlement

For-profit debt settlement companies may negotiate with creditors on your behalf, but their success is not guaranteed. This approach can harm your credit and may leave you in deeper debt due to fees.

The Bottom Line

Consulting with a certified credit counselor is a prerequisite for filing bankruptcy in the U.S. Use this opportunity to explore your options and understand which debts can and cannot be discharged. Consider working with the counselor long-term to stay on track with your recovery efforts. If you need expert mortgage services, contact O1ne Mortgage at 213-732-3074.

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