Not Dischargeable Debts
[Debts you will have to
By Mark Saiki
Taxes: Internal Revenue Service
e-1) Dischargeable Debts. The discharge only lifts your liability on dischargeable debts.
You have not been discharged from your non-dischargeable debts. For example, taxes,
student loans and child support, government fines, penalties, forfeitures, traffic fines,
parking tickets, criminal actions, criminal restitution and prisoner fees, are self executing.
This means that they do not have to object to discharge, in order to keep their debts alive,
so that they can collect on them. However, debts incurred by fraud are generally not self-
executing, meaning that if they did not file an objection to discharge in a timely manner,
then that debt has been discharged, assuming that they received notice of your bankruptcy.
Secured debts also survive, but they arguably may have been turned into non-recourse
loans. Unscheduled or unlisted debts might survive, particularly if this was an asset case.
Arguably if it were a no-asset case, you might still be able to list them and discharge those
debts under certain circumstances.
2) Self-Executing Debts. These debts are automatically excepted from discharge. These
creditors do not have to object to discharge, in order to collect on their debts.
a) Dischargeable Taxes. Personal income tax returns, which were filed on time,
more than two or three years ago, and not assessed within 240 days, might be
dischargeable. Even with dischargeable taxes, the IRS generally claims secured status and
you are generally not allowed to claim exemptions against the IRS.
b) Non-Dischargeable Taxes. Most other forms of taxes are not dischargeable,
meaning after you file for bankruptcy, you will still be liable for your tax liabilities. If
you did not file tax returns, then those debts are basically never dischargeable. If you
filed a fraudulent return, those debts are generally not dischargeable. If the tax was
assessed within 240 days, it is probably not dischargeable. The IRS seems to reassess
taxes every six months, which sets up their argument that your taxes are not
dischargeable. The IRS tends to make up their own rules, and they frequently prevail in
court. Many business taxes, and particularly employee withholding taxes (and the 1,000%
penalty for misusing these trust fund taxes), are generally not dischargeable.
Debts incurred to pay non-dischargeable taxes probably will not be dischargeable.
c) Chapter 13 and Taxes. Taxes not paid by the plan are generally not
dischargeable. A Chapter 13 Bankruptcy arguably freezes penalties and interest as of the
date of filing. If the entire debt is not paid by the plan, the IRS may try and recapture
penalties and interest from the date of filing. They may add additional penalties and
interest to your tax debt. For example, you owe $4,000 in taxes. The plan paid $3,000 in
taxes. The IRS may recapture three years of penalties and interest on the $4,000 original
balance. One of your options is to modify the plan paying more taxes inside the plan. If
you choose to do this, you must act before the discharge is issued.
If your plan provides for taxes, and the IRS or other taxing authority fails to file a proof of
claim, in a timely manner, you can argue that the tax debt will be discharged, upon
completion of the plan. Some attorneys even modify the plan, paying less to taxes. This
is an iffy argument, and I think that it is safer to file a proof of claim for taxes, or a motion
to allow a late claim. If taxes are actually paid by the plan, then you have a stronger
d) Student Loans. Since 2005, bankruptcy generally does not discharge student
loans. This is true whether you file Chapter 7 or 13. You will still be liable on student
loans after you file for bankruptcy. In many cases, student loan creditors will wait until
after your Chapter 13 Bankruptcy in finished, and then they will tack on interest and start
collecting on your student loans.
Hardship Discharge. The main exception is if you file an adversary proceeding known
as a student loan hardship discharge. If you are going to prevail on a hardship discharge,
you need to prove that you are unable to payback your student loans, not merely that
repayment is difficult. For example, you trained to be a fireman, then became paralyzed
and cannot find work as a fireman, or any other job. If you are merely unemployed, but
capable of holding a job, you generally will not be discharged. You need to show that you
are unemployable. You must file a separate motion for a hardship discharge. Debtor can
prove that repayment would cause undue and unusual hardship. In general this means
proving a physical or mental disability which prevents you from being able to work. My
Contract for Legal Services excludes student loan hardship adversary proceedings, such
items must be separately contracted for and a retainer must be paid.
Some earlier cases state that cosigners must fall into these exceptions. Some of these
earlier cases state that cosigners are generally discharged.
e) Government Fines, Penalties, Traffic Fines, Criminal Actions, Criminal
Restitution. Most government fines, penalties, motor vehicle, traffic fines, and parking
tickets, criminal actions (including criminal bad check lawsuits), prisoner fees, and
criminal restitution are not dischargeable, unless they are for pecuniary loss. After you
file for Bankruptcy, you probably will still be liable for these types of debts.
f) Child Support. Child support, alimony, maintenance, property settlements,
and/or debt divisions (the last two are not dischargeable under Chapter 7). The last two
are arguably dischargeable under Chapter 13.
g) HOA Fees. Most homeowner and condominium fees incurred after the date of
filing and prior to foreclosure are not dischargeable. An alternative is to quitclaim the
property back to the secured creditor, in an attempt to reduce your post-filing liability on
these types of claims or assessments. These debts often run with the land, and Congress
has provided special protections for them in the Bankruptcy Code.
h) Intoxicated Injury or Death. Death or personal injury caused by the debtor’s
operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the
debtor was intoxicated from using alcohol, a drug, or another substance.
i) Other. There are a number of other not dischargeable debts listed in 11 USC 523,
such as discharges denied in a prior case, depository institution defalcation, election law
violations, certain debts owed by pension plan providers, stock bonus or profit sharing
plans, and federal security law violations.
2) Not Dischargeable. These creditors must object to discharge, in order to preserve
j) Fraud. Fraud or defalcation while acting in a fiduciary capacity, embezzlement,
or larceny are not dischargeable.
k) False Financial Statements.
l) Willful and Malicious Injury to Property.
See also my earlier list of dischargeable debts or .pdf file