The thought of filing for bankruptcy is likely to prompt two contradictory reactions: some people dread bankruptcy as a permanent stain on their financial record, while others may think of it as a get-out-of-debt-free card. The fact is, bankruptcy is neither as terrible nor as easy as you might expect. It provides a powerful tool for financial recovery and it can be erased from your financial record after a certain period. On the other hand, bankruptcy does not offer relief from every debt. The following debts cannot be discharged, or can be discharged in only very limited circumstances:
Student loans. If you have amassed debt for your education, that debt will have to be paid off even if you file for bankruptcy, unless you are able to demonstrate that paying back that debt would cause you undue hardship. Different courts apply different tests to determine whether undue hardship exists. Some courts ask debtors to show that they cannot maintain even a minimally acceptable standard of living if they have to repay the loan, that they have tried to repay the loan, and that their current situation is likely to persist for several years. Other courts examine the totality of the circumstances to decide whether repaying student loans would constitute an undue hardship.
Tax liens. If you owe taxes and the IRS records a property lien for payment of those taxes before you file for bankruptcy, the debt will not be discharged in bankruptcy.
Other types of liens. If a creditor records a lien on your property, the lien survives a bankruptcy filing. This means that a bank could still foreclose on your home even if a bankruptcy technically eliminates the mortgage debt.
Child support and spousal support. If you are obligated to pay financial support for your children or a former spouse, you must continue to meet those obligations during and after bankruptcy.
Fines and criminal judgments. If you are ordered to pay a fine (for example for an unregistered vehicle) or restitution for a crime that you have committed, those debts survive bankruptcy.
If you are contemplating filing for bankruptcy, understanding what filing for bankruptcy can and cannot do will help you make good decisions and manage your expectations about the experience.
Kathleen Davies is a Staff Writer for GetLegal.com. She is a graduate of the University of Michigan Law School and has practiced law and taught legal writing and advocacy.