Bankruptcy might seem like hitting the reset button on your debts, but not all bills get cleared away. Some debts stick around no matter what, and knowing which ones won’t disappear is key to making smart financial decisions. In this article, we break down the types of debts that stay with you after bankruptcy, including child support, student loans, fines, and certain taxes. Understanding these exceptions before you file can save you surprises and help plan a path forward that really works.

Key Takeaways:

• Child support and alimony obligations cannot be discharged in bankruptcy and remain legally enforceable.
• Most student loans survive bankruptcy unless you prove undue hardship under strict legal standards.
• Recent tax debts and payroll taxes typically remain after bankruptcy, though some older income taxes may qualify for discharge.
• Court-ordered fines, penalties, and restitution payments stay with you regardless of bankruptcy filing.
• Trust fund obligations related to fraud or misappropriation are permanent and cannot be eliminated through bankruptcy.

Debts Not Discharged in Bankruptcy

Certain debts cannot be discharged in bankruptcy, including child support and alimony obligations, most student loans, criminal fines and restitution, and certain unpaid taxes. These debts remain your responsibility even after the bankruptcy process is complete.

Among the most critical debts that survive bankruptcy are those related to family obligations, particularly child support and alimony. These debts reflect ongoing responsibilities toward loved ones, and the law protects them because they directly affect people’s welfare. Courts make it clear that financial support for children or former spouses cannot be discharged. These debts continue demanding timely payment regardless of bankruptcy status.

Most tax debts, especially recent income taxes, are non-dischargeable. The reasoning is straightforward: societies rely on taxes to function, so the government has strong protections to ensure these obligations endure. However, some older tax debts beyond specific age thresholds can sometimes be wiped out, depending on factors like how long ago the tax was assessed and whether proper returns were filed.

Student loans represent another significant debt category often misunderstood during bankruptcy proceedings. Generally, student loans are not dischargeable unless “undue hardship” is proven, a legal standard difficult to meet. Courts hold tightly to these debts because education is considered an investment with potential future benefits.

Fines, penalties, or restitution ordered by courts as part of criminal or civil judgments generally remain intact after bankruptcy. These payments serve public interests or compensate victims directly and are treated separately from other financial burdens. If fines or restitution are part of your debt picture, filing for bankruptcy won’t erase them.

Finally, debts stemming from fraud or breach of trust carry serious legal weight, preventing their discharge. Trust fund obligations linked to fraudulent activities or misappropriation fall outside the scope of dischargeable debts. Courts preserve these claims to prevent abuse of the bankruptcy system by individuals trying to escape accountability.

Child Support and Alimony

Financial responsibilities such as child support and alimony hold a unique position in bankruptcy law. Unlike many other types of debt, these obligations are not wiped away when you file for bankruptcy. Their protection stems from the understanding that these payments directly impact the welfare of children and former spouses who often depend on them for basic needs like housing, food, and healthcare.

When someone files for bankruptcy, they might hope to alleviate various debts like credit cards or medical bills. But child support and alimony are non-dischargeable because they are seen as ongoing responsibilities tied to personal relationships and family stability rather than financial transactions alone. This means that even if you go through Chapter 7 or Chapter 13 bankruptcy, your obligation to make court-ordered child support or alimony payments remains legally binding.

This legal stance serves a practical purpose: it prevents debt relief from becoming a tool to avoid family duties. Courts want to ensure that vulnerable parties continue receiving the financial support they rely on regardless of the payer’s financial troubles. The consequences for failing to meet these payments can be severe, potentially resulting in contempt of court charges, wage garnishments, or even jail time.

In our experience working with clients facing bankruptcy at Siddons Law Firm, it’s common for individuals to be surprised by this rule. Bankruptcy may ease some financial pressure but it does not offer an escape route from child support or alimony. Understanding this upfront helps our clients plan better by factoring in these ongoing commitments into their post-bankruptcy budget.

If you’re struggling to keep up with child support or alimony payments while dealing with overwhelming debt, working with us can help explore options, perhaps modifying payment schedules through family court or using Chapter 13 repayment plans strategically to manage overall debts without neglecting these obligations.

Taxes and Tax Debts

Tax debts are a significant category when it comes to bankruptcy, yet not all tax obligations are treated equally under the law. Some might assume that filing for bankruptcy clears all IRS debts, but that’s far from reality. The key lies in understanding which tax debts the bankruptcy court recognizes as dischargeable and under what conditions.

While recent back taxes and unpaid payroll taxes usually remain firmly on your shoulders after bankruptcy, there’s a silver lining for certain older income tax debts, provided they meet strict criteria.

To consider whether a tax debt is dischargeable, bankruptcy law establishes specific conditions that must be satisfied. First, the tax return giving rise to the debt must have been filed at least three years before you file for bankruptcy. Second, the tax assessment must be at least 240 days old. Third, the tax return must have been filed more than two years before you file for bankruptcy. Finally, the taxes cannot be a result of fraudulent filing or willful evasion.

According to IRS data analyzed over several years, roughly 30% of older income tax debts might qualify for discharge within bankruptcy if all legal requirements are met. However, this percentage excludes other types of taxes, such as payroll or fraudulent obligations, which maintain their non-discharge status.

Payroll taxes, such as Social Security and Medicare contributions withheld from employee wages carry special treatment. These liabilities are prioritized by law given their connection to employee benefits and typically remain intact after bankruptcy filings. Similarly, recent income tax debts within the last three years are shielded from discharge to discourage recent tax evasion attempts.

When addressing your tax debts in a bankruptcy context, we recommend working closely with us to understand both federal and local nuances. Properly identifying which debts qualify can make a remarkable difference in your financial fresh start.

Student Loans

Student loans stand out among debts as some of the toughest to erase through bankruptcy. Unlike credit card debt or personal loans, student loan debt typically survives the bankruptcy discharge unless you can demonstrate an undue hardship. This isn’t a casual claim; it’s a high legal bar that requires going beyond simple financial struggles.

The most common standard courts use is the Brunner test, which breaks down this hardship into three critical parts. First, you must prove that you cannot maintain a minimal standard of living if forced to repay the student loans. This means looking closely at monthly expenses like rent, utilities, food, and necessary health care compared against income sources.

Second, the hardship must be likely to persist for a significant portion of the repayment period. The court wants to see that your financial distress isn’t temporary or due merely to short-term setbacks but rather reflects a long-lasting inability to pay.

Third, and perhaps most challenging, is proving that you have made good faith efforts to repay your loans. Courts rarely excuse debts if they perceive someone has not tried to find employment, apply for deferment or forbearance options, or explore income-driven repayment plans.

Meeting all three prongs of the Brunner test is demanding. However, it is important to know that success is possible. For those few who can thoroughly document these hardships with detailed evidence like financial records, employment history, and personal hardships, there exists a path to eliminating student loan debt altogether.

Given how difficult discharging student loans is under bankruptcy law, it often makes sense to explore alternative solutions alongside bankruptcy filings. For example, we can discuss income-driven repayment plans or loan consolidation programs that can ease some pressure without risking your credit further.

Court-Ordered Obligations

Court-ordered obligations hold a unique place in bankruptcy law because they reflect legal responsibilities enforced by the judicial system. These debts are not just financial; they often arise from penalties imposed due to wrongful or illegal conduct, making their discharge in bankruptcy extremely rare, if not impossible.

Among the most common court-ordered obligations that survive bankruptcy are criminal fines, penalties, and restitution payments. Restitution is designed to compensate victims directly for losses caused by the debtor’s actions. For instance, if a person has been convicted and the court orders them to repay what was stolen or damages caused, that restitution remains payable regardless of any bankruptcy filing.

The importance placed on these obligations underlines how our legal system balances fairness toward creditors with accountability for actions deemed harmful or unlawful. Bankruptcy is intended as a fresh start for those overwhelmed by typical financial burdens like credit cards and personal loans, but it does not provide an escape from the consequences of criminal behavior or willful wrongdoing.

This extends beyond criminal fines to include certain civil judgments where fraud or misrepresentation played a role. Courts tend to hold firm that debts arising from fraudulent acts, such as embezzlement, lying to obtain money, or unauthorized use of funds, are non-dischargeable.

Trust Fund Obligations

Trust fund obligations refer to debts that arise when someone holds money or property not for themselves but on behalf of others and then mishandles or withholds those funds. This typically includes taxes like sales taxes, payroll taxes, or employee withholding taxes that a business collects but must pass along to government authorities.

The logic behind this is straightforward: without making trust fund obligations non-dischargeable, debtors would be tempted to use bankruptcy as a loophole to dodge responsibilities stemming from fraud, embezzlement, or similar misconduct. These debts aren’t just financial burdens; they carry an element of legal and ethical accountability.

For example, when a business owner collects sales tax from customers at the point of sale, that tax is not part of their income or revenue; it belongs to the state. If the owner instead uses those funds for other expenses and then files for bankruptcy, allowing discharge of that tax debt would effectively reward fraudulent behavior.

What this means practically is that if you are facing bankruptcy and owe amounts categorized as trust fund obligations, you should prepare for the possibility that those debts will survive your bankruptcy case. Working closely with us can help you understand your liabilities and explore alternative arrangements.

Managing Non-Dischargeable Debts

Facing debts that survive the bankruptcy process can feel challenging. These obligations, such as certain tax debts, child support, and student loans, don’t disappear simply because you filed for bankruptcy. Understanding this reality helps you prepare better and take control of your finances moving forward.

The first step is developing a solid budget that reflects not only basic living costs but also these ongoing debt responsibilities. We recommend tracking your expenses closely to reveal spending patterns that can be adjusted to free up funds for crucial payments.

Once you know where your money is flowing, prioritizing debts becomes essential. Non-dischargeable debts often carry severe consequences if left unpaid, like wage garnishments or damage to creditworthiness, so tackling them must come before less critical spending. For instance, keeping up with child support payments protects your legal standing and family relationships, while tax debts may require negotiations with the IRS or state agencies.

At times, managing these debts alone can feel overwhelming. That’s when seeking our professional guidance becomes invaluable. We can offer tailored strategies, such as repayment plans or renegotiation options, that align with your unique circumstances.

To explore how we can handle your non-dischargeable debts effectively and craft a realistic plan tailored to your situation, we invite you to contact our team at Siddons Law Firm. We’re ready to provide insightful consultations designed to empower you through these financial challenges.

Frequently Asked Questions

Can I ever discharge student loans in bankruptcy?

Yes, but only if you can prove undue hardship through the Brunner test, which requires demonstrating that you cannot maintain a minimal standard of living while repaying loans, that this hardship will persist long-term, and that you’ve made good faith efforts to repay. This is extremely difficult to prove and succeeds in less than 1% of cases.

How old do tax debts need to be before they can be discharged?

For income tax debts to potentially be discharged, the tax return must have been filed at least three years before bankruptcy, the tax must have been assessed at least 240 days prior, and the return must have been filed at least two years before filing for bankruptcy. The taxes also cannot involve fraud or willful evasion.

Will bankruptcy stop wage garnishment for child support?

No, bankruptcy does not stop wage garnishment for child support or alimony. These are priority debts that continue regardless of bankruptcy filing. In fact, trying to use bankruptcy to avoid family support obligations can result in contempt of court charges and additional legal penalties.

What happens to court fines and restitution after bankruptcy?

Court-ordered fines, penalties, and restitution remain fully enforceable after bankruptcy. These obligations are considered non-dischargeable because they serve public interests and compensate victims for harm caused. You remain responsible for these debts and must continue making payments according to court orders.

Can business owners discharge payroll taxes they collected but didn’t pay?

No, payroll taxes and other trust fund taxes cannot be discharged in bankruptcy. These are funds collected on behalf of employees or government entities and are considered trust fund obligations. Since the money was never truly yours but held in trust for others, bankruptcy law treats these debts as permanent obligations that survive discharge.