The Bankruptcy Discharge Wipes Away Debt Via Federal Court Order
For most debtors, the bankruptcy discharge is the reason they go through with the stress of bankruptcy in the first place. The discharge is a Court Order that terminates the debtor’s personal liability for debts disclosed in the bankruptcy filing. Common debts eliminated by the bankruptcy discharge are credit card bills, medical bills and personal guarantees on real estate and car loans.
What Does it Mean to “Include” a Debt in Bankruptcy?
In the typical chapter 7 bankruptcy, the debtor will give a list of all their creditors and debts to their bankruptcy attorney. As part of preparing the case, the attorney will then file the list, called the creditor matrix, with the Bankruptcy Court. The creditor matrix includes the addresses of each creditor the debtor seeks a discharge from. Once a bankruptcy case has been filed, the Court will send written notice (a Notice of Commencement) to all creditors listed in the petition. The Notice of Commencement alerts creditors to the fact that a bankruptcy case has been filed and that a stay is in place which prevents them from contacting the debtor. Absent any problems with the case, the Court will mail a copy of the discharge order to the debtor and all their creditors approximately four months after the case has been filed.
How is the Bankruptcy Discharge Enforced?
The bankruptcy discharge is Court Order, signed by a Judge, which prohibits creditors from collecting on debts included in the bankruptcy filing. Creditors who continue to pursue debtors after bankruptcy, do so in contempt of court and face fines and sanctions. Despite the fact that the are violating the law when they do so, some creditors will try to collect from debtors even after they have received their bankruptcy discharge. For this reason, it is usually a good idea to keep a copy of your discharge order as well as a copy of your bankruptcy filing so that you can quickly deter future harassment. Usually, faxing a copy of the discharge order will be enough to stop the collection activity, but if you find yourself consistently contacted about a discharged debt, contact your attorney. For more information, see: Have You Been Sued by a Creditor After Bankruptcy?
How Soon After the Chapter 7 Case is Filed Will the Discharge Papers be Received?
Approximately two months after the chapter 7 bankruptcy case has been filed, the Bankruptcy Court will issue an order, signed by the Bankruptcy Judge, formally discharging debts included in the bankruptcy. The bankruptcy discharge papers will be sent via mail to the debtor and all creditors by the Bankruptcy Court.
What Types of Debts Will be Eliminated by the Chapter 7 Discharge?
As a general rule, the chapter 7 discharge will eliminate all unsecured debt, such as credit card debt, medical bills and personally guaranteed loans. Be aware that the bankruptcy discharge will not relieve your obligation to pay the mortgage or a car loan if you wish to keep the property. Alternatively, if you wish to surrender a home or car, you can do so with no continuing obligation to your lender as the bankruptcy discharge will break your personal guarantee. For more information, see: What Types of Debt Will Filing for Bankruptcy Get Rid Of?
How Does the Chapter 13 Discharge Work?
Unlike chapter 7 bankruptcy which is over in a matter of a few months, filing for chapter 13 protection takes quite a bit longer. Chapter 13 bankruptcy involves crafting a repayment plan with the help of your attorney in which you will pay back a percentage of your unsecured debts over a three to five year period. the amount of debt that you pay back hinges on your disposable income after expenses. Once a Chapter 13 debtor successfully completes their repayment plan any amounts left outstanding are then discharged. To put it simply, chapter 13 bankruptcy provides the opportunity for discharge once a repayment plan has been completed. Anything that you owed for bankruptcy that was not paid in your plan is wiped clean as part of the discharge.
What are the Limitations of the Discharge?
Child support obligations, student loan debt and debts incurred through drunk driving are not dischargeable in bankruptcy. Similarly, debts incurred through fraud cannot be eliminated in bankruptcy. Section 523(a) of the Bankruptcy Code lists the following types of debts that are deemed non-dischargeable:
1. Certain income taxes
2. Debts incurred under false pretenses or deceit
3. Purchases of luxury goods or services for $500 or more and made within 90 days of filing bankruptcy
4. Cash advances of $750 or more made within 90 days of filing bankruptcy
5. Unlisted debts (this is a big one, to get a discharge, you must list the debt)
6. Debts incurred fraudulently or as a result of embezlement
7. Domestic support obligations (Child support is a common domestic support obligation)
8. Government fines such as traffic tickets
9. Student loans absent showing of undue hardship
10. As mentioned above, drunk driving debts
The above list is certainly not exhaustive and the Bankruptcy Code does address other scenarios where certain debts are non-dischargeable. We’ve tried to list the debts that most commonly apply to consumers here. For more information see: Recently Used Credit Cards? Bankruptcy Might Have to Wait and Is Student Loan Debt Bringing Down Your Standard of living?