FAQ On Bankruptcy

What debts are not discharged by bankruptcy?


Not all debts are discharged. In general, liens (such as mortgages and security interests in cars) are non-dischargeable as are some other types of obligations including:

(1) Federal, state and local tax claims (subject to specific time rules)

(2) Customs duties

(3) Spousal support

(4) Child support

(5) Most student loans

(6) Secured debts

(7) Fines and penalties imposed by government agencies

(8) Debts incurred due to false statements made with the intent to deceive

(9) Fraud committed in a fiduciary capacity, such as embezzlement or larceny

(10) Punitive damage claims for "willful and malicious" acts

(11) Debts not listed on the forms and schedules filed with the Court

(12) Drunk driving obligations

A non-dischargeable debt is one that will survive the bankruptcy proceeding. The debtor still has the obligation to pay this debt; the creditor has every right to collect.

That is why it is so important to consult with a bankruptcy attorney. Depending on your circumstances bankruptcy may or may not make sense for you. If after the bankruptcy you will be no better off then you were before, why do it?

Suppose the bankrupt committed fraud - would the debts be discharged in bankruptcy?
No. The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, carrying forth a basic policy of affording relief only to an "honest but unfortunate debtor."

Congress did not favor giving perpetrators of fraud a fresh start (by allowing them to wipe out their debts in bankruptcy) over the interest in protecting victims of fraud when it wrote the Bankruptcy Laws. Accordingly, Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A).

Can all debts be discharged in bankruptcy?

No. That is why it is so important to consult with a bankruptcy attorney. Depending on your circumstances bankruptcy may or may not make sense for you. If after the bankruptcy you will be no better off then you were before, why do it?

Heck, if lots of folks and companies go into bankruptcy, why shouldn't I?
Bankruptcy is not something that should be entered into just for the heck of it. Some of your debts might not be dischargeable, and you might have to give up some of your assets if you file. Very often there are intelligent alternatives to bankruptcy that may produce a far better result than going into bankruptcy.

Bankruptcy also goes on your credit records, and may make it difficult to obtain new credit for years.

Before anyone files for bankruptcy he or she should consult with a bankruptcy lawyer. There are critically important issues as to timing and disclosure that you had better address before, not after, you file for bankruptcy.

Are there different types of bankruptcy?

Yes, and they are known by the title of the Chapter of the Federal Bankruptcy Act in which they appear. Each "Chapter" contains a different set of laws and rules.

While there are several different types of bankruptcy procedures, each known by the title of the chapters of the Bankruptcy Code where they appear, the two most commonly used by individual consumers are:

(1) Chapter 7 bankruptcy is the most frequently used by individuals. Under this arrangement, a court-appointed trustee collects your assets, sells them for cash, and makes distributions to creditors. You can keep assets that are exempt either under Federal law or the law of your home state. You cannot repeat this filing for six years.

(2) Chapter 13 bankruptcy is designed for an individual debtor who has a regular income and stable job. Under this procedure, you pay debts off over a three-to-five year period and keep your property. At a confirmation hearing, the court either approves or disapproves the plan. A Chapter 13 can be filed at any time.

Individuals may also use Chapter 11 reogranizations, but this form is generally targeted to businesses. Farmers can use Chapter 12 (see following question).

What is Chapter 7 bankruptcy?

Chapter 7 is the bankruptcy provision most frequently used by individuals. It involves the complete liquidation of a debtor's property to pay creditors and wipes out the remaining debts, giving the debtor what's known as a "fresh start". However, the debtor can retain certain property that is specifically "exempt" depending her State's law, such as tools of one's trade, limited equity in a car and house, and some personal effects.

If you use Chapter 7 you may lose your home (depending on your state) but it does enable you to get out from under the burden of debt more quickly.

The post-October 17, 2005, Bankruptcy Code made major changes in this chapter, making the process longer and more expensive and undeniably harder for consumers to shed debts than under the old law. Under one of the key changes, a means test determines whether a debtor can use a Chapter 7 filing or be forced to file a Chapter 13 and repay some of their debts over five years.

What is Chapter 11 bankruptcy?

Chapter 11 is typically used for business bankruptcies and restructuring. It is not commonly used by individual consumers since it is far more complex and expensive to pursue. It allows businesses to reorganize themselves, giving them an opportunity to restructure debt and get out from under certain burdensome leases and contracts. Typically a business is allowed to continue to operate while it is in Chapter 11, although it does so under the supervision of the Bankruptcy Court and its appointees.

What is Chapter 13 bankruptcy?

Chapter 13, which has also been known as a wage earner's plan, is an interest-free repayment plan where a debtor repays at least some of his or her unsecured debts with regular payments over five years. Under the new bankrtupcy law, effective for filings on and after October 17, 2005, more bankrtupcy filers will have to choose Chapter 13's repayment plan because of the application of a complicated, two-part means test.

Generally the creditors expect to get more than they would have received from the debtor's estate if the debtor had sought a complete liquidation under Chapter 7 Bankruptcy.

One of the important benefits of Chapter 13 is that the debtor generally can more easily continue to live in his or her home. If the debtor fails to comply with the Chapter 13 plan, the Court will usually dismiss the bankruptcy case

Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments.

The disadvantage of Chapter 13 to the debtor is that the debts can linger for years, burdening future income.

Are statutory penalties or punitive damages for fraud discharged in bankruptcy?
No. It is not only the actual value of the "money, property, services, or . . . credit" the debtor obtained through fraud that is non-dischargeable in bankruptcy, but also treble "punitive" damages and attorneys fees and costs related to the fraud. This was made clear in a March 25, 1998 decision of the Supreme Court of the United States in Cohen v. de la Cruz.

The case involved a landlord who had overcharged his tenants. The trial court found that the landlord had committed "actual fraud" within the meaning of the Bankruptcy Act and that his conduct amounted to an "unconscionable commercial practice" under New Jersey’s Consumer Fraud Act. As a result, the court awarded the tenants treble damages plus reasonable attorney's fees and costs. The debtor recognized the approximately $30,000 in improperly charged rent would not be dischargeable, but argued that he should not be stuck having to pay the $100,000 in punitive damages and attorneys’ fees the court awarded. The court decided those extra damages had been awarded as a result of his fraudulent acquisition of "money, property, services, or . . . credit." All the debtor’s obligations arising out of fraudulent conduct, including both punitive and compensatory damages, are not subject to discharge in bankruptcy.

Is bankruptcy bad?
In calendar year 1999, approximately 1.3 million individuals sought the relief from debts and claims of creditors by filing for bankruptcy, down slightly from the 1.4 million in calendar 1998. With that huge number of people seeking relief from their debts and the claims of their creditors, much of the stigma of "going bankrupt" has gone away.

In addition to providing relief from debts and obligations for individuals, hundreds of such long established blue chip companies as Dow Corning, Montgomery Ward, Penn Central and Texaco have used the provisions of the bankruptcy laws.

What is Chapter 12 bankruptcy?
Chapter 12 is designed for "family farmers" or "family fishermen" with "regular annual income." It enables financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts. The purpose of the "regular annual income" requirement is to ensure that the debtor's annual income is sufficiently stable and regular to permit the debtor to make payments under a chapter 12 plan. But chapter 12 makes allowance for situations in which family farmers or fishermen have income that is seasonal in nature.

Relief under chapter 12 is voluntary, and only the debtor may file a petition under the chapter.

In tailoring bankruptcy law to meet the economic realities of family farming and the family fisherman, chapter 12 eliminates many of the barriers such debtors would face if seeking to reorganize under either chapter 11 or 13 of the Bankruptcy Code. For example, chapter 12 is more streamlined, less complicated, and less expensive than chapter 11, which is better suited to large corporate reorganizations. In addition, few family farmers or fishermen find chapter 13 to be advantageous because it is designed for wage earners who have smaller debts than those facing family farmers.

Can a creditor ask a debtor to reaffirm the debt?
Yes, this means that the creditor is asking that the debtor pay the debt anyway, even though it is eligible to be discharged in bankruptcy. A debtor may be willing to do this if there is a co-signer or guarantor of the debt (such as a family member, friend or employer) that the debtor does not wish to leave saddled with the debt. Also, a debtor may want to reaffirm a debt in order to avoid having a secured creditor take the collateral securing the debt. A creditor may also ask a debtor to reaffirm the debt before he (the creditor) will agree to do business with the debtor again. This only applies in Chapter 7 consumer bankruptcy. This will not usually happen in a business Chapter 7.

The decision to reaffirm a debt is voluntary; no law requires the debtor to do it. The debtor can also choose to pay a debt that has been discharged in bankruptcy without reaffirming the debt, which means that the lender has no legal rights to collect the debt. Reaffirmation agreements can't impose an undue burden on you or your dependents and must be in your best interest.

A debt is reaffirmed in an agreement filed with the court within 60 days after the first meeting of the creditors in the bankruptcy case, also called the 341 meeting. Once you sign a reaffirmation agreement you have 60 days or until the judge issues the discharge order in your bankruptcy case to cancel the agreement.

It is important to remember that a reaffirmed debt is not wiped out (discharged) in bankruptcy. Once your bankruptcy order is filed and the debt is reaffirmed, you must pay the debt. If you don't, the creditor can sue you for the balance owed or repossess the property in a secured debt.

How long does my bankruptcy remain on my credit report?
Your credit report can show your bankruptcy filing for up to 10 years, but many credit reporting agencies will remove it after 7. Having a bankruptcy on your credit record could make it harder to rent an apartment or to obtain a credit card at a favorable rate of interest. It might also make it very difficult to obtain a home mortgage loan or insurance.

"Wiping the slate clean" through bankruptcy also puts all future lenders on notice that you have had difficulty repaying your debts; creditors are more likely to either refuse to extend credit, or to make you pay (through higher interest rates, for example) for the additional risk they are taking in extending you credit.

However, even with a bankruptcy on your credit report, many lenders will do business with you and extend you new credit. This is because the discharge obtained in bankruptcy leaves all future earnings free from the claims of past creditors.

Copies of a credit report can be obtained from one of the following sources: (1) Experian (formerly TRW), http://experian.com; (2) Equifax, http://equifax.com; (3) Trans Union, http://tuc.com. The reports contain loans and credit card accounts, balances and payment history, bankruptcies and liens. In many cases, you'll be entitled to a free copy of your report so long as you don't ask for extra-cost "products" like a credit score or automatic update reports.

What can I do if I have bad credit but I want to obtain a home loan?
If you have bad credit, it generally cannot be avoided on your credit report and can affect whether or not you're approved for a home loan. However, you can help to correct credit errors or misunderstandings by writing a letter to the creditor or by writing letters to be included within your credit reports. Sometimes, a letter explaining a sudden loss of a job, a lay off, or a long-term illness will change the view of the lender in reviewing your credit report. Additionally, you should provide any documentation proving your reason for failing to pay on your debts. By law credit reporting agencies are required to include letters of explanation along with any documentation proving such explanation with the credit report. As a general rule, a bad credit report usually stays on your record for a period of 7 years (10 for bankruptcies).

Lenders have extended loans to home buyers with bad credit, charging them sometimes significantly higher rates of interest. These loans are called subprime loans. Responsible, in part, for the financial crisis of 2008, subprime loans have become harder to get due to stricter federal regulations. Borrowers, unable to pay their mortgages in a depressed economy with rising interest rates, now face foreclosure.

Your best bet may be to wait a few years to buy and focus on rebuilding and improving your credit in the meantime.

What debts are not discharged by bankruptcy?
Not all debts are discharged. In general, liens (such as mortgages and security interests in cars) are non-dischargeable as are some other types of obligations including:

(1) Federal, state and local tax claims (subject to specific time rules)

(2) Customs duties

(3) Spousal support

(4) Child support

(5) Most student loans

(6) Secured debts

(7) Fines and penalties imposed by government agencies

(8) Debts incurred due to false statements made with the intent to deceive

(9) Fraud committed in a fiduciary capacity, such as embezzlement or larceny

(10) Punitive damage claims for "willful and malicious" acts

(11) Debts not listed on the forms and schedules filed with the Court

(12) Drunk driving obligations

A non-dischargeable debt is one that will survive the bankruptcy proceeding. The debtor still has the obligation to pay this debt; the creditor has every right to collect.

That is why it is so important to consult with a bankruptcy attorney. Depending on your circumstances bankruptcy may or may not make sense for you. If after the bankruptcy you will be no better off then you were before, why do it?

Suppose the bankrupt committed fraud - would the debts be discharged in bankruptcy?
No. The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, carrying forth a basic policy of affording relief only to an "honest but unfortunate debtor."

Congress did not favor giving perpetrators of fraud a fresh start (by allowing them to wipe out their debts in bankruptcy) over the interest in protecting victims of fraud when it wrote the Bankruptcy Laws. Accordingly, Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A).