They also noted that the 5th, 10th, and 1st Federal Circuits have recently overturned the two-year rule, barring all tax liabilities from late-filed returns from being discharged in bankruptcy
; however, a bankruptcy appellate panel in the 9th Circuit rejected the arguments in those cases and allowed discharge, a decision the 11th Circuit later agreed with.
Economically, this makes sense: private lenders have no accountability for their high interest rates--currently, they are taking advantage of the system by charging interest rates to borrowers who really should not be taking out loans because the lenders know the loans they give out cannot be discharged in bankruptcy
. Making private loans dischargeable would incentivize private lenders to be more stringent with their eligibility requirements and should greatly reduce the amount of loans private lenders would approve, knowing that their loans are now dischargeable.
If the debtor has been paying on the federal student loans for the ten years, then the debtor can file for the federal student loans to be discharged in bankruptcy
just like any other debt.
* Generally, tax debts that may be discharged in bankruptcy
are income tax debts that are not recent-from returns due more than three years before the bankruptcy filing, or, for filed returns, those more than two years old.
Non-opportunistic debtors benefit from filing for bankruptcy if the amount of debt discharged in bankruptcy
[D.sub.p] exceeds the cost of filing for bankruptcy [C.sub.p] plus the value of non-exempt wealth that debtors must give up, which is either W - [X.sub.p] or zero, whichever is greater.
However, when a debt is discharged in bankruptcy
, no income is realized.
Therefore, the taxes associated with the return are not discharged in bankruptcy
As a result, if an unpaid tax debt is discharged in bankruptcy
, the interest on that tax is also eliminated.
Debt tied to fraud can't be discharged in bankruptcy
court, a lesson Diane M.
(9) If the right to payment is an "alternative" to the right to an equitable remedy, the necessary relationship clearly exists--"the two remedies would be substitutes for one another." (10) In such cases, the creditor holds a claim that can be discharged in bankruptcy
. Whether an equitable remedy gives rise to a right to payment is typically determined under the applicable state or federal law.
Some debts cannot be discharged in bankruptcy
and remain a debtor's binding obligation even if the court grants a bankruptcy discharge.
Taxes can be discharged in bankruptcy
in either a chapter 7 or a chapter 13 filing.