Filing for bankruptcy can sometimes be the best way to move on from large amounts of debt. You can hit the financial reset button and get a fresh start. However, only certain debts can be discharged. Others are nondischargeable, and you will still be on the hook for paying them.
Knowing which debts you can and cannot get rid of may help you determine whether bankruptcy is the right debt relief option for you. Below, we’ve explained how discharge works and which debts qualify.
Need to review bankruptcy basics first? Read this.
What is a bankruptcy discharge?
When you file for bankruptcy, you are acknowledging to the court and to your creditors that you cannot pay what you owe. The debt you don’t repay is discharged — basically, it’s written off and you are no longer held liable.
Dismissal is NOT the same thing as discharge
It’s much better to have bankruptcy discharge than a dismissal. Dismissed debt still needs to be repaid. Dismissal closes your bankruptcy case and ends the automatic stay on your accounts, meaning that your creditors can once again contact you about your debt.
When does bankruptcy discharge occur?
This depends on the type of bankruptcy you file. In Chapter 7 bankruptcy, your debts will be discharged after about four months.
Chapter 13 bankruptcy discharge takes longer. Since Chapter 13 involves a repayment plan to help you repay some of your debts, you are granted discharge only after this plan ends three to five years after filing.
Which debts get discharged?
If you have these debts, filing bankruptcy can help you get rid of them:
- Payday loans
- Credit card debt
- Business debts
- Medical bills
- Some tax penalties
- Past-due utility bills
Bankruptcy discharge of tax debt
Tax debt must meet specific requirements to be discharged. These include:
- Must be income tax debt.
- Should be at least three years old.
- Cannot be the result of fraud.
- Ideally, the tax return should have been filed on time.
- The IRS should have assessed the tax debt at least 240 days before the bankruptcy filing.
If your debt doesn’t fit these requirements, it may be nondischargeable. You will have to repay it in another way. Learn more about bankruptcy and tax debt here.
Bankruptcy discharge of student loans
Getting your student loans discharged is very unlikely. According to the Bankruptcy Abuse Prevention and Consumer Protection Act, student loans can only be discharged if they cause a consumer “undue hardship.” This term is vague for a reason − BAPCPA wants to leave the decision up to the bankruptcy court.
The easiest student loans to discharge are private educational loans. Since federal student loans are connected to the government, they run by different rules. Private loans are similar to any other bank loan and can be discharged if listed in a bankruptcy.
Learn more about student loans and bankruptcy discharge here.
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Which debts are not discharged?
Unfortunately, filing bankruptcy cannot get rid of these debts.
- Child support and alimony
- Car loans
- Debt from fraud
- Criminal penalties and fines
- Court costs
- Mortgages, HOA fees, co-op and condo fees
- Nondischarged debts from a prior bankruptcy case
- Money you owe due to DUI/DWI charges
- Debts you didn’t list in your bankruptcy case
Why are some debts nondischargeable?
Some debts may be incurred by a consumer’s own wrongdoing. For example, driving while intoxicated (DWI) charges and debt from fraud cannot be discharged. Any other court fees or fines from crimes you committed in the past are also off-limits.
Domestic support debts like child support or alimony also cannot be discharged. These aren’t like credit card debt or a loan − you agreed to pay these to a person, not a creditor or lender.
Since debts like mortgages and car loans are secured with collateral, they are nondischargeable because the creditor can simply confiscate the asset.
What do I do if my largest debts are nondischargeable?
If you can’t receive a discharge on the types of debt giving you the most trouble, you will have to seek other solutions besides bankruptcy. For housing debts, you may face foreclosure. If you can’t pay car loans, your vehicle may be repossessed. So, what can you do to prevent losing your property or being stuck in a cycle of debt?
Even if your largest debts are nondischargeable, filing for bankruptcy to discharge your other, smaller debts may free up cash to repay the debts you can’t get rid of. You can also seek out other solutions, such as debt settlement, to pay off smaller debts so you can focus on the larger ones that are holding you back.
Article last modified on November 18, 2020. Published by Debt.com, LLC