Discharging and Eliminating Debts
The goal of most people filing bankruptcy is a fresh start in life that is worry-free of debts. The goal is achieved once the person filing bankruptcy is granted a bankruptcy discharge by the bankruptcy court. A discharge enjoins or prohibits the commencement or continuation of any action or an act to collect, recover or offset any debt as a personal liability of the person filing bankruptcy. Plus the discharge voids any judgment that imposes personal liability on the person filing bankruptcy with respect to any debt discharged, whether or not discharge of the debt was waived by the bankruptcy filer prior to the date the bankrutpcy case was filed. Upon the entry of the discharge order by the bankruptcy court, a permanent injunction prevents the creditors whose debts were discharged from collection and other actions against the person filing bankruptcy personally. Violators of this injuncction could be harshly punished, including the imposition of fines, penalties, and monetary damages. If intentional, a contempt of court action could be brought against the offending creditor.
A bankruptcy discharge is a court order that generally provides that the person filing bankruptcy does not have to repay debts personally owed. The term bankruptcy discharge has been defined as a release of the bankruptcy filer from personal liability for certain dischargeable debts set forth in the bankruptcy laws. A discharge releases the person filing bankruptcy from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the bankruptcy filer to collect the debts. The discharge also prohibits creditors from communicating with the person filng bankruptcy regarding the debt. The bankruptcy discharge would stop credit card bill collectors, stop garnishments, stop harassing telephone calls, stop collection letters, and stop personal contact by the creditors.
The chapter 7 discharge discharges the person filing chapter 7 from all dischargeable debts that arose before the date the bankruptcy case was filed and any liability on any claim arising before the case was filed. The scope of discharge extends to all claims whether allowed or allowable, and whether or not the creditor contests the bankruptcy discharge or files a proof of claim. In short, a debt will be discharged unless the debt falls within a statutorily defined list of categories of nondischargeable debts.
The discharge is a permanent order prohibiting creditors from taking any form of collection action on discharged debts, including legal action and communications with the person filing bankrutpcy, such as telephone calls, letters, and personal contacts. Although the person filing bankruptcy is not personally liable for discharged debts, a valid lien like a house mortgage or vehicle lien that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien; but that same creditor would not have the right to collect personally against the person filing bankruptcy.
The goal of most people filing bankruptcy is a fresh start in life that is worry-free of debts. The goal is achieved once the person filing bankruptcy is granted a bankruptcy discharge by the bankruptcy court. The discharge voids any judgment that imposes personal liability on the person filing bankruptcy with respect to any debt discharged, whether or not discharge of the debt was waived by the bankruptcy filer prior to the date the bankrutpcy case was filed. Plus, a discharge enjoins or prohibits the commencement or continuation of any action or an act to collect, recover or offset any debt as a personal liability of the person filing bankruptcy. Upon the entry of the discharge order by the bankruptcy court, a permanent injunction prevents the creditors whose debts were discharged from collection and other actions against the person filing bankruptcy personally. Violators of this injuncction could be harshly punished, including the imposition of fines, penalties, and monetary damages. If intentional, a contempt of court action could be brought against the offendinng creditor.
A bankruptcy discharge grants a discharge to the person filing bankruptcy. A discharge is not a dismissal of the bankruptcy case and it does not determine how much money, if any, the trustee will pay to creditors. The bankruptcy discharge prohibits any attempt to collect from the person filing bankruptcy a debt that has been discharged. For example, a creditor is not permitted to contact the bankruptcy filer by mail, phone, or otherwise, to file or continue a lawsuit, to garnish wages or attach any other property, or to take any othre action to collect a discharged debt from the person filing bankruptcy. A creditor who violates the bankruptcy discharge order can be required to pay damages and attorney's fees to the bankruptcy filer.
However, a creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the bankrutpcy filer's property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case. Also a debtor may voluntarily pay any debt that has been discharged.
The chapter 7 discharge order eliminates the bankruptcy filer's legal obligation to pay a debt that is discharged. Most, but not all, types of debts are discharged if the debt existed on the date the bankruptcy case was filed or converted. Some of the common types of debts which are not discharged in chapter 7 bankruptcy are: debts for most taxes; debts incurred to pay nondischargeable taxes; debts that are domestic support obligations; most student loans; debts for most files, penalties, forfeitures, or criminal restitution obligations; debts that the bankruptcy court specifically decided are not discharged; debts for which the bankruptcy filer has given up the discharge protections by signing a reaffirmation agreement in compliance with the bankruptcy code reaffirmation requirements; and debts owed to certain pension, profit sharing, stock bonus, or other retirement plans.
The discharge order is entered by the bankruptcy court according to statutorily defined times. The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 case, the court typically grants the discharge approximately 60 days after the original date set for the Section 341 meeting of creditors. This 60 day period is not extended by any continuance of the Section 341 meeting date. Since the Section 341 meeting of creditors is typically scheduled for a date between 20 and 40 days after filing the bankruptcy case, the discharge should be granted approximately 80 to 100 days after the bankruptcy case was filed. In a chapter 13 case, no discharge is entered until after the person filing chapter 13 completes all of the payments set forth in the repayment plan confirmed by the bankruptcy court. Since a chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about three to five years after the bankruptcy case was filed.
The entry of the bankrutpcy discharge could be delayed by either the trustee or a creditor. To do so, the moving party must file a motion to extend time to file an objection to the entry of a discharge. That motion is time sensitive and must be filed prior to the discharge being entered. There are severe consequences for both the trustee and the creditor for failure to file the motion to extend the date or to untimely contest the entry of the bankrutpcy discharge. The trustee's or creditors' failure to object to discharge on a timely basis favors the person filing bankruptcy and results in the court entering a discharge order.
The person filing bankruptcy automatically receives a discharge approximately 60 days after the original date of the Section 341 meeting of creditors --- unless there is litigation involving objections to the discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee's attorney, if any. The person filing bankruptcy and his/her attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.
However, the bankruptcy discharge may be denied entirely if the person filing bankruptcy, for example, destroys or conceals propery; destroys, conceals or falsifies records; or makes a false oath. The bankrutpcy filer must tell the truth and disclose all assets, liabilities, income and expenses. Falsely portraying one's financial position could lead to the denial of the discharge.
The person filing chapter 7 bankruptcy is discharged of all personal debts in the overwhelming majority of cases. However, the discharge is not unlimited. Some statutorily defined debts are excluded from the discharge for public policy reasons. The list of some nondischargeable debts include:
- most taxes and customs duties;
- debts for money, property or services, or an extension, renewal or refinance of credit obtained by false pretenses, false representation or actual fraud, or by use of a written statement that is materially false with respect to the bankruptcy filer's financial condition, on which a creditor relied;
- consumer debts for luxury goods or services exceeding $500 incurred within 90 days of the filing;
- cash advances on open-end accounts exceeding $750 incurred within 70 days of the filing;
- unlisted or unscheduled debts in cases wherein the trustee distributes funds to unsecured creditors;
- debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny;
- domestic support obligations, including alimony and child support;
- debts for willful or malicious injury by the bankruptcy filer to the person or property of a creditor;
- any debt that is a fine, penalty or forfeiture;
- most student loans;
- debts arising from death or personal injury where the liability was incurred as a result of the operation of a motor vehicle, vessel or aircraft illegally due to the use of alcohol, drugs or another substance;
- debts from prior bankruptcy cases in which the debtor waived or was denied a discharge for a reason other than the eight-year bar;
- debts owed to a spouse, former spouse, or child, other than support obligations, in connection with property settlements and decrees in the dissolution of a marriage;
- debts for money borrowed to pay an otherwise nondischargeable federal, state or local tax liability; and
- debts owed to an ERISA-qualified pension, stock bonus, profit sharing or other plan.
Generally speaking, the exceptions to discharge listed above apply automatically. However, some of the exceptions apply only if a creditor brings an action against the person filing bankrutpcy. Failure to bring such an action results in the loss of the exception and the entry of a discharge order in favor of the bankruptcy filer. Consequently, dischargeability procedures can make life difficult for chapter 7 creditors. If a creditor believes its claim nondischargeable in chapter 7 because it is based on fraud, false pretenses, misrepresentation, false financial statement, embezzlement, larceny, defalcation by a fiduciary, willful and malicious injuries to persons or property or the debt is a nondischargeable property settlement, then the objecting creditor must file an objection with the bankruptcy court to the discharge of the claim within 60 days after the date first set for the Section 341 meeting of creditors or its claim will be dishcarged regardless of how good a case it might have on the merits for nondischargeabilty. The 60-day period is set in stone. The deadline can only be extended by a motion filed within that time period. If the 60-day period runs and no objection is filed or extension obtained, the court cannot extend the time and allow a late objection under any grounds, even on excusable neglect grounds.
A slightly broader discharge of debts is available to a person filing chapter 13 bankruptcy than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. Although a person filing chapter 13 bankruptcy generally receives a discharge only after completing all payments required by the court-approved confirmed repayment plan, there are some limited circumstances under which the bankrutpcy filer may request the court to grant a hardship discharge even though the person filing bankruptcy has failed to complete plan payments. Such a discharge is available only to a bankruptcy filer whose failure to complete plan payments is due to circumstances beyond their control. The scope of a chapter 13 hardship discharge is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge.
In chapter 7 cases, creditors have the right to object to the entry of a bankruptcy discharge if the person filing bankruptcy has engaged in conduct that renders the debt nondischargeable, as defined by the bankruptcy laws. The person filing chapter 7 bankruptcy does not have an absolute right to a discharge. An objection to the bankruptcy filer's discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an adversary proceeding.
The person filing bankruptcy may be denied a bankrutpcy discharge if the bankruptcy filer engaged in any of the following conduct:
- with an intent to hinder, delay or defraud the creditor or officer of the estate, transferred, concealed or removed property of the debtor within one year before the date of filing of the bankrutpcy case or property of the estate after the filing of the petition;
- has concealed, destroyed, mutilated or failed to preserve any record from which the bankruptcy filer's financial condition might be ascertained;
- knowingly and fraudulently, in or in connection with the case, made a false oath;
- has failed to satisfactorily explain any loss of assets or deficiency of assets to meet one's liabilities;
- has refused (a) in the case to obey any lawful order of the court, (b) on the ground of privilege against self-incrimination to respond to a material question or to testify after being granted immunity, or (c) on a ground other than a properly invoked privilege against self-incrimination to respond to a material question;
- has been granted a discharge in a chapter 7 or chapter 11 case within eight years before filing the petition;
- has been granted a discharge under chapter 13 in a case commenced within six years before the date the case was filed, unless payments under the repayment plan totaled at least 100% of the allowed unsecured claims or 70% of the unsecured claims and the plan was propsed in good faith and was the bankruptcy filer's best efforts; or
- the court approves a written waiver of discharge executed by the bankruptcy filer after the case was filed.
In chapter 13 cases, there are fewer exceptions to a bankruptcy discharge. These exceptions include (a) certain debts relating to alimony, maintenance, and support; (b) certain tax obligations; (c) debts for money, property or services, or an extension, renewal or refinance of credit obtained by false pretenses, false representation or actual fraud, or by use of a written statement that is materially false respecting the bankruptcy filer's financial condition, on which a creditor relied; (d) unscheduled debts not paid through the plan; (e) most student loan debts; (f) restitution and fines included in criminal sentences; (g) restitution, or damages, awarded in a civil action against the bankruptcy filer as a result of willful or malicious injury by the bankrutpcy filer that caused personal injury or the death of an individual; and (h) consumer debts incurred after the bankruptcy case was filed for property or services necessary for the bankruptcy filer's performance under the plan, for which the trustee's prior approval was practicable, but was not obtained.
A person can file more than one chapter 7 bankruptcy in a lifetime. A person filing chapter 7 bankruptcy can obtain a second bankruptcy discharge if that person waits long enough. The court will deny a discharge in a later chapter 7 case if the bankruptcy filer received a discharge under chapter 7 in a case filed within eight years before the second case is filed. The court will also deny a chapter 7 discharge if the bankruptcy filer previously received a discharge in a chapter 13 case filed within six years before the date of the filing of the second case unless (1) the bankruptcy filer paid all allowed unsecured claims in the earlier case in full, or (2) the payments under the plan in the earlier case totaled at least 70 percent of the allowed unsecured claims and the plan was proposed in good faith and the payments represented the bankruptcy filer's best effort. A person is ineligible for a chapter 13 bankruptcy discharge if the filer received a prior discharge in a chapter 7 case filed four years before the current case or in a chapter 13 case filed two years before the current case.
A bankruptcy discharge entered by the bankruptcy court can be revoked even after being entered under certain circumstances. On request of any creditor or the trustee and after notice and a hearing, the court may revoke a discharge upon a finding of certain gounds, including that the discharge was obtained through fraud and the requesting party did not know of the fraud until after the granting of the discharge. Another ground to revoke is that the debtor knowingly and fraudulently retains property of the estate. Next, the discharge can be revoked if the bankruptcy filer fails to satisfactorily explain a material misstatement in an audit. Plus, the discharge can be revoked if the person filing bankruptcy fails to make available for inspection all necessary accounts, papers, documents, financial records, files or property requested by an auditor. In a chapter 13 case, if confirmation of a plan or the discharge is obtained through fraud, the court can revoke the order of confirmation or discharge.
The revocation period is limited. An action to revoke a discharge must be brought not later than one year after the date the discharge order was entered if the discharge was obtained through fraud. On all other grounds, the action to revoke the discharge must be brought within one year of the date the discharge was entered or the case is closed, whichever is later.
Any debt can be voluntarily paid. The purpose of the discharge is to eliminate the duty to pay debts. So, a person who has received a discharge may voluntarily repay any discharged debt. A bankruptcy filer may repay a discharged debt even though it can no longer be legally enforced against the person filing bankruptcy. Sometimes a bankrutpcy filer agrees to repay a debt because it is owed to a friend or family member. No order of court is required to voluntarily pay a creditor.
Creditors who contact the bankruptcy filer after the discharge order has been entered are risking fines and other punishments. The bankrutcy discharge order acts as a permanent injunction prohibiting creditors from any and all collection activities relating to discharged debt. If a creditor has a question whether a debt is dischargeable or nondischargeable, then the creditor would be wise to ask the bankruptcy court for clarification. Unilateral interpretations can be hazardous to the creditor if the interpretation turns out incorrect in the end.
Violating the discharge order is a very serious matter. The attorney for the bankruptcy filer could move the court to reopen a closed bankrutpcy case for purposes of addressing the creditor's violation of the bankrutpcy injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by penalties, fines, fees, and costs.
An employer may not terminate an employee SOLELY because the employee filed bankrutpcy. The law provides express prohibitions against discriminatory treatment by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person who filed bankruptcy solely because the person filed the bankrutpcy, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.
A copy is always mailed to the person filing bankruptcy by the Clerk of the US Bankruptcy Court when the discharge order is first entered. But sometimes the orders are lost. You could contact your bankruptcy attorney for another copy. Alternatively, the discharge order can be obtained by contacting the clerk of the bankruptcy court that entered the order. The clerk of the court will charge a fee for searching the court records. If the case has been closed and archived there will also be a retrieval fee, and obtaining the copy will take longer.