Think You Know Which Debts Bankruptcy Wipes Out? Here’s What Most People Get Wrong

If you’re considering filing for bankruptcy, you may have done some online research to see if it’s a good solution for your financial situation. Undoubtedly, you’ve come across at least one site that breaks bankruptcy law down into a cookie-cutter list or chart. The information seems straightforward, but these boiled-down lists carry a high risk of pitfalls. As with most areas of law, bankruptcy has exceptions. In fact, the question of dischargeability of the same debt can be a “yes” for one person and a “no” for someone else.

These exceptions to what debts are discharged in bankruptcy illustrate the more nuanced answer to whether a type of debt is truly never wiped out or whether certain circumstances could change that answer. Individual filing circumstances, such as timing and the amount owed, coupled with recent federal guidance on bankruptcy law, can all affect whether a debt is discharged in a bankruptcy.

Let’s walk through what details can change a debt’s categorization, and at the same time address common misconceptions about bankruptcy law. Specifically, we’ll look at the short list of debts that truly never go away, and then dissect old income tax debt, student loans, and credit cards.

Key Takeaways

• Federal bankruptcy law includes some absolute debt-discharge provisions, but many debts are subject to exceptions that can either allow an otherwise excluded debt to be discharged or prevent an otherwise dischargeable debt from being discharged.
• The nuance in the law is crucial to understanding how your debts may be treated.
• The most common misconceptions are that income tax debt and student loans are never discharged and that all credit card debt is always discharged.
• Depending on the circumstances, certain rules can make income tax debt and student loans eligible for discharge in bankruptcy.
• Timing and dollars spent matter for credit card purchases and cash advances, so the discharge of these debts isn’t always guaranteed.

The Debts That Almost Never Go Away in Bankruptcy

Before we get into bankruptcy myth-busting, let’s talk about the handful of debts that never get discharged. These are listed in Section 523 of Title 11 of the United States Code. This section is colloquially known as the "Exceptions to Discharge" rule, and applies to both Chapter 7 and Chapter 13 cases unless noted otherwise. (For an in-depth discussion of the difference between these two filings, take a look at this article.)

If you owe any of the following, you’ll likely still be on the hook after your case is closed:

• Child support or alimony;
• Certain (key word, here) tax debts;
• Debts arising from a death or injury of another caused by the debtor’s operation of a motor vehicle while intoxicated; and
• Court fines and penalties, including criminal restitution, imposed on the debtor as a result of violating the law.

Note that for Chapter 7 filings, nicknamed the “no asset” or “liquidation” Chapter, other debts make the list, including:

• Condo, co-op, and HOA fees;
• Debts for loans taken from certain retirement plans; and
• Debts that were not dischargeable under a previous bankruptcy.

Some generic bankruptcy websites list more debts that are never dischargeable, but that categorization is too broad and simplistic. It doesn’t account for the nuance that could apply to almost all other types of debt. The categories presented here are as close as you can get to a hard rule in this area of law.

The Rule “Old Tax Debt Can Never Be Discharged” Isn’t Always True

The first misconception regarding debts discharged in bankruptcy we’ll debunk is that old income tax debt never gets erased, no matter what. Not entirely true. (Why don’t we say “not true” without inserting “entirely”? Because, as you’ll see, the devil is in the details.)

Some income tax debts are protected from discharge. But older debt may be eligible if it meets specific timing requirements.

These requirements are known as the “3-2-240 Rule.”

This rule is found in subsection (a)(1) of Section 523. Broken down, the rule requires that the tax return must have been due more than three years before the bankruptcy filing, the return must have been filed more than two years before the filing, and the tax owed must have been assessed at least 240 days before the bankruptcy case was filed. Fraud or a willful attempt to evade the tax is almost always a dealbreaker for discharge.

So, while bankruptcy doesn’t automatically give you a clean slate from income tax debt, there are instances where this debt gets erased.

The details matter when it comes to debts discharged in bankruptcy, and seemingly small facts can change the outcome. For example, a substitute return prepared by the IRS after a taxpayer fails to file generally does not satisfy the return requirement under the “3-2-240 rule.” And certain types of taxes are treated differently. Payroll and other trust-fund taxes generally cannot be discharged through this route, no matter how old they are.

Student Loans Aren’t as Permanently Stuck as Their Reputation Suggests

The second misconception involves bankruptcy and student loans, which have a (well-earned, to some degree) reputation for being impossible to discharge. But this is also not entirely true. This is perhaps the most common of the three misconceptions addressed here, to the point that people often don’t ask questions about student loans and bankruptcy, even when speaking to an attorney. Our advice is to speak up and ask. Here’s why:

Before any discharge of the student loan can be granted, federal law requires that borrowers show that repayment would create an “undue hardship.”

The question of undue hardship is addressed in subsection (a)(8) of Section 523. Bankruptcy courts apply the “Brunner test” to determine whether the borrower would face undue hardship if required to continue paying the loans. The test has three parts: whether the borrower can maintain a minimal standard of living while making payments; whether any financial hardship is likely to persist; and whether the borrower has made good-faith efforts to repay the loans.

How the federal government approaches these cases has recently changed.

Guidance issued by the Department of Justice in November 2022, in coordination with the Department of Education, created a more streamlined process for evaluating federal student loans and undue hardship claims. When a borrower provides the required financial information and meets the guidance’s criteria (essentially the Brunner test), government attorneys can agree that undue hardship exists and support a full or partial discharge without requiring a hearing before the judge.

This does not mean student loans are automatically categorized as debts discharged in bankruptcy. A borrower must still file an adversary proceeding within the bankruptcy case and show that an undue hardship would result if the student loans aren’t discharged. However, the process today is not the same as the old assumption that discharging student loans is nearly impossible. If you have student loan debt and are facing serious, lasting financial hardship, it’s worth asking whether you may qualify for relief from those loans as part of your bankruptcy.

Recent Credit Card Charges Can Survive the Bankruptcy Even When the Rest of the Balance Doesn’t

Our third and final misconception is that credit card debt will be erased entirely. And once again, not entirely true. Like old tax debt, timing matters here, but in terms of the recent past, what you charge in the weeks and months immediately before filing can have a significant impact. In subsection (a)(2)(C) of Section 523 of the bankruptcy law, purchases of “luxury goods or services” totaling more than $900 from a single creditor within 90 days before filing are presumed to be nondischargeable. This distinction became effective on April 1, 2025, and is scheduled to last at least through March 31, 2028. The rule aims to prevent someone from racking up credit card debt on nonessential purchases shortly before filing bankruptcy, expecting the debt to disappear.

There is a similar rule for cash advances. If a cash advance from a single creditor totals more than $1,250 within 70 days before filing, the debt is presumed nondischargeable in bankruptcy. It’s important to note that this presumption applies regardless of how the borrower spent the money; it doesn’t matter whether the money went toward “luxury goods or services” or ordinary living expenses.

Neither of these presumptions is absolute, and these exceptions are not automatic, however. The creditor first has to file an “adversary proceeding” in bankruptcy court alleging there was no intent to repay this part of the debt when it was incurred. Over time, such proceedings have become increasingly rare, as many creditors prefer to write off such debts rather than incur legal expenses. In many situations the issue can be avoided entirely simply by timing the filing of the bankruptcy petition.

Work With a Connecticut Bankruptcy Attorney Before You Assume How Your Debt Will Be Treated

The bankruptcy attorneys at Lawrence & Jurkiewicz, LLC represent clients throughout the greater Hartford area and the Litchfield County area. We can help Connecticut borrowers assess their financial situation and the nuances of their debt categorization under federal bankruptcy law, including any applicable exceptions.

We understand that one size doesn’t fit all when it comes to bankruptcy. We will meet with you to review your financial situation and discuss which debts are discharged in bankruptcy in your case. Contact us to schedule your free consultation.