These 8 Types of Debt Never Disappear, Even if You Declare Bankruptcy
Having debt is common, but being in debt is isolating.
On average, eight out of 10 Americans carry debt, and the typical person dies with $62,000 worth of debt to their name. Many people feel so discouraged that they’ll never be free of debtors that they resort to drastic measures to escape the burden of owing money.
There’s no easy solution to getting out of debt. But one way that some people combat their financial mistakes is by declaring bankruptcy. On one hand, this method effectively wipes the slate clean by eliminating old debts and letting you start over.
But it’s not without drawbacks. For one thing, bankruptcy will severely impact your credit score for a long time. It’s not a magic solution for starting over — it’s a last resort for desperate cases. Even if you declare bankruptcy, you won’t get rid of all your debt. Some debt is not dischargeable.
Read on to discover the eight types of debt that won’t disappear even if you declare bankruptcy.
1. An expensive item you just bought
Let’s say you purchased a car or a diamond ring a few months before declaring bankruptcy. Don’t assume you’ll get a “free” luxury item out of the deal.
When you have this type of debt, you have two options: either continue making payments on the item, or give it back to the lender. Even if you’ve declared bankruptcy, the lender has every right to repossess the item.
Next: Income taxes
2. Income taxes
While it’s not impossible to get your unpaid income tax discharged, there are specific parameters you need to meet to qualify.
To get tax debt discharged, you must have filed honest tax returns, you must not have avoided filing your taxes, the debt must be 3 years old, and the IRS must have assessed your income tax no fewer than 240 days before you declare bankruptcy.
Next: Loans against retirement or pension plans
3. Loans against retirement or pension plans
You may try to free up some cash by borrowing against your 401(k) or pension — but even if you declare bankruptcy, you’ll still owe that money. When you file for bankruptcy, it automatically puts a halt on wage garnishment by your creditors. But this does not apply to withholdings related to your retirement loans.
Next: Student loans
4. Student loans
For most people considering bankruptcy, this is the hardest one to hear. Even bankruptcy won’t free you from the burden of student loan debt. Federal student loans, private student loans, and loans that come directly from the school are not eligible to be discharged when you file bankruptcy.
However, there is an exception. If you can pass the Brunner Test, then it’s possible (but not easy) to have your student loan debt erased when you file for bankruptcy.
To qualify, you must show that it won’t be possible for you to maintain a minimum standard of living if forced to pay the loans. You must prove you’ve tried your best to pay off the loans, and that your financial hardship is likely to continue for a long time. You may also qualify if you’re unable to work due to a permanent disability.
Next: Debts owed to the government
5. Debts owed to the government
When you owe Uncle Sam money, you’re not likely to have that debt forgiven. Fines and penalties issued by the United States government will remain on your record until your dying day regardless of your bankruptcy status.
Next: Child support and alimony
6. Child support and alimony
You can’t make your child support or alimony payments disappear by declaring bankruptcy. Any debts you owe in conjunction with marital property will not qualify for discharge under the protection of bankruptcy.
Next: Debts from a previous bankruptcy
7. Debts that weren’t dischargeable in a previous bankruptcy
It’s possible to file for bankruptcy more than once — but if you do, don’t expect to get your debts dispersed when they didn’t qualify the first time around. You should assume that everything you still owe after filing initially will still stand until you pay it off.
Next: Reckless debt
8. Reckless debt
Debt accrued from white collar crimes such as embezzlement and larceny won’t be forgiven when you declare bankruptcy. The same goes for damages you owe victims from causing someone’s death, such as if you were found guilty of vehicular manslaughter in a drunk driving case.
Next: These are the debts you can be freed from.
9. Here’s what kinds of debt you can get rid of
If these are all the types of debts that can’t be forgiven when you file for bankruptcy protection, you’re probably wondering what does qualify. The most typical debts forgiven include credit card debt, medical bills, overdue bills in collections, personal loans, utility bills, business debt, and overdue taxes.
Studies show that more than half of all bankruptcy cases are linked to excessive medical debt specifically.
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