Chapter 7 bankruptcy discharges most unsecured debts, but taxes, student loans, support obligations, fraud-based debts, fines, restitution, injury-related debts, and willful and malicious injury debts typically survive the case.
A Chapter 7 bankruptcy is designed to give debtors (the person or people who owe the debts and filed the bankruptcy case) a fresh start with their finances. Discharging the debtor's debts creates this fresh start by "discharging" the debts of the debtor. Once a debt is discharged, the debtor no longer has a legal obligation to pay the creditor. However, not all debts may be discharged in a Chapter 7 bankruptcy.
Debts Not Discharged in Chapter 7 Bankruptcy
The Bankruptcy Code governs bankruptcy filings in the United States. In the Bankruptcy Code, Congress has provided a list of certain debts that can't be discharged through 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. (11 U.S.C. § 523.)
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. (11 U.S.C. § 523(a)(1).)
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, 2023, and, on the return, self-reported that she owed $800. Self-reporting taxes due creates an assessment, and the third requirement will be met on December 10, 2023. 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 becomes effective 240 days after the date of the assessment contained in the notice the IRS provides 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 can't be discharged in a bankruptcy. A debtor may, however, apply to the court to have the student loan debt 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 can't 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 during 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. (11 U.S.C. § 523(a)(8).)
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 student loan debt will almost always survive bankruptcy.
Child Support, Spousal Support, and Other Family Support Obligations
Money owed for a domestic support obligation (that is, child support, spousal maintenance, or alimony) or money owed as a result of a divorce settlement or decree won't be discharged at the end of your Chapter 7 bankruptcy. (11 U.S.C. §§ 523(a)(5), (15).)
Debts for Willful and Malicious Injury
A debt for willful and malicious injury that the debtor causes to another person or to another person's property also survives a Chapter 7 discharge. "Willful" means the debtor intended to cause the injury, and "malicious" means the debtor acted without just cause or excuse. This exception commonly arises with lawsuit judgments for intentional torts, such as assault or the deliberate destruction of someone's property, rather than ordinary negligence. A creditor who wants a court to except this type of debt from discharge must object and prove the claim during the bankruptcy case. (11 U.S.C. § 523(a)(6).)
Other Debts That Aren't Discharged in Chapter 7 Bankruptcy
Several other types of debt can't 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, embezzlement, larceny, or other 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, including most criminal restitution, and
- debts that are owed as a result of causing injury or death to another while intoxicated. (11 U.S.C. §§ 523(a)(2), (3), (4), (7), (9), (13).)
