Debts That Are Not Eligible For A Bankruptcy Discharge

When you file a Chapter 7 or Chapter 13 bankruptcy case, the purpose of filing the case is to get out of debt. Other factors may be involved, and you may receive other benefits of filing for bankruptcy relief. However, the ultimate goal is to come through bankruptcy with as little debt remaining as possible.

Eliminating debt gives you a fresh start to rebuild after a financial hardship. Some of the common reasons people file for bankruptcy relief include:

  • Unemployment
  • Reduction in income
  • Death of a spouse
  • Sudden illness
  • Accidental injury
  • Divorce
  • Failure of a business

Regardless of why you need bankruptcy relief, you want the most affordable, efficient means of gaining a bankruptcy discharge.

A bankruptcy lawyer analyzes your financial situation to determine if bankruptcy is the best option to resolve your debt problems. During your free consultation, the attorney determines which chapter of bankruptcy you qualify to file and if that chapter of bankruptcy offers you the best protection from creditors and the court.

Call now to schedule your no-cost, no-obligation case review with a bankruptcy attorney. It does not cost you anything to receive experienced bankruptcy advice from a trusted legal professional.

What Debts Are Dischargeable in a Bankruptcy Case?

In most cases, debtors can get rid of all of their debts by filing a Chapter 7 or Chapter 13 bankruptcy case. However, some debtors have incurred debts that are not eligible for a bankruptcy discharge. These debts “survive” a Chapter 7 or must be paid in full in a Chapter 13 case.

Because each individual’s financial situation is unique, some of the information below may not apply in your case. Schedule a free consultation with a bankruptcy attorney to receive a free case review that is specific to your financial situation.

Secured Creditors vs. General Unsecured Creditors vs. Priority Unsecured Creditors

  • Secured Creditors

Secured creditors have a lien on collateral. For instance, a mortgage company is a secured creditor because it holds a mortgage on real estate. A lender who has a lien on the title to your vehicle is a secured creditor. Secured creditors can take legal action to foreclose or repossess the property if the borrower does not pay the loan payments according to the terms of the note.

A Chapter 7 or Chapter 13 bankruptcy filing does not release the lien a secured creditor holds on collateral. You either pay the loan payments, or you surrender the collateral. However, in a Chapter 13 case, you might be able to value some secured liens to pay less than the full payoff to release the lien. The balance is paid as a general unsecured debt.

  • General Unsecured Creditors

Unsecured creditors do not hold a lien on collateral. Examples of general unsecured debts include medical bills, personal loans, credit card debt, student loans, judgments, unpaid rent, and old utility bills. A creditor that does not have collateral is unsecured creditor.

In Chapter 7 cases, general unsecured debts are discharged at the end of the bankruptcy case. The bankruptcy discharge releases your legal liability to repay the debt. In other words, you do not pay anything on general unsecured debts that are discharged. Some general unsecured debts may not be eligible for a discharge, such as student loans. With very few exceptions, student loans are not discharged and must be paid.

In a Chapter 13 case, your general unsecured creditors receive a percentage of the amount owed to them through the bankruptcy plan. The percentage paid to unsecured creditors can be as low as one percent. In a few rare cases, a debtor may pay 100 percent of the unsecured debt. However, the percentage paid to unsecured debt for most cases is much lower than 100 percent.

At the end of the Chapter 13 plan, the remaining balances owed to general unsecured creditors are discharged, and you do not pay anything else to those creditors. However, as with a Chapter 7 case, some general unsecured debts are not eligible for a discharge, including student loans. Therefore, you must pay the amount owed on your student loans after your Chapter 13 case is completed.

  • Priority Unsecured Creditors

Priority unsecured creditors do not hold a lien on collateral, but these creditors do have priority over other unsecured creditors. Priority unsecured creditors must be paid in full through a Chapter 13 plan, and the debts are not discharged in a Chapter 7 case.

Examples of priority unsecured debts include:

  • Most taxes
  • Alimony
  • Child support
  • Administrative fees
  • Restitution

Some personal income taxes may be dischargeable, depending on how old the tax debt is and when you filed your tax returns. A bankruptcy lawyer carefully reviews your tax debt to determine if you can discharge some or all of the debt. If your tax debt qualifies for a discharge, it is treated as general unsecured debt in both a Chapter 7 and a Chapter 13 case.

An advantage of filing a Chapter 13 case is that you can spread the priority unsecured payments over 60 months. Therefore, if you owe income taxes, alimony, or child support, you can avoid wage garnishments by filing a Chapter 13 case and repaying the debt in full through the bankruptcy plan. A Chapter 7 bankruptcy case does not give you this option.

Determining Which Chapter of Bankruptcy to File

There are numerous factors to consider when deciding what chapter of bankruptcy you should file. One of the controlling factors is your income and expenses. To file under Chapter 7, you must meet the income requirements of the Means Test. However, some individuals may choose to reduce expenses to file a Chapter 13 if they have priority unsecured debts that must be paid or they need to protect equity in assets.

Bankruptcy lawyers carefully analyze your financial situation to determine the pros and cons of filing Chapter 7 vs. Chapter 13 for your individual situation. During your free consultation, the attorney discusses all bankruptcy options and non-bankruptcy options for eliminating debt.