Debt Baggage You Can Carry Even After Filing for Bankruptcy
By Keith Rucinski, Akron, OH
Chapter 13 Trustee
The American bankruptcy system is designed to help the innocent person who has fallen on hard financial times earn a bankruptcy discharge (discharge is a legal term meaning to successfully complete a bankruptcy plan). The discharge prohibits creditors from filing lawsuits and wage garnishment to collect on past due debt, including credit card debt and medical debt.
Millions of Americans have used the bankruptcy system to save their homes, keep their cars, and reorganize their finances. However, there are some financial situations that you are responsible for even after filing for bankruptcy.
Pursuant to the law (11 USC §523), some debt is not included in the bankruptcy discharge. After the bankruptcy, creditors can continue to seek collection efforts against individuals for the following types of debt:
Domestic Support: The bankruptcy discharge does not relieve a person of the responsibility to pay domestic support obligations. These obligations include alimony and child support.
Property Tax: The bankruptcy discharge does not relieve a person from the responsibility to pay local property taxes. Property taxes are state law liens against real estate (called in rem liens). Although a person is not personally liable on the tax, failure to pay the property tax can cause a person to lose their home to foreclosure.
Property Tax Lien Certificates: Similar to property tax are tax liens purchased by tax lien certificate purchasers. Many states sell delinquent property tax in what is called a tax lien certificate sale. The buyer of the certificate has nearly the same rights of the local government who sold the certificate, meaning these certificate buyers can cause a person to lose their home to foreclosure. Once property tax certificates are sold, the homeowner has to pay the certificate buyer the past due property tax, interest as high as 18%, and administrative costs which can be $4,000 or more.
Income Tax: The bankruptcy discharge does not relieve a person from the responsibility of paying income taxes if the person failed to file tax returns timely. Income tax can be discharged if returns have been filed timely and the statutory time limits have passed.
Withholding Tax: The bankruptcy discharge does not relieve a person from the responsibility of paying withholding taxes. If a business owner deducts the payroll taxes from employees, but does not pay the tax to the government, the business owner remains liable for the withholding tax, often referred to as “trust fund taxes”.
Fraud: The bankruptcy discharge does not relieve a person from the responsibility to pay restitution for obtaining money through fraudulent conduct. To be deemed fraudulent conduct usually requires litigation and for the court to enter an order that the conduct was fraudulent. The conduct generally involves dishonesty and theft.
For example, if an employee embezzles funds from the employer and is subsequently found guilty of the crime and ordered to pay restitution, it would be difficult for the employee to discharge the restitution obligation in bankruptcy.
DUI: The bankruptcy discharge does not relieve a person from any court ordered financial restitution obligation if the person is found guilty of causing death or personal injury to another while driving when intoxicated.
Student Loans – Maybe : For many years a bankruptcy discharge generally did not relieve a person from the responsibility of repaying student loans. There has been a change in bankruptcy guidelines to make it easier for a person to seek a hardship discharge of student loan obligations. Obtaining a discharge of student loans will require litigation and approval by the bankruptcy court.
This article does not contain all debt which may not be subject to bankruptcy discharge. To determine if a debt can be discharged, individuals should always consult with an experienced bankruptcy attorney.