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Upon meeting all the requirements of a court-ordered bankruptcy plan, many of your outstanding debts will be erased, or discharged, but there are some debts that even bankruptcy can't eliminate. Here's an overview of those debts, and some options for addressing them.
What Debts Can't Be Discharged in Bankruptcy?
The most common types of non-dischargeable include the following:
Undeclared Debts
Successful discharge of debts requires compliance with all requirements of the bankruptcy court. Among the first of these is to list all your outstanding debts in required declaration documents. If you fail to declare a debt to the court, the court cannot discharge it, even if it is otherwise dischargeable.
Most Unpaid Taxes
Bankruptcy can discharge individuals' unpaid state and federal income taxes more than three years old (unless the returns connected to those taxes were filed late), but most other taxes are not dischargeable through bankruptcy.
Spousal and Child Support
Unpaid spousal and child support payments cannot be forgiven through the bankruptcy process. If you file Chapter 13 bankruptcy, the repayment plan the court creates will include steps for bringing spousal and child support payments current (and, in fact, you cannot receive a final discharge in a Chapter 13 case until all delinquent child support payments are paid up), but going forward, you will be obligated to meet all remaining payments.
Malicious-Injury Judgments
If a court finds that you owe compensation or damages over injuries you willfully inflicted on individuals or property, those obligations cannot be dischargeable through bankruptcy. In certain Chapter 13 cases, if you obtained funds fraudulently, an order of reimbursement may be dischargeable unless the other party files a claim objecting to its discharge.
Debts Incurred Through DUI-Related Personal Injury
If a court orders you to pay fines, compensation or damages to individuals injured or killed in an accident caused by you driving under the influence, those obligations cannot be discharged through bankruptcy.
Government Agency Fines and Penalties
If a government agency has subjected you to a fine or penalty, your obligation to pay it will not likely be dischargeable through bankruptcy. This includes, for example, unpaid parking tickets or court fees related to a criminal conviction.
Federal Student Loans
Balances on most educational loans funded or guaranteed by the federal government can only be discharged through bankruptcy if you convince the court that repaying the loan would cause undue hardship.
The bankruptcy court evaluates undue-hardship claims in a procedure known as an adversary proceeding, during which you (or your lawyer) present evidence supporting your claim and the loan servicer may challenge your claim.
Loans From Retirement Plans
If you borrow money from your employer-sponsored 401(k) or 403(b) retirement plan, that debt cannot be discharged through bankruptcy. The IRS treats unpaid loans from 401(k) or 403(b) plans as early withdrawals (if they were made before you reached the age of 59½), which makes them subject to penalties and taxable as income at your current federal income tax rate.
What Debts Can Be Discharged in Bankruptcy?
Debts that can be discharged in bankruptcy include:
- Unsecured consumer debt such as credit card balances and unpaid personal loans
- Medical debt
- Private loans extended to you by friends or family members
- Back rent
- Unpaid utility, phone and cellphone bills
Delinquent payments on loans that use property as collateral may be discharged in bankruptcy, but unless the loan is reaffirmed and payments are maintained, the lender can and likely will seize the property (such as your home or car) in accordance with the laws where you live.
Should You File for Bankruptcy if You Can't Discharge All of Your Debt?
The existence of debts that cannot be discharged through bankruptcy doesn't mean bankruptcy cannot help you.
Chapter 13
If you have sufficient income to enter into a repayment plan, Chapter 13 bankruptcy can help you address both dischargeable and non-dischargeable debts. You will file a repayment plan with the court, laying out how much you'll pay each creditor and over what period of time. The court will approve or adjust your payment plan, which must encompass a full repayment of priority debts—child support, taxes and attorney fees, for example.
Once a Chapter 13 plan is approved, if you pay all the monthly installments required over your three- or five-year term (and complete all other court requirements, including credit counseling and education), the unpaid portions of all debts covered by the plan will be erased.
Chapter 13 gives bankruptcy filers the option of excluding certain debts from the repayment plan and maintaining the regular payment schedule on them. Debtors often use this process, known as "reaffirming" the debt, to keep homes or other financed assets while fulfilling a bankruptcy payment plan. If you fail to keep up with payments on a reaffirmed debt, the lender can seize property pledged as collateral and may sue you to recover any payments you failed to make as agreed.
Chapter 7
Under Chapter 7 bankruptcy, you must forfeit all but certain exempt property and assets to the court-appointed trustee, who converts them to cash for distribution to your creditors. When this is done (and you meet all other requirements of the bankruptcy court), your dischargeable debts will be forgiven.
Non-dischargeable debts will remain your responsibility, but the absence of the discharged debts may make it easier to keep up with your bills.
Debt Relief Alternatives
Bankruptcy does deep, long-lasting harm to your credit, so it's worth considering these alternatives before pursuing a bankruptcy filing:
Debt Consolidation
If your credit standing is at least fair to good, you may be able to avoid bankruptcy using debt consolidation. This entails using a loan with a fixed monthly payment and a comparatively low interest rate to pay off the balances on revolving-credit balances with higher interest rates.
Reducing your interest rate can save you money each month, and replacing multiple bills with variable minimum payments with a fixed monthly payment can make budgeting more predictable.
Debt Management Plan
A debt management plan (DMP) is a repayment program a certified credit counselor can organize for you. After helping you determine how much you can realistically afford to put toward debt repayment each month, the counselor negotiates with creditors with the goal of resolving your debts within three to five years.
Note, however, that certain types of debt, including mortgages, federal student loans and unpaid alimony and child support, cannot be included in a DMP. And, while typically less damaging than bankruptcy, a DMP can harm your credit due to not paying the full amounts, and credit card issuers who participate typically require accounts included in DMPs to be closed.
Debt Settlement
For-profit debt settlement companies (which often market themselves as debt relief providers) may claim they can lower your debt burden dramatically by negotiating with creditors on your behalf, but their efforts are not always successful. They typically advise withholding payment from your creditors and placing funds in a dedicated account from which they'll attempt to make partial repayment to your creditors. This can do serious damage to your credit. Even if successful, these companies' fees often leave customers in deeper debt than when they began the process.
The Bottom Line
A prerequisite for filing bankruptcy in the U.S. is consulting with a certified credit counselor. Take advantage of that session to review your options and make sure you understand which of your debts can and cannot be discharged through bankruptcy. Ask about options for addressing debts that cannot be discharged, and consider working with the counselor longer-term to keep your recovery efforts on track. As you work through bankruptcy (or its alternatives), keep an eye on your credit score to track its likely downturn—and eventual upswing—as you navigate the bankruptcy process.
