Consumer bankruptcy helps individuals start a new life free of much of their debt burden. However, the relief it provides may not always be complete.
Chapter 13 bankruptcy works by offering individuals a structured plan to repay their debts over a short period, usually three to five years, providing a path toward financial stability. However, this plan will exclude certain kinds of debts.
There is a category of debts considered non-dischargeable by bankruptcy. Child support, alimony, student loan debt and some long-term obligations like mortgages fall into it. Debt from personal liability cases where the court found the debtor guilty because of willful or malicious actions also generally does not fall under bankruptcy. For instance, debt accrued from damages arising from an accident where the debtor was driving intoxicated is usually not dischargeable.
Recent tax debts
While a Chapter 13 bankruptcy plan may include some tax debts, certain tax claims may not be dischargeable. For example, recent tax debt usually will not be in a bankruptcy plan. Such plans generally do not cover debts related to income taxes incurred within the last three years. They can include IRS tax liens. The IRS also must follow the terms of the repayment plan.
According to the United States Courts, the number of bankruptcy filings rose by 10% between June of 2022 and June of 2023. Bankruptcy is a valuable tool for reducing debt, but it does not eliminate all debt. While some debts not dischargeable under Chapter 7 bankruptcy can be in a Chapter 13 repayment plan, others do not fall under either. Debtors must handle these excluded debts themselves.