What Debts Are Not Dischargeable In Michigan Bankruptcy?

dischargeable in bankruptcy

The vast majority of debts you may owe are dischargeable in Chapter 7 or Chapter 13 bankruptcy. However, some debts are not dischargeable.

Why is this, and what are those non-dischargeable debts?

This Article will discuss these questions, as well as the others. However, first, some bankruptcy basics.

Bankruptcy: Federal Law Trumps Michigan Law

The first thing to understand about dischargeable versus non-dischargeable debt is why bankruptcy has the ability to discharge anything at all.

Bankruptcy will discharge most debts because it operates with the force of Federal law.

Credit card loan applications, mortgage contracts, hospital bill invoices, auto loan purchase agreements or leases, rental leases … These types of contracts operate with the force of Michigan state law. Or the law of some other state, such as Delaware.

Most commercial loan obligations, unless they are Federal student loan promissory notes or Small Business Administration loans or a few others, are creatures of state law.

Bankruptcy is a legal process created by the US Congress pursuant to the US Constitution (which provides for a system of bankruptcy in the US). Congress defined the operation and scope of the bankruptcy process with the enactment of the US Bankruptcy Code.

The US Bankruptcy Code is, in other words, the Federal statute governing the Chapter 7 and Chapter 13 bankruptcy process.

The Code preempts (overrides) and state law or contract that conflicts with its provisions.

The Bankruptcy Code and the Code alone determines what debts are dischargeable and which are not.

A debt is never dischargeable because of any aspect of Michigan state law or any provision of the contract requiring payment.

What Is the Bankruptcy Discharge?

That said, the Bankruptcy discharge itself is what you hope to get out of the Chapter 7 or Chapter 13 process.

It is a permanent Federal injunction that prohibits any creditor for attempting to collect on any debt that you owed prior to the filing of the bankruptcy. It frees you from any contractual obligation to make any further payments on those discharged debts.

That is, unless the debt is not dischargeable.

Why Are Some Debts Not Dischargeable in Bankruptcy?

The debts that are not dischargeable in bankruptcy are those listed under Section 523 of the Bankruptcy Code.

Why these debts?

The too-simple answer is that these are the debts that Congress considered to be excepted from discharge because the implicate some level of “bad faith.”

Although the concepts of “good faith” and “bad faith” are not defined in the Bankruptcy Code, the Congressional Record related to the enactment of the Code directs that a discharge of debt in bankruptcy is available only to those debtors acting in “good faith.”

Thus, largely, the debts that are included in Section 523 are those arising from some level of fraud or criminal behavior.

This is not entirely the case, however. As noted below, student loans are also non-dischargeable in bankruptcy except in cases of “undue hardship” (also not defined in the Code).

Why are student loans not dischargeable in bankruptcy (mostly)? There’s another easy answer here. Student loans are not dischargeable because, in the early 2000s, when the 2005 BAPCPA Bankruptcy Code Reform Act was deliberated, Sallie  Mae and other student loan servicers lobbied Congress hard to make them not dischargeable.

That is, money changed hands.

God bless America.

Non-Dischargeable Debts: The List

Among the debts listed as non-dischargeable in the Bankruptcy Code are the following:

  • Tax debts that became due within the 3 years prior to bankruptcy filing (and failing to meet other criteria for dischargeability);
  • Debts owed for monies obtained through fraud, including false representation;
  • Debts for more than $500 incurred within 90 days prior to the filing of the bankruptcy case (presumed fraudulent, but this is rebuttable);
  • Secured debts not listed in the debtor’s bankruptcy petition;
  • Debts arising from “defalcation” (misuse of funds held as a fiduciary), embezzlement, or larceny;
  • Child and spousal support obligations;
  • Debts owed for willful and malicious injuries cause to another or another’s property;
  • Fines, penalties, or forfeitures owed to governmental entities;
  • Student loans, with some few exceptions;
  • Debts owed for death or personal injuries caused by the debtor’s drunk or drugged operation of a motor vehicle or vessel;
  • Restitution orders;
  • Homeowner’s and condominium owner’s association dues and fee under certain circumstances; 
  • Debts related to banking and financial institution fraud and fiduciary duties. \

This is not an all-inclusive list, and it attempts to keep things short and sweet. Or somewhat so. To determine whether any exception to any of these non-dischargeable debts applies in your specific case, you will need to consult an experienced Michigan bankruptcy attorney.

Can Bankruptcy Help with Non-Dischargeable Debts?

So is bankruptcy helpless when it comes to these non-dischargeable debts?

With regard to Chapter 7 bankruptcy, the answer is generally, “Yes.”

The reason for this is that Chapter 7 is a relatively short process. The typical Chapter 7 process in Detroit and elsewhere in Michigan is roughly 4 months long, from filing to discharge. While the staying of debt collection during the bankruptcy due to the temporary “Automatic Stay” injunction that activates upon filing is useful, it is a short-lived benefit.

Chapter 7 will either discharge a particular debt or not. If not, within just a few months, the non-discharged creditor will be able to resume collections (once the bankruptcy is over) and with added interest and late fees lumped in.

What is more helpful in dealing with non-dischargeable debt is a Chapter 13 bankruptcy.

Non-Dischargeable Debt in Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is not a “liquidation” bankruptcy as is Chapter 7. It is a “reorganization” bankruptcy.

In Chapter 13, for 3-5 years, you make a monthly payment to the Chapter 13 Trustee assigned to your case by the Bankruptcy Court. Your creditors, with very few excepts, are subject to the Automatic Stay injunction for this entire time period.

That monthly payment that you make to the Trustee is disbursed to your creditors in a priority order mandated by the Bankruptcy Code and by the Chapter 13 Payment Plan that your Michigan bankruptcy attorney files for you.

Whatever money is paid to creditors holding dischargeable debt from that monthly payment is all that those creditors receive.

At the end of the Chapter 13, the remaining “on paper” balance is totally discharged.

If any portion of a non-dischargeable debt is unpaid, it will remain collectible. However, you will have stayed that collection for up to 5 years—and potentially paid it in full, depending on the amount of your monthly Chapter 13 plan payment.

Contact a Livonia, Michigan Bankruptcy Attorney Today

In summation, there is no reason to presume that, because a debt is not dischargeable in bankruptcy, that there is no reason to speak with a Michigan bankruptcy lawyer.

Bankruptcy Attorney John Hilla has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Livonia, Detroit, Westland, Southfield, Dearborn, Redford, Farmington, Ann Arbor, Flint, Bay City, and virtually everywhere else in Michigan.

Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is prosecuted properly, competently—and with kindness.

If you aren’t sure whether a debt that you owe will be dischargeable in bankruptcy, contact us to discuss.

Click the button below to directly schedule your free consultation or contact us at (313) 380-0492.