Bankruptcy can provide immediate relief from overwhelming debt, but it doesn’t erase all financial obligations at the drop of a hat. Knowing which debts remain can help you better manage your financial future and decide on the method of bankruptcy you proceed with. This article will discuss which debt categories are typically not dischargeable – the reasons why, and how you can use this info to make a more informed decision.
Why Doesn’t Bankruptcy Discharge All Debt?
Bankruptcy aims to help individuals regain financial stability, but it doesn’t wipe out every type of debt. The idea is to balance fairness and responsibility. Some debts are too important to discharge because they serve critical social, legal, or ethical purposes. For example, child support and taxes are essential for public welfare and government operations, and preventing them from being discharged aims to keep everyone in America working toward a better future. If all taxes were dischargeable, people would act much more recklessly with their finances, knowing there are even fewer repercussions. Similarly, student loans and specific personal injury claims are preserved to uphold policy goals and accountability.
Types of Non-dischargeable Debts
Child Support and Alimony
- What It Encompasses: Child support and alimony are court-ordered financial obligations to support a former spouse and children following a divorce or separation. Most payments cover essential living expenses, education, healthcare, and overall welfare of dependents.
- Reasoning: The law prioritizes these obligations to safeguard the well-being of children and former spouses. Discharging these debts in bankruptcy would undermine the financial stability of those who rely on these payments for their livelihood.
Taxes and Government Debts
- What It Encompasses: This category includes federal, state, and local taxes, as well as other government debts such as fines and penalties. While some older income tax debts might be dischargeable, the majority of tax obligations are not.
- Reasoning: Taxes are fundamental to the operation of government and the provision of public services. Everything around you, from infrastructure to education and healthcare, relies partly on taxes. Allowing these debts to be discharged would reduce the income base for government operations and, more importantly, destabilize it. Additionally, tax debts represent a legal duty to contribute to societal needs. By limiting the ability to discharge these debts, the law keeps everyone on an even playing field. It ensures that the burden of public financing is not unfairly shifted to other taxpayers.
Student Loans
- What It Encompasses: Federal and private student loans are generally not dischargeable loans, barring the debtor’s ability to prove “undue hardship,” a challenging and rarely met criterion. However, there have been increasingly more ways in recent years to seek forgiveness from the government for your student loans. (Read: Most Recent Updates on Student Loans)
- Reasoning: The non-dischargeable nature of student loans is intended to protect the integrity and sustainability of the student loan program. These loans are often provided without extensive credit checks, making them accessible to students who may lack a credit history or the ability to get on a payment plan immediately. Discharging them too readily could lead to abuse and increased costs for future borrowers.
Debts from Personal Injury Claims
- What It Encompasses: Debts arising from personal injury or wrongful death claims, especially those resulting from incidents involving intoxication, such as drunk driving accidents, are typically non-dischargeable.
- Reasoning: These debts are preserved to uphold accountability and justice for victims of negligent accidents. Those adjudicated in civil court to have caused harm through negligent or reckless behavior remain responsible for compensating their victims, reinforcing the consequences of such actions. But again, each case is unique, and only egregious cases of negligent behavior are at risk of being 100% non-dischargeable.
