What Is a Non-Dischargeable Debt in Bankruptcy?

Bankruptcy proceedings offer individuals a financial fresh start by eliminating certain obligations. However, not all debts can be erased. A non-dischargeable debt is an obligation that legally cannot be eliminated through bankruptcy and remains enforceable even after the bankruptcy case concludes. Understanding these debts clarifies which financial responsibilities persist despite filing for bankruptcy.

General Principles of Non-Dischargeability

The framework for non-dischargeable debts is rooted in public policy, balancing a debtor’s need for a fresh financial beginning with creditor rights and broader societal interests. Congress identified specific debts that should not be discharged, reflecting a judgment that certain obligations are too important to be discharged. This approach prevents individuals from using bankruptcy to avoid responsibilities that are fundamental or from wrongful conduct. Rules prevent abuse while upholding societal obligations like supporting dependents or fulfilling tax duties.

Bankruptcy Code Section 523 categorizes these debts, ensuring these obligations remain even if other debts are discharged. This framework ensures bankruptcy serves as a tool for honest debtors, not a mechanism to escape all financial accountability, especially for obligations with significant public interest. The system provides an orderly method for debt resolution, protecting vulnerable parties and maintaining financial integrity.

Common Categories of Non-Dischargeable Debts

Several common categories of debts are non-dischargeable. These are established due to their importance to public welfare or the nature of how the debt was incurred.

Tax Debts

Recent income taxes, those due within the last three years before filing for bankruptcy, are not dischargeable. Trust fund taxes, which include payroll taxes an employer withholds but fails to remit to the government, are non-dischargeable. Taxes associated with unfiled returns or those resulting from fraudulent activity, such as intentional tax evasion, cannot be discharged.

Student Loans

Federal and most private student loans are non-dischargeable unless the debtor can demonstrate “undue hardship” to the bankruptcy court. This standard is difficult to meet and requires an adversary proceeding. Courts often apply the “Brunner Test,” which requires proving that the debtor cannot maintain a minimal standard of living if forced to repay the loan, that this hardship will persist for a significant portion of the repayment period, and that the debtor has made good faith efforts to repay the loan.

Domestic Support Obligations

Child support and alimony are non-dischargeable. These obligations are fundamental for the financial well-being of children and dependent spouses, taking precedence over a debtor’s fresh start. This includes both current and past-due payments, ensuring support for family members continues regardless of a bankruptcy filing.

Government Fines, Penalties, and Restitution

Criminal fines, court-ordered restitution to victims, and civil penalties imposed by governmental units are non-dischargeable. For instance, fines for traffic violations, building code violations, or those imposed as part of a criminal conviction are not discharged. These obligations serve a punitive or compensatory purpose.

Government-Guaranteed Debts

Certain government-guaranteed debts beyond student loans may also be non-dischargeable. This category can include specific types of government-backed loans or obligations where the government has a direct interest in repayment. This protects public funds and ensures accountability for debts owed to governmental entities.

Debts Requiring a Court Order for Non-Dischargeability

Some debts are not automatically non-dischargeable; instead, a creditor must specifically request that a bankruptcy court declare them so. This involves filing an adversary proceeding, where the creditor must prove their claim to the court. If the creditor does not initiate this proceeding within specified deadlines, the debt may be discharged.

Fraud or False Pretenses

Debts arising from fraud or false pretenses can be non-dischargeable if proven in court. This includes debts incurred when a debtor intentionally makes false statements or misrepresentations to obtain money, property, or credit. For example, if a debtor provides false information about their financial condition on a loan application, the resulting debt may be non-dischargeable if the creditor can demonstrate justifiable reliance on that false information.

Willful and Malicious Injury

Debts stemming from willful and malicious injury to another person or their property can be non-dischargeable. This exception applies when the debtor intentionally causes harm, not merely through negligence or recklessness. The creditor must demonstrate that the debtor acted with the intent to cause the injury, or that the act was done without just cause or excuse.

Embezzlement, Larceny, or Fiduciary Defalcation

Obligations arising from embezzlement, larceny, or defalcation while acting in a fiduciary capacity can be non-dischargeable. Embezzlement involves the fraudulent appropriation of property entrusted to someone, while larceny is the taking of property without the owner’s consent. Defalcation refers to a failure to account for money or property held in a fiduciary role, such as a trustee misusing funds. These exceptions prevent individuals from escaping debts incurred through breaches of trust or theft.

Intoxicated Driving Injuries

Debts for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft while intoxicated are non-dischargeable. This ensures individuals responsible for such harm cannot use bankruptcy to avoid financial accountability. Unlike other injury-related debts, establishing non-dischargeability for intoxicated driving does not require proving malice or intent to injure; the fact of intoxication and causation of injury is sufficient.

Post-Bankruptcy Treatment of Non-Dischargeable Debts

After a bankruptcy case concludes and a discharge order is issued, non-dischargeable debts remain legally enforceable. The bankruptcy discharge only relieves the debtor of personal liability for dischargeable debts. Creditors of non-dischargeable debts can continue their collection efforts against the debtor.

These collection efforts may include continued billing, phone calls, or pursuing legal remedies like wage garnishment or placing liens on property. For instance, tax authorities can continue to collect unpaid non-dischargeable taxes, and student loan servicers can resume collection on non-discharged student loans. While bankruptcy offers a fresh start for many debts, it does not provide a complete escape from all financial responsibilities.