FAQ: Debt Discharge in Bankruptcy

These questions and answers can help you to understand the benefits of a Chapter 7 bankruptcy discharge.

What is a “Discharge” in Bankruptcy

The bankruptcy discharge exempts the debtor from certain types of personal liability. This means that the debtor is no more legally obligated to pay any discharged debts.

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A discharge is a permanent order that prohibits the creditors from taking any type of collection action on the discharged debts. This includes communications with the debtor such as phone calls, letters and personal contacts.

A debtor is not personally responsible for any discharged debts. However, a valid lien, which is a charge on specific property to pay a debt, that has not been avoided in bankruptcy will still be in effect. A secured creditor can enforce the lien to recover any property that is secured by it.

When does the discharge occur?

The chapter under which the case was filed will determine the timing of the discharge. Chapter 7 (liquidation) cases, for instance, usually grant discharge immediately after filing.

The deadline for filing a complaint against discharge

60 days after the date of the first creditors’ meeting, the time for filing a motion for dismissal in case of substantial abuse

This usually occurs approximately four months after the filing of the petition with the bankruptcy clerk. The court grants discharge in individual Chapter 11 cases and Chapter 12 (adjustment debts of a family farmer/fisherman) cases. This happens as soon as the debtor has made all payments under the plan.

The discharge usually occurs approximately four years after the filing date, as Chapter 12 and Chapter 13 plans may allow for payments over three to five year periods. If the debtor does not complete an “instructional course regarding financial management”, the court can deny a Chapter 7 or Chapter 13 case discharge.

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The Bankruptcy Code allows for limited exceptions to the “financial managing” requirement. This is if the U.S. trustee/bankruptcy administrator finds inadequate education programs or if the debtor becomes disabled, incapacitated, or is on active military service in a combat zone.

What is the process for a debtor to get a discharge?

Unless there are any legal proceedings involving objections to discharge, the debtor will generally receive a discharge. Federal Rules of Bankruptcy Procedure allow the bankruptcy court clerk, to mail a copy of a discharge order to all creditors, U.S. trustees, trustees in the case and trustee’s attorney if necessary.

Copies of the discharge order are also sent to the debtor and his attorney. This notice is a copy the final order to discharge the debtor. It does not specify which debts were deemed non-dischargeable by the court. The notice informs creditors that all owed debts have been paid and they are not allowed to collect.

The notice warns them that continued collection efforts could result in contempt. The validity of the order granting discharge does not change if the clerk fails to promptly send the creditor or debtor a copy.

Are all of the debtors’ debts discharged or just a few?

All debts may not be discharged. The Code exempts certain debts from discharge. These debts must be repaid even if bankruptcy is granted. These types of debts cannot be discharged for public policy reasons by Congress. This is based on either the nature of the debt or whether the debts were incurred because of an improper behavior such as drunken driving.

Chapters 7, 11 and 12 exempt 19 types of debt from being discharged. Chapter 13 cases are exempt from discharge. A smaller list of exceptions applies. These are the most common nondischargeable types of debts:

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Certain tax claims are not allowed
Defaults by the debtor not listed on the schedules and lists the debtor must file with court
Debts for child support, spousal and alimony
For willful and malicious injury to property or person, you may be liable for debts
For fines or penalties, debts to governmental units
For most government-funded, guaranteed educational loans and benefit over-payments, there are usually debts
Personal injury claims for debts resulting from the debtor’s driving a motor vehicle while under the influence
Certain tax-advantaged retirement programs may owe debts
For certain condominium and cooperative housing fees, debts

In a Chapter 13 case, a debtor can get a slightly wider discharge of debts than in a Chapter 7 one. Chapter 13 debts are dischargeable, but not Chapter 7. Chapter 7 debts do not. Willful or malicious injury to property Non-dischargeable taxes obligations – Debts Property settlements in divorce proceedings or separation proceedings can lead to debts

A Chapter 13 debtor is generally discharged only after they have made all payments as required by the court-approved, i.e. “confirmed” repayment plan. However, there are limited circumstances in which the court may grant a “hardship discharging” even if the debtor has not completed the plan payments.

This discharge is only available to debtors who are unable to make plan payments due to circumstances beyond their control. Chapter 13 “Hardship discharge” is similar to Chapter 7 in that it covers the types of debts exempted from discharge. Chapter 12 also allows for hardship discharge if the debtor fails to make plan payments due to “circumstances not to be held responsible.”