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Does Bankruptcy Eliminate All Debt?

If debt has begun to pile up in your life, you might be considering every possible way to get out of it. Declaring bankruptcy is a great way for many people to get debt relief, but it’s a serious legal process that can have a significant impact on one’s financial life. As a consequence, it’s anything but a “get-out-of-debt-for-free” card and shouldn’t be taken lightly.

That said, if you owe the right kind of debt, declaring bankruptcy may be your best bet to relieve yourself from punishing interest rates and fines that only dig a deeper hole. But what’s considered “the right kind” of debt, anyway? This implies that there are some debts that can’t be discharged through bankruptcy, and it’s true: Some debts can’t be ejected through bankruptcy, although most common consumer debts can be.

Common Dischargeable Debts in Bankruptcy

Whether you are filing for bankruptcy under Chapter 7, Chapter 13, or Chapter 11 (if you don’t qualify for Chapter 13), you will either be seeking a full discharge of your debt or a plan to repay your debt that could lead to a discharge of any remaining financial obligations after the plan’s completion.

For most people, debt problems often involve things like the following:

  • Credit cards
  • Medical bills
  • Personal loans (made to family, friends, and others)
  • Past-due utility bills
  • Business debts
  • Dishonored checks
  • Social Security overpayments
  • Unemployment overpayments
  • Past-due rent
  • Tax penalties and back taxes (after a certain number of years has passed)
  • Student loans (exceptionally rare; must prove undue hardship)

These are examples of dischargeable debts that aren’t secured by collateral. This means that as long as you meet the requirements for discharge, the court is inclined to relieve you of your debt and your obligations to your creditors conclude.

There are also secured debts that are dischargeable, but you may lose whatever collateral is tied to your debt. The best examples of this are auto loan and mortgage payments: While you can be relieved of unpaid payments in bankruptcy for these things, your creditor still has a lien against the property and can repossess it if necessary.

Non-Dischargeable Debts in Bankruptcy

Certain types of debt are impossible to discharge in bankruptcy. This is true regardless of which chapter of bankruptcy is filed.

Examples of these debts include the following:

  • Alimony/Spousal Support
  • Child Support
  • Most tax debt
  • Criminal restitution
  • Personal injury judgments
  • Money borrowed to pay taxes
  • Student Loans (in the vast majority of cases)
  • Dischargeable debts not included in the bankruptcy filing

Sometimes non-dischargeable debts are tied to individuals because it’s implied that these debts were incurred as a result of malfeasance on the debtor’s part, as is true for criminal restitution and personal injury judgments.

Ultimately, though, non-dischargeable are often non-dischargeable because Congress decided that it would not be beneficial to society for certain debts to be erased. This is the case for child support and alimony payments: The benefits children and ex-spouses gain from such support is more important to society than relieving someone of these obligations.

Are Student Loans Dischargeable in Bankruptcy or Not?

You may have noticed that “student loans” appears on both of our lists for dischargeable and non-dischargeable debts. You may be wondering why this is, and the answer is a little complicated.

To simplify things by a lot, we’ll say that student loans are generally non-dischargeable for the vast majority of people. That said, there are circumstances under which student debt can be erased through bankruptcy, but these are limited to cases where a debtor is experiencing extreme financial hardship.

How extreme is that hardship? In Missouri, that’s assessed by a “totality of circumstances” test that the courts use. This test evaluates one’s past, present, and future financial circumstances to determine if student loan debt poses too much of a burden for the debtor to maintain a basic standard of living. If sufficient hardship can be proven, student debt can be ejected during bankruptcy – but keep in mind that this is exceedingly rare. Most people will not qualify.