The Chapter 7 Discharge: What Debts are not Eliminated?

Many people are familiar with the most common categories of debts that may be discharged in Chapter 7 bankruptcy. These include credit card account balances, medical bills, old utility and phone bills, and unsecured personal loans. What are not so well known, however, are the types of debts not eligible for discharge in Chapter 7 bankruptcy.

The key to understanding those so called ‘nondischargeable’ debts is a familiarity with the section of the Bankruptcy Code that sets forth a list of ‘exceptions to discharge’. The logic of the code is that if the debt does not fall into one of these categories, it is presumed to be dischargeable unless contested by a creditor. That is to say, a creditor may file an objection to the dischargeability of a particular debt under this section, in which case the court will decide the issue.

Here, then, is the section of the Bankruptcy Code that lists the exceptions to discharge. It’s a lot of densely written legalese, so you might want to just skim through the statute to get the general idea, and then read the summary at the bottom that refers back to the statute where appropriate:

§ 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—

(1) for a tax or a customs duty—

(A) of the kind and for the periods specified in section 507 (a)(3) or 507 (a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, or equivalent report or notice, if required—

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; or

(C)

(i) for purposes of subparagraph (A)—

(I) consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

(II) cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable; and

(ii) for purposes of this subparagraph—

(I) the terms "consumer", "credit", and "open end credit plan" have the same meanings as in section 103 of the Truth in Lending Act; and

(II) the term "luxury goods or services" does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.

(3) neither listed nor scheduled under section 521 (1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

(5) for a domestic support obligation;

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty—

(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A)

(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

(9) for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance;

(10) that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title or under the Bankruptcy Act in which the debtor waived discharge, or was denied a discharge under section 727 (a)(2), (3), (4), (5), (6), or (7) of this title, or under section 14c(1), (2), (3), (4), (6), or (7) of such Act;

(11) provided in any final judgment, unreviewable order, or consent order or decree entered in any court of the United States or of any State, issued by a Federal depository institutions regulatory agency, or contained in any settlement agreement entered into by the debtor, arising from any act of fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union;

(12) for malicious or reckless failure to fulfill any commitment by the debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured depository institution, except that this paragraph shall not extend any such commitment which would otherwise be terminated due to any act of such agency;

(13) for any payment of an order of restitution issued under title 18, United States Code;

(14) incurred to pay a tax to the United States that would be nondischargeable pursuant to paragraph (1);

(14A) incurred to pay a tax to a governmental unit, other than the United States, that would be nondischargeable under paragraph (1);

(14B) incurred to pay fines or penalties imposed under Federal election law;

(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit…

For sake of brevity let’s stop at this ‘exception category 15’; although the statute provides several more categories, they are very technical and, importantly for our purposes, arise only very rarely. The above portion of the discharge exception statute, then, while not completely exhaustive, does contain the most commonly encountered types of debts not discharged. Let’s summarize the key ones:

§ 523(a)(1) and (14): Most taxes, along with debts incurred to pay them. Simple enough.

§ 523(a)(2)(A) and (B): Debts where the money or property was obtained by fraud – no surprise here.

§ 523(a)(2)(C)(i)(I) and (II): Be warned – don’t buy any large luxury items on credit right before you file; likewise, don’t take any large cash advances. If you’ve already done so, then you’d better wait awhile (at a minimum you should wait the 90/70 day lookback period) before you file your Chapter 7 bankruptcy petition.

§ 523(a)(3): Be absolutely sure that you’ve listed all debts. A safe rule of thumb would be, "if you don’t list it, it won’t get discharged."

§ 523(a)(5) and (15): The vast majority of "family court" obligations, with only very narrow exceptions.

§ 523(a)(8): Student loans, unless the debtor can make a showing of "undue hardship." Courts have generally interpreted ‘undue hardship’ very strictly.

§ 523(a)(9): Most commonly, a debt arising from injuries from a car accident caused by the debtor while DUI.

Again, there are several more categories of nondischargeable debts beyond the ones listed above, but these are the key ones. Before an informed decision can be made as to whether a bankruptcy makes sense for a prospective filer, the debtor must first fully understand the benefits – along with any limits to those benefits – that a bankruptcy filing will afford in his or her specific circumstances. And that means knowing, in advance, exactly what debts will or will not be discharged. Discuss the matter carefully with your bankruptcy attorney – it’s too important an issue to leave to chance.