Bankruptcy Discharge

A bankruptcy discharge is the legal holy grail for anyone who files for bankruptcy. A discharge means there’s a court order in the bankrupt’s case that erases all qualifying debts.

Creditors who once hounded you have been silenced and must no longer be paid, because the court has discharged your debts. Your personal liability is at an end, your obligation to pay canceled.

“Bankruptcy discharge … is the final nail in the coffin for your credit card debt,” says Adrienne Hines, a bankruptcy attorney for more than 20 years in northern Ohio. “It’s your permanent protection from those past creditors who were included in the bankruptcy.”

What Is a Discharge in Bankruptcy?

A discharge is a court order that marks the conclusion of the bankrupt’s case. It’s a legal document that says the filer has met all the obligations set before him/her under the bankruptcy code, and therefore is no longer responsible to repay whatever balances remain on qualified debts.

Desperate debtors might come to bankruptcy as a last resort — what happens after filing is often a rough ride — and for a wide variety of reasons. But each filer’s goal is the same: Get relief from creditors and either forgiveness for debt balances (Chapter 7), or an arrangement to pay off most or all of their debt under a court-directed plan (Chapter 13).

Bankruptcy is not a one-size-fits-all proposition. Seattle bankruptcy attorney Richard J. Symmes calls it a “very specific case-by-case question.”

In Chapter 7, “People may lose assets if they are not protected by exemptions,” Symmes says, but protecting assets can be problematic. “They may have to repay all debt in a Chapter 13 plan. In some cases, they may not be able to afford a Chapter 13 plan or feel restricted by a Chapter 13 plan.”

Perhaps most important, after the court-ordered discharge, bankrupts are shielded from creditors, who are banned from pursuing debtors for unrecovered debt.

With their discharge order in hand (and duly filed with the clerk of court), bankrupts are released to begin rebuilding upon their personal finances.

When the lessons of bankruptcy have been well-learned, such fresh starts are not taken lightly. Still, because the bankruptcy code accounts for the fallibility of individuals, multiple filings are both allowed and not unheard of.

» Learn More: Filing Bankruptcy Twice

How Does a Bankruptcy Discharge Work?

While there are different requirements and expectations for Chapter 7 and Chapter 13 filers, the ultimate outcome of a discharge remains the same: the filer is no longer obligated to repay certain qualifying debts.

“Chapter 7 and Chapter 13 are very different,” Hines says, “but they both require a complete accounting of your income, assets, household size, debts, state/region, and actions in the 6-24 months before filing.”

Chapter 7 bankruptcy, also known as “straight” bankruptcy or “liquidation” bankruptcy, is the most straightforward of an individual’s options. Certain qualifying assets are turned over to the court’s representative to be sold and the proceeds paid out to creditors. Assuming the filer fulfills all the other requirements of his/her bankruptcy case, the remaining balances on most unsecured debts will be discharged, or wiped out.

“Chapter 7s seem easier,” Hines says, “but I’ve seen a lot of people without lawyers get pretty lost in the bankruptcy system.”

Under Chapter 13 bankruptcy, often called “reorganization” bankruptcy, applicants most complete a court-directed repayment plan, usually ranging from three to five years. Only then will the bankruptcy court issue a discharge order. In the meantime, however, creditors cannot badger you for payments.

“Chapter 13 has a dismal success rate for people who file them without a lawyer,” Hines says, “and they should not be undertaken at all without extensive legal consultation.”

Debts Discharged in Bankruptcy

Individuals seeking Chapter 7 bankruptcy protection will, if successful, see their slates wiped clean of a variety of unsecured debts. Debts eligible for discharge in a Chapter 7 bankruptcy include:

• Credit card balances, including overdue and late fees.
• Collection agency accounts.
• Past-due rent and unpaid balances under lease agreements.
• Medical debt.
• Personal loans, including those from friends, family, and employers.
• Past-due utility payments.
• Repossession deficiency balances.
• Business debts.
• Most attorneys’ fees.
• Government program overpayments, including welfare, Social Security, and veterans’ assistance plans.
• Personal loans.
• Other unsecured debts.

Debts Not Eligible for Discharge

Even a successful discharge cannot get those who file off the hook for certain debts. Individuals filing Chapter 7 bankruptcy still must wrestle with most federal student loans, tax debts, and more. Chapter 13 bankrupts must complete a payment plan, but the courts may grant a “hardship discharge” under rare circumstances.

The following lists the most the most common debts bankruptcy cannot erase.

• Tax.
• Most federal student loans.
• Auto loans.
• Debts secured by liens.
• Debts excluded from court filings.
• Child and spousal support.
• Alimony.
• Money owed as a consequence of wrongdoing that injures someone, or damages property.
• Debts incurred by fraud.
• Court costs.
• Government fines and penalties.
• Debts related to damages or injuries caused when driving under the influence of alcohol or drugs.
• Certain retirement plan loans.
• Mortgages, co-op, condo, and homeowners’ association fees.

Consequences of Bankruptcy Discharge

The foremost consequence of a bankruptcy discharge is the debtor is released form the legal obligation to pay another penny toward the debts that have been eliminated.

But there are consequences of bankruptcy that must be weighed before a debtor considers diving into the bankruptcy pool.

For openers, in Chapter 7, your stuff that cannot be protected from creditors will be conscripted and sold to pay off some of your debt. So, there’s that. But wait.

“The reality,” Hines says, “is most people worry about what they think is going to happen in bankruptcy without taking the time to understand how it might be perfect for them.

“Every state has exemptions, and in my practice, 95% of my clients get through Chapter 7 without turning over anything they own for liquidation. The most common thing my clients usually have to turn over is a portion of one year’s tax refund in the year they file.”

Good to know. But then there’s the long-term pain.

Having a bankruptcy on your credit history (for 7-10 years) tells lenders you can’t be trusted with someone else’s money. Your credit score will plunge as much as 100-200 points, making it difficult, if not impossible, to qualify for loans or credit cards.

What this means is you better like what you’re driving and where you’re living, because, post-bankruptcy, the likelihood of being able to score loans at all, let alone under favorable terms, is slim to zero.

Can Bankruptcy Discharge Be Denied?

Filing for bankruptcy is only the beginning of a long and involved process in which the filer’s life and finances will be scrutinized. Failure to live up to the requirements set out by the court, whether in Chapter 7 or Chapter 13, can result in the filer’s attempt to achieve a bankruptcy discharge denied.

Among the reasons for having a discharge denied are these:

• Attempt to defraud by transferring, removing, destroying, mutilating, or concealing property within one year before the date of filing, or any time after the date of filing.
• Concealing, destroying, or falsifying information.
• Lying in connection with your case, including lies of omission.
• Being unable to satisfactorily explain the loss or deficiency of assets.
• Refusing to comply with a court order.
• Failure to take or complete course in credit counseling and personal financial management.

Bankruptcy Discharge vs. Dismissal

We repeat, given the choice between the competing dis-words in bankruptcy, your pick almost always should be “discharge.” That’s the one that means you have met the requirements of the court, and your fresh start is in hand.

By contrast, despite the sound of it, a dismissal (unless requested voluntarily by the filer) does not mean the applicant’s debts have been waived. Instead, it means the case has been tossed out, a result of the bankrupt person failing to fulfill the court’s instructions.

The upshot? Dismissal means the applicant still owes all of her/his debt, and the bombardment by creditors can — and likely will — resume.

“A dismissal does not provide for a discharge of debt,” Symmes notes, “which means in many cases, the bankruptcy case can be refiled to get the discharge if needed.

“A dismissal typically occurs if somebody fails to pay a court fee, filed the required bankruptcy documents, fails to make Chapter 13 plan payments or fails to provide required documents to a bankruptcy trustee.”

The court can dismiss Chapter 7 and Chapter 13 cases for a variety of reasons, including if the filer:

• Fails to take or complete the required credit counseling course.
• Has too much income to declare bankruptcy.
• Gives the court reason to believe (s)he’s committed fraud by running up unsecured debt without the intent to repay creditors.
• Is discovered to have been hiding financial information.
• Commits perjury in the petition or under questioning.
• Defrauds creditors by transferring assets.

Credit Counseling for Bankruptcy

Consumers whose finances are a wreck can’t help but wonder whether they’d be better off biting the bankruptcy bullet. Indeed, bankruptcy could be the correct call for some whose debts are beyond redemption.

However, anyone weighing such a life-altering decision would be well-served to gather every shred of information and advice available. Once bankruptcy is declared, there’s no turning back.

Pre-bankruptcy credit counseling could keep you from choosing poorly. Certified credit counselors not only have the knowledge essential to helping you gain a clear picture of your financial trouble, they can recommend the tools that will steer you clear of the bankruptcy iceberg.

Remember, those filing for bankruptcy are going to have to take a credit counseling course as a condition of processing their case. Doing it up front may save you the pain of going to court.

“Credit counseling is a good way to get an overview of options before filing a bankruptcy case,” Symmes says. “There are … non-bankruptcy related credit counselors …  who can go more in depth with you.”

Credit counseling could be for you if:

• You have a lot of personal loan and/or credit card debt that can be tackled with a debt management plan.
• You want an expert intervening on your behalf with your creditors to negotiate better terms and have them stop hounding you.
• You like the idea of consolidating your debts into a single regular payment.
• You want help to create a livable budget and/or money management advice.