What Are Non-Dischargeable Debts in Bankruptcy?

Bankruptcy offers individuals a structured path toward financial relief, often culminating in the discharge of certain debts. This process can provide a fresh financial start by legally eliminating the obligation to repay eligible debts. However, some debts are specifically categorized as “non-dischargeable,” meaning they legally survive the bankruptcy filing and remain the debtor’s responsibility even after the bankruptcy case concludes.

Understanding Non-Dischargeable Debt Categories

Certain types of financial obligations are generally not eliminated through bankruptcy due to various legal and public policy considerations. These debts are often deemed too important to be discharged, protecting specific creditors or upholding societal responsibilities.

Taxes

Taxes represent a significant category of non-dischargeable debt. Recent federal and state income taxes are not dischargeable in bankruptcy. For an income tax debt to potentially be discharged, specific conditions must be met, including a “three-year rule” where the tax return due date, including extensions, must be more than three years before the bankruptcy filing. Additionally, the tax return must have been filed at least two years before the bankruptcy petition, and the tax must have been assessed by the taxing authority at least 240 days before the bankruptcy filing. However, taxes for which a fraudulent return was filed or where there was an attempt to evade payment are never dischargeable, nor are trust fund taxes, such as payroll taxes withheld from employee wages.

Student Loans

Student loans, whether federal or private, are generally non-dischargeable in bankruptcy. An exception exists if the debtor can prove “undue hardship,” a very stringent standard. Courts typically apply a multi-part test to determine undue hardship, often requiring evidence that the debtor cannot maintain a minimal standard of living if forced to repay the loans, that this financial situation is likely to persist for a significant portion of the repayment period, and that the debtor has made good faith efforts to repay the loans prior to bankruptcy. This high bar means that student loan discharge is relatively rare and requires a separate legal action within the bankruptcy case.

Domestic Support Obligations

Domestic support obligations, including child support and alimony, are universally non-dischargeable. This protects the financial well-being of former spouses and dependent children, reflecting a strong public policy. Any arrears or ongoing payments for these obligations will continue to be owed, regardless of a bankruptcy filing.

Debts from Fraud

Debts arising from fraud or false pretenses are also non-dischargeable. This includes obligations incurred through false representations, actual fraud, or fraudulent statements made to obtain money, property, or services. The creditor usually needs to prove that the debtor acted with intent to deceive, and in certain cases, even if the debtor did not personally commit the fraud, the debt might still be non-dischargeable if obtained through the fraud of a business partner or agent.

Willful and Malicious Injury

Debts for willful and malicious injury to another person or their property are exempt from discharge. This category applies to injuries caused intentionally, not merely through negligence or recklessness. The creditor must demonstrate that the debtor intended the injury, not just the act that led to the injury, and that the action was without justification or excuse.

DUI/DWI Liabilities

Liabilities stemming from death or personal injury caused by driving under the influence (DUI) or driving while intoxicated (DWI) are non-dischargeable. This provision ensures that individuals responsible for such harm cannot escape financial accountability through bankruptcy. While debts for personal injury or death are clearly non-dischargeable, liabilities solely for property damage from a DUI/DWI might be dischargeable unless the creditor successfully challenges their discharge.

Government Fines and Penalties

Government fines and penalties are also non-dischargeable. This includes non-compensatory fines, penalties, or forfeitures owed to governmental units, such as criminal fines, traffic tickets, and restitution orders imposed as part of a criminal sentence. These obligations are generally upheld due to their punitive or regulatory nature.

Fiduciary Fraud, Embezzlement, Larceny

Debts arising from fiduciary fraud, embezzlement, or larceny are also non-dischargeable. This applies when someone entrusted with managing funds or assets for another misuses them. A “fiduciary capacity” in bankruptcy law is often narrowly defined, typically requiring an express trust relationship. Embezzlement involves the fraudulent appropriation of property already lawfully in one’s possession, while larceny refers to the unlawful taking of another’s property.

Unlisted Debts

Debts not properly listed in the bankruptcy petition may also remain non-dischargeable. If a creditor was not given notice of the bankruptcy filing and did not have an opportunity to assert their claim, the debt generally survives. However, in “no-asset” Chapter 7 cases, where there are no funds to distribute to creditors, unlisted debts might be discharged if the omission was an honest mistake and did not prejudice the creditor.

Luxury Goods and Cash Advances

Debts incurred for luxury goods or services, or certain cash advances, within specific timeframes before filing bankruptcy can be non-dischargeable. Purchases of luxury goods totaling over $900 from a single creditor within 90 days before filing may be presumed fraudulent. Similarly, cash advances exceeding $1,250 obtained within 70 days of filing are also presumed non-dischargeable. These presumptions exist to prevent debtors from accumulating significant debt with no intent to repay just before seeking bankruptcy protection.

Treatment of Non-Dischargeable Debts in Bankruptcy

When an individual files for bankruptcy, the treatment of non-dischargeable debts differs significantly from that of dischargeable obligations. While dischargeable debts are legally eliminated, offering the debtor a fresh start, non-dischargeable debts remain fully enforceable. This means the debtor retains the legal responsibility to repay these specific types of obligations.

Creditors holding non-dischargeable debts are generally permitted to continue their collection efforts once the automatic stay, which temporarily halts most collection activities upon filing, is lifted. This can include pursuing lawsuits, wage garnishments, or bank levies to recover the outstanding amounts. The bankruptcy process primarily functions to address and resolve dischargeable debts, allowing the debtor to reallocate financial resources.

For secured non-dischargeable debts, such as certain tax liens on property, the bankruptcy discharge typically only eliminates the personal obligation to pay the debt. The lien itself usually remains attached to the property. This means that if the debtor wishes to keep the property, they will likely need to satisfy the lien, even if the underlying personal debt was technically discharged or never dischargeable.

The continued existence of non-dischargeable debts can significantly impact a debtor’s financial recovery after bankruptcy. Even with dischargeable debts eliminated, the burden of these remaining obligations can still be substantial, necessitating a clear plan for their repayment. Bankruptcy can, however, free up income that was previously used to service dischargeable debts, making it easier to manage payments on the non-dischargeable ones.

While generally non-dischargeable, certain categories, such as some tax debts or student loans, may offer limited avenues for resolution. For instance, some older tax debts might be included in a Chapter 13 repayment plan, or student loans could potentially be discharged under the extremely rare “undue hardship” standard. However, these are specific exceptions and not the typical outcome, underscoring that the primary goal of bankruptcy is to address dischargeable debts.