The Basics: the Bankruptcy Discharge of Debts
“Discharge” is the permanent legal elimination of debts.
Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are designed to finish with a discharge of your debts. A discharge provides you with permanent relief from your debts by making any further collection efforts by your creditors illegal.
Most Chapter 7s do finish with a discharge of all or most of the debtors’ debts. Chapter 13s are more challenging—they require complying with a schedule of payments lasting usually 3 to 5 years. A successful completion of the plan usually results in the discharge of all or most of your unpaid debts.
Unless Some Exception Applies, You “Shall” Get a Discharge
The Bankruptcy Code makes clear under both Chapter 7 and 13 that the “court shall grant a discharge.” (See Sections 727(a) and 1328(a).) Yes, there are exceptional situations when no discharge is granted, some of which we’ll touch on in a moment. But the point here is that the law starts with the assumption that you are entitled to a discharge of your debts through bankruptcy.
The burden is mostly on your creditors and your bankruptcy trustee to raise any objections to your entitlement to a discharge. There ARE some specific categories of debts that aren’t discharged even without anyone objecting. But again the overall assumption is that each debt will be discharged unless it fits those exceptions.
What Exactly Happens When Debts are Discharged?
In both Chapter 7 and Chapter 13, towards the very end of your case the bankruptcy judge signs a court order discharging your debts. The legal effect of that discharge order is described in Section 524(a)(2) of the Bankruptcy Code as follows:
“[It] operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor… .”
This means that after the court issues the discharge order, your creditors can’t sue you, can’t continue with an ongoing lawsuit against you, and can’t take any action at all to collect the debt. Forever.
Does this Law Have Some Teeth to It?
Creditors seldom attempt to collect a debt after it has been discharged in bankruptcy because they know doing so is illegal. It would be a violation of federal law, and a violation of a direct federal court order (which is sent to all your listed creditors right after the judge signs it).
But if a creditor DOES disregard the law, and does anything to try to collect a discharged debt, the bankruptcy does judge can hold this creditor in contempt of court for violating its order. Depending on the seriousness of the creditor’s illegal behavior, the court may require it to pay punitive damages, your attorney fees, and other possible sanctions.
Two kinds of exceptions to discharge exist—those that result in no discharge of ANY of your debts because of circumstances affecting your whole case, and those exceptions which result in just a PARTICULAR debt not being discharged because of the nature of that debt
Rare Circumstances in Which You Don’t Get Any Discharge
If you act in ways that are in effect a fraud on the bankruptcy court, you could jeopardize your right to a discharge of your debts. These bad actions include hiding assets from the bankruptcy trustee, destroying or selling such assets, hiding or destroying financial or business records, lying under oath, and disobeying a bankruptcy court order.
You can also lose your right to a discharge by filing a bankruptcy too soon after getting a discharge of debts in a prior bankruptcy case.
Some Types of Debts Specifically Not Discharged
Section 523 of the Bankruptcy Code lists a series of “exceptions to discharge”—debts which are either never discharged or are not discharged under certain circumstances. They include:
- most but NOT ALL taxes
- debts that you incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
- debts which were not listed on your bankruptcy schedules on time
- money owed because of alleged embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
- child and spousal support
- non-support obligations to an ex-spouse (except under Chapter 13)
- claims against you for intentional injury to another person or their property
- most but not all student loans
- claims against you for allegedly causing injury or death to someone by driving (or boating and flying!) while intoxicated!
As long as you behave honestly and diligently in preparing and proceeding through your bankruptcy case, you will very likely get a discharge. If so, you may nevertheless still have a debt or two of a type that won’t or might not be individually discharged. Be sure to see an experienced bankruptcy attorney to get advice about your own situation and to discharge the maximum amount of debts.