A common misconception about bankruptcy is that any debt associated with the government cannot be discharged by filing for bankruptcy protection.
As an example, a blogger recently blogged on a bankruptcy forum website, “My friend has a student loan and also a SBA disaster loan totaling 140 thousand dollars. She is under the assumption that if she files Chapter 13, that both these loans will be discharged. Anyone know? Her SBA is like a second mortgage.”
To the contrary of the myth held by this blogger and many other Americans, most government loans can be discharged in a bankruptcy filing. As an example of a government loan that cannot be discharged in bankruptcy, neither private or government student loans can be discharged in bankruptcy unless undue hardship is proven.
It is very difficult to prove undue hardship so you can remove the responsibility of repaying a student loan. The proof of undue hardship is left up to the judgment of each bankruptcy district, but many of the districts define “undue hardship” as being able to show permanent disability accompanied by absolutely no possibility of repayments to the lender within in your lifetime.
Student loans notwithstanding, most other loans issued by the government can be discharged in a bankruptcy case without having to prove undue hardship. Whether or not a loan is subject to discharge depends on a number of factors.
Chapter 7 and Chapter 13 bankruptcies will only discharge unsecured debt. A loan secured by a lien is not subject to discharge unless the collateral secured by the lien is surrendered. So, in effect, a lien will survive a bankruptcy, but the loan may not necessarily survive unless a reaffirmation agreement is signed.
VA Loans, HUD Loans, and SBA loans, like the SBA loan illustrated by the blogger, are commonly secured by real estate or personal property. Because they are considered a secured debt, the loan must be paid unless you are willing to surrender the collateral supporting the lien. Otherwise, you will face a foreclosure on the property. Your loan can still be discharged in certain types of bankruptcy, but the property might be taken back by the lien holder.
Are all government loans exempt from bankruptcy discharge? The answer is obviously, no. As a matter of fact, most government loans can be discharged in bankruptcy under the right circumstances.
There are debts that cannot be discharged from bankruptcy unless, like student loans, undue hardship is proved. The most common types of debts not discharged in bankruptcy include certain types of government tax claims; debts not listed by the debtor on the schedules filed in bankruptcy court; debts for spousal or child support; debts for willful and malicious injuries to person or property; government fines and penalties as ordered through a court of law; student loans; debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated; debts owed to certain tax-advantaged retirement plans; and debts for certain homeowner association fees.
Determining what may or may not be discharged in bankruptcy can be a complicated part of bankruptcy law. It is recommended you consult with an experienced bankruptcy lawyer before you file for bankruptcy protection.
- Reaffirmation is a Legal Process (betterbankruptcy.com)
- Minnesota Bankruptcy Discharge: Second Discharges (minnesotaattorney.com)
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