Monday, August 1, 2011

Debts which are dischargeable and nondischargeable

Most people who file for bankruptcy do so to get a discharge of their debts so they can start over financially. Debts fall into different categories under federal law which may or not be dischargeable. In many consumer cases, many debts are either clearly dischargeable or clearly not dischargeable, though some debts fall into gray areas.

The discharge order in a bankruptcy case does not specify which debts are being discharged. A dischargeable debt that was not challenged (e.g., a credit card balance) is presumed to be discharged, and a nondischargeable debt (e.g., a student loan) is presumed to remain collectible. A debt from any category can be challenged for dischargeability by the creditor for special reasons, sometimes after the bankruptcy case is closed. A debtor can also start a proceeding to determine the dischargeability of a debt in order to settle conflicts that may arise after the bankruptcy case.

The common types of debts that are discharged are:
  • Credit cards
  • Personal loans
  • Medical bills
  • Liability on repossessed cars and foreclosed houses
The common types of nondischargeable debts are:
  • Student loans
  • Taxes (but not all of them)
  • Child support or alimony
To help clear this up, the Bankruptcy Code lists only the exceptions to discharge. You only have to look up a type of debt to see if there is an exception but not to see if it is allowed. However, we run into gray areas when we are not sure whether the facts and circumstances of a debt will put it into one of these exceptions. And to make things more complicated again, a hardship discharge could be available for a nondischargeable debt (e.g., for a student loan for someone who has become permanently disabled).

A major exception to dischargeability is based on some kind of fraud. A creditor can challenge the dischargeability of a debt if it was incurred by false pretenses, a false representation, actual fraud, or a false written statement with certain conditions. It could also be challenged if it was incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The first problem for the creditor making the challenge is deciding what type of fraud was involved and how the circumstances fit into all the necessary legal elements. The second problem is actually proving that all these elements (which may come from state law as well as federal law) are met.

If you choose to file for bankruptcy protection, be sure you understand which debts you are discharging, which debts you are not discharging, and if there are any risks of uncertainty.

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