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Which debts cannot be discharged through Chapter 11 bankruptcy?


Residents of Tyler, Texas, may have heard about individuals and businesses going bankrupt or filing for bankruptcy and thereby recovering from debt. However, not many may realize that this is rarely as simple as it sounds. There are different kinds of bankruptcy petitions for which debtors may or may not qualify, depending on the nature of their financial difficulty. Filing a bankruptcy petition does not automatically imply a discharge of debt.

Filing for Chapter 11 bankruptcy, for instance, implies that a firm in trouble opts to go in for debt reorganization rather than outright liquidation of assets. While liquidation is a possibility, it is an option for the creditors rather than for the debtor. Typically, businesses which go in for liquidation under Chapter 11 of the bankruptcy code cannot have their debts discharged, ensuring that creditors are repaid. Even a reorganization plan, however, must have the support of most of the creditors, irrespective of the proposed manner of repayment.

In the case of individuals filing a petition under Chapter 11, the plan proposed only becomes effective upon making all required payments. Bankruptcy does not allow individual debtors to skip child support or alimony payments, or release them from liabilities arising from accidents. Similarly, individuals may continue to be responsible for some taxes, as well as government-backed loans. This guarantees that the discharge sought is related to genuine financial problems rather than debts incurred due to negligence and ill-intent.

Both individuals and businesses are required to undergo credit counselling prior to filing a petition. In the case of individuals, counselling can be useful in coming up with a plan by which to repay all existing debt. Another requirement is the payment of court-ordered fees; if unpaid, the petition is likely to be dismissed. These measures have the primary effect of keeping in check any frivolous petitions, and make sure that courts do not waste time dealing with debtors who just seek debt relief without any attempt at addressing their financial situation.

Source: USCourts.gov, "Reorganization Under the Bankruptcy Code," Accessed on Aug. 7, 2014

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