Discharging Debts Through Bankruptcy

An underlying policy of bankruptcy law is to help consumers receive a fresh start in their financial lives. Many times, the only way to help people receive this fresh start is to allow them to completely get rid of a certain amount of debt. Getting rid of debt through bankruptcy is a process called discharge.

Discharge of debt occurs at the end of a consumer’s bankruptcy case. After the consumer’s non-exempt property has been collected and sold at auction, the proceeds of the auction sale are distributed to the consumer’s creditors. Once all of the auctions proceeds are gone, the consumer can discharge many of her debts one and for all. Indeed, the ability to discharge burdensome debt is one of the more attractive provisions of the bankruptcy laws.

However, not all of kinds of debt can be discharged through bankruptcy, and it is important to be aware of the types of consumer debts that are “non-dischargeable.” Debt that is “non-dischargeable” is debt that survives through the end of bankruptcy, and the consumer will still owe the same amount of that particular debt. For example, many consumers likely wonder if they can discharge their student loan debt through bankruptcy. Unfortunately, student loan debt is non-dischargeable through bankruptcy. The reason for this is because Congress decided that if a consumer could discharge her student loan debt by filing for bankruptcy, then lenders of student loans would be less willing to loan students money to pay for tuition. So, Congress created bankruptcy laws that do no allow for the discharge of student loans in order to encourage more institutions to lend students money to pay for their education.   Other debts that are non-dischargeable include state and federal taxes, debt obtained through fraud by the consumer, domestic support obligations, fines or penalties payable to the government, and debt resulting from deliberate actions of the consumer resulting in harm to another person or entity.[1]

Importantly, however, a consumer might be able to discharge her student loans and other non-dischargeable debt if she can show what is called “undue hardship.” A consumer with undue hardship usually cannot maintain a minimal standard of living if forced to repay the loans and the court sees that these burdensome circumstances will persist into the future. It must be noted that the standard for proving undue hardship is a high standard and somewhat difficult for consumers to show in bankruptcy. If, however, the consumer can prove undue hardship, then a court has the ability to discharge the student loan debt or at least reduce the amount owed.

In addition, the bankruptcy laws are very clear in saying that dishonesty is frowned upon. In fact, a court may completely deny the ability of a consumer to discharge her debt if it finds that the consumer has lied to the court or to the consumer’s creditors. In these cases, where the court finds that the consumer has been intentionally dishonest regarding her bankruptcy, the consumer may not be able to discharge any of her debt thereby eliminating one of the most beneficial parts of filing for bankruptcy.

In summary, filing for bankruptcy can allow for a consumer to discharge a significant portion of her debt and allow the consumer to leave bankruptcy with a fresh start. However, some kinds of debt cannot be discharged, unless undue hardship is shown. As with all aspects of filing for bankruptcy, is it vital to consult with an attorney to discuss your options.

[1] For full list of non-dischargeable debt, see § 523(a).

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