Chapter 9 Which Debts Are Discharged

• Library: How to File for Chapter 7 Bankruptcy (Nolo) (2022 Ed.)

CHAPTER 9 Which Debts Are Discharged

Debts That Will Be Discharged in Bankruptcy

Credit Card Debts

Medical Bills

Lawsuit Judgments

Debts Arising From Car Accidents

Obligations Under Leases and Contracts

Personal Loans and Promissory Notes

Other Obligations

Debts That Survive Chapter 7 Bankruptcy

Debts Not Dischargeable Under Any Circumstances

Debts Not Dischargeable Unless You Can Prove That an Exception Applies

Debts Not Dischargeable in Bankruptcy If the Creditor Successfully Objects

Disputes Over Dischargeability

Complaints to Determine Dischargeability

Creditor Objections to Discharges

Objections Based on Credit Card Fraud

Not all debts can be discharged in a Chapter 7 bankruptcy. Some debts survive the bankruptcy process—they remain valid and collectable, just as they were before you filed for bankruptcy. To understand what bankruptcy will do for you, you need to know which of your debts, if any, you will still owe after your bankruptcy case is over.

When granting your final discharge, the bankruptcy court won't specify which of your debts have been discharged. Instead, you'll receive a standard form from the court stating that you have received a discharge. (A copy appears on the companion page.) This chapter helps you figure out exactly which of your debts are discharged and which obligations might survive.

Here's the lay of the land:

• Certain kinds of debts are routinely discharged in bankruptcy, except in rare circumstances.
• Some types of debts are never discharged in bankruptcy.
• Student loan debts are not discharged unless you can prove that your situation is an exception to the rule.
• Income tax debts aren't discharged unless they're old—approximately three years or older—and you meet other state law requirements.
• Some types of debts are discharged unless the creditor comes to court and successfully objects to the discharge.

Debts Your Creditors Claim Are Nondischargeable

Some of your creditors may claim that the debts you owe them cannot be wiped out in bankruptcy. For example, computer leases—for software and hardware—often contain clauses stating that if you're unable to complete the lease period, you can't eliminate the balance of the debt in bankruptcy.

Don't fall for it. The only debts you can't discharge in bankruptcy are the ones specifically listed in the Bankruptcy Code as nondischargeable—and we'll describe them in this chapter. Don't let your creditors intimidate you into thinking otherwise.

Debts That Will Be Discharged in Bankruptcy

Certain types of debts will be erased when you receive your Chapter 7 discharge—that is, you will no longer be responsible for repaying them. If you have nonexempt assets, the bankruptcy trustee will divide the proceeds among your creditors, and at the end of your case, the court will discharge any balance that remains unpaid.

Credit Card Debts

Without a doubt, the vast majority of those who file for bankruptcy want to get rid of credit card debts. Happily, most bankruptcy filers succeed in this mission. Credit card debts are typically wiped out in bankruptcy, with the exception of a few rare cases involving fraud or luxury purchases made immediately before filing for bankruptcy. (See "Debts That Survive Chapter 7 Bankruptcy," below).

Medical Bills

Many people who file for bankruptcy got into financial trouble because of medical bills. Despite attempts to make health insurance more affordable, many Americans either have inadequate insurance from their employers or can't afford the deductibles in the available plans.

Luckily, bankruptcy provides an out: Your medical bills will be discharged at the end of your bankruptcy case. In fact, an enormous amount of medical bills are discharged in bankruptcy every year.

Lawsuit Judgments

Most civil court cases are about money. If someone wins one of these lawsuits against you, the court issues a judgment ordering you to pay. If you don't come up with the money voluntarily, the judgment holder can collect it by, for example, grabbing your bank account, levying your wages, or placing a lien on your home.

Money judgments are usually dischargeable in bankruptcy, regardless of the facts that led to the lawsuit in the first place. There are a couple of exceptions (discussed in "Debts That Survive Chapter 7 Bankruptcy," below), but in the vast majority of cases, money judgments are discharged. You can even cancel liens on your home arising from a court money judgment if they interfere with your homestead exemption. (See Ch. 5 for more on how bankruptcy affects a judicial lien on your home.)

Debts Arising From Car Accidents

Car accidents usually result in property damage and sometimes in personal injuries. Often, the driver responsible for the accident is insured and doesn't have to pay personally for the damage or injury. But sometimes the driver at fault has insufficient insurance and remains financially responsible for the harm.

If the accident resulted from the debtor's negligence—careless driving or failing to drive in a prudent manner—the debtor can discharge the debt arising from the accident. This is true even if the accident was the result of reckless driving. If, however, the accident was due to the driver's willful and malicious act or impaired driving, it will survive bankruptcy. (See "Debts Not Dischargeable in Bankruptcy If the Creditor Successfully Objects," below).

Obligations Under Leases and Contracts

It's becoming more common for people to lease things rather than own them. However, financial problems can arise when severe penalty clauses kick in because you can't make the monthly payment or fail to do something required by the lease.

Some debtors also have contractual obligations to do things like sell real estate, buy a business, deliver merchandise, or perform in some other way. If you can't uphold your end of the deal, the other party might want to force you to by suing you for breach of contract damages.

Typically, you can discharge your liability for both types of obligations in bankruptcy. A bankruptcy filing will convert your lease or contractual obligation into a dischargeable debt unless the trustee believes the lease or contract will produce money to pay your unsecured creditors or the court finds that you've filed for bankruptcy to get out of a personal services contract (such as a recording contract).

Personal Loans and Promissory Notes

The money you borrow in exchange for a promissory note—or even a handshake and an oral promise to pay the money back—is almost always dischargeable in bankruptcy. As with any debt, the court could refuse to discharge a loan debt if the creditor can prove that you acted fraudulently; however, that rarely happens. (See "Debts That Survive Chapter 7 Bankruptcy," below.)

Other Obligations

Not all debts are dischargeable in bankruptcy. So how do you know whether you can wipe out all of your debts? The rule is simple. You can eliminate an obligation or debt unless it fits within one of the exceptions discussed in "Debts That Survive Chapter 7 Bankruptcy," below.

Debts That Survive Chapter 7 Bankruptcy

In Chapter 7, several categories of debt are "not dischargeable." That is, you'll still owe them after your bankruptcy is final. For instance, some debts:

• can't be discharged under any circumstances
• will not be discharged unless you convince the court that they fit within a narrow exception to the rule, and
• will be discharged unless the creditor convinces the court that they shouldn't be.

Are Secured Debts Dischargeable?

Secured debts are contractually linked to specific items of property, called collateral. If you don't pay the debt, the creditor can take the collateral. The most common secured debts include loans for cars and homes. If you have a debt secured by collateral, bankruptcy eliminates your personal liability for the underlying debt—that is, the creditor can't sue you to collect the debt itself. But bankruptcy doesn't eliminate the creditor's hold, or "lien," on the property that served as collateral under the contract. Other types of secured debts arise involuntarily, often due to a lawsuit judgment or an enforcement action by the IRS on taxes that are old enough to be discharged (covered below). In these cases, bankruptcy eliminates the underlying debt but might not extinguish a lien placed on your property by the IRS or a judgment creditor.

Chapter 7 offers several options for dealing with secured debts, such as buying the property from the creditor for its replacement value, reaffirming the contract, or surrendering it. You'll find options for dealing with secured debts in Ch. 5.

Debts Not Dischargeable Under Any Circumstances

Bankruptcy doesn't affect certain debts at all. You will continue to owe these debts after your case closes.

Domestic Support Obligations

Debts defined as "domestic support obligations" are not dischargeable. Domestic support obligations include child support, alimony, maintenance, and spousal support. For example, suppose a spouse agreed to pay some of the other spouse's or the children's future living expenses (shelter, clothing, health insurance, and transportation) in exchange for a lower support obligation. The bankruptcy court could treat the obligation to pay future living expenses as nondischargeable support owed to the other spouse even though a family law court didn't order it.

But the rule doesn't apply to all debts owed between ex-spouses. To be nondischargeable under this section, a domestic support obligation must have been established or be capable of being established in:

• a separation agreement, divorce decree, or property settlement agreement
• an order of a court authorized by law to impose support obligations, or
• a determination by a child support enforcement agency or another government unit legally authorized to impose support obligations.

A support obligation assigned to a private entity for reasons other than collection (for example, as collateral for a loan) is dischargeable, but this...