Many people are under the impression that if you owe any kind of debt to a federal authority, it is non-dischargeable in bankruptcy. This is not always the case. Like any other debt it depends on what type of debt it is, not who the creditor is. It can be very helpful to have an expert on your side to help you sort this out.
What Can Be Discharged
The important thing to remember is that any debt to any creditor that is incurred as a result of fraud – that is, you induced someone to lend you money under false pretenses – is not dischargeable. Fraud, for bankruptcy purposes, includes spending money that you know you do not have (such as maxing out a credit card), because that implies you planned to never pay back that money.
That said, some of the most common types of government debts are indeed dischargeable in all but the most unusual circumstances. The first is income taxes, both state and federal – income taxes from up to three years past can be discharged in a Chapter 7 filing, as long as the return was not fraudulent, and the filer was/is not guilty of tax evasion. Another common category of generally dischargeable debt is Social Security overpayments. The Social Security Administration states that after a Chapter 7 filing, your benefits will not be reduced just because of a prior overpayment.
What May Be Discharged
The main debt that occupies this position is student loans. In theory, they are not dischargeable – but circumstances do exist in which your obligations could be reduced or eliminated. If it would be an undue hardship upon you to be forced to pay the entire amount back, the courts have the power to either reduce or eliminate the debt entirely. California’s bankruptcy courts are part of the 9th Circuit, which has in the past reduced student loan debt to a manageable amount for the debtor. However, this is still rare – only about 10% of students have their loans adjusted in this way because the test that the court applies is very stringent.
What Cannot Be Discharged
There are some debts which, by their nature, cannot be discharged, regardless of circumstances. The most common type is any fine or penalty owed to the government. This is because unlike money designed to compensate you, a fine is a punishment – so if you were to avoid paying that fine, you would actually be in a better position than where you began. You would have benefited from the original action that the government deemed an infraction, and then again when you did not have to pay the penalty.
Another common nondischargeable debt is any type of veterans benefit – scholarships, incentive pay, et cetera. An individual service member may be able to obtain a waiver of either service or payment, but that is not the same as discharging the debt in bankruptcy.
Contact a Bankruptcy Attorney
This list of debts is by no means exhaustive; to get the full picture of which debts are and are not dischargeable in bankruptcy, you will need the help of an experienced bankruptcy attorney.
If you owe back taxes and other governmental debts why not get your case evaluated by an experience bankruptcy attorney. We have a long history of getting debtors to where they need to be, and we will work just as hard for you. Contact us for a free consultation today at 510-233-7700 or by email at [email protected]