Debts That Survive Chapter 7 Bankruptcy

Some debts cannot be discharged (cancelled) in bankruptcy. Learn about them here.

A Chapter 7 bankruptcy is designed to give debtors (the person or people that owe the debts and filed the bankruptcy case) a fresh start with their finances. The fresh start is created by "discharging" the debts of the debtor. Once a debt is discharged, the debtor no longer has a legal obligation to pay the creditor for the debt. However, not all debts may be discharged in a Chapter 7 bankruptcy. (To learn which debts are discharged, see  Debts That Are Discharged in Chapter 7 Bankruptcy.)

The bankruptcy code is the law that governs bankruptcy filings in the United States. In the bankruptcy code, Congress has provided a list of certain debts that cannot be discharged through a bankruptcy. This means that even after successfully completing the bankruptcy case and receiving a discharge, the debtor will still owe these debts.

Here are some of the most common debts that survive a Chapter 7 bankruptcy.

Tax Debts

Whether an income tax debt can be discharged depends on time. The basic rule is that for an income tax debt to be discharged:

  • the taxes must have been due at least three years before the filing of the bankruptcy case
  • the tax return, if required, was filed at least two years before the filing of the case, and
  • the IRS assessed the liability for the taxes more than 240 days before the bankruptcy filing.

For example, Dana Debtor owes federal income taxes for 2008. These taxes were due on April 15, 2009. Dana filed her tax return for tax year 2008 on April 14, 2009. The tax return showed that Dana owed $800 in federal income taxes. In order to satisfy the "3/2" rule for 2008 income taxes, the bankruptcy case must be filed three years after the due date of the taxes (April 15, 2012), and the income tax return must have been filed within two years of the bankruptcy filing (this requirement is satisfied on April 14, 2011). In this example, Dana’s debt for 2008 federal income taxes will will satisfy the first two requirements if she files bankruptcy on or after April 16, 2012.

The third requirement is that the IRS assessed the tax liability more than 240 days before the bankruptcy filing. An "assessment" from the IRS simply means that the IRS considers the taxes due and owing. Assessment can happen several ways. The first way is that the taxpayer files a tax return showing a balance due. In the example above, Dana filed her tax return on April 14, 2009, and, on the return, self-reported that she owed $800. The self-reporting of taxes due creates an assessment, and the third requirement will be met on December 10, 2008. An assessment can also result at the conclusion of an IRS audit or after an IRS Notice of Proposed Assessment becomes final. In these situations, the third requirement will become effective 240 days after the date of the assessment contained in the notice provided by the IRS to the taxpayer.

Other tax debts may also survive a bankruptcy; however the rules can get more complicated. If you owe other tax debt, you should consult with an attorney to determine if the debt can be discharged through a Chapter 7 bankruptcy.

Student Loans

As a general rule, student loan debt cannot be discharged in a bankruptcy. A debtor may, however, apply to the court for the student loan debt to be discharged. The application must show that the payment of the student loan debt—both at the time of the bankruptcy filing and in the future—would create an "undue hardship" on the debtor or the debtor’s dependents.

"Undue hardship" is not defined in the bankruptcy code. As a result, many courts follow what is known as the "Brunner  Test" to determine if a student loan debt can be discharged. The  Brunner  Test requires that a debtor show three things in order to discharge student loan debt:

  • that the debtor cannot maintain a "minimal" standard of living based on current income and expenses if required to repay the student loans
  • that there are circumstances that will cause the debtor's financial situation to remain the same during a majority of the time which the student loans are scheduled to be repaid, and
  • the debtor has made good faith efforts to repay the student loans in the past.

Courts have determined that Congress wanted student loan debt to be discharged only in exceptional circumstances. As a result, it is very hard to convince a court that student loan debt will create an undue hardship, and, as a result, student loan debt will almost always survive a bankruptcy.

Child Support, Spousal Support and Other Family Support Obligations

Money owed for a domestic support obligation (i.e. child support, spousal maintenance or alimony) or money owed as a result of a divorce settlement or decree will not be discharged at the end of your Chapter 7 bankruptcy.

Other Debts That Survive Chapter 7 Bankruptcy

Several other types of debt cannot be discharged in a Chapter 7 bankruptcy. These include:

  • debts that are not listed on the initial paperwork filed with the bankruptcy petition (or added by amendment in a timely manner)
  • credit or money that was obtained by fraud or dishonesty
  • certain debts for luxury goods or services incurred within 90 days of filing the bankruptcy case
  • certain cash advances obtained within 70 days of filing the bankruptcy case
  • money owed for a fine or penalty owed to a governmental unit, and
  • debts that are owed as a result of causing injury or death to another while intoxicated.

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