If you are struggling with debt and afraid to answer the door or pick up the phone for fear of it being another debt collector; then bankruptcy can seem a very appealing solution the opportunity to pay off some of your loan debts over time or have them taken away completely offers to escape from the pressure that you have been under for so long. However, there are certain loans debts that are not alleviated when you file for bankruptcy.
What Kind Of Loan Debt Is Not Alleviated When You File For Bankruptcy?
There are certain categories of loan debts, called Non-dischargeable debt, that cannot be cleared by a bankruptcy proceeding. These debts include student loans, taxes (most state and federal), local taxes, money paid from a credit card for those taxes, child support, and any alimony. There are other debts that cannot be alleviated as well, although less common.
Objections To Discharge
There are some other debts that cannot be discharged if the creditor chooses to object to any discharge. These can include debts that arose as part of a marital settlement or divorce.
If a debt was incurred through a fraudulent act, or debts were from willful and malicious acts against someone else's property or person, they too are subject to an objection.
Debts that were a result of embezzlement, theft or breaching fiduciary responsibility, will also be subject to an object.
In the above cases, the creditor may, or may not object, and that will decide whether they are exempted or not.
Malfeasance & Omission
If a debt was the result of malfeasance (willful and intentional action that causes harm), or by being omitted from the schedule of debts included when you filed bankruptcy; they may also be non-dischargeable. There are limited exceptions to this (for example the creditor was aware of the bankruptcy and took no action).
A more specific example of what kind of loan debt is not alleviated when you file for bankruptcy is in the case of the debtor being intoxicated and operating a motor vehicle and the resulting debt for personal injury and death.
Credit Cards & Luxury Goods
If a debtor used his/her credit card to purchase luxury items from one person within 90 days of filing for bankruptcy, the creditor can object to exemption. However, if the debtor can convince the judge that they intended to repay the creditor, or that the items were not, in fact, luxury items, then the court may still permit the items to be discharged,
Cash advances made within 70 days of filing for bankruptcy may also become non-dischargeable.
Additional Reasons in Chapter 7
There are some other reasons why a court may declare items cannot be discharged. An example of this would be where a debtor hides assets, transfers assets, or destroys financial records to hide things from the creditors. If the debtor simply does not account for known assets that are missing.
Another reason would be if the debtor did not undertake the mandator course in personal finance management that is a requirement for Chapter 7 filing. The result may be that the court simply refuses to discharge,
A Recent Bankruptcy
In a situation where a debtor has previously filed for bankruptcy and had items discharged, and is now back again asking for further discharges, the court may decide that they will not make further discharges if the two Chapter 7 bankruptcies were to close. The same would apply in the case of two Chapter 13 bankruptcies, or one of each. Whatever happens, in a repeat bankruptcy, you can expect the court to be much more thorough in its investigations.
Student Loan Bankruptcy
As stated already, student loans are generally not alleviated when you file for bankruptcy. If you are filing for bankruptcy in the hope that your student loan debt will be discharged, you are possibly not taking the correct action. In this section, we will look at this further.
You should not file for bankruptcy if your only debt is a student loan, however difficult you are finding repayment. The Department of Education will take a very poor view of this, seeing it as a strategy to get out of paying your student loan. Without any other dents on top of the student loan, you are very unlikely to win your case. Student loan discharge is reserved for those who have circumstances that are totally beyond their control.
Private or Federal Student Loan?
You may have a slightly better chance of discharging a private student loan in bankruptcy. The Federal loans can be resolved with a federal-based IDR (income-driven repayment). The feeling is that if you qualify for an IDR plan you should have the resources to pay your debt.
It is a bit of a chicken and egg situation. To stand any chance of getting a student loan debt discharged, you will need the services of a lawyer who is an expert in this field. If the court sees that you can afford a lawyer, they will probably conclude that you can pay your debts. Even if you succeed in getting a discharge, bankruptcy will remain on your financial records for ten years.
Filing Adversary Proceedings
Filing Chapter 7 or Chapter 13 alone is not enough to get a student loan discharged. You will also need to file an adversary proceeding. This is a kind of lawsuit within the bankruptcy proceedings and is designed to assess whether you have a case to have the student loans discharged. This is going to add to the cost of your bankruptcy, and if you consider this extra step as well, you may come to believe that bankruptcy is not the route to go down.
To win the adversary proceedings you have to demonstrate that you suffer undue hardship. There are no set criteria for this and most states use the "Brummer Test". Some other states use The "Totality of Circumstances" Test. Either way, unless you really have exceptional circumstances, you are unlikely to win the judgment. The result of pursuing this may simply be to increase the amount of money you owe and spend.