Filing for bankruptcy imposes a lot of legal requirements and qualifications. These can be confusing for many people. For example, you may have heard that bankruptcy does not discharge your tax debt or student loans.
It is not true that you cannot discharge these types of debt in bankruptcy at all. However, it does not happen automatically. If you meet certain conditions, it is possible for bankruptcy to discharge tax debt and student loans.
Tax debt
It may be possible to discharge income tax debt through bankruptcy under certain circumstances. The requirements mostly depend on how much time has passed since the taxes were due and you filed the return. The return must be at least three years old.
If you hope to have your tax debt discharged by filing for bankruptcy, you can not have any history of tax evasion. The tax return itself cannot be frivolous or fraudulent.
Student loans
After filing for Chapter 7 or Chapter 13 bankruptcy, you can file a separate action with the court called an adversary proceeding regarding your student loan debt. This allows you to request that the court find that repaying your student loans would impose an undue hardship. If the court agrees, it may partially or fully discharge your loan.
A full discharge means that you would not have to pay any of it back, while a partial discharge would require you to pay back a smaller portion. Another possibility is that the court does not discharge your debt but lowers the interest rate or otherwise changes the terms under which you have to pay it so that it would no longer impose an undue hardship.
The Bankruptcy Code is complex and confusing. Perhaps this is why people misunderstand the requirements. Be sure to understand your options when you consider filing for bankruptcy.