What Exactly Is A Discharge In A Bankruptcy?

In this article, you will learn:

• Facts about discharges during bankruptcy
• About debtor and creditor rights during bankruptcy

The discharge is what every debtor wants out of bankruptcy. The discharge is this almost magical item that, in essence, gets rid of the debt you had before the bankruptcy. But technically speaking, it doesn’t really get rid of the debt. Instead, it creates a situation where your creditors can no longer collect that debt from you. So, all the debt that you come in with before the bankruptcy, you get an automatic stay that prevents creditors from collecting from you during the bankruptcy. Then, on the consummation of that bankruptcy, you get your discharge which is an injunction that prevents your creditors from attempting to collect the debt that was owed before the bankruptcy from you forever, barring some change in circumstance or your independent agreement to repay that debt after the bankruptcy.

So, it is what some other bankruptcy lawyers have called a gift from the federal government to debtors to allow you to get a clean slate, moving forward after the bankruptcy.

What Debts Are Going To Be Dischargeable In My Chapter 7 Bankruptcy?

The easier way to describe the dischargeable debts may be that the debts that are not dischargeable in bankruptcy. The underlying assumption in your Chapter 7 case is that all your debts will be discharged. But there will be a specific list in the bankruptcy code of various debts that are not. For most people, those debts will be secured debt, which is secured by property. So, if you still have a home, car, or something else that you are paying for but that is secured by that item like a mortgage or your car note, you will have to either give back that property or reaffirm that debt going forward. The other big item that hits most people is student loan debt, which is not going to be discharged except for certain exceptions.

Other than secured debt and student loan debt, most of the other debt that your general consumer bankruptcy debtor will have will be discharged in the bankruptcy. Barring fraud or some other odd situations that are not typical, just about every debt you have will be discharged.

At What Point Does The Discharge Actually Occur In Chapter 7?

In Chapter 7, your discharge will be granted near the end of your case. You will file your initial petition filing to start the bankruptcy and then you will be assigned to a judge and a trustee will be assigned. The trustee will set a date for your creditor’s hearing, or 341 hearing, where the trustee and creditors may ask you some questions. Your creditors will also be able to ask you some questions at that meeting. Then, within about 45 to 60 days after that hearing, barring some unusual circumstances, you will receive your discharge. Unless some creditor appears within 30 to 60 days after that discharge to file an independent action in your bankruptcy to exclude a specific debt from discharge or to exclude you from being able to obtain a discharge for some reason, then that’s it.

Would The Court Ever Deny A Discharge In A Chapter 7 Case?

There are a couple of bankruptcy code provisions that would provide for the denial of a discharge for a debtor in Chapter 7. One section of the bankruptcy code provides for a flat-out denial of any discharge of any debt to the debtor, and that section is a death knell for a Chapter 7. Suppose a creditor seeks and obtains a determination from the bankruptcy court under that provision that you are unable to obtain a discharge. In that case, none of your debts that exist as of the date of the petition can ever be discharged. However, that situation is very rare. Still rare but more common is a provision in the bankruptcy code that allows for the non-dischargeability of specific debts. Often that provision will be raised by creditors if they want their specific debt to be excluded from discharge. This is much more common than the complete dischargeability issue because if a creditor allows you to obtain a discharge of any debt that you may have other than that particular creditor’s debt, then that creditor will have a much easier time collecting its debt from you.

Does The Debtor Have An Absolute Right To A Discharge, Or Can Creditors Challenge It?

Except in rare situations, creditors cannot object to the discharge once it is awarded, and a debtor in bankruptcy, absent specific circumstances set out in a couple of provisions in the bankruptcy code, will be entitled to that discharge. So, barring those rare circumstances, which typically would include fraud or some other improper action by the debtor at some point before the bankruptcy, or during the bankruptcy, the debtor will be entitled to that discharge.

Creditors can object to or file a claim under certain bankruptcy situations or object to the debtor’s listing of their debt. The most likely way a creditor could prevent the discharge of certain debt is by filing a non-dischargeability action called an “adversary proceeding.” In an adversary proceeding, the creditor could ask the court to declare either the debtor’s entire debt non-dischargeable (which is rare), or to hold that particular creditor’s debt should be non-dischargeable (less rare but still doesn’t happen often). While these adversary proceedings are rare, you are most likely to see these arise where there is a larger debt – often a personal guaranty related to the debtor’s business.

Can Or Should A Debtor Ever Repay A Discharged Debt After A Bankruptcy Has Concluded?

If the debtor so chooses, he or she can voluntarily repay any debt that was discharged in the bankruptcy. There are some circumstances where a debtor might want to do just that. One common situation involves what I refer to as an “insider creditor.” For example, the debtor gets a loan from Mom and Dad or mother and father-in-law and obtains the discharge of bankruptcy but voluntarily decides to repay that debt for the sake of family feelings, etc. Another situation might arise if the debtor has a co-debtor or guarantor on the debt. For example, the debtor gets a discharge of certain debt related to a car, but mom or dad was a guarantor on the loan. So, the debtor wishes to repay the creditor to avoid having Mom and Dad have to make that payment.

For more information on Discharge For Debtors Under Bankruptcy Code, an initial consultation is your next best step. Get the information and legal answers you seek by calling (205) 506-3354 today.