A bankruptcy discharge is an action taken by the U.S. Bankruptcy Courts to forgive an individual from his or her debt. Discharged debt is the debt you do not have to repay. There are many types of debt you can discharge, however, there are consequences to doing so. Individuals who file Chapter 7 bankruptcy or Chapter 13 bankruptcy may see some or all of their debt discharged in the process. The entire process of what can be discharged and what cannot is defined by the U.S. Bankruptcy Code.
What Happens When You File a Bankruptcy Case?
A bankruptcy filing with the local bankruptcy court will start the process for you. A court-appointed trustee will work with you to determine the next steps in the process for your needs. Generally, you will petition the court to request your debt is either reorganized under Chapter 13 bankruptcy filing or discharged fully under a Chapter 7 bankruptcy. In either situation, the court will work to sell assets to pay off any debt. Then, they will send warnings to all of your creditors about your plans to discharge the debt.
After a period of time, the court decides whether or not to allow you to receive a discharge or provides you with steps to take first. In nearly every situation, you must prove you need to do so in order to maintain or improve your financial wellbeing. The process is not simple and should be taken seriously, but can offer you some financial help and peace of mind if you simply cannot repay your debts.
What About Collections?
When you file a bankruptcy request with the court, an immediate automatic stay goes into effect. This process means the court has paused all collection of your debt from anyone. Any collection action taken against you to this point is paused. And, your creditors cannot attempt to collect on the debt either. It will remain this way until the court determines if it will discharge the debt. If it does not do so for any reason, your creditors can continue to request payment.
What Type of Debt Is Discharged in Bankruptcy?
This depends on a variety of situations. It also depends on the type of bankruptcy you file. Here is a closer look.
Chapter 7 Bankruptcy
If you file Chapter 7, you are stating to the court you are insolvent. This means you do not have the means to repay your debt or doing so would take a long time and be a financial burden for you. In this type of situation, the trustee will divide any type of assets you own that are not otherwise protected under the Bankruptcy Code to your creditors. For example, if you own two cars, it may force the sale of one of those cars. In doing so, the funds from the sale are then split amongst your creditors.
Then, all remaining debt is discharged. This means you do not have to repay it and creditors cannot move forward with any type of collection on it. An order of discharge gives you the legal right not to continue to make payment. This type of bankruptcy is best for:
- Unsecured debt such as a credit card or medical bills
- Personal liability such as a personal loan
- Other types of unsecured debt or secured debt you no longer wish to repay.
You will need to work through a financial management program after this occurs.
Chapter 13 Bankruptcy
In a Chapter 13 case, the situation is a bit different. Here, you petition the court to request that it help to reorganize your debt to make it easier for you to repay. The court gathers information about your debts. It works through your creditors to develop a repayment plan. Most people remain in this repayment plan for three to five years. During this time, you make mandatory payments to the bankruptcy court. The court then makes payments on your behalf to the creditors.
Over time, you will pay down some of your debt. Some people repay all of it. However, at the end of this period of time, any remaining debt is discharged. This can help to reduce any liability you have to repay this debt.
This type of bankruptcy is best for some people including:
- Those who make too much to qualify for Chapter 7 bankruptcy
- Those who have a secured creditor, such as a car loan or mortgage, with too much equity they wish to maintain
- Individuals with a significant amount of assets (no assets are sold in Chapter 13)
You will also need to go through a financial management planning course here.
What About Your Credit Report?
Discharged debt is noted on your credit report. It will note “not paid as agreed” or “discharged in bankruptcy” on your credit report. It will remain this way for the next 7 to 10 years. You cannot remove this information.
However, over the next few years, your credit score will improve as you make better financial decisions. If discharging the debt helps you to become better at making financial decisions, it is best to use this method. It is important to work with your credit counselor and your bankruptcy attorney to understand the ramifications of filing for bankruptcy.
Can Anyone Stop the Discharge from Occurring?
Any creditor can approach the bankruptcy court and state that it does not believe the discharge should occur. This is a component of the bankruptcy process. They may find a discharge injunction with the court.
In short, this simply means the creditor does not feel the debt should be discharged. Most large creditors, such as credit card companies and lenders, are not likely to do this. However, smaller creditors may.
There are some situations in which the bankruptcy court can side with the credit, though. For example, if you lie on your bankruptcy filings, this can stop the process. In addition, if you took out the debt just before you filed for bankruptcy, this too may cause the bankruptcy case to be thrown out of the court.
What Type of Debt Cannot Be Discharged?
The bankruptcy case filing may result in your obligation to repay the debt continuing. There are some situations where you will want this to happen. For example, if you are not behind on your mortgage payments and you wish to maintain your loan long term, you can continue to do so as long as your creditor agrees.
Some debts legally cannot be discharged by the court. Here are a few key examples:
- Debt you owe for back child support
- Back taxes
- Retirement plan debt – loans you borrow from your plan
- Court fees
- Marital debts from a settlement agreement or divorce
- Fees from an HOA, Condo, or Coop
What Should You Do Now?
If you are considering the benefits of filing for bankruptcy, work with the Law Offices of Jeffrey B. Kelly. Our team can answer all of your questions. Call us for a free consultation.