Why Might A Debtor Bring A Dischargeability Action?
A debtor might bring a dischargeability action because there is a debt that will not be discharged unless the debtor successfully challenges its nondischargeability. The two most common types of debts on which debtors initiate dischargeability actions are student loans and tax debts.
Student loans are not dischargeable unless the debtor initiates an adversary proceeding, and is successful in convincing the bankruptcy judge assigned to the case to declare the debt dischargeable. I just discussed student loans in detail, so I won’t repeat that discussion here.
As for tax debts, there is a mechanical three-part test to determine whether a tax debt is dischargeable. First, the return for the given tax year must have been due, with extensions, more than three years before the petition date (the 3-year rule). Second, the debtor must have filed a legitimate, nonfraudulent return for the given tax year at least two years before the petition date (the 2-year rule). And third, the tax the debtor is seeking to discharge cannot have been assessed during the 240-day window prior to the petition date (the 240-day rule). There can be additional wrinkles depending on the facts of the case. And timing is crucial. If you’re even one day off you lose.
There may be a dispute over whether the debtor owes a debt to a former spouse. Child support and alimony obligations are not dischargeable in bankruptcy. However, while a debt to a spouse or former spouse that was incurred in a separation agreement of divorce decree is not dischargeable in a Chapter 7 or a Chapter 11, it is dischargeable in a Chapter 13.
There are other kinds of debts associated with divorce that can be murky, such as the attorney fees that were incurred as part of the divorce proceeding. Is that considered domestic support, or a nondomestic support debt to a former spouse? It depends on where you live because it is largely based on case law. Even though bankruptcy is federal law, if there is a state law question, state law controls. A debtor might want to initiate an adversary proceeding, if enough money is at stake, to have a determination that this particular debt is not support and would be dischargeable in a Chapter 13. If so, the debtor might pay a small fraction of the debt through the Chapter 13 plan, with the rest discharged at plan completion.
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