Most people who file bankruptcy do so to discharge debts and get a fresh financial start. It can be a surprise to learn that not all debts can be discharged through bankruptcy, but the good news is that many common debts can be. We sometimes refer to these obligations collectively as dischargeable debts.
Examples of Dischargeable Debts
Some of the most common types of debt that are generally dischargeable through bankruptcy are:
- Medical bills
- Credit cards
- Personal loans
- Payday loans
- Certain civil judgments
For a debt to be dischargeable it must have been incurred prior to the date of the bankruptcy petition. This is important for recurring debts like utilities or other subscriptions.
Bankruptcy can discharge the debts that were due before the petition date, but any debts that occurred after the petition will not be discharged.
It is important to understand what discharge really means. Bankruptcy only eliminates a debtor’s personal liability for debt and prevents most creditors from taking collection action after filing.
We say most because there are certain exceptions, including secured debts such as a mortgage, automobile loan, or HOA dues. Since bankruptcy does not automatically remove liens from property used as collateral, the debtor must continue to pay these obligations after filing bankruptcy if he or she wants to retain the property.
Filing chapter 13 may enable a debtor to cure late payments through the bankruptcy plan and this sometimes makes it possible to retain secured property that the debtor could not if he or she filed chapter 7 bankruptcy.
Otherwise, the property still can be foreclosed or repossessed after filing bankruptcy, the difference is just that those creditors will not be able to sue the debtor for any deficiency balance.
Because of this limitation, creditors frequently try to force debtors to sign reaffirmation agreements — contracts that reassume personal liability for debts.
These are almost never in the debtor’s best interest and many times debtors can retain the property without reaffirmation.
So if you noticed that certain types of debts were not listed above, there is a good chance it is because these are non-dischargeable.
Non-dischargeable debts survive bankruptcy and include:
- Child support
- Spousal maintenance or alimony
- Criminal fines and restitution
- Most tax obligations
- Student loans (though hardship exceptions exist)
- Debts incurred through fraud or false pretense
In addition to being non-dischargeable, actions to collect these debts may not be barred by the automatic stay. As an example, if you owe child support, your wages may continue to be garnished even after filing bankruptcy.
It is not all bad news, however. Debtors who have non-dischargeable debts may benefit more from chapter 13 bankruptcy than debtors who do not. This is because child support, spousal maintenance, and most types of tax debt are incorporated into and prioritized in the bankruptcy plan.
Because these debts do not go away, it sometimes makes sense to file chapter 13 and work toward discharge of all of the debts that are dischargeable while repaying these mandatory obligations.
For additional information about dischargeable debts or bankruptcy more generally, contact our bankruptcy attorneys for a free consultation.