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What Debts are Unaffected by Bankruptcy?

This week’s blog is another question from a listener of The Crushing Debt Podcast, and the question is, “Can you file bankruptcy on a judgment that is for domestic violence?”

Generally, the answer is that the debt would not be dischargeable – meaning it would not be eliminated by the bankruptcy. However, I don’t know if the person asking the question is the victim of domestic violence and so she’s asking because somebody owes her a debt and the person who attacked her either filed bankruptcy or is about to file bankruptcy? Or is the person asking the question the one who committed the domestic violence and so that person is asking because that person is thinking about filing bankruptcy and wondering if the domestic violence debt is going to go away?

I don’t necessarily think the answer to the second question (whether the person asking is the one who was attacked or the one who owes the money) matters very much but I do like to know all of the facts before I provide an answer.

Regardless, I’m referencing exceptions to discharge. The discharge in a bankruptcy is what causes the debts go away forever. I’m writing in “layman’s terms.”  The debts never really go away; the bankruptcy code imposes a permanent injunction against the creditor ever trying to collect the debts.  So, in that sense, the debts are uncollectible. However, Section 523 of the Bankruptcy Code does reference debts that are not dischargeable, so these debts would not be affected by the bankruptcy discharge injunction. Some of the types of debts are obvious and some of them may not be so obvious.

IRS Debts

The first type of non-dischargeable debt is taxes; Uncle Sam always gets his cut! However, taxes could be dischargeable under certain circumstances. I do have a couple of referral partners who are tax attorneys who help me analyze whether a certain tax obligation is dischargeable and, if not, they can negotiate these types of debts with the IRS (or other taxing authority).

The general rule is that income taxes and other different types of taxes are not dischargeable unless the obligation to pay the tax, and the related tax return are more than three (3) years old. Some people misinterpret this rule. For example, if the taxes owed are for 2014 (more than three years ago as I write this) but the return was filed late in 2017 (less than three years ago as I write this) then the taxes would not be dischargeable because they were assessed or imposed less than three years ago.  If the taxes were both owed and thee return filed in 2014, then the tax may be dischargeable.  Again, this is a general guideline and a tax attorney or CPA can help you determine if the particular tax meets the requirements to be dischargeable.  If not, then the tax would be owed even if you filed bankruptcy.  In that instance, we might want to consider a Chapter 13 reorganization bankruptcy to repay the tax that is owed over the life of the bankruptcy plan.

Fraud

The second type of debt that is not dischargeable is money or services obtained by fraud. If you get defrauded by someone, that debt (repayment) they owe you is not going to be dischargeable when they file bankruptcy. An example of this type of debt may be where the borrower lies to you (maybe falsifies his financial statements) to entice you to loan money. In that scenario, if you can prove the borrower committed fraud, the debt may be non-dischargeable in the event the borrower files bankruptcy.

Unlisted Creditors

Unlisted creditors are the third type of debt that is not dischargeable. If you don’t list a creditor in your bankruptcy case it is possible that that debt is not going to be eliminated by the bankruptcy. Typically most of my clients will not want to list a creditor because it’s a credit card that they don’t want to know about the bankruptcy so that they can continue to use that credit card post-filing. Unfortunately, they have to list the credit card for a few reasons: (1) the bankruptcy trustee is going to ask them at the meeting of creditors if they listed everything they own and everyone to whom they owe money, and the debtor needs to be truthful and honest in the bankruptcy petition, (2) if we don’t list a creditor that creditor may not be eliminated or discharged when the bankruptcy is over, and (3) the credit card company may get notice of the bankruptcy anyway because it is tied to the debtor’s social security number, so failure to list the creditor in the schedules may not prevent the creditor from discovering the bankruptcy.

Fraud in a Fiduciary Capacity

Different than fraud listed above, this reason for non-dischargeability relates to fraud in a fiduciary capacity (think Bernie Madoff and Ponzi schemes). If you are in a fiduciary capacity because you’re a trustee or you’re a financial adviser or something like that, any debts that may be created by defrauding your clients while in that capacity may not be dischargeable.

Alimony and Child Support

Alimony,  maintenance, and child support are also not dischargeable. So if you owe your spouse alimony, or if you owe your ex child support, or if the divorce court has ordered some type of property settlement, all those types of debts are not dischargeable. Bankruptcy may be appropriate in a situation where you owe Child Support or Alimony, not to eliminate the family obligation but to eliminate your other debts and create more room in your budget to pay the family obligations.

Willful and Malicious Injury

The next type of non-dischargeable debt is willful and malicious injury. For example, if you see someone you don’t like and you walk up to them and you punch them in the nose,  that’s a willful and malicious injury. If that person sues you for their medical bills and their pain and suffering that’s not going to be a debt that could be eliminated by the Bankruptcy Code. This is different from a car accident or something like that which is, by definition, an accident (so not willful or malicious). However, see below if alcohol or drugs is involved in the car accident.

Government Fines, Penalties and Forfeitures

Similar to income taxes, government fines, penalties and forfeitures are also non-dischargeable.  Again, Uncle Sam always gets his cut. These debts are things like restitution orders, code enforcement fines, property taxes, and similar debts.  Although some of these debts attach to the related property (even homestead property) so their dischargeability may not be an issue as these debts become liens.

Student Loans

Student loans are non dischargeable at least as of the writing of this blog. There are some things being bounced around in Congress that might change that, but nothing has been passed or implemented as of this writing. In addition, it does not matter if the student loans are government backed or private student loans; they are still non-dischargeable at this time. The other interesting thing about student loans is that they are treated the same as other unsecured creditors but they’re not discharged. Therefore, if your unsecured creditors are getting 20% of what they’re owed through the bankruptcy, the student loan company / servicer is going to get 20% of what is owed and then when the bankruptcy is over you’re going to still owe the remaining 80%. There have been improvements in the bankruptcy process here in Tampa where income driven repayment plans are likely to survive the filing of a bankruptcy so that you continue repaying your student loan in a Chapter 13 case. There have been inroads into discharging student loans from non-accredited schools outside the United States (like Caribbean Medical Schools for example), and some student loans can be discharged if you can show there was no educational benefit from the loan. Finally, there are hardship discharges available in certain circumstances. However, for purposes of this blog, student loans are another type of debt that is, for now, generally non-dischargeable.

Death or Personal Injury Caused by DUI

While, generally, debts resulting from a car accident are dischargeable, a death or personal injury caused by a DUI is not dischargeable. The State of Florida can suspend your driver’s license if you owe money to the injured party as the result of a car accident. A bankruptcy will generally clear that debt and allow you to get your driver’s license back – unless the injury and resulting debt is the result of DUI. In that circumstance, the debt is non-dischargeable.

Conclusion

There are other instances where a debt may be non-dischargeable, so please consult with a local bankruptcy attorney about your particular circumstances when deciding whether bankruptcy is the best option for you. Also, keep in mind that even if bankruptcy will not eliminate certain kinds of debt, you can use bankruptcy to eliminate other unsecured debts (like credit cards, hospital bills, repossessions, etc.) which then frees up money in your budget to pay the non-dischargeable debts.

How do we make the determination of whether the debt is dischargeable or not? We have to file what is called an adversary proceeding in the Bankruptcy Court, which is a lawsuit within the bankruptcy case. The adversary proceeding does have its own unique case number but it is related to the bankruptcy case. The adversary proceeding would be resolved by agreement or by trial in front of the judge. If the person who filed bankruptcy wins the adversary proceeding, all that means is it that the debt is dischargeable. Winning the adversary proceeding or losing the adversary proceeding doesn’t necessarily mean that the borrower owes the debt or doesn’t owe the debt. All it means is that the borrower has to pay the debt or the debt is eliminated.

So how does this relate to the question that we received? It could be argued that domestic violence is a willful and malicious injury, and if we successfully argue that in front of the judge then that debt would not be dischargeable in a bankruptcy. Again, this is a general answer without all of the particular facts, so I do think you need to consult with a local bankruptcy or contact us if you have a specific question.

If you are overwhelmed by credit cards, student loans, IRS or any other type of debt, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at shawn@yesnerlaw.com. You can also order Crushing Debt: 9 Strategies to Eliminate Financial Bullies on Amazon.com. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.

Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa Bay based consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Citrus Park, Odessa, Oldsmar, Palm Harbor, Clearwater, Countryside, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay Area.

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