The purpose of a bankruptcy filing is to get a discharge from your debts. A discharge means that you do not have to ever pay the debts. However, some debts are not discharged in bankruptcy and this post covers the most important exceptions to the discharge.
The first category of non-discharged debts taxes. If you filed your tax return on time and there was a balance due, your taxes may not be discharged. If the return was due within the three years before your bankruptcy filing, they will not be discharged, but if it is over three years, they will be. Thus, if your 2009 tax return was filed on April 15, 2010, and you file bankruptcy after April 15, 2013, your taxes will be discharged. If you file your return after the due date, the time period is either two years from when the return was actually filed, or three years from when it should have been filed, whichever is later. These rules apply to returns that show a balance due.
When you receive a letter from the taxing authority, either the Internal Revenue Service or your state, and a change is made in your taxes, the taxes will be discharged if that finding was more than 240 days prior to your filing in bankruptcy. However, here again, it is the longer of the 3-year, 2-year or 240-day rules.
If you never filed a return, or your return was fraudulent, the taxes are never discharged. Also, if the taxes are “trust fund” taxes, meaning they are not your taxes but you collect them for the government, they are never discharged. This is usually applied to sales taxes where you have a retail business, and withholding taxes where you have employees. And this applies even if the business is a corporation, if you are the responsible officer of the company whose duty it was to collect and pay the taxes.
Debts for alimony, maintenance and child support are never discharged. Debts that are governmental fines, such as speeding tickets, parking tickets and the like are not discharged. And student loans are not discharged. All of the debts mentioned up to this point are automatically not discharged. No action by the creditor is needed.
There are some types of debts that may be discharged depending on the actions of the creditor to whom the money is or may be owed. These are the debts where a claim is made by the creditor that the debt fraudulent. It is an easy claim to make, but hard to prove. In order for these types of debts to be excepted from the discharge, the creditor has to come to court and file a separate case against the debtor and prove that the debt fits under one of the “fraud” exceptions. If the debtor does not come to court and prove its case, the debt is discharged. These are debts obtained by various forms of fraud, including false statements on applications for credit, use of credit cards when you are so far in debt there is no reasonable way to pay off the debts, embezzlement or theft. In this category, the use of credit shortly before the filing of the bankruptcy petition is an indication that the debt will be excepted, but the creditor still has to come to court and prove its case. In actual practice, unless the use of the credit is especially flagrant, it is usually not challenged.
The vast majority of bankruptcy cases have no objections to the discharge of debts claimed to be fraudulent, and the rules mentioned in this post seldom come into play, but it is good to know what may not be discharged in a bankruptcy case.