As we discussed in the previous blog post “Will My Claim Be Paid in Bankruptcy? Part 1 – Priority Claims,” people or companies file bankruptcy because they can’t pay their debts on time or in full. Most individual and corporate bankruptcy debtors file bankruptcy to seek relief from their legal obligation to repay some or all of their debts. The overarching purpose of bankruptcy law is to provide an organized system for handling a situation when a debtor can’t pay its debts. Without an organized system, each creditor would be left to its own efforts to sue the debtor and seize as much of the debtor’s assets as possible. This would result in a lot of wasted effort by the creditors and minimize their return. The bankruptcy process streamlines the evaluation of the debtor’s assets and debts and provides a predictable method for distributing certain assets to certain creditors.
One of the most important parts of the Bankruptcy Code deals with nondischargeability. Section 523 of the Bankruptcy Code is entitled “Exceptions to Discharge.” Subsection 523(a) provides for approximately 19 categories of debts that are not discharged by bankruptcy. Some of these types of debts are commonplace; others are unusual. The 19 categories are:
- Certain taxes and customs duties;
- Debts for assets obtained by false-pretenses, false statements regarding a debtor’s financial condition;
- Debts that aren’t listed on the debtor’s bankruptcy schedules;
- Debts based on fraud, defalcation in a fiduciary capacity, embezzlement, or larceny;
- Domestic support obligations;
- Debts for willful and malicious injury by the debtor to another entity or property of another entity;
- To the extent such debt is for a fine, penalty, or forfeiture payable to a governmental unit other than a tax penalty;
- Student loans;
- Death or personal injury caused by driving while impaired;
- For debts listed in a debtor’s prior case in which discharge was denied;
- Debts with respect to depository institutions or insured credit unions;
- Debts for failure to fulfill a commitment to a federal depository institution regulatory agency;
- Any payment of an order of restitution issued under Title 18 of the United States Code;
- Debts incurred to pay a tax to the United States that would be nondischargeable pursuant to Paragraph 1, including
- a. Debts incurred to pay a tax to a governmental unit other than the United States that would be nondischargeable under Paragraph 1
- b. Debts incurred to pay fines or penalties imposed under Federal Election Law
- Debts to a spouse, former spouse, or child of the debtor incurred by the debtor in the course of a divorce or separation;
- For Homeowner’s Association dues and assessments arising after the date of the petition;
- Certain fees imposed on prisoners;
- Certain debts owed to a pension from a profit-sharing, stock bonus, or other plan; and
- Debts for certain violations of the Securities Laws.
The most common types of nondischargeable debts are:
- Student loans;
- Domestic support obligations and other divorce-related debt;
- Debts not disclosed in the debtor’s bankruptcy;
- Certain taxes
- Debts based on fraudulent or malicious conduct;
- Post-petition HOA dues;
- Fines, restitution, and similar penalties.
It is important to keep in mind that certain deadlines apply to the determination of whether or not a debt is nondischargeable. With respect to certain types of nondischargeable debts, they are deemed nondischargeable even if no affirmative action is taken by the creditor to establish that they are nondischargeable in nature. For certain other types of nondischargeable debts, a creditor is required to file an Adversary Proceeding within a certain time period of the debtor’s bankruptcy in order to establish that the debt is nondischargeable. In those cases, if the creditor does not file an Adversary Proceeding within the required time period, the debt may change from one that is nondischargeable into one that is dischargeabe.
If someone who owes you money has filed for bankruptcy, or if you think they might, you should determine whether their debt to you is dischargeable or nondischargeable. You should also determine what steps you need to take to maximize your chance of being repaid. Call or email us to set up a consultation to discuss your particular situation: (910) 763-3626