Discharge of Debt
What Debts Will Not Go Away?
Bankruptcy eliminates (or "discharges") most of your debts. Certain debts, however, may not get discharged through Chapter 7 bankruptcy. This includes debts incurred after a bankruptcy case is filed, debts not disclosed in bankruptcy schedules, domestic support obligations like child support, most tax debts, most student loans, court-ordered fines, criminal restitution, debts obtained through fraud, gambling debts, and debts from willful or malicious injury to another person or their property.
There are a number of exceptions to this list. For example, a good lawyer can often wipe out student loans or old income tax debts in bankruptcy. Remember, many debts not dischargeable in Chapter 7 may still be paid through a Chapter 13 repayment plan. In my 20 years of experience as a Milwaukee bankruptcy lawyer, I have discharged many tax debts in bankruptcy for my clients. When working with you, I analyze your situation and let you know whether any debts you are concerned about are non-dischargeable.
You may not want to eliminate certain debts in bankruptcy, such as your vehicle loan or mortgage. If you file Chapter 7, you can usually keep your house and car. Just stay current on your payments at all times. If you're behind, you will need to get these loans current before you file Chapter 7. If you can't get current, Chapter 13 may be your best option.
Can I get my student loans discharged?
Under 11 U.S.C. § 523(a)(8), most student loans are non-dischargeable. At one time, this rule applied to just public school loans; however, when Congress reformed the U.S. Bankruptcy Code in 2005, they expanded this section to prohibit the discharge of private loans as well. Now, this section essentially prohibits the discharge of all student loans, unless the loan poses an "undue hardship" on the debtor or his / her dependents.
The U.S. Bankruptcy Code does not provide a definition of "undue hardship," but case law does provide a test. The leading case defining "undue hardship" is the 1987 case of Brunner v. New York State Higher Education Services Corporation. That case laid out three factors that must be considered: First, the debtor cannot maintain a minimum standard of living and still re-pay the student loans; second, this inability to maintain a minimal standard of living must be likely to continue into the future; and third, the debtor must demonstrate that he or she made good faith efforts to pay the loan in the past.
To have a student loan declared dischargeable as an undue hardship, an adversary proceeding must be filed. During this special trial, a judge will determine whether the student loan is an undue hardship. In these cases, there is room for argument and the debtor has the burden of proving to the judge that their educational loan creates an undue hardship. Generally, a person who is permanently disabled and receiving Social Security disability will stand the best chance of demonstrating the loan poses an "undue hardship."
Can I get my income taxes discharged?
Whether someone should file Chapter 7 or 13 often depends on whether they have a lot of income tax debt. This is because income taxes that are non-dischargeable under Chapter 7 can be repaid and satisfied through a Chapter 13 debt repayment plan. Discharging tax debts is complicated and it is always recommended that you consult with an experienced bankruptcy attorney. At Sapinski Law Office, S.C., I will consider the following factors if you have income tax debts:
Do the debts have "priority" status?
If an income tax debt has "priority" status, it cannot be discharged under Chapter 7 and must be paid off completely under Chapter 13. A tax debt is considered "priority" under 11 U.S.C. § (a)(8)(A)(I) when the tax return for that debt was due within three years before the bankruptcy filing date. The debt will also be given priority status if the return was assessed by the IRS within 240 days prior to the filing of the bankruptcy case. The best way to determine if there has been a recent assessment is to first obtain a record of account from the IRS before the bankruptcy case is filed. It will show the assessment date.
When were returns filed?
The second thing I will look at is whether returns were ever filed. If they were, they must have been filed at least two years before the bankruptcy filing. Under 11 U.S.C. § 523(a)(1)(B) an income tax debt won't be dischargeable if the returns have not been filed or if they have been filed within a period of two years before bankruptcy. Remember, these debts can be paid through Chapter 13 bankruptcy over 3 to 5 years. A record of account obtained through the IRS will indicate the date the returns were filed. Also remember, it is best that you file the returns yourself. Tax returns the government files on your behalf may be insufficient to meet the tax return filing requirements of § 523(a)(1)(B).
Is there evidence of fraudulent return or tax evasion?
If the return was fraudulent or if there was a willful attempt to evade the tax, the tax debt will also be non-dischargeable under 11 USC § 523(a)(1)(c) - meaning it can't be eliminated through Chapter 7, but may be repaid through Chapter 13.
Other factors I will consider
The code contains tolling provisions that need to be considered. Time spent in a prior bankruptcy will toll (delay) the running of the three year priority waiting period discussed above. Tax return extensions also delay the start of that three year period, and a pending offer in compromise delays the start of the 240-day period and adds an extra 30 days. Timing is critical when addressing income tax debts in bankruptcy. Be sure to obtain a record of account from the IRS and have it reviewed by your lawyer. Your attorney will then help you determine whether you should file Chapter 7 or 13 and when your case should be filed.
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