CPA Exam — REG (Regulation)Business LawMedium
A debtor files for Chapter 7 bankruptcy. Among their debts are $50,000 in student loans, $10,000 in credit card debt for luxury goods incurred 3 months prior to filing, $5,000 in unpaid child support, and $2,000 in utility bills. Which of these debts is generally NOT dischargeable under Chapter 7 bankruptcy?
- ACredit card debt for luxury goods
- BUnpaid child support
- CStudent loans
- DUtility bills
Show answer & explanationAnswer & explanation
Correct answer: B. Unpaid child support
Certain debts are non-dischargeable in Chapter 7 bankruptcy. Unpaid child support is a domestic support obligation, which is explicitly listed as a non-dischargeable debt to protect dependents. While student loans are also generally non-dischargeable, they can be discharged if the debtor can prove 'undue hardship,' which is a high bar. Child support is almost universally non-dischargeable.
Why the other options are wrong
- A. Credit card debt for luxury goods incurred just before filing may be challenged as non-dischargeable due to presumed fraud, but it is not inherently non-dischargeable debt in the same category as child support or student loans. It requires specific action by a creditor.
- C. Student loans are generally non-dischargeable but can be discharged under specific, stringent 'undue hardship' criteria, making them potentially dischargeable, unlike child support.
- D. Utility bills are generally unsecured debts and are typically dischargeable in Chapter 7 bankruptcy.
Non-Dischargeable Debts (Chapter 7)
Specific types of debts that cannot be eliminated in a Chapter 7 bankruptcy and remain obligations of the debtor.
- Include certain taxes, student loans (absent undue hardship), domestic support obligations (alimony, child support), and debts incurred by fraud.
- The purpose is to prevent abuse of the bankruptcy system and protect certain creditors.
- Debtors remain liable for these debts even after the bankruptcy discharge.
Memory trick: FATS DUCKS are Not Discharged.