If you are struggling with debt before bankruptcy and are afraid to answer the door or pick up the phone for fear that it will be another debt collector; then bankruptcy may seem like a very attractive solution the opportunity to pay off some of your debts over time or have them eliminated completely offers you an escape from the pressure you have been under for so long. However, there are certain loans that are not relieved by filing bankruptcy.
What Type Of Loan Debt Is Not Relieved By Filing Bankruptcy?
There are certain categories of debts, called non-dischargeable debts, that cannot be discharged through a bankruptcy proceeding. These debts include student loans, taxes (mostly state and federal), local taxes, money paid on a credit card for those taxes, child support and any alimony. There are other debts that also cannot be relieved, although they are less common.
Objections To Discharge
There are some other debts that cannot be discharged if the creditor chooses to object to any discharge. These include debts arising under a marital settlement or divorce.
If a debt was incurred through a fraudulent act, or if the debts arise from deliberate and malicious acts against the property or person of another person, they are also subject to an objection.
Debts resulting from embezzlement, theft or breach of fiduciary responsibility are also subject to an objection.
In the above cases, the creditor may, or may not, object, and that will decide whether they are exempt or not.
Embezzlement & Omission
If a debt was the result of wrongdoing (willful and intentional action that causes harm), or by being omitted from the list of debts included when you filed for bankruptcy; they may also be non-dischargeable. There are limited exceptions to this (e.g., the creditor had knowledge of the bankruptcy and took no action).
A more specific example of what type of loan debt is not discharged when bankruptcy is filed is where the debtor is intoxicated and driving a motor vehicle and the resulting personal injury and death debt.
Credit Cards & Luxury Goods
If a debtor used his or her credit card to purchase luxury goods from a person within 90 days of filing bankruptcy, the creditor may object to the exemption. However, if the debtor can convince the judge that he or she intended to reimburse the creditor, or that the items were not, in fact, luxury items, then the court may allow the items to be discharged,
Cash advances made within 70 days of the bankruptcy filing may also be nondischargeable.
Additional Reasons In Chapter 7
There are other reasons why a court may declare that items cannot be discharged. An example of this would be when a debtor conceals assets, transfers assets, or destroys financial records to hide things from creditors. If the debtor simply fails to account for known missing assets.
Another reason would be if the debtor failed to take the mandatory personal financial management course that is a requirement for a 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 bankruptcy and had items discharged, and is now coming back for more discharges, the court may decide that it will not make any more discharges if the two Chapter 7 bankruptcies are closed. 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 mentioned above, student loans are not usually relieved by filing bankruptcy. If you file bankruptcy in hopes of having your student loan debt forgiven, you may not be taking the right action. In this section, we will delve deeper into this aspect.
You should not file bankruptcy if your only debt is a student loan, no matter how difficult it is for you to repay. The Department of Education will frown upon this as they see it as a strategy to get out of paying the student loan. Without any other dents besides the student loan, it is highly unlikely that you will win your case. Student loan forgiveness is reserved for those who have circumstances that are totally out of their control.
Private Or Federal Student Loan?
You may have a slightly better chance of discharging a private student loan in bankruptcy. Federal loans can be resolved with a federally based IDR (income-based repayment). The feeling is that if you qualify for an IDR plan you should have the resources to pay off your debt.
It’s a bit of a chicken and egg situation. To have any chance of getting student loan debt forgiven, you will need the services of an attorney who is an expert in this field. If the court sees that you can afford an attorney, it will probably conclude that you can pay your debts. Even if you get the discharge, the bankruptcy will remain on your financial record for ten years.
Adverse Proceeding Filing
A Chapter 7 or Chapter 13 filing alone is not sufficient to have a student loan discharged. You will also need to file an adversary proceeding. This is a type of lawsuit within the bankruptcy proceeding and is designed to evaluate whether you have a case to have student loans discharged. This is going to add to the cost of your bankruptcy, and if you consider this additional step as well, you may come to believe that bankruptcy is not the way to go.
To win the adversary proceeding you have to show that you are suffering undue hardship. There are no set criteria for this and most states use the “Brummer test”. Other states use the “totality of the circumstances” test. In any event, unless there are truly exceptional circumstances, it is unlikely that you will win at trial. The result of pursuing this may simply be to increase the amount of money you owe and spend.
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