If you were to file for bankruptcy, you might experience an unwelcome shock in finding out this does not discharge all forms of debt. Those who carry certain debts are still held responsible for paying what they owe.
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Which types of debt are not considered eligible? Here are the primary forms of debt which cannot be discharged in bankruptcy?
Most types of student loans are not discharged in bankruptcy.
Why not? Student loans are considered investments in the debtor’s future earning potential, said Levon L. Galstyan, CPA at Oak View Law Group. Therefore, Galstyan said it is in the public interest to ensure these loans are repaid.
Child Support and Alimony
Neither child support nor alimony is dischargeable debt.
“These debts are considered to be obligations to support dependents, and it is important these obligations are fulfilled in order to provide for the well-being of the dependents,” Galstyan said.
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Debt Incurred Through Fraud or Deceit
If you file for bankruptcy, you cannot discharge debt incurred through fraud or deceit.
This is also true of debts for willful or malicious injury to another person or property as well as certain fines and penalties imposed by government agencies. According to Galstyan, the reason why these debts cannot be discharged is because they are considered to be actions that involve moral turpitude and/or criminal conduct.
“It is considered fair that the debtor should be held accountable for these debts,” Galstyan said.
Most Tax Debt
In most cases, those who owe tax debts cannot discharge these debts in bankruptcy.
“Tax debts are considered to be a priority because they are used to fund important government services,” Galstyan said. “Therefore, it is in the public interest for these debts to be paid.”
There are exceptions to this. A couple of the rules for discharging tax debt include that it has to be income tax debt and it must be three years old or older.
Options Available for Those Liable for Paying Debts
Those who file for bankruptcy but still owe any debts mentioned above have options available for their situations.
It is possible an individual can work with a creditor to create a repayment plan. Galstyan said this plan may include reduced payments, lower interest rates or other terms that can make it easier to repay the debt.
Galstyan said it is possible for those with debts to try to negotiate a settlement with the creditor. In this settlement, they may be able to pay a reduced amount of the debt in full.
Assistance From Government Agencies
Some government agencies, like the IRS or the U.S. Department of Education, may help assist those with debt. Galstyan recommends looking into any special programs that may be offered to assist with debt repayment.
Advice From Credit Counselors
In a pinch, it may be wise to reach out to a credit counselor or financial advisor for advice. These professionals, Galstyan said, can help create a budget, negotiate with creditors and explore other options for managing their debt.
Debt Relief Through State or Local Programs
There may be some state or local programs designed to offer relief for certain types of debt. However, Galstyan said to remember these options vary by county and state. “It’s recommended to consult with a local bankruptcy attorney or credit counselor to understand what options are available in your area.”
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