There are several types of debts that are never discharged; others that are usually discharged unless the creditor of the debt can convince the court that a special exception applies; and some debts become nondischargeable because a creditor has successfully challenged the discharge of its debt. Most nondischargeable debts include either priority payments considered by Congress to be important or debts incurred by the bad behavior of the debtor. These debts are enumerated under §523 of the Bankruptcy Code.
Debts That Survive Bankruptcy Automatically
The following debts are not dischargeable and the creditor does not have to take any action to protect its claim.
Generally, unpaid taxes that were due within 3 years of the bankruptcy filing for returns that were timely filed, or for returns that were filed late within 2 years of the bankruptcy, or taxes that were not paid because the debtor did not file a return, or filed a fraudulent return or tried to evade the tax are not dischargeable.§523(a)(1)
Unlisted or Unscheduled Debts
If the debtor did not list a creditor in his bankruptcy forms, then the debt survives bankruptcy and is not discharged unless the creditor learned, in some other way, about the bankruptcy soon enough to file a claim or to challenge the discharge of its debt. So if the debtor already received the discharge or the creditor had grounds to challenge the discharge but was time barred because it learned of the bankruptcy too late, then the debt is not dischargeable.§523(a)(3)
Domestic Support Obligations
Domestic support obligations are never dischargeable. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) has elevated domestic support obligations as the top priority payment, even higher than the administrative expenses of the trustee in the bankruptcy case. Domestic support obligations include maintenance, alimony, and child support. However, the payments must actually be for support and not simply characterized as such. §523(a)(5)
Government Fines, Penalties, and Forfeitures
Government fines, penalties, and forfeitures that were assessed, not as compensation for pecuniary loss, but to punish the debtor are also not dischargeable. §523(a)(7)
Educational Loans and Benefits
Debts incurred to finance education are not dischargeable, unless the debtor can prove that he would suffer an undue hardship without their discharge. If the court decides that the education loans are an undue hardship, then the court can either allow the entire debt to be discharged, or it can lower the amount of the debt or payments so that it would no longer be a hardship. §523(a)(8)
Courts ascertain undue hardship by examining the debtor's financial resources and expenses, and whether the debtor demonstrated good faith:
- did the debtor make a diligent effort to pay the debt,
- to find a good paying job,
- or to reduce living expenses.
For instance, courts have not found undue hardship where the debtor simply elected to work at a more desirable job for less money when he could have earned more elsewhere.
Li Liability for Driving Under the Influence of Drugs or Alcohol
Liability for injuries or death resulting from driving while under the influence of alcohol or other drugs is not dischargeable. §523(a)(9)
Prior Debts Where Discharge was Waived or Denied in a Prior Case
If the debtor had filed bankruptcy before and either waived the discharge of a particular debt or was denied a discharge on grounds of §§727(a)(2) – (7), which enumerates acts of bad faith or unlawful behavior by the debtor, then the debt is forever nondischargeable. However, if the debtor did not receive a discharge because he had obtained a previous discharge after which a sufficient amount of time has not passed before the law allows another discharge, then the debtor can discharge those debts in a subsequent filing that would have otherwise been dischargeable if not for the time bar.§523(a)(10)
Order of Restitution Payments in Federal Cases
This section pertains only to payments required by an order for restitution resulting from a conviction of a crime in a federal case and prevents the discharge of the restitution in a Chapter 13 case. The nondischargeability of restitution under other bankruptcy chapters is covered by the willful and malicious section or by the government penalties section. The Chapter 13 discharge co covers more debts than Chapter 7, so this was inserted to prevent its discharge even in Chapter 13. Note that restitution imposed by a state court is not covered by this section. §523(a)(13)
Matrimonial Debts that are not Domestic Support Obligations
Any debts incurred as the result of a divorce decree or separation or property settlement are nondischargeable. §523(a)(15)
Debts That Only Survive If The Creditor Successfully Challenges Its Discharge
Debts incurred because of the debtor's dishonesty, fraud, larceny, embezzlement, or willful or malicious behavior are generally not dischargeable. However, the creditor must challenge the discharge of its debts by giving notice within 60 days of the 1st creditors meeting. The dischargeability of the debt will be determined at a hearing.
Obligations Based on Fraud
If credit was obtained by fraudulent representations, then the debt is nondischargeable. §523(a)(2) provides general unsecured creditors their most potent tool to prevent a discharge of their debts, since many credit applicants provide false information on the credit applications—particularly about their income.
If the debtor obtained credit based on false pretenses or representations, or actual fraud, whether oral or written, then the debt is not dischargeable under §523(b) if the false information was material in assessing the debtor's financial condition.
There are 4 elements commonly required to prove fraud:
- that the debtor made a false representation of a material fact;
- that the debtor knew it was false and made the false statement with intent to deceive (scienter);
- the creditor must have justifiably relied on the misinformation;
- and that the debtor caused injury by not repaying the loan before filing for bankruptcy.
If the false information was about the debtor's financial condition, then §523(b) states that
- it must be in writing;
- it must be materially false;
- the debtor's intention was to deceive;
- and the creditor must have reasonably relied upon it.
The purpose of the explicit guidelines in this subsection is so that a creditor cannot deny the debtor of a discharge of its debts for a simple mistake on the loan or credit application.
Although the burden of proof is generally on the creditor to prove fraud, §523(c) establishes a presumption of fraud if the debt was incurred shortly before bankruptcy. In this case, the burden is placed on the debtor to rebut the presumption that the debt was not obtained fraudulently. Debts that are presumed to be based on fraud are any debts incurred within 90 days of the order for relief that were more than $550 from any single creditor for luxury goods or services, or for an aggregate sum of $825 of cash advances from any number of creditors within 70 days of the order for relief regardless of what the money was used for. These amounts were current as of April 1, 2007, and will be adjusted for inflation every 3 years.
Much of the litigation in this area depends upon what constitutes luxury goods and services, since the Bankruptcy Code only specifies that it does not include goods or services reasonably necessary for the support of either the debtor or the debtor's dependent.
A debt is not automatically excluded under this subsection. If a creditor wants to challenge the discharge of its debts, it must do so within 60 days of the 1st creditors meeting.
To discourage frivolous challenges by creditors, §523(d) allows the court to award attorney fees to the debtor if the nondischargeability action was not substantially justified and if it would not otherwise be unjust to award such fees.
Debts Due to the Debtor's Dishonesty as a Fiduciary, or From Embezzlement or Larceny
If the debtor obtained funds by embezzlement or larceny, or if the debtor was a fiduciary and took funds through fraud or defalcation, then the debt is not dischargeable. §523(a)(4)
Debts for Willful or Malicious Injury
Debts incurred because of the willful and malicious injury to an entity or their property are excluded from discharge. Willful means that the debtor intended the act and was not just negligent. Malicious means that the consequences of the act were also intended. §523(a)(6)
Discharge of Nondischargeable Debts From a Previous Case
There are 3 types of debts that are dischargeable in a subsequent bankruptcy by §523(b) that were not dischargeable in an earlier case as long as the reason for the exclusion in the prior case no longer applies:
- nondischargeable tax debts under §523(a)(1);
- unscheduled debts that would have otherwise been dischargeable if they were listed;
- and educational debts under §523(a)(8).