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Can Government Debt Be Wiped Out in Bankruptcy?

Many people take government loans to start a business, or pay for their education, etc. However, when things don’t work out, they may find themselves on the hook for their federal loan. Luckily, if the circumstances are right, then you can discharge (eliminate) your obligation to repay government debt.

Nonetheless, not all government debt will be wiped out. For instance, if you pledged any of your assets as collateral for your loan, filing for bankruptcy might not remove the lien on that property. That’s why you need an experienced bankruptcy lawyer in Oregon who can assess your case and determine if bankruptcy can indeed help your situation.

What Government Debts Are Dischargeable in Bankruptcy?

When seeking a federal loan discharge, it is assumed that the debt is honestly incurred and is unsecured. Secured loans mostly have a lien and will generally survive a Chapter 7 bankruptcy.

Income Tax

Income taxes are dischargeable under certain circumstances. The rules for tax debt aren’t quite so clear cut, but you generally have three elements that need to be satisfied for a successful tax debt discharge:

  • The taxes can only be discharged after at least three years have passed since they were due. For example, 2020 taxes are due in April 2021 and can only be discharged after April 2024.
  • You must have filed a tax return at least two years before your bankruptcy. So it would be impossible to discharge a tax debt if you never filed a return.
  • Taxes need to be assessed within 240 days before your bankruptcy filing.

You may need to work closely with a CPA and Eugene bankruptcy attorney to determine whether bankruptcy is a possible alternative to resolving your federal tax liabilities.

SBA Loans

A federal agency (Small Business Administration) gives SBA loans to small business owners who wish to start or expand a business. And yes, SBA loans can be discharged like any other business loan if it wasn’t incurred fraudulently. Because they are government loans, most people think they are non-dischargeable.

The only catch is that SBA loans are often secured, and business owners are required to sign a personal guarantee making the owner responsible. Still, the business owner can eliminate their personal guarantee of the loan.

One strategy you can use is to file personal bankruptcy, discharge the debt personally, then engage the SBA for a discounted settlement of the lien on personal property. This means that the debt would be discharged, but the SBA can still repossess/foreclose on any collateral unless your bankruptcy lawyer makes an appropriate payment arrangement. It’s best to speak to an experienced Oregon bankruptcy attorney near you to see what options are available to you.

Social Security Overpayments

If you received social security overpayments in the past, your current benefits would not be deducted after filing for bankruptcy in Oregon.

Government Guaranteed Student Loans

A common myth flying around is that you cannot wipe out or reduce a student through bankruptcy. Since most people are often told they need to have a disability where they are unable to work, many don’t use bankruptcy as a way to earn debt forgiveness.

However, your student loan can be discharged if you can show a judge that you meet the “undue hardship” standard. This is a very tough standard to prove, and requires you to show: 1) Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans; 2) Your current financial situation is likely to continue for a big part of the repayment period; and, 3) You have made a good faith effort to repay your student loans.

What Government Debts Survive Bankruptcy?

Fines, Penalties, and Restitution

If for some reason you’ve been fined by a government agency, or subjected to a penalty, then this debt will not be discharged through Chapter 7 bankruptcy.

Trust Fund Payroll Taxes

Bankruptcy treats trust fund taxes differently. This form of tax has a priority for payment and can’t be discharged in bankruptcy.

A Skilled Attorney Offering Legal Advice in Eugene, OR

The discharge process may never go as smoothly or quickly as debtors might wish. Discharging federal debt through bankruptcy might be difficult for you if you don’t understand the intricacies involved in the process.

If a significant portion of your debt consists of government debt, consider seeking the legal advice of an experienced bankruptcy lawyer. Your lawyer will review your situation and offer you options and the likely outcome. Talk to Eugene, OR bankruptcy attorney Tom Butcher by calling (541) 762-1967.

Tom Butcher, Attorney At Law

Tom Butcher is the owner and attorney at Butcher Law Office, LLC. He represents clients in financial distress in Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. Tom offers a friendly, respectful, and compassionate experience for clients who are in financial and legal distress. Rather than taking a mechanical approach to filing bankruptcy for clients, like other bankruptcy firms, Tom strives to offer a personal, one-on-one experience, where the client’s situation is of utmost importance. Tom believes this personal attention keeps him connected to the community, and serves his clients best during their bankruptcy.
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