What Is a Bankruptcy Discharge and How Does it Work?
Generally, a bankruptcy discharge is the desired objective when you file a bankruptcy case, whether it is a Chapter 7 or Chapter 13 bankruptcy. A bankruptcy discharge eliminates your personal liability for debts listed in the bankruptcy petition. By eliminating your personal liability for the debt, you are no longer obligated to repay the discharged debts.
Understanding Bankruptcy Discharge
The actual discharge is a bit anti-climactic. It is simply a court order on a single sheet of paper stating that your debts have been discharged. The order is mailed to you and your attorney and docketed in your case. This order lets creditors know that the debts owed to them have been discharged, and they can no longer make any attempts to collect the discharged debts.
Surprisingly, the order does not list each of your discharged debts. Instead, it provides information about the types of debt that are generally excluded from a discharge order.
Because your bankruptcy discharge order is so important, you should retain a copy in your records and provide a copy of it to any creditor who attempts to collect otherwise discharged debts.
Secured and Unsecured Debts
The ultimate effect of a bankruptcy discharge, however, may vary depending on the type of debt at issue.
Unsecured debts include credit cards, medical bills, and personal loans. A bankruptcy discharge is most effective at “wiping out” these debts so that you will not have to pay anything to these creditors.
Secured debts include mortgages, car loans, or other loans where the lender retains a lien or security interest in the underlying asset. For example, a mortgage lender lends you the money to purchase a house. You purchase and own the house, but the lender retains a security interest in the house. If you fail to repay the mortgage according to the original loan terms, the lender may foreclosure on the house.
In bankruptcy, you have a choice as to how you want to handle your secured debts:
- If you wish to retain the house or the car, you would have to reaffirm those debts and agree to keep making the required payments.
- If you wish to surrender your house or your car, you can do so and the bankruptcy discharge would “wipe out” your personal liability for those debts. However, the lender would retain its lien or security interest in the underlying property such that it could foreclose or repossess it.
Because the United States Congress drafts the language governing bankruptcy, it decided that there are certain debts that cannot be discharged in bankruptcy. The most common types of non-dischargeable debts are taxes and student loans. Even if you file bankruptcy, these debts will not be summarily “wiped out” like some other debts.
Other non-dischargeable debts include those due to:
- Spousal or child support
- Willful and malicious injuries to person(s) or property
- Governmental units for fines and penalties
- Personal injury or death caused by DUI or DWI
- Certain tax-advantaged retirement plans
- Some condominium or cooperative housing fees
- Others not mentioned on your bankruptcy petition
Some debts are dischargeable in a Chapter 13 bankruptcy but not a Chapter 7.
These debts include those from:
- Willful and malicious injury to property
- Non-dischargeable tax obligations
- Property settlements in divorce or separation proceedings
When to Expect a Discharge
The timing of your discharge depends on the chapter under which you filed for bankruptcy. In Chapter 7 bankruptcy, you can expect to receive a discharge within 5-6 months after you file your case. Due to the fact that a Chapter 13 bankruptcy involves a payment plan over 3-5 years, your discharge will not be entered until after you have completed all payments required under your plan.
If you are considering filing for bankruptcy, call the Law Offices of Mark A. Bandy, PC to set up a free initial consultation. Our attorney's job is to guide you successfully through the bankruptcy process so that you receive a discharge that puts your debts in the rearview mirror and gives you the fresh start you need!