Filing for bankruptcy is a tactic often used to erase large amounts of debt, but nondischargeable debts can prevent that clean slate.
Certain kinds of debt, including child support, student loans, and some tax bills, typically survive a bankruptcy filing.
Some 403,000 Americans filed for bankruptcy in the 12-month period ending March 31, 2023. For one reason or another they found themselves in debt situations complex enough to seek bankruptcy as a means of relief.
Though on the surface bankruptcy may appear to produce an opportunity for a fresh start, nondischargeable debts prevent it from being a true end-all solution.
What Does Nondischargeable Debt Include?
Nondischargeable debts can include home mortgages, certain taxes, child support, and student loans, and can vary based on the chapter of bankruptcy filed.
A debt may also be considered nondischargeable if a creditor formally objects to a discharge in court and wins.
When a debt is discharged through bankruptcy, the debtor is relieved of any legal obligation to pay it back, and the creditor is prevented from taking any further action to collect that debt. This includes contacting the debtor or filing a lawsuit.
Personal loans, credit card debt, and medical bills are types of debt generally considered dischargeable.
Nondischargeable debt, on the other hand, does not dissolve in a bankruptcy filing. The debtor remains liable for payment even after the filing is complete. These are types of debt that Congress has deemed unforgivable due to public policy.
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Types of Nondischargeable Debt
Nineteen categories of nondischargeable debt apply for Chapters 7, 11, and 12 of the Bankruptcy Code. (A more limited list of exceptions applies to cases under Chapter 13.)
Except in unique circumstances, if a debt falls under one of these categories, it is not considered dischargeable.
1. Debt incurred from U.S. taxes or a customs duty.
2. Debt for money, property, or services obtained fraudulently or under false pretenses.
3. Any debt excluded from bankruptcy filing paperwork (unless the missing creditor received prior notice and had ample time to respond to the filing).
4. Debt acquired due to fraud, larceny, or embezzlement while working as a fiduciary.
5. Debt contracted for a domestic support obligation, including child support and alimony.
6. Debt from intentionally harming another person or their property.
7. Tax debt as a result of a fine, penalty or forfeiture that is, at minimum, 3 years old.
8. Student loan debt (unless not discharging the debt would impose an “undue hardship”).
9. Debt incurred due to the death or injury of someone caused by the debtor while operating a vehicle, vessel, or aircraft while intoxicated.
10. Any debts that were or could have been listed in a prior bankruptcy filing, and the debtor waived or was denied a discharge.
11. Debt obtained by committing fraud or misappropriating funds while acting as a fiduciary at a bank or credit union.
12. Debt incurred for the malicious or reckless failure of a debtor to fulfill any commitment to a federal depository.
13. Debts for any orders of restitution.
14. Debt incurred by penalty in relation to U.S. taxes.
15. Any debt to a spouse, former spouse, or child that is incurred through a separation or divorce.
16. Debts incurred due to condominium ownership or homeowners association fees.
17. Legal fees imposed on a prisoner by a court for costs and expenses related to a filing.
18. Debts owed to a pension, profit-sharing, stock bonus, or another retirement plan, as well as any loans taken from an individual retirement annuity.
19. Debt obtained for violating federal or state securities laws, common law, or deceit and manipulation in connection with the purchase or sale of any security.
Recommended: Understanding Bankruptcy: Is it Ever the Right Option?
How Will Nondischargeable Debt Affect Me?
Nondischargeable debt is just like any other debt in the sense that it must be paid off on time to avoid negative consequences.
If a debt is left unpaid for too long, the creditor may sell the debt to a collection agency, which then may result in any number of the following repercussions:
• Significantly lowering a credit score
• Flagging a borrower as “high risk” to future lenders
• Decreasing the odds of approval for future credit offerings
• Increasing high-interest rate offers with less favorable terms
• Adding negative remarks to your credit history
• Activating a lien against a property or asset
• Prompting creditors to pursue legal action
• Enacting wage or asset garnishment
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How Can I Resolve Nondischargeable Debts?
Making plans to resolve any outstanding debts as soon as possible is key to managing a credit history and salvaging future credit opportunities. Here are a few strategies to consider for paying off debts.
Stop Using Credit
The first step toward debt resolution is to stop collecting it.
The average American consumer has 3.84 credit cards, and the average balance is $5,910 in 2022, according to data from Experian.
Making a point not to purchase anything that can’t be bought with cash outright can help curb unnecessary expenses. This includes larger purchases that may require financing. Leaving credit cards at home and removing their information from online payment systems can also help remove the temptation of using them.
Create a Budget
According to a 2022 Debt.com survey, 85% of Americans said making a budget helped them get out of or stay out of debt.
A monthly plan including income and expenses can help reveal where extra money might be coming in and where you can cut back on unnecessary spending. A plan will provide a holistic view of spending habits, allowing for larger decisions to be made about how to change habits in order to fit new, debt-focused priorities.
Cutting back on expenses and carefully tracking spending can help reveal extra dollars and cents needed to pay down debts.
Start a Part-Time Job
When paying down debt is a top priority, taking on another job or picking up additional hours at your current one can be extremely helpful.
An extra check here and there can provide funds to make additional payments on debts, helping to dissolve them more quickly. Consider options such as working weekends at a local coffee shop, picking up a temporary gig in food delivery, or freelancing for additional income.
Recommended: 19 Jobs That Pay Daily
Consolidate Debt
Applying for a personal loan is a strategy for managing several debts simultaneously. Though it may seem counterintuitive to take on another loan, a personal loan can be used to pay off multiple existing lines of credit, such as credit cards, and consolidate them into one loan with a single monthly payment and, possibly, a lower interest rate.
In addition to comparing rates, it’s important to make sure you understand how a new loan could benefit you in the long run. For instance, if your monthly payment is lower because the loan term is longer, it might not be a good strategy, because it means you may be making more interest payments and therefore paying more over the life of the loan.
However, a debt consolidation loan could help streamline payments and ease the anxiety that comes with being responsible for managing numerous lines of credit.
The Takeaway
Nondischargeable debts require more than bankruptcy to be resolved, and without proper management, they could worsen your current financial situation. Like any other debt, nondischargeable debt must be paid off on time in order to avoid negative repercussions. Creating a plan to handle outstanding debts as soon as possible is a smart choice.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
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