Bankruptcy, both for persons and corporations, is a special type of legal protection that is granted when people end up so high in debt that they cannot realistically continue to make payments on what they owe. People who gain bankruptcy protection, through the order of a bankruptcy court, are granted a limited period of time in which collectors cannot continue to pressure them, certain debts are written off, and others are adjusted so as to create more realistic payment obligations.
Unfortunately from the perspective of the debtor, and very fortunately from the perspective of creditor banks, there are some debts that a bankruptcy will not erase. These are referred to as debts that cannot be discharged through bankruptcy. What debts a bankruptcy will not erase depends on where you live, because the particular rights and privileges granted by bankruptcy laws in different states and countries are not the same.
In the United States, as a general rule, several particular types of debt are not discharged or erased by a bankruptcy. This means that people will not receive relief with respect to these debts (unless, of course, they manage to negotiate a new agreement with the creditor outside of the bankruptcy process). When they leave bankruptcy protection, these debts will remain in full and they are expected to continue making the required payments. First, any debts that fail to be listed on a special schedule when bankruptcy is declared are not covered by the bankruptcy process, regardless of whether or not they fall into the following categories.
Next, bankruptcy lawyers and trustees examine and do not discharge debt that falls into certain categories. These include obligations set by family courts as part of child support payments or alimony payments (payments to spouses after a divorce). Court fees and fines or penalties imposed by a government agency are also not excused through bankruptcy. This includes fines from traffic infractions, like drunk driving, as well as back-taxes owing to a city, the state, or the federal government (including IRS liens).
In general, student loans are specially listed as a type of debt that a bankruptcy will not erase, although in some places courts are allowed to provide relief here, as well, if the bankrupt person can prove that the student debt is a hardship that will make it more difficult, or impossible, to restore some semblance of financial well-being (in which case the student loan would not be repaid anyways). Typically a court with the power to review student loans will only be willing to grant relief here if the person in debt proves they will not be able to survive on the income left over after student loan payments are made, that this hardship is expected to continue for a very long time (as opposed to just a few weeks or months), and that in the past they have made genuine efforts to pay back as much of the loan as they can.
Finally, a bankruptcy will not erase debts which are proven to have arisen through illegal actions, since courts will not sanction crime. This includes debts arising after fraudulent business practices, embezzlement, or theft. The onus lies on the creditors to establish that debt fits into one of these categories and therefore should not be erased from a bankruptcy.
– Sources and More Information –
FindLaw. “Debts That Remain after a Chapter 7 Discharge.”
Phoenix Bankruptcy Law. “Debts That Cannot be Discharged with Chapter 7 Bankruptcy.”