Most people seek bankruptcy relief to wipe out their debts and get a fresh start. While most debts can be eliminated in bankruptcy, certain obligations (called nondischargeable debts) survive your bankruptcy discharge. Read on to learn more about the difference between dischargeable and nondischargeable debts and how they are treated in bankruptcy.
(For more articles on the bankruptcy discharge, see our Bankruptcy Discharge topic area.)
What Are Dischargeable Debts?
Dischargeable debts are obligations that can be wiped out by your bankruptcy discharge. This means that when you receive your discharge, you are no longer obligated to pay any of these debts and creditors cannot come after you to collect them.
Common examples of dischargeable debts include:
- credit card debt
- medical bills
- personal loans, and
- utility bills.
How Are Dischargeable Debts Treated in Bankruptcy?
In most cases, you can completely eliminate dischargeable debts in bankruptcy without any repayment. However, how dischargeable debts are treated and if those creditors will receive anything in your bankruptcy depends on whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
Dischargeable Debts in Chapter 7 Bankruptcy
Most Chapter 7 bankruptcies are no asset cases. This means that there is typically nothing for the trustee to sell to pay creditors with. As a result, dischargeable debts are normally wiped out without receiving anything in Chapter 7 bankruptcy.
Further, if there are any proceeds to distribute, general unsecured debts (such as credit card obligations) are the last to get paid and receive a pro-rata share of any money left over after all priority debts (such as alimony, child support, and certain taxes) are paid.
However, keep in mind that your discharge only eliminates your personal liability for these debts. It does not affect liens on your property (such as a mortgage or car lien). As a result, if you stop paying your mortgage or car loan, your lender can still foreclose on or repossess your property even if it cannot sue you personally to collect the debt.
(Here's a list of debts you can wipe out in Chapter 7 bankruptcy.)
Dischargeable Debts in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, most dischargeable debts are treated as nonpriority general unsecured claims. This means that, depending on your income, assets, and expenses, they typically receive little or nothing through your Chapter 13 repayment plan. And they are discharged upon completion of your plan payments.
However, if a dischargeable debt is secured (such as your car loan), you have two choices. If you want to keep the car, you must continue making payments on it during your Chapter 13 bankruptcy (if certain conditions are met, you may be able to reduce your principal balance through a Chapter 13 cramdown). Alternatively, you can surrender the car and your personal liability for the car loan will be discharged when you complete your bankruptcy plan.
(For a list of debts you can get rid of in Chapter 13, see Dischargeable Debts in Chapter 13 Bankruptcy.)
What Are Nondischargeable Debts?
Congress has decided that certain obligations (called nondischargeable debts) are too important to be eliminated in bankruptcy. As their name suggests, these debts survive bankruptcy and are not wiped out by your discharge. This means that you are responsible for paying them back even after bankruptcy.
Most nondischargeable debts are automatically excepted from discharge without any action required by the creditor. But some obligations (such as debts acquired by fraud) require creditors to object to your discharge, prove fraud, and obtain a court order before they will be deemed nondischargeable.
Examples of nondischargeable debts include:
- child support and alimony
- criminal fines, penalties, and restitution
- certain tax obligations
- student loans (with rare exceptions), and
- debts acquired by fraud (creditors must prove fraud before debt will be deemed nondischargeable).
How Are Nondischargeable Debts Treated in Bankruptcy?
Some nondischargeable debts (such as alimony, child support, and certain taxes) receive priority treatment in bankruptcy while others (like student loans) do not. How your nondischargeable debts will be treated in bankruptcy depends on whether they are priority debts and whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
Nondischargeable Debts in Chapter 7 Bankruptcy
You cannot eliminate nondischargeable debts through Chapter 7 bankruptcy. Because nondischargeable debts survive your bankruptcy discharge, you are still obligated to pay them even after bankruptcy. Further, most nondischargeable debts receive priority status in Chapter 7 bankruptcy and will get paid first (before nonpriority unsecured debts) if there are any assets to distribute.
(To learn more, see Nondischargeable Debts in Chapter 7 Bankruptcy.)
Nondischargeable Debts in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, nondischargeable priority debts must be paid in full through your repayment plan. This means that if you have any priority debts, you must pay them off before you can even receive your discharge.
Nonpriority nondischargeable debts (like student loans) receive the same treatment as your general unsecured debts. As a result, you are not required to pay them off through your Chapter 13 plan. But they will not be wiped out by your discharge and you are still on the hook for paying them back after your bankruptcy.
(To learn more, see Nondischargeable Debts in Chapter 13 Bankruptcy.)