Non-Dischargeable Debts: What Are They and What To Do About Them
For most Connecticut residents, filing for bankruptcy is about erasing unpayable balances on medical bills, credit cards, and other amounts owed. But some non-dischargeable debts can survive even bankruptcy proceedings. Knowing what these debts are, and what to do about them, can help you make the right decision about filing for bankruptcy.
What are Non-Dischargeable Debts?
When you complete a bankruptcy proceeding, the final step involves the discharging of unpaid debts. In a Chapter 7 bankruptcy, this happens after the bankruptcy trustee has overseen the liquidation of any non-exempt assets. In a Chapter 13 bankruptcy, it comes at the end of your three to five year repayment plan. In either case, the end result is substantially the same: most unsecured creditors are required to be satisfied with what they have already received and any remaining balances are discharged as uncollectible.
A non-dischargeable debt is an exception to that rule. Non-dischargeable debts survive the bankruptcy process, meaning that Connecticut bankruptcy filers will still owe those balances even after the bankruptcy is successfully completed. If most of what you owe falls into the category of non-dischargeable debt, bankruptcy may not be the right choice for you. That is why it is important to understand what non-dischargeable debts are, and what you can do about them.
Common Types of Non-Dischargeable Debts in Bankruptcy
First, it is important to differentiate “secured” debts. A secured debt is any debt that is collateralized. The most common secured debts for Connecticut residents are mortgages and car loans. If a borrower defaults on a secured debt, the lender has a right to take possession of that collateral and sell it through foreclosure or repossession. Secured debts have a “hybrid” nature, in that there is both “in personam” (personal liability), and the creditor also has “in rem” rights, that is, rights in the collateral. Connecticut allows you to discharge your personal liability on a mortgage or car loan while keeping the collateral (your house or car), so long as you maintain current payments. But if you can’t do that, or decide not to (for example, you might decide that maintaining mortgage payments on a house that is well “underwater” is not worth it), then you can discharge your personal loan obligation in a chapter 7 bankruptcy and walk away from the property.
The following debts are usually non-dischargeable:
- Unpaid child support or alimony (spousal support) arrearages
- Student loans (absent undue hardship)
- Personal injury or wrongful death judgments related to drunk driving
- Criminal fines and penalties (including traffic tickets and restitution)
- Income tax debts incurred in the last 3 years
- Municipal property taxes
- Obligations imposed by a divorce judgment or settlement
These determinations can be quite nuanced, however. A Connecticut bankruptcy court may also declare certain debts non-dischargeable:
- Debts resulting from fraud, embezzlement, larceny, or breach of trust
- Money owed due to willful or malicious injury to another person or their property
- Credit purchases exceeding $1,150 for luxury goods or services within 60 days of filing your bankruptcy petition
- Loans or cash advances exceeding $1,150 taken within 60 days of filing your bankruptcy petition
In these cases, the creditor must challenge your request to discharge the debt. Strategic planning can minimize the chances of this even happening.
What to Do About Debts that Survive Bankruptcy
Unfortunately, some Connecticut residents’ financial troubles come primarily from non-dischargeable debts. They may face foreclosure on their home, collections on unpaid child support, or owe substantial amounts following a personal injury or divorce trial. Since those debts won’t be discharged after bankruptcy, you and your bankruptcy attorney should consider other options to address what you owe.
Your first choice may be to use a Chapter 13 bankruptcy. While it is true that non-dischargeable debts are not forgiven at the end of a Chapter 13 bankruptcy, they can be paid in your chapter 13 plan, thus preventing foreclosure or repossession. In fact, many non-dischargeable debts take priority in these plans over other, dischargeable debts like credit cards or medical bills. Your bankruptcy attorney can structure your payments to make sure your non-dischargeable debts get paid off during the repayment period. With less money left over for other debts, you can maximize your ability to pay non-dischargeable debt as well as mortgages and car loans that you choose to keep paying.
Get Advice for Dealing with Non-Dischargeable Debts
At Lawrence & Jurkiewicz, we focus our practice on helping people. When debt is a problem bankruptcy is a powerful tool, but we know bankruptcy isn’t a “cure-all”, especially if you owe large amounts of non-dischargeable debts. We will meet with you to review your financial circumstances and help you decide whether to file for a Chapter 7 or Chapter 13 bankruptcy, or if another financial strategy might suit you better. We want to help you make the right decision for you and your family. Please call (860) 264-1551 or contact us for a free consultation.