Does Bankruptcy Eliminate Court Judgments?
As a general rule, filing bankruptcy effectively eliminates judgments, debts, tort liability and others types of general liability. The official term for eliminating these types of obligations is discharge. The general rule applies to Chapter 7, 11 and 13, although the discharge process is different in each chapter. Not all debts are subject to discharge. The U.S. Bankruptcy Code carves out numerous exceptions.
Judgments for most types of general liability are dischargeable according to bankruptcy law. Examples of general liability from adverse court rulings include suits based on loan defaults, non-payment of credit cards, tort liability, breech of contract, and many others.
Bankruptcy also effectively eliminates liability based on secured debts. For example, if you lose your home through foreclosure, any remaining balance owed becomes a deficiency balance. A deficiency balance is contractual liability created by secured notes, deeds of trust, and other loan documents. These documents survive foreclosure and the terms are still enforceable as a contract even though you no long possess the collateral. Bankruptcy wipes out deficiency judgments. Alternatively, debtors who still posses their home may surrender property and discharge debts associated with home mortgages. You cannot keep collateral and discharge the entire debt.
Tactics for Wiping Out Debts
In some circumstances, the nature of a debt can change. For example, a borrower could apply for an unsecured loan to pay off child support or fines owed to the government. Then, if filing bankruptcy, a debtor perhaps attempts to charge off the unsecured debt completely even though the original debt is not dischargeable. The rules applying to these circumstances are complex and the risk of committing fraud high. A debtor may however engage in ordinary consumer transactions and conduct business.
Transactions within the gray between these two extremes usually require careful evaluation. The best time to consider these transactions is before they occur. Frequently, creating a proper transaction is merely a matter of knowing what to avoid.
See our Bankruptcy Strategies for more information about allowed and prohibited transactions.
Some Debts Are Never Discharged
Exceptions to discharge primarily relate to prior bad acts. The law seeks to prevent anyone to discharge debts and profit from harming another or neglecting high priority obligations. These exceptions include the types of debts appearing immediately below.
- Back taxes, accrued interest, government fines, penalties and punitive debts assessed by government authorities.
- Any debt that was not eliminated in a prior bankruptcy case filed under chapter 7.
- Debts resulting from credit card withdrawals for $750 or more, if the withdrawal occurred within 70 days of filing.
- Debts for purchases of luxury goods or luxury services for $500 or more, if the debt occurred during 90 days before filing.
- Debts created by accounts, credit cards, unsecured loans or installment credit if accepted during the 60 days before filing.
- Liability resulting from the commission of a crime, including fraud, theft, larceny, embezzlement, robbery. This ban applies at the time of discharge and is covers all debts incurred at any time without limitation, including all court ordered restitution.
- Debts for damages and personal injuries caused while a debtor drove under the influence of alcohol or controlled substances.
- Any debts assigned to a governmental authority for collection.
- Liability for malicious injuries, including assault, battery and vandalism.
- Other fines for violations of law, including all criminal fines and traffic tickets.
- All debts credit created fraud, deception, concealment or intentional false pretenses.
In these circumstances, the court cannot discharge the debt. Debtors sometimes list these debts in schedules incorrectly and fail to explain the nature of the debt. The trustee and court may not catch the error. Your creditors may not catch the error. Nevertheless, the debt remains enforceable. Further, authorities could charge a debtor with fraud for attempting to obtain an illegal discharge through deception.