Non-Dischargeable Debts

Taxes as to which the debtor either filed a fraudulent tax return or attempted to evade or defeat the tax are not dischargeable in bankruptcy. This includes intentional dishonesty or failure to report income. Although a mere non-payment of taxes is not sufficient to hold the debt non-dischargeable, a non-filing pattern and failure to pay taxes may result in non-dischargeability and denial of the bankruptcy discharge altogether.

In Florida, income taxes are non-dischargeable in bankruptcy, including post-petition interest rate on taxes, unless they meet the following three rules:

Tax liens are non-dischargeable in bankruptcy. IRS automatically files tax liens if the past due taxes exceed $10,000. If the IRS or a state taxing authority file a notice of lien for unpaid taxes, the tax lien attaches to all assets of the debtor, including real estate, personal property and financial assets, and encumbers the property until the debt is fully paid or settled.

The tax lien must be satisfied to sell or refinance the property. However, in certain circumstances, the IRS may allow subordination or withdrawal of the lien. Tax liens are negotiable. The debtor may workout either monthly payments or a lump sum payment to satisfy the lien. Although the IRS can foreclose on homestead property to enforce the lien because the federal laws supersede state exemption laws, this typically does not happen.

If the debtor voluntarily, consciously or knowingly, and intentionally fails to file tax returns and pay taxes, these taxes may be non-dischargeable.

Property taxes incurred within a year of the bankruptcy filing, or property taxes that have become statutory liens are non-dischargeable.

Any taxes that the debtor is legally required to withhold or collect from others, such as income withholding taxes, employer’s share of Social Security taxes, sales taxes paid by the debtor’s customers, are non-dischargeable.

Excise taxes for which a return, if required, is last due, within three years before the bankruptcy filing. Excise taxes include sales taxes, estate and gift taxes, workers’ compensation premiums, occupation taxes.

E.g., duties on imports or merchandise.

The IRS and state taxing authorities allow payment of taxes by credit cards. However, if the debtor charges non-dischargeable taxes to his credit cards and later files for bankruptcy, such debts will be non-dischargeable.

The IRS and state taxing authorities allow payment of taxes by credit cards. However, if the debtor charges non-dischargeable taxes to his credit cards and later files for bankruptcy, such debts will be non-dischargeable.

Failure to schedule a debt or list the name of a creditor and an accurate address may result in non-dischargeability of the debt, unless the creditor has notice or actual knowledge of the case in time to file its proof of claim or, with respect to certain debts, a timely request for a dischargeability determination. In no-asset cases, debtor may be allowed to re-open the case to amend the schedules to include the omitted debt and creditor.

For example, running up credit card debt and then shortly after filing bankruptcy or misrepresenting income on a credit card application may result in non-dischargeability of these debts.

To except a debt from discharge under this section, a creditor must prove actual fraud in obtaining credit, property, or services. Fraud can be committed by false representation (express misrepresentations) or false pretenses, which are implied representations, or any conduct intended to create and foster a false impression, such as concealment or non-disclosure of material facts.

Some debts are presumed to be non-dischargeable under this category, but the debtor may overcome the presumption:

Domestic support obligations are debts for alimony, maintenance and support, including assistance provided by a government unit. They can be incurred and/or established before, on, or after the date of the bankruptcy filing.

The domestic support obligations may be established by a separation agreement, divorce decree, property settlement agreement, a court order, or a determination by a government unit. Whether a particular domestic support obligation is considered alimony, maintenance, or support usually turns on the parties’ intent at the time of the agreement.

Obligations incurred to third parties in connection with the parties’ divorce, such as debtor’s obligation to pay the attorney’s fees, arising from divorce and child custody proceedings are also non-dischargeable.

All domestic support obligations, whether support in nature, property division, or hold harmless obligations are nondischargeable if they arise as part of a divorce or a separation or fixed in connection with a separation agreement, divorce decree or other court order.

For example, if the debtor agrees as part of the property settlement agreement to pay marital debts and hold the other spouse harmless from liability for those debts, these obligations are non-dischargeable in Chapter 7 bankruptcy. The debtor may be able to discharge them in Chapter 13 if the obligation is not found to be the nature of alimony, maintenance, or support.

Homeowner association (HOA) and condominium dues and fees that accrued after the bankruptcy filing are non-dischargeable. However, HOA and condo fees that became due before bankruptcy are dischargeable.

Any debt owed to a pension, profit-sharing, stock bonus or other plan established under IRS sections 401, 403, 408, 408A, 414, 457, or 501(c).

 “Willful” means deliberate and intentional. “Malicious” means wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will. Also, the debtor must intend the injury, not just the act that leads to the injury.

Any debt caused by the debtor’s operation of a motor vehicle, vessel, or aircraft while intoxicated is non-dischargeable in both Chapter 7 and Chapter 13. The driver does not need to be criminally charged or found guilty of DUI for the debt to be non-dischargeable. The debtor’s intoxication may be established by a civil trial or by the bankruptcy court based on consideration all available evidence and circumstances.

Absent “undue hardship,” most student loans are non-dischargeable. Non-dischargeable loans include government or non-profit student loans or loans that qualify for a tax deduction. Loans made by federal credit units and banks, colleges, or universities that are guaranteed or insured by the U.S. or one of the states are considered to be made by governmental units and thus, are non-dischargeable. Also, consolidation loans resulting from the refinancing of a series of student loans are non-dischargeable. Private loans that are not “qualified education loans” under IRS section 221(d)(1) are dischargeable. The non-dischargeability of student loans applies to both the student debtor and any co-makers of the loan, e.g., parents.

Florida adopted the Brunner test to allow courts to discharge student loans. Under the Brunner test, the debtor must establish three elements:

Most student loan discharge cases turn on proving persistent “undue hardship,” the second element of the test, which is a demanding requirement.

Debts that the debtor failed to schedule in a prior bankruptcy case or debts for which the discharge was denied are non-dischargeable.

The debt has to be for a fine, penalty, or forfeiture, not compensation for actual monetary loss/damages. For example, fines imposed for contempt of court in a criminal case, costs assessed against an attorney by a state court in a disciplinary proceeding, penalties levied by the government, criminal restitution, costs of criminal prosecution.

A fiduciary relationship is a legal and ethical relationship where one party (the fiduciary) is obligated to act solely in the best interests of another party (the beneficiary). Attorney-client, landlord-tenant, parent-children, creditor-investors, bank officers-depositors, executors/administrators-beneficiaries are examples of fiduciary relationships.

Embezzlement is the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come. Larceny is the fraudulent and wrongful taking and carrying away of the property of another with intent to convert the property to the taker’s use without the consent of the owner.

Although for debts created by embezzlement or larceny to be excepted from discharge the existence of a fiduciary relationship is not necessary, fraud is a prerequisite to finding an embezzlement or larceny. A creditor would have to demonstrate that the debtor appropriated funds or property for his own benefit and that he did so with fraudulent intent. For example,  if a debtor is holding funds or property for another and then uses the funds for his own benefit or fails to deliver the sale proceeds from the property to the owner, the debt may not be excepted from discharge.