To Learn More About Debts that Can Follow You to the Grave, Call a Bankruptcy Lawyer
The §523 exceptions apply to individuals filing under Chapters 7, 11, 12, and, with certain exceptions, Chapter 13. Section 523 does not apply to corporations. In general, corporations are not eligible to receive a discharge in bankruptcy even though there is an exception for corporations reorganized, but not liquidated, under Chapter 11.
Below is a short list of §523 exceptions. If any of your debts fall into these categories, a complete fresh start in bankruptcy may not be possible under Chapter 7, and you may need to file under Chapter 13.
- As a rule, income taxes less than three years old from when they first came due are not dischargeable. Trust fund taxes are not dischargeable no matter when they were incurred. Trust fund taxes include an individual debtor’s liability for corporate or other business employee withholding taxes. There is no time limit on those taxes, and they are not dischargeable. Under some state laws, certain kinds of sales taxes and employee taxes are considered trust fund taxes and are not dischargeable. If the taxes are a direct obligation to the debtor, they are not considered trust fund tax and may be discharged.
Income taxes more than three years old may be discharged as long as the debtor has filed a tax return and an offer in compromise is not pending. Fraudulent returns or tax obligations that arise from tax evasion may not be dischargeable and do not fall into the three-year rule.
Money/Services obtained by fraud. This category includes refinancing, services, money, or renewals of credit obtained by false pretenses, fraud or false representations. If you obtained money legally but attempted after the fact to hide or conceal it from a creditor, this would not create a non-dischargeable obligation. Non-dischargeability arises from originally obtaining the money by fraudulent circumstances.
It may be possible to prove the non-dischargeability of the debt but not liability for the debt itself.
Clients need to be cautioned about taking out cash advances or using credit cards or prior to filing for bankruptcy. Under the old rules, any purchase of more than $1,225 worth of “luxury goods or services” or a cash advance from an individual creditor within a period of 60 days prior to the bankruptcy filing is presumed to be fraudulent—and therefore non-dischargeable. BRA changed those amounts, lowering the threshold to $250 on luxury goods and $750 for cash advances, and it increases the look-back to 90 days (70 days for cash advances). A case should not be filed during this period if the client has been using credit cards or taking out cash advances.
Unlisted creditors. Creditors who are not listed or scheduled in your petition may not be discharged unless they have actual knowledge of the bankruptcy. The failure to list a creditor does not automatically exempt the debt from discharge.
Fraud in a fiduciary capacity. This kinds of debt arises when a debtor has a fiduciary duty to a creditor, such as operating under power of attorney, holding funds in trust, and/or as an employee or other capacity entailing a fiduciary duty between the parties.
Alimony, maintenance and child support. Alimony and child support owed to a spouse, former spouse, or child are not dischargeable. Attorney fees incurred to establish maintenance, alimony, or child support are not dischargeable. Fees for property settlement litigation are dischargeable. Property settlement agreements could be dischargeable, but there is an exception if it creates a hardship on the ex-spouse. The decision of whether the obligation is support or property distribution is a question of federal bankruptcy court, not by state divorce law.
Willful and malicious injury. Willful means that the debtor acted purposefully. Malicious is defined as knowing that the act is likely to cause injury. If the debtor knew what he was doing, did it on purpose, and knew it would probably cause some type of injury or damage, the resulting debt is non-dischargeable.
Student loans. Most student loans are now insured or guaranteed by a governmental unit, such as the U.S. Department of Education or Sallie Mae. These student loans are usually not dischargeable. There is a provision for discharge if it would impose an “undue hardship” on the debtor or the debtor’s dependents. The courts have generally been inflexible on determining a hardship. As a general rule, if the debtor is not homeless, there is no undue hardship, and student loans have to be repaid.
DUI-related death or personal injury. Personal injury or death claims resulting from the debtor’s operation of a motor vehicle while intoxicated with drugs or alcohol are non-dischargeable. Although personal injury claims from DUIs cannot be discharged, property damage claims can be.
Payment of an order for restitution. Restitution related debts are not dischargeable. This includes criminal restitution ordered by a court.
Property settlement agreements in divorces. Property settlements may not be dischargeable if the discharge would result in an undue hardship on the non-filing ex-spouse. This language provides that the discharge of these claims arising from property settlement agreements should be granted if discharging the property settlement “would result in a benefit to the debtor that outweighs the detrimental consequences to the spouse.”
Certain condominium dues and fees. HOA’s and such debts survive the discharge and become due and owing. This is a little-used section, but if you have a condominium or some type of cooperative housing, a review of what the fees are and whether they fall within the exception is important.
Non-dischargeable debt from a prior bankruptcy. Debt that was exempted from discharge in a prior bankruptcy cannot be discharged in a subsequent bankruptcy. This prevents the debtor from being denied a discharge in bankruptcy, waiting a short period of time, and then trying it again.
Contact Chris to Learn About Debt that can Follow you to the Grave.
Contact The Law Office of Christopher German 720-675-8070 and become armed with the facts and details you need. You’ll be glad you did!
Contact The Law Office of Christopher German 720-675-8070 and become armed with the facts and details you need.
You’ll be glad you did!