The term used in bankruptcy court to mean elimination of a debtor’s obligations is a “discharge”. A discharge in a bankruptcy filing releases the debtor from personal liability for certain debts. This means that the debtor will no longer be legally required to pay for debts that are discharged. The discharge is a permanent order from the bankruptcy court prohibiting the creditors from taking any form of collection action on the discharged debts.
So, which of debtor’s debts can be discharged and which debts cannot be discharged? Can ALL of a debtor’s debts be discharged?
Most of an individual’s debts can be discharged in a bankruptcy filing. These debts that are ALWAYS discharged would mostly consist of the following:
(1) Credit card debts – the vast majority of bankruptcy filers are trying to get rid of credit card debts they can no longer afford to pay. Luckily, bankruptcy gives these debtors a new chance to start over again with a zero balance instead of being saddled with a negative balance.
(2) Medical bills – many people who have unexpected medical conditions which result in huge medical bills that are unaffordable. Millions have no medical insurance and many of us are just a sickness away from being obligated with medical bills we cannot afford.
(3) Lease or contractual obligations – obligations under lease agreements, or contractual obligations (to buy, sell, pay, etc) will be converted into dischargeable debts in a bankruptcy filing and can be discharged.
(4) Lawsuit judgments – lawsuits are mostly about money judgments. If you are unable to pay for these money judgments, they can also be discharged in bankruptcy.
(5) Personal loans and promissory notes – money you borrowed with promissory notes or even with just oral promises are almost always dischargeable
There are, however, different classes of debts. One of these classes of debts is NEVER discharged. You will continue to owe on these debts even after bankruptcy filing. This class of non-dischargeable debts consists of the following:
(1) Fines, restitutions and penalties that a federal, state or local government has imposed to punish you for violating a law.
(2) Domestic support obligations such as child support or alimony
(3) Certain tax debts
(4) Intoxicated driving debts
(5) Certain condominium or homeowner association fees
(6) Loans from a retirement plan
(7) Debts from a previous bankruptcy which were not discharged
There is also another class of debts that would be discharged in a bankruptcy filing unless the creditor successfully objects to the discharge. This class of debts would consist of the following:
(1) Debts incurred through fraud or Malicious acts
(2) Debts from a false written statement about your financial condition
(3) Recent debts for luxuries where a creditor runs up his debts for luxury goods or services within 90 days before filing for bankruptcy
(4) Recent cash advances within the 70 days before fling for bankruptcy
(5) Debts from embezzlement, larceny or breach of fiduciary duty
(6) Debts to creditors not listed in the bankruptcy filing
There is also a certain class of debts that are not discharged unless the debtor can prove that he is within the exception. This class of debts is the following:
(1) Student loans – there are certain conditions attached to the discharge of a student loan. Generally, the debtor pleads poverty based on current income and expense; his current financial condition is likely to continue for a significant period; the debtor has made good faith effort to repay the debt.
(2) Regular Income taxes – certain income taxes can be discharged in bankruptcy if you meet certain conditions.
The main purpose a debtor files for bankruptcy is to get a discharge from debts he can no longer afford to pay. Therefore, to understand exactly what bankruptcy can do for a debtor, one needs to know which, if any, of the debts will still be owed after the bankruptcy case is over as not all debts will be automatically eliminated in a bankruptcy filing.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)
