Understanding Bankruptcy: What Debts Can and Cannot Be Discharged

Bankruptcy can be a daunting process, but it can also provide a fresh start for those overwhelmed by debt. At O1ne Mortgage, we understand the complexities of financial struggles and are here to help you navigate through them. If you have any mortgage service needs, don’t hesitate to call us at 213-732-3074. In this blog, we will explore the types of debts that can and cannot be discharged in bankruptcy, and discuss some alternatives to consider before filing.

What Debts Can’t Be Discharged in Bankruptcy?

While bankruptcy can eliminate many types of debt, there are certain obligations that remain even after the process is complete. Here are some common non-dischargeable debts:

Undeclared Debts

To successfully discharge debts, you must comply with all bankruptcy court requirements, including listing all outstanding debts in the required declaration documents. If you fail to declare a debt, the court cannot discharge it, even if it is otherwise dischargeable.

Most Unpaid Taxes

Bankruptcy can discharge unpaid state and federal income taxes that are more than three years old, provided the returns were filed on time. However, most other taxes are not dischargeable through bankruptcy.

Spousal and Child Support

Unpaid spousal and child support payments cannot be forgiven through bankruptcy. In Chapter 13 bankruptcy, the repayment plan will include steps to bring these payments current, but you will still be obligated to meet all remaining payments going forward.

Malicious-Injury Judgments

If a court finds that you owe compensation or damages for injuries you willfully inflicted, those obligations cannot be discharged 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

Fines, compensation, or damages ordered by a court for injuries caused by driving under the influence cannot be discharged through bankruptcy.

Government Agency Fines and Penalties

Fines or penalties imposed by government agencies, such as unpaid parking tickets or court fees related to a criminal conviction, are not dischargeable through bankruptcy.

Federal Student Loans

Most federal student loans can only be discharged through bankruptcy if you can prove that repaying the loan would cause undue hardship. This is determined through an adversary proceeding, where you present evidence supporting your claim, and the loan servicer may challenge it.

Loans From Retirement Plans

Debts from borrowing money from your employer-sponsored 401(k) or 403(b) retirement plan cannot be discharged through bankruptcy. The IRS treats unpaid loans from these plans as early withdrawals, subject to penalties and taxable as income at your current federal income tax rate.

What Debts Can Be Discharged in Bankruptcy?

Bankruptcy can discharge several types of debt, providing relief for those struggling financially. These include:

• Unsecured consumer debt such as credit card balances and unpaid personal loans
• Medical debt
• Private loans from friends or family members
• Back rent
• Unpaid utility, phone, and cellphone bills

Delinquent payments on loans that use property as collateral may also be discharged, but unless the loan is reaffirmed and payments are maintained, the lender can seize the property.

Should You File for Bankruptcy if You Can’t Discharge All of Your Debt?

The existence of non-dischargeable debts doesn’t mean bankruptcy cannot help you. Here are two types of bankruptcy to consider:

Chapter 13

If you have sufficient income, Chapter 13 bankruptcy can help you address both dischargeable and non-dischargeable debts. You will file a repayment plan with the court, detailing how much you’ll pay each creditor and over what period. The court will approve or adjust your plan, which must include full repayment of priority debts like child support, taxes, and attorney fees.

Once a Chapter 13 plan is approved, if you pay all required installments over your three- or five-year term and complete all other court requirements, the unpaid portions of all debts covered by the plan will be erased. Chapter 13 also allows you to exclude certain debts from the repayment plan and maintain the regular payment schedule on them, a process known as “reaffirming” the debt.

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. Once this is done and you meet all other court requirements, your dischargeable debts will be forgiven. Non-dischargeable debts will remain your responsibility, but the absence of discharged debts may make it easier to keep up with your bills.

Debt Relief Alternatives

Bankruptcy can severely impact your credit, so consider these alternatives before filing:

Debt Consolidation

If your credit is fair to good, you may avoid bankruptcy through debt consolidation. This involves using a loan with a fixed monthly payment and a lower interest rate to pay off higher-interest revolving credit balances. This can save you money each month and make budgeting more predictable.

Debt Management Plan

A debt management plan (DMP) is a repayment program organized by a certified credit counselor. The counselor helps you determine how much you can realistically afford to put toward debt repayment each month and negotiates with creditors to resolve your debts within three to five years. Note that certain types of debt, like mortgages and federal student loans, cannot be included in a DMP.

Debt Settlement

For-profit debt settlement companies may claim they can lower your debt burden 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 for partial repayment. This can seriously damage your credit, and the companies’ fees often leave customers in deeper debt.

The Bottom Line

Before filing for bankruptcy, consult with a certified credit counselor to review your options and understand which debts can and cannot be discharged. Consider working with the counselor long-term to keep your recovery efforts on track. As you navigate the bankruptcy process or its alternatives, keep an eye on your credit score to track its likely downturn and eventual upswing.

At O1ne Mortgage, we are committed to helping you find the best solutions for your financial needs. If you have any mortgage service needs, call us at 213-732-3074. We are here to assist you every step of the way.