The bankruptcy code of the United States was designed to give people a “fresh start” financially by ridding them of debt obligations that have become impossible to pay. With New Jersey’s high cost of living, it’s easy to see why so many people fall behind on bills and ultimately file for bankruptcy. It can be a great way to get rid of credit card debts, medical bills and other debts that are keeping a person from achieving their financial goals.
Unfortunately for some, both the federal and state bankruptcy laws have designated certain debts as “non-dischargeable,” meaning that they will survive the bankruptcy proceeding and still be owed in their full amount plus interest once the proceeding is complete. What are these debts and why are they not permitted to be discharged through bankruptcy? Let’s examine a few.
Perhaps the most notorious non-dischargeable debt on the list is that of student loans that have been guaranteed by the federal government. This accounts for a large percentage of all student loans, and although there has been some recent news about cases where student loan debt was discharged, this only occurs in instances where the debtor can demonstrate “extreme financial hardship,” which is very difficult to prove.
The reasoning behind excluding these loans from bankruptcy dates back to the 1970s when these rules were first put into place. Back then, and again when the rules were reaffirmed in the 2005 act, higher education was very different than it is now. Most college graduates were able to find gainful employment that covered their student loan debts right after graduation.
Unfortunately, in the last several years the costs of higher education have skyrocketed while employment opportunities have dried up. Hopefully, these circumstances will lead to more courts allowing a discharge of student loans, but for now, it is best to consider these loans as non-dischargeable in bankruptcy. Read more here about some alternatives to filing for bankruptcy that may relieve student loan debt.
Mortgages are considered secured loans, because they are attached to a piece of collateral, like a home. If the payments on these loans stop, the creditor is within their rights to repossess the collateral property and sell it to make up for any deficiencies.
Anyone that has fallen behind on their mortgage payments or that is facing foreclosure is likely to consider filing for bankruptcy. While the automatic stay that occurs after filing will temporarily halt foreclosure proceedings, the creditor will be able to move forward with repossession once the proceedings are complete. Those looking to keep their home through bankruptcy will need sufficient income to get current on payments and to continue paying those debts throughout and after the bankruptcy process.
Depending on the specific financial situation of the person filing for bankruptcy, they may be able to reaffirm this debt in a Chapter 7 proceeding, or to include this debt in a Chapter 13 repayment plan. It’s best to consult with an experienced bankruptcy attorney before choosing a method of filing, especially when keeping one’s home is a goal.
Some debts have been given an elevated status by law due to their nature. These are called “priority debts” and include domestic support obligations like child support and alimony, as well as certain income tax debts. Priority debts are not dischargeable in Chapter 7 bankruptcy. Whatever is owed before the start of the bankruptcy proceeding will continue to be owed during the process and after it is complete, in addition to any new installments that occur while filing.
Those filing for Chapter 13 bankruptcy will need to include all priority debts into their repayment plan. The plan must include a way for all of these debts to be paid in full or brought current over the course of the plan. Any plan that cannot account for priority debts will not be confirmed by the bankruptcy courts. If priority debts account for a large percentage of one’s overall debt, it may be best to consider some alternatives to filing for bankruptcy.
Debts Incurred through Fraud or Other Criminal Activity
It’s in the public’s interest to not allow those convicted of a crime to escape liability for the associated costs of the offense. As such the federal bankruptcy rules do not allow any debt incurred by fraud or other criminal activity such as larceny or embezzlement to be discharged through bankruptcy.
Except for a few exceptions involving damage to property in a Chapter 13 filing, these sorts of debts will never be included in a bankruptcy discharge, and will be continued to be owed in their full amount after the proceeding is complete.
Recent Luxury Purchases
Once again citing fairness and the public’s interest, the courts will look back at the 90 days prior to a person’s initial filing of a bankruptcy petition in order to see whether they have made any “luxury” purchases. Luxury items and services are generally considered to be anything valued above $550 that is not necessary to maintain the support of the debtor and their dependents.
These debts are held out of the bankruptcy proceeding, and it’s easy to understand why. We don’t want to allow anyone to go on a luxury spending spree piling up credit card charges only to see all of those debts subsequently dismissed in bankruptcy. If you have made any recent luxury purchases, be sure to pay special attention to when to file for bankruptcy.
Future Debts and Other Considerations
Bankruptcy will also not protect a person from debts incurred after the proceeding has begun. Once again this makes sense — we don’t want anyone filing for bankruptcy to go out and incur so much more debt that they’ll be forced to file again in the future (which may not be allowed depending on timing). So a person undergoing a bankruptcy proceeding will need to get any future debts approved by their case trustee before they take them on.
Understanding what is and isn’t included in a bankruptcy proceeding requires extensive knowledge of the bankruptcy laws, procedures and available exemptions. Before filing it’s best to consult with an experienced attorney that can help develop a strategy that will discharge the highest amount of debt while not getting delayed or dismissed due to improper or inaccurate action on the part of the debtor. At Rosenblum Law our attorneys are ready to help, call us today.