Most debts ARE legally written off (“discharged”) in bankruptcy. But let’s clear up some likely confusion about certain debts that might not be discharged.
There are two separate sets of them, and they are treated very differently. Understanding the difference will help you make sense of bankruptcy.
The difference is simply that the debts in the first set are not discharged ONLY IF a creditor objects, while the debts in the other set of debts is not discharged EVEN IF no one objects.
Debts that Require Creditor Objection
The first set involves certain kinds of alleged bad behavior by the debtor. We’re usually talking about serious stuff like lying on a credit application, embezzlement from an employer, intentionally writing a string of bad checks, or coercing an elderly acquaintance to change her will in favor of the debtor. But the behavior could also be less extreme such as simply not being thorough on a credit application, or writing a bad check hoping there’d be money to cover it but not making sure, or
using a credit card when knowing it would likely not get paid off.
Not only does the creditor need to object to stop these kinds of debts from being discharged in a bankruptcy case, it needs to do so by a very strict and very quick deadline. That deadline is usually 60 days after the “meeting of creditors,” which itself is usually about a month after the bankruptcy is initially filed at court.
And not only does the creditor need to object on time, it then needs to convince the bankruptcy judge that the debtor’s bad behavior fits within the narrow grounds that the law lays out for this purpose. These grounds are found at Section 523(a)(2), (4), and (6) of the Bankruptcy Code, involving fraud, misrepresentation, theft, or intentional harm to the creditor or its property.
The creditor must object by filing a specialized lawsuit in the bankruptcy court called an “adversary proceeding.” The debtor can respond if he or she disagrees, and the matter is then decided either by the two sides settling the matter or by the judge ruling whether the debtor’s behavior fits the legal grounds for not discharging the debt.
Debts NOT Requiring Creditor Objection
The second set of debts does not involve debtors’ bad behavior. Rather these kinds of debts are ones that Congress has determined should simply not be discharged in bankruptcy for various policy reasons. These include child and spousal support, most student loans, recent income taxes, as well other less common ones. These can be found at Section 523(a)(1), (5), and (8) of the Bankruptcy Code
In these cases the creditor doesn’t need to object at any point. The debt is simply not discharged as a matter of law, and so the debtor continues to owe it after the completion of the bankruptcy case.
But some of the rules specifying which debts are not discharged are not always crystal clear. So sometimes after the bankruptcy case is over, whether or not a specific debt was discharged is not so obvious. For example, whether or not a specific income tax debt is discharged can depend on a combination of conditions, including when that tax was originally due, whether and when its tax return was actually filed, whether the taxpayer requested an extension to file, whether she proposed an offer in compromise, and more!
So in these (admittedly unusual) situations a creditor can honestly believe that the debt fits the conditions for not being discharged, but the debtor can just as honestly disagree. Since the creditor doesn’t need to raise any objection DURING the bankruptcy case, AFTER it is over it may start pursuing a debt that the debtor thought was discharged.
That can get legally awkward for both sides because it’s illegal for a creditor to pursue a debt that has been discharged in bankruptcy, but legal for it to pursue one that has not been discharged.
It’s important to understand that these situations are rare. Your attorney knows which debts are not discharged only if the creditor raises an objection versus those debts which are not discharged even without any objection. And among this second set, your attorney knows which of those clearly aren’t discharged and those that might be debatable. Ask your attorney whether you have debts which are not clearly one way or the other, and what can be done about it.