The discharge is what you receive at the end of your bankruptcy, and it means that any dischargeable debt is no longer your legal responsibility. However, even debt that is normally dischargeable, such as credit card debt, can become nondischargeable if the creditor files a nondischargeability complaint and succeeds.
Ways Debts Become Nondischargeable
There are three ways that debts are, or become, nondischargeable in bankruptcy.
Debts that are always nondischargeable. Bankruptcy cannot wipe out certain debts; these debts are nondischargeable. Debts that are always nondischargeable include child support and alimony. If you owe money for these types of debts, they are automatically nondischargeable; you will have to repay them even after your bankruptcy discharge is entered.
Debts that are nondischargeable unless you take action to make them otherwise. Debts that are sometimes dischargeable, such as student loans, will be nondischargeable unless you take action to request that the court discharge them. In other words, if you have student loans, you will have to pay them back after your bankruptcy unless you file an action with the court to make them dischargeable and you succeed in that action.
Debts that are discharged unless a creditor takes action to make them otherwise. Finally, debts that are generally dischargeable, like credit card debt, medical bills, personal loans and utilities, will be discharged unless the creditor takes action to make them nondischargeable. To render a dischargeable debt nondischargeable, the creditor must file an adversary proceeding within the bankruptcy case. (To learn more, see Adversary Proceedings in Bankruptcy.)
Grounds for Challenging the Discharge of a Debt
An adversary proceeding for nondischargeability begins when the creditor files a complaint to determine dischargeability of the debt. The complaint must allege that the debt should not be discharged for one of the reasons set forth in the bankruptcy laws. The different grounds for a nondischargeability action include:
- the debt was obtained by fraud, false pretenses or a false statement made pertaining to the debtor's financial condition
- the debt was obtained by the use of a false statement about the debtor's financial condition, made in writing with the intent to deceive, and which the creditor relied upon in issuing the credit
- the debt was incurred in the purchase of luxury goods or services exceeding $650 in aggregate during the 90-day period before the bankruptcy filing
- the debt is a cash advance or a series of cash advances aggregating more than $925 and incurred within the 90-day period before the bankruptcy filing
- the debt is owed because the debtor engaged in fraud while acting as a fiduciary; embezzlement; or larceny, or
- the debt is owed because the debtor caused willful and malicious injury to another or to another's property.
Example 1. Kim used her credit card to rent an exotic European sports car for her husband for one day; the total cost was $1,000. 45 days later, she filed bankruptcy. The credit card company can file an adversary proceeding in Kim's bankruptcy case requesting that the debt be nondischargeable, because it was incurred for a luxury service within 90 days before the case was filed. If the court agrees with the creditor, Kim will have to repay the $1,000 even after her discharge is entered.
Example 2. Ellen wanted a personal loan, but she didn't have a job, which would disqualify her from the loan. She lied on her credit application, saying she had a job as a paralegal making $60,000 per year. The creditor, believing that Ellen made $60,000 and would therefore be able to repay the loan, granted her the loan. Ellen filed bankruptcy two years later. The creditor is likely to file a nondischargeability action, alleging that Ellen obtained the loan under false pretenses.
Example 3. Andy got in a bar fight and seriously injured Lewis. Lewis sued Andy in civil court and won a judgment against him for assault in the amount of $5,000. Andy filed bankruptcy. Lewis can file a nondischargeability action and allege that the $5,000 debt was incurred because of willful and malicious injury.
Example 4. Chris owned a business with his brother, Jim. Over the course of five years, Chris embezzled $10,000 from the partnership. Jim found out, and he demanded the money back. Chris filed bankruptcy to avoid repaying the money. Jim can file a nondischargeability action against Chris, alleging that Chris owes the partnership $10,000 and that the debt is nondischargeable because of embezzlement. Although Jim does not have a judgment against Chris, he can still make these allegations and the bankruptcy judge will determine their validity.
To learn more about actions that creditors can bring within your bankrupcy case, see the articles in Adversary Proceedings in Bankruptcy.