Debts that Remain After a Chapter 7 Discharge
If you file for bankruptcy under Chapter 7, you should be aware that not all debts are eliminated (or "discharged") once the bankruptcy process is complete. Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:
- Debts or creditors not listed on the schedules filed at the outset of the case.
- Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship (more on student loans below).
- Recent federal, state, and local taxes.
- Child support and spousal maintenance (alimony).
- Government-imposed restitution, fines, and penalties.
- Debts resulting from driving while intoxicated.
- Debts not dischargeable in a previous bankruptcy because of the debtor's fraud.
Student Loans
As noted in the above list, educational loans are generally not discharged by a Chapter 7 bankruptcy. They may be dischargeable, however, if the court finds that paying off the loan will impose an "undue hardship" on the debtor and his or her dependents.
In order to qualify for a hardship discharge of a student loan, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed, and will not be able to make payments in the future. The debtor must apply for the hardship discharge before discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:
- Income -- if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents;
- Duration -- the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and
- Good Faith -- the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
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