In your goal of getting a fresh financial start, your most important tool is the “discharge”–the permanent legal elimination of your debts.
Whether you file a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts,” they are both designed to finish with a discharge of some or all of your debts. A discharge gives you permanent relief from your debts. It does so by making it illegal for your creditors to take any further collection action on them.
Most Chapter 7 cases finish in less than 4 months with a court order discharging all or most of your debts. Sometimes you have to give up some asset(s) in return, but not usually.
Chapter 13 cases take a lot longer and usually (but not always) require paying at least something to all your creditors. Chapter 13 requires proposing and getting approval of a formal plan of payments lasting usually 3 to 5 years. Your successful completion of this payment plan results in the discharge of all or most of your remaining debts.
You “Shall” Get a Discharge (Unless There’s a Specific Exception)
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) of the Bankruptcy Code.) Yes, there are exceptions. But the law starts with the assumption that you are entitled to a discharge of your debts through bankruptcy.
There are some specific categories of debts that simply aren’t discharged. But otherwise the burden is on your creditors and your bankruptcy trustee to object to your entitlement to the discharge. Those objections are relatively rare, and your lawyer will inform you about any that may apply to you.
What Happens Exactly When Debts are Discharged?
Near the very end of both a Chapter 7 and Chapter 13 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 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. This injunction lasts forever.
Enforcing This Injunction
For a creditor to try to collect a debt discharged in bankruptcy is illegal. It’s a violation of federal law and of a federal court order. So creditors very seldom try to collect a debt once it’s been discharged.
But if a creditor does do anything to try to collect a discharged debt, a bankruptcy judge can hold this creditor in contempt of court for breaking the law and violating its order. Depending on the seriousness of the creditor’s illegal behavior, the court may require it to pay you punitive damages, your attorney fees, and other possible sanctions.
Our next blog post will get into the specific types of debts that would not or may not be discharged.