What is Nondischargeable Debt?

The key benefit of a Chapter 7 bankruptcy case is the discharge–the elimination of the legal obligation to pay many unsecured debts. If you’re considering Chapter 7 bankruptcy, you may have heard about “nondischargeable debt” and be unsure how much bankruptcy will help you, or which of your debts may be wiped out in Chapter 7.

Fortunately, most unsecured debt is dischargeable in bankruptcy, including the types that most commonly create problems for Californians, such as:

• Medical debt – According to the Urban Institute, 13% of California households have medical debt in collections. This debt is generally dischargeable, which means that it can be eliminated in Chapter 7 bankruptcy, and may be partially dischargeable upon completion of a Chapter 13 bankruptcy plan.
• Credit card debt – A recent report from ValuePenguin indicated that Californians are carrying an average of $10,496 in credit card debt as of 2018. Unsecured credit card debt is one of the most common types of debt discharged in bankruptcy.
• Payday loans – The payday loan industry is largely unregulated in California, and the state has the 11th-highest payday loan interest rates in the country. According to a 2018 CNBC report, California payday loan borrowers pay an average of 460% interest on their loans–a rate that can quickly trap the borrower in a cycle of reborrowing and ever-growing costs. 

These and many other unsecured debts are typically dischargeable even if you have already been sued, the creditor has already been granted a judgment against you, or the debt has been sold to a debt buyer or other third party. The list of nondischargeable unsecured debts is much more limited.

Debt that Generally Cannot be Discharged in Bankruptcy

• 523 of the U.S. Bankruptcy Code sets forth the circumstances under which debt may not be discharged. That means that if you file for Chapter 7 and receive a discharge, you will still be responsible for paying that debt. 

Some of the prohibitions on discharge involve categories of debt. For instance:

• Tax debt – You may have heard generally that tax debt is not dischargeable, but that isn’t true across the board. Certain types of tax debt, such as debt that is too recent, debt for taxes when returns were not properly filed, and debt resulting from tax fraud are nondischargeable. But, under some circumstances, some tax debt may be dischargeable. Timing and the actions you take in advance of filing can impact dischargeability of tax debt. So, if you are considering bankruptcy and have delinquent tax debt, be sure to consult a local bankruptcy attorney before you take the next steps.
• Domestic support obligations – Domestic support obligations are nondischargeable, and that goes beyond child support. Spousal maintenance / alimony awarded by the divorce court or granted pursuant to a divorce settlement agreement is not dischargeable. However, it isn’t always entirely clear whether an obligation to a former spouse falls into this category, and so discharge of an obligation to a former spouse is often disputed.
• Student loan debt – Although there is a hardship exception to the prohibition on discharge of student loan debt, the bar is high and it is relatively rare for student loan debt to be successfully discharged. Although the issue arises less often, this prohibition also extends to other types of educational debt, such as repayment of scholarship funds or overpayment made by a governmental unit.
• Fines and penalties – Fines, penalties, and forfeitures owed to governmental entities are typically not dischargeable.

Some debts are nondischargeable not because of the type of the debt, but because of the way it was incurred. For example, debt incurred through the use of fraud, or that results from willful and malicious injury to another person or to the property of another may not be discharged in bankruptcy.

An Experienced Bankruptcy Attorney is Your Best Source of Information

While some types of debt, such as child support obligations, are categorically nondischargeable, the analysis is rarely that simple. Debt to a former spouse may or may not be dischargeable depending on the nature of the obligation. Student loan debt is not generally dischargeable, but may be subject to a hardship exception. Tax debt is nondischargeable under some circumstances and dischargeable under others. In other words, it can be difficult for someone without extensive knowledge of bankruptcy law to determine exactly how bankruptcy will play out in his or her case, and whether or not certain debts may be dischargeable. 

Even when one or more of your debts are nondischargeable, Chapter 7 bankruptcy may free up funds to settle that debt, or a Chapter 13 plan may provide a workable alternative for taking control of debt. 

The bankruptcy attorneys at Borowitz & Clark have extensive experience in both Chapter 7 and Chapter 13 bankruptcy, as well as other debt management strategies. They have represented many people working to regain control of their finances and move forward with a more stable financial foundation. They know how stressful and confusing it is to be overwhelmed by debt, and want to make it as easy as possible for you to gather the information you need to make good decisions and move forward with confidence. 

That’s why they offer free consultations in several Southern California locations, including Los Angeles, West Covina, Santa Fe Springs, Ontario, Torrance, Palmdale, and Glendale. Schedule yours right now by calling 877-895-1072 or filling out the contact form on this site.