Bankruptcy is most commonly filed under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 7 bankruptcy provides for liquidation of certain assets, which means selling off some of the debtor’s property to pay back some of the debt. The assets subject to liquidation vary by state and other factors, including the debtor’s financial situation. Examples of some assets that may be liquidated and distributed to creditors include cash, bank accounts, securities, second homes, and second cars, subject to varying exemptions. A Chapter 13 bankruptcy case allows debtors to keep their property but requires them to pay their debts back over time.
Common types of debt that are discharged in bankruptcy include credit card debt, collection agency accounts, medical bills, past due utility bills, and money owed under lease agreements.
Student loans are, unfortunately, non-dischargeable absent a showing that excepting student loans from discharge would impose an undue hardship on the debtor and the debtor’s dependents. Showing undue hardship is difficult. The majority of circuits have adopted the test from Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), to determine undue hardship. According to Brunner, to demonstrate undue hardship, the debtor must prove that: (1) the debtor cannot not maintain a “minimal” standard of living if forced to repay the student loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor has made good faith efforts to repay. Circuits that have not adopted Brunner have adopted comparable standards; only a minority have opted for less stringent standards.
Some courts suggest that the Brunner test, as commonly applied, makes it too difficult to discharge student loans. See, e.g., In re Rosenberg, 610 BR 454, 459 (Bankr. SDNY. 2020). In In re Buckland, for example, the court held that $75,018.81 of student loan debt owed by Mr. Buckland, one of the debtors, should be excepted from discharge. (424 BR 883, 895 (Bankr. D. Kan. 2010)). According to the debtors in Buckland, they were unable to repay their student loans due to factors outside their control, including the tragic death of their daughter caused by cancer. Mr. Buckland claimed that he was unemployed because, among other things, he was terminated while he was helping care for his dying daughter. Ms. Buckland was also unemployed because she suffered from physical ailments. Applying the Brunner test, the court found that the debtors met Buckland’s first prong, but not the second and third prongs, resulting in the ruling excepting the student loan debt from discharge.
Other common debts that are excepted from discharge are tax debts, owed spousal or child support or alimony, and outstanding fines and penalties due to government units, among others. Liens, most commonly against homes and cars, cannot be discharged. Even if you declare bankruptcy, secured creditors, like a bank that finances a car purchase, can still attempt to recover (in other words, repossess the car).
Filing for bankruptcy will have long-lasting effects other than providing relief from debt, and anyone considering it should consult an experienced attorney. The filing itself is a public record, and bankruptcy can have a stigma—both personally and professionally. Filing for bankruptcy will negatively impact your credit score, and it will be listed on your credit report for ten years (Chapter 7) or seven years (Chapter 13). Nonetheless, if you can no longer pay your debts and you and, ideally, your attorney determine that bankruptcy is right for you, bankruptcy can provide a fresh start.