When a person files for bankruptcy, their debts are discharged, meaning they are no longer legally obligated to pay them. However, there are certain types of debts that are not eligible for discharge under Section 523. These may include debts incurred through fraud, embezzlement, or willful or malicious injury to another person or property.
What Is Section 523?
Section 523 of the Bankruptcy Code excepts 21 types of debts from discharge under Chapters 7, 11, 12 and 13. A Section 523 action refers to a lawsuit brought under Section 523 of the U.S. Bankruptcy Code, which deals with the exceptions to discharge in bankruptcy.
A Section 523 action is typically initiated by a creditor seeking to have a particular debt declared non-dischargeable. The creditor must prove to the bankruptcy court that the debtor engaged in one of the behaviors listed in Section 523, such as fraud or willful injury, in order to obtain a judgment that the debt is non-dischargeable.
What Are Non-Dischargeable Debts Under Bankruptcy Code?
Non-dischargeable debts under Section 523 include, but are not limited to:
- Debts incurred through fraud or false pretenses,
- Debts arising from fraud or defalcation while acting in a fiduciary capacity, embezzlement, and larceny,
- Willful or malicious injury to another person or property,
- Alimony, child support, or other domestic support obligations,
- Taxes owed to government entities,
- Fines or penalties imposed by government entities,
- Debts incurred while driving under the influence of drugs or alcohol, and
- Student loans (with limited exceptions).
However, debts specified in (1), (2), and (3) above will be discharged unless a complaint is timely filed. When a creditor believes that a debt owed to them falls under one of the non-dischargeable categories, they can file a non-dischargeability action with the bankruptcy court. The debtor can then contest the action, and a judge will ultimately determine whether or not the debt is non-dischargeable.
What Happens if a Debt Is Included in Section 523?
If the judge determines that the debt is non-dischargeable, the debtor will still be responsible for paying it even after the bankruptcy is complete. However, if the judge determines that the debt is dischargeable, it will be included in the discharge, and the debtor will no longer be responsible for paying the debt.
It’s important to note that not all debts are automatically nondischargeable under Section 523, and some of these types of debts may be subject to exceptions or limitations. Additionally, even if a debt is generally nondischargeable, there may be ways to address it in bankruptcy, such as through a payment plan or restructuring. It is important to work with an experienced bankruptcy attorney with an understanding of creditor’s rights to protect your interests.