What Is Nondischargeable Debt?
Nondischargeable debt is a type of debt that cannot be eliminated through a bankruptcy proceeding. Such debts include, but are not limited to, most student loans; most federal, state, and local taxes; money borrowed on a credit card to pay those taxes; and child support and alimony.
Key Takeaways
- Not all debt can be forgiven. This type of debt is known as nondischargeable.
- Nondischargeable debt includes marital support, child support, as well as most taxes and student loans.
- Filers may not use a credit card to purchase luxury goods right before filing. This is known as presumptive fraud and is also nondischargeable.
How Nondischargeable Debt Works
In addition to those already listed, some additional debts may be nondischargeable but only if the creditor objects to the discharge. These include debts arising from a marital settlement or divorce decree; debts incurred based on fraudulent acts; debts from willful and malicious acts to another person or another person's property; and debts from embezzlement, larceny, or a breach of fiduciary responsibility.
Borrowers with nondischargeable debts likely won't get as much out of filing for bankruptcy as those without any. Instead, borrowers struggling with their nondischargeable debt payments may be better served by working with one of the best debt relief companiesorcredit counseling agencies.
Ways NondischargeableDebts Are Determined
Many nondischargeable debts are deemed so because they may stem from acts of malfeasance on the debtor’s part. There may be errors of omission that also fall in this category. For example, unscheduled debts, which refer to any debts that were not listed in the bankruptcy petition, may be nondischargeable. Exceptions to this are possible, particularly if the creditors had knowledge of the bankruptcy filing and took no action.
Under Chapter 7 of the Bankruptcy Code, other types of nondischargeable debt include payments owed for personal injury caused by the debtor while intoxicated and operating a motor vehicle. Creditors can also dispute charges that the debtor wants to remove through bankruptcy. If the court approves such objections, those debts will become nondischargeable.
This includes credit card purchases owed to a single creditor for luxury goods exceeding certain dollar amounts that were procured within 90 days of the bankruptcy filing. However, if the debtor can prove they intended to repay the creditor or that the purchases were not luxury items, the court may allow the debt to be discharged. Cash advances above a certain dollar amount that were received within 70 days of a bankruptcy filing may also be nondischargeable debt.
There are additional circ*mstances under Chapter 7 wherein the court could declare debts as nondischargeable. This includes instances when the debtor destroys records of their finances, transfers property in an effort to hide it from creditors, if the debtor does not fulfill the completion of a course in personal finance management, or if the debtor cannot account for certain missing assets.
There may be instances where a debtor previously filed for bankruptcy and had debts discharged. This could be grounds under their latest bankruptcy for their debts to be declared nondischargeable, dependent on the type of bankruptcy that was filed and the time frame.
When Are Student Loans Dischargeable?
It's fairly difficult to have student loans discharged, but it may be accomplished by filing a separate suit known as an adversary proceeding. This suit will establish undue hardship or prove the fact that repaying the student loans would be unnecessarily damaging financially.
Can I Get Alimony or Child Support Payments Discharged?
No, marital settlements and child support payments are nondischargeable debts and must be paid.
What Is Presumptive Fraud?
Presumptive fraud is when a filer uses their credit card on nonessential or luxury goods within a short time before filing for bankruptcy. If creditors suspect that the filer has purchased luxury goods, knowing that their bill would be wiped clean in short order, they may decline to discharge those debts.
The Bottom Line
Although bankruptcy offers relief for most debts, not all are eligible. Nondischargeable debts will have to be repaid, although you may be able to negotiate a more reasonable repayment plan.
FAQs
What Is Nondischargeable Debt? Nondischargeable debt is a type of debt that cannot be eliminated through a bankruptcy proceeding. Such debts include, but are not limited to, most student loans; most federal, state, and local taxes; money borrowed on a credit card to pay those taxes; and child support and alimony.
What does a nondischargeable debt mean? ›
Nondischargeable Debts are debts that cannot be extinguished in bankruptcy. As a threshold matter, regardless of the type of bankruptcy, 11 U.S.C. § 523 categorizes certain debts as nondischargeable. For example, 11 U.S.C. § 523(a)(1) categorizes certain tax or customs duties as nondischargeable; 11 U.S.C.
What type of debt cannot be discharged? ›
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
What happens to discharged debt? ›
Debt discharge is the cancellation of a debt due to bankruptcy. When a debt is discharged, the debtor is no longer liable for the debt and the lender is no longer allowed to make attempts to collect the debt. Debt discharge can result in taxable income to the debtor unless certain IRS conditions are met.
Is unsecured debt dischargeable? ›
1) Some unsecured debts are not dischargeable because Congress has determined they are types of debts that should not be discharged because of public policy reasons. These debts are listed in Section 523 of the Bankruptcy Code and usually require that a debtor prove the debt should not be discharged.
How do I remove discharged debt from my credit report? ›
How to Remove Canceled Debt From Your Credit Report. In general, you can't get discharged debt removed from your credit report unless the information is inaccurate. In that case, you have the right to file a dispute with the credit reporting agencies.
What are examples of nonexempt assets? ›
Examples of nonexempt assets that can be subject to liquidation:
- Additional home or residential property that is not your primary residence.
- Investments that are not part of your retirement accounts.
- An expensive vehicle(s) not covered by bankruptcy exemptions.
- High-priced collectibles.
- Luxury items.
The following categories of debts are not released on discharge: A debt incurred in respect of, or the payment of which was avoided by, any fraud or fraudulent breach of trust to which the bankrupt was a party (see paragraph 40.178).
Can a bank collect on a discharged debt? ›
The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.
Does discharged debt count as income? ›
In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable.
Even when the bankruptcy is discharged—meaning you won't be liable for that debt anymore—it won't be removed from credit reports. The status of the bankruptcy will be updated, but it could still take up to seven to 10 years from the bankruptcy filing date for the bankruptcy to be removed from credit reports.
What loans Cannot be discharged? ›
Key takeaways. Loans, medical debt and credit card debt are generally all able to be discharged through bankruptcy. Tax debt, alimony, spousal or child support and student loans are all typically ineligible for discharge.
How long does it take to discharge a debt? ›
Typically, a bankruptcy discharge is made about four years after the filing date. After a bankruptcy discharge is granted, a debtor can decide to voluntarily repay a debt.
Can you go to jail for not paying unsecured debt? ›
Can you go to jail for debt? A long time ago, it was legal for people to go to jail over unpaid debts. Fortunately, debtors' prisons were outlawed by Congress in 1833. As a result, you can't go to jail for owing unpaid debts anymore.
What happens if you can't pay your unsecured debt? ›
If you don't pay an unsecured loan, you might face late fees and higher interest rates, and your credit score could drop. Debt collectors might call you and send letters. If you still don't pay, the debt could go to a law firm, and they might sue you.
Can I lose my house to unsecured debt? ›
Your home provides security to the lender that you would pay back the debt. If you owe money for most other debts like credit cards and medical bills, you (usually) did not sign a security agreement. So, the creditors cannot seize your home to pay the debt.
Why are student loans nondischargeable? ›
Why Are Student Loans Not Dischargeable? The main reason student loans aren't wiped out in bankruptcy is the worry about system abuse. The thought was students could rack up loans for school and then declare bankruptcy before getting a job and earning money.
Which of the following is a dischargeable debt? ›
Dischargeable debts are those debts that can be eliminated through the bankruptcy process, meaning that the debtor is no longer legally obligated to repay them. In a Chapter 7 bankruptcy, most unsecured debts can be discharged, including credit card debt, medical bills, personal loans, and certain types of taxes.
What excluded debt means? ›
Excluded Debt means (i) intercompany Indebtedness between or among the Borrower and any of its Subsidiaries, (ii) credit extensions under the Existing Credit Agreement and the Existing Securitization Facility, (iii) (x) credit extensions under any Indebtedness of any Subsidiary of the Borrower arising from cash pooling ...
What cancellation of debt is excludable from income? ›
Debt that is canceled as part of a bankruptcy case (including Chapter 7, Chapter 11 and Chapter 13 bankruptcy) does not count as taxable income. This applies both to unsecured debts like credit card debt and medical bills, along with secured debts in which property is repossessed to satisfy the loan.
