Debt Discharge

Discharge in the bankruptcy sense refers to clearing the debtor's slate of all, or most, past debts. Although many people expect that filing bankruptcy will wipe out all of their debts, that is not always the case. Bankruptcy only discharges certain debtors of certain debts. The availability of discharge depends on the type of bankruptcy proceeding involved, who the debtor is, and what type of debts the debtor has.

In a Chapter 7 liquidation case, only individuals, and not business entities, are entitled to a discharge. Also, if the debtor was in some way dishonest or uncooperative, such as by making fraudulent transfers of his or her assets, or failing to keep adequate records, discharge may be denied under Chapter 7. The event that triggers the discharge also differs for different Bankruptcy Code chapters. In Chapter 11 reorganization cases, if the plan of reorganization is approved, the debtor will receive a discharge. In Chapter 13, however, confirmation of the plan does not trigger discharge; rather, discharge will occur after the completion of the payments provided for by the plan.

Even after discharge is granted, however, certain debts remain. The timing of the debt is one factor. In a Chapter 7 case, only debts that arose before the date of the order for relief will be discharged. Under Chapter 11, discharge relates only to those debts that arose before confirmation of the plan or reorganization. Section 523 of the Bankruptcy Code sets out other exceptions to discharge applicable in Chapter 7 cases and Chapter 11 cases in which the debtor is an individual. Many of these exceptions relate to debts involving some type of fraudulent conduct by the debtor. A Chapter 13 discharge affects only those debts provided for by the plan. Additional exceptions to a Chapter 13 discharge include claims for spousal and child support; educational loans; drunk driving liabilities; criminal fines and restitution obligations; and certain long-term obligations, such as home mortgages, that extend beyond the term of the plan. These need to be paid even after the bankruptcy is completed and the discharge obtained.

When a discharge is granted, it protects the debtor from any further liability on the discharged debts. No legal action may be taken against the debtor to collect on discharged debts, and no collection calls or letters may be sent with regard to such debts. A discharge does not actually cancel or extinguish the debt, however, it merely extinguishes the debtor's personal liability. Also, a discharge does not automatically discharge co-debtors' or guarantors' liability.

A bankruptcy discharge also has no effect on liens. Take, for example, the situation in which the debtor owes the creditor $5,000 and the debt is secured by the debtor's car, which is worth $3,000. If the debtor files for Chapter 7 relief and receives a discharge, the discharge does not extinguish the creditor's security interest. In other words, the creditor can still repossess the car. It cannot, however, go after the debtor for the $2,000 difference between the debt and the value of the security. That is the personal protection afforded to the debtor by the bankruptcy discharge.

An experienced bankruptcy attorney can inform debtors on whether their debts will be discharged by bankruptcy, and can advise creditors on how debts owed to them will be affected by a bankruptcy discharge.

Checklist: Debts That Are Not Discharged In Bankruptcy

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Debts That Are Not Discharged in Bankruptcy

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This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.