Does Chapter 11 Wipe Out All Debt? Not Always

Chapter 11 does not discharge all debt. A confirmed reorganization plan wipes out most debts that existed before the confirmation date, but federal law permanently exempts specific categories from discharge — child support and alimony, certain taxes, debts obtained by fraud, government fines, and student loans among them.¹ For individual filers, even the debts that qualify for discharge stay enforceable until every plan payment is made, which usually takes three to five years.

What the Plan Actually Does to Your Debt

The reorganization plan is a court-approved contract that replaces your original loan and vendor agreements. It sorts creditors into classes — secured lenders, priority tax claims, general unsecured creditors, equity holders — and states exactly what each class receives.² Once confirmed, the plan is binding and supersedes the old agreements it covers.

Debt is not simply erased. The plan can cut a balance to a fraction of what was owed, drop the interest rate, stretch out the repayment period, or all three. Before confirming, the court has to find the plan meets the “best interests of creditors” test: each impaired creditor must receive at least what they would have gotten in a Chapter 7 liquidation.³ That floor is the reason unsecured creditors sometimes recover a meaningful percentage rather than nothing.

Even when a class of creditors votes no, the court can still confirm the plan through cramdown, as long as it does not unfairly discriminate and is “fair and equitable.” For unsecured creditors, “fair and equitable” means no lower-priority claim or equity holder gets anything unless the dissenting class is paid in full. Owners typically cannot keep their equity while unsecured creditors take a haircut, unless those creditors agree.³

Debts That Chapter 11 Can Discharge

For a corporate debtor, confirmation of the plan is the discharge. The order eliminates any debt that arose before the confirmation date, whether or not the creditor filed a claim or voted yes.¹ The debts most often cleared this way include:

Unpaid trade debt owed to suppliers and vendors.
Unsecured business loans and lines of credit with no collateral behind them.
Obligations left over from leases and contracts the debtor rejected during the case.
Deficiency balances, meaning the shortfall when a secured creditor’s collateral sells for less than the debt.

Individuals see the same treatment for personal unsecured obligations like credit card balances and medical bills, but with a critical timing difference covered below.

One limit applies even to companies. If the plan calls for liquidating all or substantially all of the assets and the business will not keep operating afterward, the court will not grant a discharge.¹ That rule blocks companies from using Chapter 11 as a way to shed debts while winding down.

Debts That Survive a Chapter 11 Discharge

The list of what cannot be discharged depends on whether the debtor is an individual or a corporation.

For Individual Debtors

Individuals filing Chapter 11 face the same exceptions to discharge that apply in other bankruptcy chapters. A discharge does not touch:⁴

Domestic support obligations. Child support and alimony are fully protected.
Certain tax debts, including income taxes tied to returns due within three years of filing, taxes assessed within 240 days before filing, and any taxes connected to a fraudulent return or evasion.⁵
Debts obtained through fraud or misrepresentation. The creditor has to prove the fraud in an adversary proceeding filed inside the bankruptcy case.
Debts arising from willful and malicious injury to another person or their property.
Fines and penalties payable to a government agency, including criminal restitution and environmental penalties, so long as they are not compensation for actual financial loss.
Student loans, unless the borrower proves in a separate court proceeding that repayment would impose an undue hardship.
Debts the debtor failed to list, where the creditor had no notice of the case and missed the deadline to file a claim.

The student loan exception is the one most people ask about. Courts have traditionally applied a three-part test: the borrower has to show they cannot maintain a minimal standard of living while repaying, that this situation will persist for most of the repayment period, and that they made good-faith efforts to pay. In 2022 the Department of Justice rolled out an attestation-based process meant to make these cases move faster for federal student loans, though the underlying legal standard is unchanged.⁶

For Corporate Debtors

Corporations get a narrower set of exceptions. A corporate Chapter 11 discharge does not eliminate debts connected to fraud against a government entity, including claims under federal or state false-claims laws, or taxes tied to a fraudulent corporate return or attempted evasion.¹ The longer Section 523 list generally does not apply to corporate debtors.

When the Discharge Actually Takes Effect

Timing is where individual and corporate cases split sharply.

A corporate debtor’s discharge kicks in the moment the plan is confirmed. The company keeps making plan payments, but it is already legally free of the pre-confirmation debts covered by the plan.¹

An individual debtor’s discharge does not arrive until the court grants it after all plan payments are complete.⁶ For most individuals that means living under the plan’s terms for years before receiving actual debt relief. Miss the payments, and the court can dismiss the case, restoring the full original balances.

There is a narrow escape valve. A court can grant a hardship discharge to an individual who has not finished plan payments, but only if the failure to pay was caused by circumstances beyond the debtor’s control, creditors have already received at least what they would have gotten in Chapter 7, and modifying the plan is not workable.¹

Individuals also have to finish two required courses before any debts can be discharged: a pre-filing credit counseling session and a post-filing debtor education course, both through providers approved by the U.S. Trustee Program. Certificates of completion for both are required.⁷

Subchapter V: Different Rules for Small Businesses

Small businesses with aggregate debts at or below roughly $3.4 million (a threshold Congress adjusts periodically) can file under Subchapter V, a streamlined version of Chapter 11. A court-appointed trustee helps move the plan along, but the owner usually stays in control of the business.

Discharge under Subchapter V follows its own rules. The court grants the discharge after the debtor completes all payments due within the first three years of the plan, or up to five years if the court extends the period.⁸ That timing applies regardless of whether the debtor is a person or an entity, which departs from the standard rule that corporations get their discharge at confirmation. The Section 523 exceptions that apply to individuals also apply to Subchapter V debtors, so child support, fraud debts, and the other protected categories still survive.

Subchapter V also softens the absolute priority rule, giving small business owners a realistic path to keep their equity even when unsecured creditors are not paid in full. The price is committing all projected disposable income to the plan across the three-to-five-year payment window.⁶

What Default on the Plan Does to the Discharge

A confirmed plan is a binding obligation. If the debtor materially defaults by missing payments, failing to file required reports, or otherwise not following through, any creditor or the U.S. Trustee can move to dismiss the case or convert it to Chapter 7 liquidation.⁹ The court has to hold a hearing within 30 days and issue a decision within 15 days after that.

Dismissal ends the bankruptcy protections. The automatic stay lifts and creditors can pursue their original claims at full value as if the case never happened. Conversion to Chapter 7 puts a trustee in charge of liquidating non-exempt assets and distributing the proceeds. A corporate debtor that already received its discharge at confirmation can still see remaining assets liquidated after default. An individual who has not yet reached the end of the plan simply never gets the discharge.

1
Office of the Law Revision Counsel. United States Code Title 11 – Section 1141 Effect of Confirmation
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Office of the Law Revision Counsel. United States Code Title 11 – Section 1123 Contents of Plan
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Office of the Law Revision Counsel. United States Code Title 11 – Section 1129 Confirmation of Plan
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Office of the Law Revision Counsel. United States Code Title 11 – Section 523 Exceptions to Discharge
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Office of the Law Revision Counsel. United States Code Title 11 – Section 507 Priorities
6
United States Courts. Chapter 11 – Bankruptcy Basics
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United States Courts. Credit Counseling and Debtor Education Courses
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Office of the Law Revision Counsel. United States Code Title 11 – Section 1192 Discharge
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Office of the Law Revision Counsel. United States Code Title 11 – Section 1112 Conversion or Dismissal