Whether you have to pay back debt after bankruptcy depends on the chapter you file and the type of debt. Chapter 7 erases most unsecured debts without any repayment. Chapter 13 puts you on a three-to-five-year plan that pays creditors a portion of what you owe. And regardless of which chapter you choose, some debts survive: child support and alimony, most student loans, recent income taxes, debts obtained by fraud, government fines and criminal restitution, and any homeowner association fees that come due after you file.
How Chapter 7 and Chapter 13 Differ on Repayment
Chapter 7 is sometimes called liquidation bankruptcy. The trustee sells your nonexempt property to pay creditors, and the court then discharges most remaining unsecured debts. Credit card balances, medical bills, personal loans, old utility bills, and similar debts are gone. You pay nothing further on them. The discharge usually arrives three to four months after filing.
Not everyone qualifies. Federal law uses a means test comparing your income to your state’s median for a household your size. Below the median, you generally proceed under Chapter 7. Above it, the court applies a more detailed look at your expenses and disposable income, and if it decides you can afford meaningful repayment, your case may be dismissed or converted to Chapter 13.1Office of the Law Revision Counsel. 11 USC 707 – Dismissal of a Case or Conversion
Chapter 13 is built around repayment. You keep your property and commit to a court-approved plan lasting three years if your income is below the state median, or five years if above. You send a fixed monthly payment to a trustee, who distributes it to your creditors.2Office of the Law Revision Counsel. 11 USC 1328 – Discharge
Creditors are not treated equally under the plan. Priority debts — including domestic support arrears and most taxes owed to government agencies — must be paid in full.3Office of the Law Revision Counsel. 11 USC 507 – Priorities Secured creditors must receive at least the value of their collateral. Ordinary unsecured creditors, such as credit card companies and medical providers, often get only a small percentage, based on whatever disposable income you have left after priority debts and reasonable living expenses. Whatever remains unpaid on those unsecured balances is discharged once you finish every scheduled payment. Miss payments and the court can dismiss the case, which brings back all of your original debts along with any accrued interest.
Debts You Still Have to Pay in Either Chapter
Federal law carves out several categories of debt that survive the discharge no matter which chapter you file.
Child Support and Alimony
Domestic support obligations are never dischargeable. They keep their full force, and missed payments continue to accrue.4Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge In Chapter 13, any support arrears sit at the top of the priority list and must be paid in full through the plan before you can receive a discharge.2Office of the Law Revision Counsel. 11 USC 1328 – Discharge
Most Student Loans
Student loans survive bankruptcy unless you prove in a separate lawsuit within your case — an adversary proceeding — that repayment would impose an undue hardship on you and your dependents.5Department of Justice. Student Loan Discharge Guidance Meeting that standard has historically been hard. Guidance from the Department of Justice and Department of Education now directs government attorneys to recommend discharge when three conditions are met: you currently cannot repay the loan, that inability is likely to persist, and you have made good-faith efforts to repay in the past.6FSA Partners. Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings
Recent Income Taxes
Income tax debt from returns due within the three years before filing generally cannot be discharged. Older tax debts may qualify for discharge in Chapter 7, but only if you filed the returns on time.7Internal Revenue Service. Declaring Bankruptcy In Chapter 13, priority tax debts have to be paid in full through the plan.
Debts from Fraud
If you obtained a debt through fraud, false pretenses, or a materially false written financial statement, the creditor can ask the court to declare it nondischargeable. The creditor has to file a timely objection.4Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge Running up credit card charges on luxury goods shortly before filing, with no intent to repay, can trigger a presumption that the debt survives.
Government Fines and Criminal Restitution
Fines and penalties owed to a government agency, including traffic tickets and regulatory penalties, are not discharged. Court-ordered restitution from a criminal conviction is not discharged either.4Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
HOA Fees That Come Due After Filing
If you own property in a community with a homeowner association, any fees or assessments that come due after your filing date remain your responsibility for as long as you or the trustee holds an ownership interest in the property.4Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge Pre-filing arrears may be discharged, but the new bills keep coming.
What Happens to Your House and Car Loans
A discharge wipes out your personal obligation to pay a debt, but it does not remove a lien from your property. If you have a mortgage or car loan, the lender’s security interest in the property survives.8Office of the Law Revision Counsel. 11 USC 506 – Determination of Secured Status The bank cannot sue you personally for missed payments, but it can foreclose or repossess if you stop paying.
In Chapter 7, you generally have three options for a secured debt:
- Keep paying the loan as scheduled and hold on to the property.
- Surrender the property to the lender, and the discharge eliminates any remaining balance.
- Redeem the property by paying the lender its current fair market value in a single lump sum. This can save money if the item has depreciated below the loan balance, but it is available only for tangible personal property used for personal or household purposes — a car qualifies, a house does not.9Office of the Law Revision Counsel. 11 USC 722 – Redemption
Reaffirmation: Choosing to Keep a Debt
A reaffirmation agreement is a voluntary contract in which you agree to remain legally responsible for a specific debt that would otherwise be discharged. People sign them to keep a car loan on good terms or preserve a relationship with a specific lender. The agreement must be signed and filed before the discharge is entered, and you can cancel it within 60 days after filing or before the discharge is entered, whichever comes later.10Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
If you had no attorney when negotiating the agreement, the court must approve it and find that it does not impose an undue hardship and is in your best interest. If you were represented, your attorney certifies that you were informed and that the payments are manageable.10Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
Once the cancellation window closes, the reaffirmed debt is treated as if no bankruptcy occurred. Fall behind later and the creditor can sue you or seize the collateral. Think carefully before reaffirming, especially on a depreciating asset like a car when you owe more than it is worth.
Co-signers Still Owe the Money
Your discharge protects you, not anyone who co-signed or jointly guaranteed the debt. In Chapter 7, creditors can immediately pursue your co-signer for the full balance, even while your case is pending.
Chapter 13 offers more protection. A codebtor stay temporarily blocks creditors from collecting consumer debts from your co-signer while your plan is in progress. A creditor can ask the court to lift that stay if your plan does not propose to pay the debt in full, if the co-signer actually received the benefit of the loan, or if the creditor would be irreparably harmed. Once your Chapter 13 case ends, the codebtor stay lifts and the creditor can go after your co-signer for whatever is left unpaid.11Office of the Law Revision Counsel. 11 USC 1301 – Stay of Action Against Codebtor
Discharged Debt Is Not Taxable Income
Outside bankruptcy, forgiven debt is normally taxable — cancel $10,000 and the IRS treats it as $10,000 of income to you. Bankruptcy is the major exception. Federal tax law specifically excludes debts discharged in a bankruptcy case from gross income.12Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness You will not receive a tax bill for the debts your case wipes out.
There is a trade-off: the excluded amount reduces certain tax attributes you carry forward, such as net operating losses and credit carryovers. Claim the exclusion by filing IRS Form 982 with your tax return for the year of discharge.13Internal Revenue Service. Instructions for Form 982 Most consumer filers have few attributes to reduce, so the exclusion is close to a pure benefit.