Strategy Series – Does a Bankruptcy Discharge Eliminate All Judgements?

Most debts are general unsecured claims or secured claims. You can easily discharge these two classifications under both Chapter 7 and Chapter 13. Expect about four months to complete a Chapter 7 case, and at least three years and up to five years to complete a Chapter 13 plan. Once a case is complete, all remaining non-priority unsecured debts become unenforceable. Your co-signers, guarantors and joint makers remain liable however if they did not file with you.

Secured debts may survive, but only if you choose to keep them. You may always surrender collateral and treat the remaining portion owed as a general unsecured claim. Alternatively, under both chapters, the U.S. Code provides mechanisms for retaining collateral and continuing with your regular payment schedule.

The U.S. Code also provides a laundry list of exceptions—known as priority debts—which are not dischargeable. Neither Chapter 7 nor Chapter 13 eliminates judgements. In most instances, the list of priority items is typical of obligations imposed by operation of law.

For example, you cannot charge off current taxes or fees owed to any government agency, customs duties, court ordered child support payments, or government guaranteed student loans. In addition, court ordered restitution is also exempt even though owed to another person. The official list also includes a few items as a matter of public policy. For instance, you cannot charge off wages owed to your employees, or debts for property settlements required by a divorce decree.

A few personal debts are non-dischargeable. You cannot charge off a debt that arose before a previous Chapter 7 case, balances owed for cash withdrawals (within 70 days), debts for luxury goods (within 90 days), or balances on recent new accounts (within 60 days) before filing.

In the past, debtors attempted to convert priority debts into general claims. The U.S. Code prohibits discharge of any loan used to pay off a priority debt. All abusive and potentially fraudulent activity remains highly suspicious and may result in dismissal of a case.

Judgements for priority debts are enforceable across state lines. The enforcement procedure is routine, but does require a suit and a court order to acknowledge a judgement in a new state.   

If you may owe priority debts, you have several options to minimize complications. These strategies are only available before you file. You should also know priority debts are not equal. For example, IRS liens defeat homestead exemptions. If you are filing to keep your home, but owe back taxes, reconsider your options before filing. Dealing with the IRS always presents unique challenges, yet you can effectively prevent IRS judgements, seizures and foreclosures if adopting a solid strategy before you file.

The best strategies and tactics require time to implement. You must carefully consider all available options and carefully monitor qualification requirements. Once you know what you want, connect the dots. Creating a great strategy is easier than you may now think. With a little help, you can accomplish almost any goal you want.

Dave Clark began practicing law in the early 1980’s, and has represented more than 5,000 clients. Today, he enjoys writing legal articles about bankruptcy strategies and tactics, plus answering common questions: does bankruptcy eliminate judgements?