Tennessee Lawyer Answers Frequently Asked Questions About What Debts Can Be Eliminated
At William E. Maddox, Jr. LLC, Attorney at Law in Knoxville, I utilize more than 25 years of experience practicing law in Tennessee to help clients devise reliable debt relief strategies. I often hear the following questions about debt elimination:
- Can bankruptcy erase all your debts?
- What is the difference between dischargeable and nondischargeable debt?
- What is the difference between secured and unsecured debt?
- What are common types of dischargeable debt?
- What are common types of nondischargeable debt?
- Can student loan debt be eliminated through bankruptcy?
- What income tax debt be eliminated through bankruptcy?
- Can a bankruptcy judge deny a debt discharge?
In most circumstances, Chapter 7 bankruptcy can discharge a sizeable portion of your debts, but certain types of obligations are usually not eliminated. Some bankruptcies simply create a manageable path for a person to repay their debts. The degree to which bankruptcy can be used to discharge your debts depends on the nature and amount of each debt, your assets and income and whether you declare Chapter 7 or Chapter 13.
When you file for bankruptcy, all the debt you owe to creditors is classified as either dischargeable or nondischargeable. A nondischargeable debt cannot be eliminated through bankruptcy. A dischargeable debt can be eliminated if the bankruptcy process is completed and a judge approves the discharge.
A secured debt is based on a specific piece of property that can be reclaimed by the lender if the debt is not repaid. For example, a mortgage loan is a secured debt because it is based on a piece of real estate.
An unsecured debt is not based on a specific piece of property that can be reclaimed. For example, medical debt is not secured because a hospital cannot take back a procedure performed by a doctor.
Unsecured debts from private lenders or service providers are often eligible for discharge. Credit card debt, medical debt, personal loans and past-due utility payments are common types of dischargeable debt. An eligible debt can only be discharged in Chapter 7 if a person’s nonexempt liquidated assets are insufficient to repay the debt.
Courts have classified certain debts as nondischargeable because their repayment is considered to be in the public interest. Debt owed for taxes, child support payments, alimony and personal injury lawsuit judgements are typically nondischargeable.
Student loan debt is usually considered nondischargeable and incapable of being cancelled through bankruptcy. However, a student loan debt may be discharged if you can demonstrate that the debt poses an undue hardship on you and your dependents. Undue hardship involves an inability to maintain a minimal standard of living for your family based on your current income, expenses and the burden of the loans. Most courts also require you to show that you made a good faith effort to repay the loans. Student loan discharges are issued in few cases.
Past-due income taxes that are several years old may be discharged depending on the situation. The debt will only be dischargeable if the tax debt is at least three years old, you filed your tax return at least two years ago and it has been at least 240 days since the IRS assessed your taxes.
Yes, a bankruptcy judge can deny a discharge under certain circumstances. However, most discharges are granted. A judge may choose not to allow a discharge if the bankruptcy petitioner committed fraud, failed to follow court orders or did not abide by state or federal bankruptcy requirements.